Earnings Call Transcript - ODC Q1 2022

Operator, Operator

Welcome to the Annual Meeting of Stockholders 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, and welcome to Oil-Dri Corporation of America's 2021 Annual Meeting of Stockholders. My name is Leslie Garber, and I'm the Manager of Investor Relations at Oil-Dri. 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 are 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, a list of stockholders of record, and Oil-Dri's proxy statement and annual report. During the meeting today, we will be covering the election of Directors and one other proposal. Next will be the business presentations and financial review, followed by time for Q&A. We ask that you submit your questions online under the Ask a Question field on your screen. Only stockholders of record are able to ask questions during the meeting. Stockholders will also be able to vote online by clicking on the Vote Here button on your screen. Now it is my pleasure to introduce our General Counsel and Secretary, Laura Scheland, who will conduct the formal portion of today's meeting.

Laura Scheland, General Counsel and Secretary

Good morning, ladies and gentlemen. I now call to order the 2021 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 26, 2021, 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 11, 2021, 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, this meeting. Broadridge Financial Solutions, Inc. has delivered an affidavit confirming the foregoing. Oil-Dri has appointed Peter Sablich of CT Hagberg LLC to serve as the Inspector of Election for this meeting. He is present on the webcast and has taken the oath of office. As of October 11, 2021, the record date for this meeting, there were 5,330,359 shares of Oil-Dri's common stock and 2,050,565 shares of Oil-Dri's Class B stock outstanding. 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 12,918,006 votes. Mr. Sablich has informed me that there are more than such number of votes represented at this meeting. Therefore, I declare there the quorum present for purposes of transacting business. Now I will present the matters to be voted upon. If any stockholder would like to make a comment regarding any of the proposals, please submit your comments through the Ask a Question field in the web portal, and we will review any comments on the proposals themselves after all proposals have been presented. As described in the 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. Jaffee, Ellen-Blair Chube, Paul M. Hindsley, Michael A. Nemeroff, George C. Roeth, Amy L. Ryan, Allan H. Selig, Paul E. Suckow, and Lawrence E. Washow. The second item of business is a ratification of the appointment of Grant Thornton LLP as Oil-Dri's independent auditor for the fiscal year ending July 31, 2022. The Audit Committee of the Board of Directors of Oil-Dri has appointed Grant Thornton to serve as the company's independent auditor for fiscal year 2022 and has directed the appointment to be submitted for ratification by the stockholders at this meeting. At this time, we'll check for and review any comments on the proposals that have been submitted. It looks like no comments have been received on the proposals. So we will proceed with opening the poll. It is 9:35 AM on December 8, 2021, and the polls are now open. Any stockholder who hasn't yet voted, or wishes to change their vote may do so by clicking on the Vote Here button on your screen. Stockholders who have sent in proxies or voted via telephone or internet and who do not want to change their vote do not need to take any further action. While we allow time for stockholders who haven't already done so to complete their voting, I'd like to remind you that the business presentation and other commentary by any of Oil-Dri's employees today may contain forward-looking statements of expected future performance. Any such forward-looking statements are subject to certain risks, uncertainties, and assumptions that could cause actual results to differ materially. We highlight a number of important risk factors that may affect our future performance in our SEC filings, including our annual report for the fiscal year ended July 31, 2021. We urge you to review and consider those risk factors carefully in evaluating the company's comments in evaluating any investment in Oil-Dri stock. Copies of our SEC filings are available through the company or on the company's website. All right, one last minute to finish voting. Okay. At this point, the polls are closed, and I will now report the preliminary results of the voting. We will be reporting the final vote results in a Form 8-K to be filed within four business days. 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. We have been informed by the Inspector of Elections that the preliminary vote report shows that the nine candidates nominated by Oil-Dri received the largest number of votes. Regarding the second item of business, 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, 2022. We have been informed by the Inspector of Elections that the preliminary vote report shows that such ratification received more than a majority of the votes represented at this meeting. This completes the business to be conducted at this meeting. There being no further business to come before the meeting, the 2021 Annual Meeting of Stockholders of Oil-Dri Corporation of America is now adjourned. I am now happy to introduce Dan Jaffee, our President and Chief Executive Officer for our business presentation and financial review.

