Earnings Call Transcript - ODC Q2 2023

Operator, Operator

Thank you for standing by, and welcome to Oil-Dri's Q2 Fiscal Year 2023 Investor Conference Call. At this time, all participants are in a listen-only mode. I would now like to hand the call over to Chairman, President and CEO, Dan Jaffee. Please go ahead.

Dan Jaffee, CEO

Thank you very much and welcome, everyone, to our second quarter and first six months of fiscal 2023 investor teleconference. With me today virtually is Susan Kreh, our CFO; Aaron Christiansen, VP of Operations; Chris Lamson, Group Vice President of Retail and Wholesale; Laura Scheland, VP of Strategic Partnerships and General Counsel; David Atkinson, VP Controller; and Leslie Garber, Manager of Investor Relations. I'd like everyone to know you'll see that Wade Robey is not on the call today. Our Animal Health team is currently at the VIV show in Asia. It's in Bangkok, Thailand. And I'm getting texts and videos. It's going very well. But due to the time change and their commitments, we will be answering any questions that we can related to Amlan and our Animal Health business. However, if there are questions that are better answered by Wade, we will save those for the third quarter earnings teleconference when he will be back on the call. And again, Wade is our President of Amlan International. So Leslie, please walk us through the Safe Harbor.

Leslie Garber, Manager of Investor Relations

Great. 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. Dan?

Dan Jaffee, CEO

Great. Before I turn it over to Susan Kreh for her to walk us through the financials, just some general comments that are highlighted in the release but are worth rementioning. So first of all, I'm very excited. We broke $100 million for the quarter. We're at $200 million through the halfway point in revenues, which is great. You can see that we have had improved margins. We only made 17.3% last year in the quarter, now 22.6%. But the point being from the first quarter to the second quarter, relatively flat around the 22.5% margin. We are very mindful that we need to get back to historic norms of 27% to 28%. We still have pricing action and fortunately, some costs are starting to come down, and you'll hear about those. So we do feel confident that we will continue to show sequential margin improvement going forward, and we're very much living our mission of creating value from sorbent minerals. So I don't want to steal too much of her thunder, so I'll turn it over to Susan to walk us through the financials.

Susan Kreh, CFO

Thank you, Dan. As a reminder from our last quarterly call, our investors have asked us to reserve more of the time on this investor call for questions and to spend less of the call on formal comments. So we understand that you've read the materials or we will assume that you have. So I'll just make a few brief comments on the quarter. First of all, as Dan highlighted, net sales of $102 million represent an all-time record quarter for Oil-Dri and a 17% increase over the same period in the prior year. This increase was driven by pricing actions across multiple products to cover the input cost increases that Oil-Dri has had to absorb. Overall, pricing was up 19% in the quarter compared to the same period last year, and the pricing increase was offset by a 2% decrease in volume, primarily attributable to low-margin products in our consumer catheter business. The strong year-over-year performance in pricing drove a significant 48% improvement in gross margin dollars. That being said, and as Dan pointed out in his opening comments, our gross margin percent of 22.6% remained flat with the first quarter of fiscal 2023. So we still have some work to do in pricing to cover our costs and return to pre-pandemic gross margin levels. During the quarter, we booked a one-time charge of $1.977 million net of tax to establish a reserve. I thought I would provide a little bit of the backstory here. In 1996, Oil-Dri began operating a landfill at our Ochlocknee, Georgia plant in order to dispose of waste generated at the plant to avoid using public landfills. This space is primarily unusable clay discarded during processing, along with some packaging and lumber. This is actually the only landfill that the company operates. In 2018, our regular monitoring and permit renewal activity identified that the landfill exceeded its permitted expense in height and area. We self-identified this issue and reported it to the Georgia Environmental Protection Division. A task force made up of Oil-Dri leaders was created with the directive to find viable outlets for this waste material. However, this met with little success. Fast forward to September 14, 2022, the Georgia Environmental Protection Division sent a letter to Oil-Dri, noting that the landfill was overfilled and that Oil-Dri was being required to provide a work plan to relocate the overflow within the permitted landfill boundaries. The Oil-Dri team engaged outside consultants to advise on the preparation of a response to the Georgia Environmental Protection Division and to develop viable plans for modification of the landfill. In the second quarter, Oil-Dri determined its only viable option was to begin excavating new landfill cells within the permitted extent and to relocate the overfill into those new cells. This plan is expected to take up to two years and is currently estimated to cost $2.5 million before tax or $1.977 million net of tax, and that is the amount that was booked in the quarter. Those being the two most notable results: the strong pricing and the one-time accrual in our very strong quarter. With that, Dan, I'll turn it back over to you.

Dan Jaffee, CEO

Great. Thank you. And Leslie, let's go through the questions. We appreciate it. We had a lot of good questions come in, and we'll cover as many of them as we can.

