Oil-Dri Corporation Of America

And welcome to the third quarter Oil Drive Corporation of America earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require additional assistance, you may press star 0 to reach an operator. I would like to hand the call over to Dan Jaffee, President and Chief Executive Officer. Please go ahead.

All right, thank you. Welcome, everybody, to our Oil Dry Third Quarter Investor Teleconference. Joining me both physically and virtually, so we're in this COVID reality, is Susan Kreh, our Chief Financial Officer, Molly Vanden Heuvel, our Chief Operating Officer, Jessica Moskowitz, Vice President and General Manager of the Consumer Products Division, Fleming Maz, President of Amlin International, Laura Sheelan, General Counsel, and Leslie Garber, Manager of Investor Relations. Leslie, will you walk us through the safe harbor?

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 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-dried stock. Thank you for joining us. Dan?

Great. And before I turn it over to Susan to walk us through the financial results, just some high-level comments, which are, you know, very proud of the oil-dried team. You know, this is a very, very challenging environment. We had to go virtual. We had to figure out what essential meant. And we had people pantry-loading cat litter, so we had to meet incredible demands. And our entire Oil Dry team did a fantastic job staying healthy, both physically and financially, and enabled us to deliver an incredible quarter in an incredibly challenging time. Reflecting, I will tell you, those investors who've been with us two years or longer had to live through the go-live pain of our ERP system when we launched that in August of a year and a half ago. And almost two years ago now. And we would not have made it without that system. If we were on the old system, we would not have made it. We would have been worse than a Lucille Ball skit. And so I just feel very fortunate timing is everything. When this hit, we had the right team in place. We had the right systems in place. We had been far enough along on the implementation of our S&OP process so that we could get out in front of the demand. And more than meet it, we had 99 and 100% fill rates for really all of our major customers and received a lot of kudos from them. So just recognize that your oil dry team really delivered during this quarter. Susan, I'll let you go through the specifics from a financial standpoint.