Dan Jaffee, President and CEO

Thank you, Laura, and thank you, everyone. Welcome to our Annual Meeting. We completed our 81st fiscal year, which is exciting. I want to thank our loyal shareholders for your continued support. I want to particularly thank our frontline workers who helped us navigate the pandemic. We're still dealing with it, and just when we thought it was safe, new variants emerged, but our workers continue to come in and fulfill orders, leading to record shipping and billing. I'm proud to announce that we surpassed $300 million in revenue for the first time. Our CFO, Susan Kreh, will provide more detailed financial numbers. We also faced significant cost pressures and supply chain challenges, which Molly VandenHeuvel will discuss. My dad used to joke that when asked, 'How's your wife?' he would respond, 'Compared to who?' That's similar to our supply chain situation. We're fortunate to control a large portion of what goes into our product, such as our raw materials. Many companies that rely on external suppliers are struggling to fill orders, whether it’s a car or an iPad, and we've all encountered delays. While we're managing well, we still face significant pressure. Fortunately, we operate in a rational market, and we've been actively cutting costs and raising prices to keep up, resulting in continued margin pressure in the first quarter. However, we're optimistic about our ability to raise prices to restore our margins to where they need to be, not to benefit ourselves but to ensure we continue to meet our customers’ expectations for quality and service. Jessica Moskowitz, along with Wade and Fred, will discuss our successful strategies in the Amlan animal health division. Jessica will touch on our lightweight litter, which we developed, patented, and launched nearly a decade ago. I always ask buyers whether they would prefer to carry home twice as much weight or half the weight when both options perform equally well. They inevitably prefer the lighter option, which is better for the environment and logistics. Retail partners focusing on lightweight litter are experiencing great success, and we'll continue to outperform the category. Canada has been a valuable test market for lightweight products. Our biggest branded competitor, Nestlé Purina, fully shifted to lightweight nearly two years ago, capturing half the market. Our cat litter sales in Canada increased by 28% for fiscal year '21 and 40% in the fourth quarter, with a 48% rise in the first quarter of this fiscal year. We are gaining market share in a category growing at around 5% to 6% due to our quality and service. While the U.S. market still has under 20% of lightweight products, you’ll hear more details from Jessica. In animal health, we have gained valuable insights and restructured our strategy and team over the past year, with a focus on our unique mineral. We've invested significantly into research and development, including opening the Dick Jaffee microbiology lab to further understand our mineral's effects on animal health. We have one of the top non-antibiotic solutions in the $3 billion market, and we have attracted a world-class team to support this effort. I believe it's important to show commitment, and every year I invest in restricted shares. I usually sell a portion to cover tax liabilities, but this year I chose to pay $200,000 in cash to retain more shares, demonstrating my confidence in the company's future. Now, I would like to turn it over to the team making it happen. We have three new Vice Presidents to introduce. Dave Atkinson is our new Vice President and Corporate Controller, who joined Oil-Dri in July 2021 with over 30 years of experience in finance and accounting. We're thrilled to welcome him and his family to the Oil-Dri family. Michelle Hueser has been promoted to Vice President of Customer Service and Supply Chain after nearly 30 years with us, exemplifying our core values and commitment to community service. Lastly, Wade Robey, who became our Vice President of Amlan Marketing and Product Development in February 2021, brings extensive experience in the agricultural and industrial sectors. We are fortunate to have him on our team, and despite the physical distance, we meet frequently to ensure productivity. Now, I’ll hand it over to Susan Kreh to walk you through the financial highlights.