Leslie Garber, Manager of Investor Relations

So we have a few questions lined up. The first one is from Brad Evans at Heartland Funds. He mentions that he's hearing from various sources that private label brands are gaining market share from branded products due to increasing price differences and challenging consumer finances. What insight do you have on the demand for private label products? How is this impacting the shelf space for your branded products with retail partners? Chris, would you like to respond to that?

Chris Lamson, Group Vice President of Retail and Wholesale

Sure. Thanks, Leslie and thanks, Brad. You're correct. This seems to be a broader trend in fast-moving consumer goods, and it definitely applies to litter as well. We've been asked about this in various ways over the past three quarters, and the response remains consistent. First, from a category perspective, we’re observing a split in the market where private label and value brands are increasing their share. This split also includes growth at the higher end of the market, particularly with crystal alternatives. Recently, we saw private label gain share significantly more than the top three consumer brands in this sector. Interestingly, there’s a new trend wherein the coarse segments, which have been slowly declining in favor of scoopable options for many years, actually showed a slight increase relative to scoopable products last quarter. This suggests that consumers are increasingly sensitive to price and cash outlay amid inflation. Regarding our situation, people may wonder if this trend is negatively impacting us. The quick answer is no, it is not. We benefit alongside private label, and our coarse business remains substantial. Furthermore, we’re not only unaffected but actually supported by our growing premium private label lightweight business, which is thriving alongside the rest of private label in the segment. Overall, these trends are providing us with modest to solid tailwinds that we expect to continue. Back to you, Leslie.

Leslie Garber, Manager of Investor Relations

Great. Thank you. Okay. The next question comes from Robert Smith from the Center for Performance Investing. I'm actually going to combine two of his questions. Are you capable of reaching $40 million in revenues for Amlan this fiscal year? And what are the parameters for pricing Amlan products? And then his second submission was, what is a reasonable gross target range for Amlan over the next several years? Dan, do you want to take that?

Dan Jaffee, CEO

Sure. So the blunt answer is no. We are not going to make $40 million this year. At the midway point, we're up a good 30%. We feel we'll finish the year up about 33%. Last year, we did about $21 million. We think we can do about $28 million. Will our running rate be in the 30? We sure hope so. Still showing growth, but it's a long cycle and they're slow to move in and they're slow to move out, but we're still gaining, obviously, as we move forward. Our pricing is very simple. It's value pricing. We're replacing antibiotics and we price our products so that they are of significant value to our customers as they use our products to do all sorts of beneficial things, including live birth rate and obviously less mortality, weight gain, all the different metrics that they use, and then we try and share in that value. Regarding going farther out, Bob, your guess would be as good as mine at this point. It's so dependent. It's like I've said all along. I'm amazed that we are hitting some singles here or doubles, being up 33%, but it's pretty much a business of grand slams or strikeouts. And we're still in the testing phase at a lot of major customers. We're getting a lot of activity. We had a great show in Atlanta. I'm hearing feedback. We're having a great show in Bangkok. So we are still very bullish on it. And in the meantime, all of our other businesses are also doing well. So it's sort of a good time to be Oil-Dri.

Leslie Garber, Manager of Investor Relations

Great. Thank you. The next question comes from Ethan Starr, a private investor. And he asks, are you expanding your capacity to manufacture Amlan products? If so, if the previous capacity was X, what will the new capacity be as a multiple of X? Aaron, do you want to field that?

Aaron Christiansen, VP of Operations

Ethan, I'm happy to field your question. I believe we've provided a similar update in past quarters. So it's a great opportunity to update on the work. The simple answer is we already have and are continuing to invest in added capacity in front of the Amlan growth. A large appropriation was made in the prior fiscal year '22 and in fiscal '23 to add capacity in at least one of our facilities for Amlan. Approximately two-thirds of that work is complete. The remaining third will take place in front of the anticipated animal growth curve. Timing is to be determined. We would prefer for a number of reasons not to devote the details of the size of the capital allocation and specifics of the capacity that is added, but I can assure you we have a very well-put together plan to have capacity in front of the animal growth.

Leslie Garber, Manager of Investor Relations

Great. Thanks, Aaron. The next question is from Eric Cinnamond from Palm Valley Capital. And he asks, there was a time when Oil-Dri hedged half of its natural gas use. Given the sharp decline in natural gas prices, has there been any consideration of reimplementing the natural gas hedging program? Aaron, do you want to take that one also?

Aaron Christiansen, VP of Operations

Yeah. Eric, that's a great question. I'll start by saying, yes, Oil-Dri has re-enacted the purchase of buying natural gas forward. I do want to speak to the word hedge that's inferred in your question. We don't think of it as a means to beat the market. We are purchasing natural gas in a very conservative and algorithmic way to average price over time. It provides our businesses better visibility to allow for pricing decisions and takes volatility out of the cost structure. Our purchase strategy will have no more than 40% of the required volume in a given month that's bought in a mechanism that has gas secured forward.