Thanks, Dan. And although I usually jump right into the numbers, I want to reiterate a few things that you just said. This was truly an unprecedented quarter, and I just want to thank all our team members who enabled us to achieve such good financial results, and we're going to talk about those shortly. As Dan said, in mid-March, our teammates were asked to work from home, and they pivoted very quickly. They embraced new technologies practically overnight in order to deliver the results required to support our business and our customers, and not just at ordinary levels, but at all-time record levels in net sales. I particularly want to thank our frontline workers who maintained safe practices to keep each other healthy and who put in a lot of extra effort to keep our customers' shelves stocked. And with that, now I'll shift to our financial results. Consolidated net sales for our fiscal third quarter of 2020 were, as I just mentioned a minute ago, an all-time record of $76.3 million. An 8% increase compared to net sales in the same quarter of fiscal 2019. We saw strength during the quarter in both of the products where we're focusing our growth investments. Those products are cat litter, which is in our retail and wholesale products group, and animal health in our business to business products group. In our B2B group, net sales for the third quarter of fiscal year 2020 were $26.7 million, an increase of 2% over the prior year. And within that, there were some ups and downs by product line, but we were pleased to see that our increased focus on our animal health products is paying off. Net sales of our animal health and nutrition products increased 25% year over year during the third quarter. Driven by increases in many of our markets for animal feed additives, particularly in Latin America, Mexico, Africa, the Middle East, and Asia outside of China. Additionally, net sales within B2B of our agricultural and horticultural chemical carrier products increased 11%, and offsetting this growth was year-over-year decrease of 8% for our fluids purification products, Where sales were impacted in part due to decreases in edible oil sales resulting from closures of restaurants and schools due to the outbreak of COVID-19. Sales were also unfavorably impacted by the closure of one of our customers' biodiesel processing plants. Now switching to our retail and wholesale products group. Net sales for the third quarter were $49.6 million. An increase of 11% over the same quarter in the prior year. This increase was driven by 20% year-over-year growth in net sales of cat litter in both private label and branded litters. In addition to the organic growth that we've been experiencing throughout the previous quarters here in fiscal 2020, as Dan mentioned, we had incremental increases in cat litter sales during the third quarter as customers purchased more cat litter and related products in anticipation of future potential shortages or store closures caused by COVID-19. Also included in our retail and wholesale product groups results were lower sales of our industrial and sports products compared to the third quarter of fiscal year 2019. Sales of industrial and sports products decreased 22% or 2.2 million, primarily driven by the impact of businesses and sports fields shutting down, beginning in March due to COVID-19. If we take a look at our consolidated gross profit for the three months ended April 30th, it was $21.4 million, which was an increase of 27% over the third quarter of fiscal 2019. This improvement had two primary drivers being deepest in the cost of freight and natural gas. Which, on a per ton basis, which is the way we look at it, declined 20% and 32% year-over-year, respectively. So, it's 20% for freight on a per ton basis and 32% for the natural gas on a per ton basis, year-over-year. During the quarter, we did incur some additional employee compensation costs to meet increased customer demands. As well as some incremental cleaning and sanitation costs due to COVID-19. However, these costs didn't have a significant impact on our consolidated gross profit. And in fact, we're basically offset by the reductions we saw in travel and expense in our SG&A expenses for the quarter. A third quarter income from operations of $5.7 million. is more than double our income from operations of $2.3 million during the same period in fiscal 2019, driven by the stronger sales and the improved gross profit resulting from lower freight and natural gas. The third quarter net income attributable to oil dry of $4.6 million compares to $5.6 million during the third quarter of fiscal 2019, and that result included a material one-time benefit of proceeds under a confidential agreement Resolving legal proceedings that was included in other income during that period. Net income for diluted common share for the third quarter of fiscal 2020 was 61 cents compared to 74 cents in the third quarter of fiscal 2019, which again included the one-time material legal settlement. If we look at it on a nine-month year-to-date basis, Net income per diluted common share of $1.69 for 2020 year-to-date compares to $1.17 for the same fiscal year-to-date period in fiscal 2019. That's a 44% increase year-over-year. So that is really good news. And shifting from that good news, I would like to highlight two subsequent events that have substantially improved our liquidity during these uncertain times. Because our final debt payment of $3.1 million is coming due on August 1st of this year, we opportunistically amended our note agreement with Prudential, details of which you can find in our 10-Q that was filed with the SEC this past Monday. Under the amended agreement, Oil Dry issued $10 million in new notes that have a 10-year tenor, and that cash is on hand today. Another event that occurred subsequent to the end of the quarter was that Oil Dry entered into a confidential agreement to grant a non-exclusive perpetual license for $13 million. This amount has been received by Oil Dry. Both of the aforementioned items will be included in our fourth quarter financial results, which we expect to release on October 13th. So all in all, a really strong quarter and a really good liquidity position. And with that, Dan, I'll turn it back over to you.

Great. Thank you, Susan. Obviously, great quarter, great year-to-date results. So we're going to open it up for questions, as always. Ask your most important question first and then go back to the end of the queue and so forth and so on. This allows everybody a chance to at least get one question in and maybe two or three. So let's please open it up.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Ethan Starr. Your line is open.

Good morning. Nice quarter considering all the challenges.

Yeah, thank you.

I understand from a recent article that oil dry has improved results in customer service leading to significant improvements in cost reduction. Could you please explain this in more detail and give some idea of maybe how much money has been saved, please?

Sure. I'll let Molly answer the question.

Sure. Thanks, Dan. So as the article said, we really focused on customer service first. And once we get our customer service levels at benchmark levels, we focused on cost reduction first. Thank you for having me.

And increased quality leads to lower costs. It always does because you have less rework. You have greater customer satisfaction, which leads to more sales, which also can lower your costs because you get to spread your fixed costs over a greater base. So, you know, the results you're seeing, you're seeing the top-line growth led by our general managers, and then you're seeing the bottom-line growth, you know, led by our supply chain, who is just functioning very, very well. So it's been a win-win. But thank you for your question.