Susan Kreh, CFO

Thanks, Dan. As I proceed through the following slides, I will be sharing a look back at the past decade of performance trends as well as focusing on our first quarter results. We will see that we are achieving growth and winning business when Oil-Dri, like so many other companies across the globe, is facing inflation in our input costs that are growing at rates faster than we have experienced in decades. Let's start by looking at 10 years of net sales growth, noting that consolidated net sales reached an all-time record high of $305 million in fiscal 2021, as Dan mentioned earlier, which represents 8% growth over the prior year. This was primarily due to higher demand for our cat litter and agricultural products, which increased by 9% and 19%, respectively, over the prior year. That sales growth momentum continued into the first quarter of fiscal 2022, where consolidated net sales reached an all-time quarterly high of $82 million, an 8% increase over the prior year. This growth was primarily driven by an increasing demand for our cat litter, fluids purification products, and industrial and sports products. While we also experienced revenue gains from our co-packaging coarse cat litter business, sales of our agricultural and animal health products declined in the first quarter compared to the same quarter last year. As I mentioned during our previous fourth quarter fiscal 2021 investor call, we've been increasing prices across all product lines to help offset rising costs. Those increases helped contribute to the improvement in consolidated net sales that we saw during the first quarter. Our business to business products group grew 5% over the prior year, and our retail and wholesale products group grew 10%, reaching a record quarterly high of $54 million. In addition to the favorable impact of pricing on our top line, our volumes also drove top line revenue growth. The momentum continued into our first quarter fiscal 2022 when we sold 209,000 tons, a 5% increase over the first quarter a year ago. So as we look at the top line during the first quarter, about one-third of the growth came from pricing and another two-thirds from volume and mix. A brief review of our net sales per ton demonstrates the impact of focusing on our mission of creating value through sorbent minerals, as fiscal 2021 reached an all-time high mark of $389 per ton sold. We continue to focus on pricing as we experienced the material adverse effects of the inflationary environment in which we are currently operating. We have publicly announced multiple price increases across our various product groups. Net sales per ton of $394 in the first quarter of fiscal 2022 includes some of the impacts of the price increases that we have already announced. We expect to achieve more of the benefit of the announced pricing during the second quarter, with some being implemented during the early part of the third quarter due to the notice periods that are built into certain of our contracts with our customers. Shifting to gross profit per ton, which is a key profitability metric that our team uses to manage the performance of our business, the headwinds that we face have become evident. While net sales and net sales per ton were at all-time highs for fiscal 2021, our gross profit per ton was severely impacted by rising costs that hit us hard primarily during the second half of fiscal year 2021. The adverse impact of inflation continued during the first quarter of fiscal 2022. Higher freight, packaging, natural gas, and non-fuel cost per manufactured ton drove the decrease in gross profit. Freight cost per manufactured ton increased approximately 37% in the first three months of fiscal 2022 compared to the same period in fiscal 2021. Packaging cost per manufactured ton increased 44% over the prior year, which was driven in large part by resin cost increases. Further, the cost of natural gas per manufactured ton used to operate the kilns and the drying place was a whopping 97% higher in the first three months of fiscal year 2022 compared to the first three months of fiscal year 2021. The magnitude and the velocity of these market-driven cost increases eclipsed our ability to increase pricing to our customers. To add just a bit of color, because of the extensive use of silk and jugs in packaging, these cost increases affect our retail and wholesale products disproportionately. While we have announced and implemented price increases in all of our markets, we continue to aggressively monitor our input costs to determine what future price increases may be needed. We see the impact of the extraordinary inflationary costs we just discussed on both our net income and our earnings per share metrics. Moving on from that, and that being said, our financial position remains strong, and we remain committed to our dividend, which is both predictable and growing. You see the increase there in the first quarter. Our strong financial position enables us to continue to invest on multiple fronts. In addition to our ongoing commitment to our shareholders through the payment of dividends, we fund new product developments through R&D. We maintain our production facilities and some cost reduction opportunities through CapEx. We also opportunistically repurchase shares of our stock to help offset the dilution of our restricted stock incentive program. Our debt remains at a low position of just under $9 million as of the end of the first quarter. Our debt to total capital ratio is a conservative 6%, which gives us plenty of dry powder to fund the investments mentioned earlier, in addition to funding our incremental working capital needs to support the growth that we talked about earlier, as well as to finance potential acquisition opportunities that may become available. In summary, we have strong momentum in capturing share in our key markets. However, we are fighting significant externally driven cost increases and supply chain challenges unlike any we have seen in recent history, and we are keenly focused on managing those challenges in order to best serve our customers. I believe that we have a strong team in place that is working together extraordinarily well in order to address these short-term challenges while maintaining our focus on our longer-term strategy. With that summary, it is my pleasure to turn this over to one of my teammates who has been working diligently, together with her team, to address the supply chain challenges we mentioned, Molly VandenHeuvel, our Chief Operating Officer.

