Oil-Dri Corporation Of America

Ladies and gentlemen, thank you for standing by, and welcome to the Oil Dry Corporation of America's second quarter 2021 investor teleconference. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 1 on your telephone. As a reminder, today's program may be recorded. I would now like to introduce your host for today's program, Dan Jaffe, President and Chief Executive Officer. Please go ahead, sir.

Thank you, and welcome, everyone, to the second quarter and six-month Oil Dry Investor Teleconference. We are still in a virtual environment, so our usual cast of characters will be on the call, but we're all in different places, or most of us are anyway. Susan Cray, CFO, Molly Vanden Heuvel, our COO, Jessica Moskowitz, Vice President and General Manager of the Consumer Products Division, Fred Cowell, our VP of Global Sales for Amlin International, Laura Sheeland, our VP in General Counsel, and Leslie Garber, our Manager of Investor Relations, are all on hand today. And Leslie, please 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 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-dry stock. Thank you for joining us. Dan?

Yeah, thanks, Leslie. And before I turn it over to Susan for a play-by-play, I'd like to add some color to what's been going on. And we've really had a lot of positives on both sides of our major business opportunities, both the retail and the B2B. As you guys know, I took over as general manager of Amlin International right around November 1st, and we have made some really, really good changes together. It's been a complete team effort, cross-functionally. We've brought in some new players. I can distill it to people, poultry, clay, and target markets. And let me start with the people. I mean, Fred and I, Fred Gow, who's our global VP of sales, have worked really hard at building our team And, you know, Fred joining Oil Dry was an initial badge of validation for the incredible opportunity we have because he's had a 20-plus year, very successful career. He's made great contacts, and people took notice when he joined the company. And so we've been in the enviable position of being able to attract a lot of talent quickly as these people first got to know Oil Dry through Fred, but then spent a lot of time with Molly and Hong Yu and our team out at the research center, getting to get comfortable with our data that they knew had to have existed because they knew Fred was joining us for a reason. And it's because this global vacuum that's been created by the elimination of antibiotics in the food chain has created an incredible market opportunity for oil dry. So just in this short period of time since November 1st, we've been able to onboard Heath Wessel, who is covering all North America for us, Jay Hughes, who is our America's tech service, Harold Zhao, who's covering APEC, and then Dr. Wade Roby, who is our Vice President of Marketing and Product Development, who's had a stellar career in the animal health. We've put out news releases on this, so I encourage our investors, if you've missed them, to track them down. You can just search Amlin and you'll find our latest news releases. But we really have created a dream team in general. But in particular, they have incredible poultry experience. So in no means are we walking away from dairy or swine, but we are going to lean heavily into poultry. Poultry represents about 40% of the $3 billion global opportunity that's been created by the elimination of antibiotics in the human food chain. And so you're talking a $1.2 billion opportunity where from Fred to that team that I just mentioned, with a quick phone call, they can get to every level at all the major decision makers around the world. And we are getting interest like never before. So it's very, very exciting. So I mentioned people, poetry. Why did I mention Clay? Because Clay is our unique entree into this market. We are the only player that has quality to the source. As you well know, if you're a long-time oil dry investor, we have Hundreds of millions of tons, we have 100 million proven, but we have equal that amount inferred, meaning we don't even bother doing the drilling because we're not going to need it in any of our lifetimes, but Mother Nature put it there. So we have hundreds of millions of tons of clay to choose from, and we have specifically identified a particular reserve that has given us the highest quality and quantity of these animal health products that we're actually discovering new applications for as we speak because the more we understand our mineral the more beneficial things we realize it's doing in the animal's gut and to the animal's well-being and so we selectively mine these we have you know always a minimum of 40 years reserves in every product line so you have no worries as this product explodes we have the capacity to mine and supply this industry. Look, we may have to spend some capital along the way, but we have the reserves, and that's very exciting. So our people, our poultry, and our clay. And then finally, our target markets. We're going to fish where the fish are, and 11 markets really are where we think we have a unique position to go after a large percentage of that $1.2 billion opportunity. My math is it's between 7 and 800 million of that 1.2, so maybe two-thirds. Don't hold me to it, but it's obviously large enough to dramatically change the financial landscape of oil dry. And the best part is one of our most exciting markets is pristine because we have stayed away from it. I'm not really sure why, honestly, but our prior management had decided that South America and Asia was more important than North America. But our current team realizes we have a great right to win in America, and we are getting a lot of interest right in our backyard. It's a language I speak. It's a currency we trust. It's contracts that are honored. And we don't have to open up new business entities to do business here. So I'm very excited about the opportunity in the United States, and we are hitting the ground running. But as I mentioned... you know, things financially are going to get worse before they get better. We've put on a lot of SG&A, a lot of infrastructure, and while these guys are getting a lot of interest, you know, we're not getting a lot of orders. We've actually gotten some orders, but not enough to cover the investment we're making in people. So you're going to see our SG&A continue to trickle up in the short run, but these are all long-term investments for oil dry. None of them will impact, you know, our – It is expected, I think I have to qualify, Laura will definitely want me to do this, I will qualify, that it is expected that none of these will impact our ability to continue our dividend policy. These are all just using cash flow in a very wise investment pattern for the B2B side. You'll be hearing from Jessica on the retail side, and we are continuing to really gain share both with our brand and our private label, Lightweight. It's very exciting. You did see in our news release that short-term we got hit with a lot of cost pressures all at once, and what she's been able to do to offset those going forward, but none of that pricing was able to impact the second quarter, but the cost certainly did. So that's my color. You're going to hear a lot of play-by-play from Susan, and then obviously use your questions to zero in on anything that maybe we haven't clarified well enough for you. So Susan, I'd like to turn it over to you for the second quarter and six month results.