Okay, I'll get back in the queue. Thanks.

Thanks.

Our next question comes from John Baer of Ascend Health Wealth Advisors. Your line is open.

Thank you. Yes, I will echo. Nice quarter. I also appreciate more detailed information in the press release and commend you for the aspect of helping the frontline workers. So I'm wondering... To what sense or to what degree do you have a sense that those extra orders and so forth in March and April may have pulled forward orders and kind of a parallel to that is do you see an increase in orders through online vendors like a Chewy or somewhere like that that you think might continue to

All right, well, John, thank you. And Jessica, who runs our Consumer Products Division, she'll answer that question.

Hi, good morning. Good morning. So in terms of the shift from Q3 into Q3 from Q4, if we look at kind of the first half, I'd say we would benchmark, you know, up 10%, and then Q3 was up around closer to 19%. So I would say that 9% to 10% difference is likely what shifted up into Q3 from Q4 and year to date. We've had strong sales year to date, so we could expect that to continue. But again, the shift would likely be 9% to 10%. In terms of Chewy and Amazon, we continue to focus on e-commerce. We've seen strong sales in e-commerce as a result of COVID, and we do expect it to continue going forward. To what extent, I don't think we can disclose that at this point, but it is something we're investing in and obviously have seen the consumer momentum into those channels, so intend to continue to focus on it.

Well, I would think that sometimes, you know, when you're forced into a habit change that you weren't expecting to do, like this pandemic has caused a lot of people, whether it's work or shopping or whatever, that you might have a sense of whether those trends are continuing. In other words, is online ordering as opposed to going into, you know, a store to pick it up? And just curious whether you're seeing some momentum, you know, continue in that area?

Yes. I think the macro level trends would suggest that consumers are shifting into those channels and our results would continue to support that kind of ongoing shift into e-com.

All right. Great. Thank you. I'll get back to you.

Thank you, John.

Our next question comes from Robert Smith of Center for Performance. Your line is open.

Good morning and congratulations on the good quarter and also on the dividend increase. My question focuses on animal health. It's a two-part question. First part, Dan, if animal health were a stand-alone unit, at what revenue level would it become profitable? Kind of a ballpark number.

Okay, I mean, I'll take that, and I can tell you, I don't know. So I have no idea. I don't look at it that way. I mean, everything is so co-mingled. I mean, if it was a standalone, it couldn't be. I mean, the products are co-generated, and we make money by being in all aspects of our business. I once used this analogy to Clorox. You know, we've been supplying them fresh up for over 40 years now. And I said, we can't just sell the filet to make money. We've got to sell the lips, the hooves, the tail, the whole thing. And then the filet becomes very profitable. But if all you did was sell the filet, you wouldn't make any money in the steak business at Oil Guy. So, honestly, it's an unanswerable question. So I don't know.

The second part of the question is, with COVID entering the southern hemisphere more vigorously now, How do you see the animal health possibilities in the remaining quarter of the year?

Clayton Fleming, who's the president of that division, will field that question.

Yeah, great question. Thank you. Yeah, so right now we are continuing to see good support for our products globally in all the regions. The COVID-19 is, of course, with the shutdown affecting more of the industrial kitchens. The schools are starting to come back. So at this point, we're not anticipating any huge impact to the business.

Well, I meant in particular in animal health. I think Brazil is an important market, so they're having quite a bit of difficulty down there.

Yes, I mean, they are seeing challenges, but they're also seeing additional improved exports into China, so there are different markets Resources and sources pulling in different directions that we would normally see.

Okay. Thank you. I'll get back in the queue.