Molly VandenHeuvel, Chief Operating Officer

Thank you, Susan. I appreciate that. I'm going to talk supply chain today. As you heard from both Dan and Susan, within the supply chain, this was a difficult year for all of us. But I was truly impressed with the way the team persevered in light of all the challenges from COVID-19 and now the broader market impacts. Most of you are aware of the global supply chain constraints that all industries are encountering today. Oil-Dri is not immune to these challenges. But in the Oil-Dri way, we have addressed these head-on and have worked to mitigate and reduce the negative impact on the business while also amplifying the positive impact. Let me start with the positive impact. Our commercial teams have set up share growth plans for some time. In the midst of these times, they have grown share and net sales much faster than we originally anticipated. A partial driver of the strong sales has been our ability to deliver products at service levels better than the industry average and keeping products on the shelf. This does put more pressure on all of our people processing tools, but we have worked to address the issues. We have strong systems, and a majority of our product is vertically integrated, as Dan mentioned, so we have control of a large part of our supply chain. However, we are not immune to the global supply chain impacts, as you can see here, which have also impacted our results, as reported in our 10-K and 10-Q, and as summarized by Susan. Our teammates remained agile to adapt manufacturing, adapt supply chain and procurement, and adapt customer service. In fact, we adjusted just about every part of our business to align production with customer demand and continually to effectively serve our customers around the globe. However, our results have been impacted in the areas of customer and cost. Unpredictable and high volume and complexity is a positive as I already mentioned, but there's also a huge driver of customer and cost impacts. In addition to the high volume impacts, you can see some of the headwinds here. When transportation capacity tightened up, our logistics professionals adjusted routings, carriers, processes, and communication to keep product moving. We have creatively and positively managed what we can, but we are still seeing late pickups, long lead times, and overall tight transportation capacity. This has also continued to drive the cost of logistics up significantly, reflecting a 13% year-over-year increase in domestic freight last year and continuing to increase this year, as summarized by Susan. As for our people, we have more open positions than we would like, but our teammates have implemented improvements and automation to help us as well as working extra hours to keep product moving. We have also adjusted our recruiting and hiring practices and improved our onboarding processes. We kept a close eye on material suppliers. When we predicted potential material supply issues, our team sourced alternative suppliers, increased safety stock, substituted packaging when possible, and fortified supplier relationships to ensure that we had no major production outages due to a lack of materials. Last but not least, we started seeing significant cost pressures in natural gas, resins, lumber, and transportation. Our Oil-Dri teammates pivoted to bring in different materials and suppliers to offset price increases as much as possible. Even with the savings initiatives and procurement pivots for less expensive materials, last year we saw impacts of cost of goods price increases such as packaging cost increased by 19% and natural gas by 15% year-over-year and higher, as summarized by Susan, just to name a few, and we have continued to see the prices increase. To compensate for this macroeconomic inflationary environment, we've executed multiple price increases in all divisions through Q4 and into this new fiscal year as a result of the high input and commodity pricing we see on all materials and energy needed to produce our products. Throughout the last year and during the pandemic, our frontline teammates kept working and producing and our support teammates managed with excellence virtually. Accomplishments toward our goals included execution of multimillion-dollar savings projects, improved and increased capacity in the cat litter division, and a near elimination of slow-moving and obsolete inventory, and our continual improvement in product quality as measured by our consumers. We continue to invest in our business. A couple of examples include opening a new mine in Georgia allowing for increased reserves and installing more automation for higher throughput on our jug line. In short, Oil-Dri finished 2021 with increasing momentum. Demand for sorbent minerals remains strong, and our global supply chain is well-positioned to capture this post-COVID global economic expansion cycle, but we are not immune to the global constraining impacts and inflationary trends. We have truly dedicated teammates to address the challenges ahead. We have strong processes, as I've outlined before, such as our sales and operations planning, which assist us in all forward forecasts and capacity planning. I do look forward to the challenges and achievements ahead in 2022. With that, I'd like to hand it off to Jessica Moskowitz. She's our Vice President and General Manager of our Consumer Products Division, and she is going to talk about some really great successes she and her team have led in our lightweight litter.

Jessica Moskowitz, Vice President and General Manager of Consumer Products Division

Thanks, Molly. I could not be more excited about our lightweight business in the consumer division. We are continuing to see our entire portfolio of lightweight litter products, and our consumer division has posted average growth of 9% from 2018 to '21, driven by strong businesses, both branded scoop cat litter and private label cat litter. On a quarterly basis, Q1 2022 represented a record quarter, also representing strong growth across both private label and branded sides of the business. In the U.S., lightweight has now reached 14% of total cat litter sales and has outpaced the growth of traditional heavy litter for the latest 52 weeks. As we continue to increase our quality and do so at a value, we expect consumers to continue to turn to our products for convenient options in the litter categories.