Leslie Garber, Manager of Investor Relations

Great. Okay. Thank you. The next question is from Bill Patterson, individual investor, and he asks, how much stock has been repurchased by the company year-to-date and how much is left under authorization? Susan?

Susan Kreh, CFO

Yeah, sure. Hey, Bill, thanks for the question. We've actually made no open market share repurchases year-to-date. However, we have repurchased 7,493 shares at a cost of $225,000 that were surrendered by employees to pay taxes related to restricted stock awards. So that's the only activity we've had in that category. As far as what's left outstanding, we have authorization to repurchase 429,033 shares left under our current authorization.

Leslie Garber, Manager of Investor Relations

Great. Thank you. The next question is from Ethan Starr. Recently, there's been an increase in expenses to support strategic initiatives, including money spent on outside services. Could you please discuss these strategic initiatives and how they will make a difference? Dan, do you want to talk about some of the B2B?

Dan Jaffee, CEO

Yeah, I'll take the B2B, and then I'll turn it over to Chris for the retail and wholesale. As I alluded to in one of my answers, it is a good time to be Oil-Dri. We have winning strategies in each of our major business units. And you know about Amlan, and it is winning. It is growing. We're continuing to attract global talent. We just hired a person to take over Latin America for us. We hired him from Tyson-Cobb. He's joining his fellow Cobb teammates. We have a whole new team there. But he's very talented, very successful, and we're excited about the impact he's going to have on our business south of the border and all the way south through Latin and South America. Our strategies are working in Amlan. We are continuing to leverage our play as our unique sustainable competitive advantage, and it's what gives us traceability and quality all the way to the mine. Over in our next largest B2B business, it's in the fluids purification side, and the trend towards renewable diesel is great for us, and specifically, it's in our backyard, with many new plants opening up in the United States that use our clay to remove trace metals. The beauty of it is they're buying oil that's already been refined many times by our clay to remove other things. When they get the oil, they then need to use another one of our products as a final polishing step. That strategy is working very well. The ag business is continuing to grow our specifically tailored spherical granules, our Verge granules, which has been a big investment over the years. We are basically sold out and putting in more capacity there, all very much in line with creating value from sorbent minerals. So our strategies are working on B2B, and we've got some exciting strategies over on the consumer side as well that I'll let Chris talk about.

Chris Lamson, Group Vice President of Retail and Wholesale

We previously highlighted this in our last shareholder meeting, and we remain very enthusiastic about the lightweight segment of the catheter category. Our unique mineral significantly enhances this category, and the strong performance is evident. We see it as our responsibility to maximize the potential of the lightweight segment. It's currently just under 20% of the overall scoopable segment, but in Canada, it exceeds 50%, presenting a substantial opportunity for Oil-Dri in the U.S. This shift also offers significant environmental advantages, potentially removing over 30,000 truckloads from U.S. roads each year. We are implementing a comprehensive consumer approach to achieve this goal. In the short term, during the second half of the year, we will concentrate our consumer demand spending on the lightweight segment, moving away from previous investments in litter for good. This shift will be visible in the marketplace over the coming months through the end of the fiscal year and beyond. Additionally, we are focused on enhancing product performance; if our lightweight product performs as well as the heavyweight version, there’s no reason consumers wouldn’t choose lightweight. Carrying 50% less weight is appealing for anyone living in an apartment. While our product performs well, we believe it can perform better, and we are committed to improving it. We are even open to collaborating with others in the category to promote lightweight options through innovative selling, although that may take more time. We are dedicating significant efforts to growing the lightweight segment, and we view the success in the Canadian market as an inspiring model for our goals.

Leslie Garber, Manager of Investor Relations

Great. Thanks, Chris. So we have two remaining questions in the queue, but they are really best answered by Wade Robey, our President of Amlan International. And as we mentioned before, he is not on the call this quarter. So we're going to save those for next quarter when he is in attendance. And Dan, I'm just going to turn it back to you for any closing remarks.

Dan Jaffee, CEO

Great. Well, thank you, and thanks to the Oil-Dri team and for our loyal shareholders. It was a very good quarter. We believe we have a lot of positive momentum heading into the third and then finally into the fourth quarters of this fiscal year. As always, we look to the long term. We are making investments that may or may not pay off this year, but we're confident they will pay off in the long run. We're benefiting this year from investments made years ago that are starting to come to fruition. Thank you for your patience. And I think you know what the next Board meeting is in March, but then in the June Board meeting is when we will discuss any kind of dividend action. We're certainly proud of our record of increased dividends, and I'm sure dividend increase will be a hot topic of conversation at our June meeting. Thank you for your support. We will talk to you again in about three months.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.