And before we go for the next question, I think we're all recognizing that there's a new world now. We used to divide equities into large cap and small cap and micro cap and growth versus value and all these different cuts. I think what we're going to be seeing forevermore now is essential versus nonessential. No one ever thought about this before COVID, but, boy, better to be lucky than good. I feel very sorry for, you know, fellow CEOs and businesses who are run every bit as well as Oil Dry, but they're in nonessential businesses, and there was nothing they could do about it. And so most of our sales are essential. They're tied to food production or animal, you know, care of pets. And so we got very lucky there. So all I can tell you, Bob, is that, you know, yes, there's COVID going on throughout the world, but, you know, you may or may not die from COVID. You will die if you don't eat. So, you know, food is absolutely essential, and we feel very lucky and fortunate that our core businesses are tied to things that were not and really won't be impacted too much by global pandemics. Next question.

Our next question is a follow-up from Ethan Starr. Your line is open.

Yeah, first, the quick question is the license fee. Is that related to cat litter?

I'm sorry, we can't provide any detail.

Okay, that's fine. My real question is this. What are your biggest challenges in getting more consumers to purchase lightweight, scoopable litter or the lowest cost litter, which is cat's pride among the major brands, and how do you plan to address those challenges?

I mean, Jessica, Matthew, have you answered? I'm happy to jump in. Give me a thumbs up or a thumbs down. She's on our screen. If you want to take it, give me a thumbs up. Okay, Jessica's going to feel better.

Yeah, I can take it, Dan, and feel free to build on it as you'd like. You know, I think... Thank you so much for joining us. As a value player to really continue to dominate the market. So I feel optimistic and our goal is to continue to delight our consumers and that's through offering them great products at a great price. And as we kind of increase the quality and are able to lower prices or offer at the same value, that value equation continues to delight consumers even more.

Well said, and I think the only thing I would add is we're in a recession. They've announced that, and actually they think now it started before COVID even hit, and then COVID put it into hyper gear. But clearly when you're in that position, people will be more incentivized to save money in their weekly or monthly grocery bill. And so competing in the value segment, whether it's through private label or through OPP, opening price point, quality brands, is a good place to be. So, you know, having Cat's Bite Scoople at $5.98 at Walmart is a good place to be. Being the OPP, well, Neiman Marcus, bad example because they went bankrupt. But you get the idea. You know, you don't want to be the cheap guy in a premium retailer saying, But clearly when it's price-related and we're leaning heavily into, and Jessica's team is doing a phenomenal job on Walmart, Target, Albertson, Safeway, Dollar General, Family Dollar, the e-commerce, all these areas where people can shop and compare on price, we believe we're well-positioned to supply them with high-quality products at affordable prices.

Okay, but are you taking a share?

Well, you can see our growth. I mean, we are growing faster than the category. So by definition, we're taking share.

Okay, I'll get back to the queue.

Our next question is a follow-up from John Baer. Your line is open.

Thank you. Kind of a simple question. What is the most exciting part of your business, the part of the business that you're most excited about? and offers what you think will be best opportunities going forward. And conversely, where do you see the biggest challenges right now? Thanks.

That's like asking me which of my children do I love the best. I mean, that's a tough one.

That's a tough question, but tough, yeah.

I love our businesses that are around creating value from sorbent minerals. How about that one? I mean, I'm excited about all of our businesses. We've got great people in place. We've got great strategies, and we play various ones. Now, you said, which ones are we targeting for the highest growth? Well, that's clearly on the cat litter side. It's with our high-quality, lightweight litters. And then it's on the animal health side where, as you well know, there's a global push away from antibiotics in the human food chain. So they're pulling them out of raising the animals. And so now they have a real unmet need. They need to figure out how to maximize production. And we have a fantastic antibiotic-free solution. So we're very excited about those in terms of the growth potential. But I will tell you, you know, very excited and thankful for our oil dry floor absorbance, industrial absorbance business, our agricultural business, our fluids purification business. These are all solid businesses where we have a real reason to be and a real reason to compete and, you know, and are doing well. So excited about all of them. Biggest challenge, you know, It's staying disciplined. I would say we all, when you start doing really well, and we've done really well for a long time, but you can see the momentum is gaining, is staying disciplined. Not just chasing every hand, but knowing when to fold, for those of you that play poker. So we are going to stay disciplined. We are going to focus our resources on the businesses we think can grow the most rapidly. And those are the consumer product and the animal health. And we will support the other divisions, but they're fighting a different war. And so I would say that's our challenge is just as a team to stay as hungry as you are when things are going poorly as you need to be when things are going well.