Fred Kao, Vice President of Sales for Amlan International

Thank you, Jessica. Good morning, ladies and gentlemen. I'd like to go through the Amlan sales part of the presentation to share what we have accomplished since 12 months ago. As most of you already know, all the key points for me as a VP of Global Sales is to recruit. And we have done that with the addition of key positions in key areas. We already introduced Dr. Robey to our marketing team. Mr. Jay Hughes is our Global Director of Technical Service joining us in February of 2021. We needed someone for our technical team, and it's really good to have another person with 20-plus years of experience from trials, analysis, and also a strong technical background to be the leader of our technical team. We also added two key directors; Mr. Heath Wessels in the U.S. and Harold Zhou in China. They both joined in December of 2020, bringing with them years of experience in the poultry industry, and they will be the key drivers to build a strong foundation in those key markets to complement what Ms. Margarita Santa is currently doing in our team in the North American region. We have added key sales positions in Asia, the U.S., and Mexico on top of a brand new 10-person team in China since FY '20. We also added a marketing and HR position for China and the APAC region to build a much bigger team in the region for future growth needs. Asia and China's regional technical managers, Dr. King and Dr. Michael Hua, are just examples of our direct dedications to not just adding sales personnel, but also adding after-sales customer support to be a complete global-focused team. We now hold patents in 15 major markets, and many of them are still pending to ensure that we have the right to sell our unique minerals to meet our customers’ needs in these countries. When China grew more than 50% from a year ago, a lot of people asked how this was accomplished? It’s not just one area we have improved, but from multiple areas. We now have a strong 10-person team in China. On top of that, we brought back three key distributors because of the relationships that we rebuilt with them since their new team is in place. Our continual focus on working with key accounts is also key to our success in the markets.

Wade Robey, Vice President of Amlan Marketing and Product Development

Fred, I appreciate that. Good morning, everyone. It's a pleasure to be speaking to our shareholders. I know the information Fred shared is very exciting, and I'm now going to focus on some of the background information around our strategy and how we're approaching the market as we grow our Amlan business. Our focus is really about creating value, improving the sustainability of animal production, and we're going to do that through leveraging our unique mineral. This is our differentiating advantage, and the thing that is going to be most prominent in our marketing messages to our customers.

Dan Jaffee, President and CEO

Thank you, Wade, and thank you shareholders for listening to our presentation. We're going to open up the floor to questions. Please submit your questions using the Ask a Question field on the webcast. Questions or remarks must be relevant to the meeting and pertinent to the matters brought before the meeting. Leslie is going to moderate our questions.

Leslie Garber, Manager of Investor Relations

Our first question comes from Robert Smith, the Center for Performance Investing. He asked how does the company protect its intellectual property while operating in China?

Laura Scheland, General Counsel and Secretary

Sure. Oil-Dri's global IP strategy includes an analysis of high-value countries, countries where we have a great potential opportunity, as well as high-risk countries, countries with a risk of IP theft and infringement. While we definitely recognize that enforcement of IP rights and enforced jurisdictions can be difficult, we do apply and register for both trademarks and patent applications, and we have filed for both patent trademarks in China. However, given the enforceability concerns, we do not rely solely on the registrations to protect our business. Practically speaking, our biggest defense is not the registrations but the fact that the value of Amlan's products is based on aspects that can't be easily replicated. For example, our R&D and technical knowledge, our relationships with our customers, and our unique mineral. Especially with key accounts and the long sales cycle that has been previously mentioned, products are not swapped out lightly, and our sales team works closely with key accounts while they conduct their own trials and evaluate the performance of our products before making switches to our products or to competitors' products. In this process, our team develops close relationships with our customers and proves to be reliable and provide exemplary technical service. Therefore, the customer relationships and the performance of our products in trials are surely our best defense to protect against knockoff substitutes.

Dan Jaffee, President and CEO

Thank you, Laura. Lawrence, thank you for your question, and it's a valid question. We do have a Board meeting coming up after this annual meeting, and I'll be sure to discuss it with the Board. This would be something the Board would address and consider.

Leslie Garber, Manager of Investor Relations

The next question comes from Ethan Star, a private investor. Thank you to everyone at Oil-Dri for the hard work in a difficult environment. Dan, could you and the team please further detail the reasons behind your excitement for the animal health business?

Dan Jaffee, President and CEO

Yes, it's a great question. As you heard from Fred, he and Wade have really rebuilt our team. It's a team of incredibly talented animal health professionals who are all joining us because they love the technology, our data, and our trials that we've done. Everyone sees the shift that's going on in the globe away from antibiotics. The team Fred has assembled can pick up the phone and get to anyone in the world. Our issue is balancing out those trials and ensuring that we get out in front of what I believe is coming.

Operator, Operator

That concludes today's conference. Thank you for joining, and have a pleasant day.