Okay. Okay. I'll get back to you. Okay.

Okay. Our next question is a follow-up from Robert Smith. Your line is open.

Hi, Dan. Can you give us some additional color on your approach to digital advertising and within the context of the advertising and promotion budget?

Sure. And Jessica will take that one.

Sure. So, you know, our approach is definitely to be hyper-targeted. I think digital offers us an opportunity to do that. Here's an idea for you. Carry on, carry less. Got it.

Our next question comes from Ethan Starr. Your line is open.

Yes, I'm wondering, I guess my impression is that Oil Dry saved much more money due to COVID on things like lower energy prices and travel expenses than you actually spent extra for COVID. And I'm just, if you can maybe expand on that and maybe go into some numbers if possible. And also, to what extent when energy prices drop, does that benefit Oil Dry or does it benefit your customers or how does that, where does that, when do you shift prices and stuff to reflect that? Thank you.

And Molly, just so I can earn my keep, I'll do the play-by-play. You can do the color if I leave anything out. But, you know, I'm proud of the fact that, yes, we saved some money on travel and entertainment, as Susan said. But during the peak of the demand, when we were pushing our people really hard, we gave the equivalent of a $2 an hour shift premium to all of our frontline workers. Thank you very much. I now don't remember the second part of your question.

Well, just to what extent, when energy prices drop, how much does it benefit oil dry, and to what extent does it shift? Do you at some point share that with the customers?

Okay. Molly will take this one, although I can take the pricing part because I was telling it to the board yesterday. Look, we're in a rational industry, and when gas prices go crazy one way or the other, If our competition all moves, we move with them and vice versa. So we're in a rational business. But, Molly, I'll let you put some more flavor on it.

Right. And it's not a straight answer for energy and fuel prices. For transportation, we do see immediate savings where we pay for freight as part of our product costs, as part of our fuel surcharge, as part of our contracts typically that's aligned to the fuel index. And sometimes we get that when we pay for it, but we have a lot of customers who pay for freight. And then they would see the benefit of that. For natural gas, we have seen some benefit in the third quarter, so that was pretty immediate. And then for other material cost savings, there is a bit of a lag just really due to commodity usage and lag timing. So it's not really a straightforward answer. Some is immediate and some is longer term. And the savings that we saw in the third quarter are more than just commodity. We really have built good processes in place to drive sustainable savings within the operation.

Okay, great. Thanks. I appreciate that. And the lag is probably mostly in the resin price, plastic packaging prices. Well, thank you very much again. Thanks for the dividend increase also, Dan.

Great, and I hope you also spotted the share repurchase, which, again, was a way of trying to deliver value back to our shareholders. And we, rightly so, were opportunistic, saw that we had a chance to buy back shares, retire dividends, and our cash is earning 0.2%. And we have plenty of opportunities that we can deploy that cash on. But we're going to still stay opportunistic on the share repurchase program. So hopefully you spotted that in the queue as well. Thank you, guys. It's been a half an hour, and we look forward to talking to you. It will be our end of the year. It will be our fourth quarter and fiscal year end. I will tell you on one of our major metrics, which is we look at pre-tax, pre-bonus income, and then we divvy up that income between the shareholders and then the teammates, We already, through nine months, have made more than we've ever made in any fiscal year we've ever had. So as I joke, we're playing with the house's money at this point. But we're having a record year. It feels really good. It feels really good that all the investments we made in the last two and a half years on people and infrastructure are why this is happening. And it's just, it feels good. It's predictable. And we're out in front of our businesses. And we've always taken a long-term approach, and the seeds we planted years ago are sprouting now, and seeds we plant today will sprout in a few years. So thank you for the long-time holders, and we're happy to reward you with what I think was our 17th year in a row of dividend increases, which is fantastic. So thanks, everybody. We'll talk to you again in a quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.