Hey, thanks, Dan. And today I'm going to recap the second quarter for you. So in our second quarter of fiscal 2021, oil drive delivered another solid quarter of top line growth with net sales of 74.5 million, growing 5% over net sales during the same quarter in the prior year. Both our business-to-business products group, which grew 7%, and our retail and wholesale products group, which grew 4%, contributed to this growth, demonstrating that, as Dan said, we are achieving success in two of the key areas of our strategic focus, and those are mineral-based animal feed additives and lightweight cat litter. Additionally, it was a very strong quarter within our business-to-business products group, as all product lines experience year-over-year growth in net sales. We are seeing evidence that the focus on our mineral-based strategy in animal health and nutrition products is paying off with 20% net sales growth during the quarter over the second quarter of the prior year. Fred and his team, many of whom are new to oil dry and who Dan mentioned during his opening remarks, have done an excellent job of focusing on the strategy and are beginning to deliver on the opportunities having just delivered on an all-time high net sales for any second quarter for Amlin International, our animal health business. During the quarter, we saw the benefit of enhanced distribution of varium, a natural alternative to antibiotic growth promoters for poultry. We also experienced strong growth in China, Latin America, and Mexico. So an all-around good story for Amlin and the investments that we're making there. Now switching to other business-to-business products, agricultural and horticultural products also had a strong quarter, achieving 10% growth over the same quarter in the prior year, driven primarily by increased sales with existing customers. In our fluids purification products, the decrease in sales of our jet fuel purification products that have been adversely impacted by the reductions in air travel due to the global pandemic were more than offset by the growth of our other products as our overall fluids purification products grew 3% in the quarter over the prior year. This growth was favorably impacted by increased sales to our foreign customers during the quarter. And finally, our co-packaged cat litter product, which sits within our business-to-business products portfolio, grew 5% during the second quarter of fiscal 2021. Now, similarly, within our consumer products group, cat litter sales grew 6% over the prior year. We believe that our continued strategic focus on growing our lightweight litter products contributed to this growth in both the US and Canada. We also experienced increases in private label and branded scoopable litter sales, as well as growth through e-commerce sales. Switching gears, our second quarter gross profit of 18.2 million was down 800,000 from the same quarter in the prior year, representing a 4% year-over-year decrease. During the quarter, we experienced some significant cost challenges, which Stan alluded to in his opening remarks. Despite the favorable growth in net sales, the quarter was unfavorably impacted by cost increases, particularly in the categories of freight, which was up 13% per manufactured ton over the same quarter in the prior year due to domestic trucking supply constraints that resulted in significant increases in transportation costs. Our packaging costs were also up 13% per manufacturing ton as increased resin pricing resulted in increased costs, particularly in our jugs and pails. And natural gas costs were up 8% per manufactured ton, which we used to operate kilns to dry our clay. Overall, our cost of goods sold per manufactured ton was up 8% over the same quarter in the prior year, driven in large part by these market-based factors that were partially offset by operating cost reductions and efficiencies during the quarter. We've responded to the significant cost challenges posed by these economic headwinds through implementing mid-fiscal year price increases. So all of our products are impacted to various extents. Consumer cat litter is particularly impacted due to the amount of freight and resin-based packaging costs that are included in those products. Switching to our total selling general and administrative expenses for the second quarter of 13.9 million, They were 843,000 higher than the prior year, representing a 6% increase. However, the second quarter of the prior fiscal year included a one-time curtailment gain of 1.3 million related to the freeze of the company's supplemental executive retirement plan, which has since been terminated. Excluding that 1.3 million one-time gain in the prior year, SG&A was down 3% during the quarter. However, there was also an underlying shift in costs as corporate expenses, including the impact of the fiscal 2020 one-time gain or excluding the impact of the one-time gain of 1.3 million, decreased from the prior year. And SG&A costs to support our business-to-business products, particularly the investments that we're talking about in our animal health and nutrition products, grew 26% or approximately $600,000 over the same quarter of the prior year. This incremental expense is consistent with our commitment to invest in this high value add product line to drive growth for our future. And Dan did share some of those highlights at the beginning of the call. Our second quarter other income of $1.1 million included an $800,000 gain upon the annual actuarial valuation of our pension plan. So as a reminder, during the fourth quarter of fiscal 2020, the company executed a lump sum buyout for the terminated vested participants in our defined benefit pension plan who had elected to take this buyout payment option. A majority of the participants that were eligible for this lump sum buyout opted to take it, which contributed to the favorable annual actuarial valuation of this obligation. And finally, net income attributed to oil drive for the second quarter of fiscal 2021 was $4.3 million, which represents an 11% decrease from the prior year for the cost and investment reasons we just reviewed. Our financial position remains strong as is reflected in our balance sheet. We ended the quarter with cash and cash equivalents of $31 million and have very little debt. equating to a debt to total capital ratio of only 6%. One of the primary uses of our cash flow is to fund our trade working capital. During the first six months of fiscal 2021, our accounts receivable increased 3.8 million, reflecting our sales growth and a shift in our customer mix, including an increase of sales to foreign customers who tend to have longer payment terms. We also use our cash to fund capital investments in our business, including those required for growth and those required to drive cost reductions in addition to normal repair and replacement capital. Because of our strong position during the quarter, we also repurchased 33,594 shares of oil dry common stock for $1.2 million and an average price of $36.09 per share. So based on our strong financial position, we often get asked if we are interested in pursuing acquisitions. And the answer is yes for the right opportunity. Because of our low leverage, we are well positioned to capitalize on strategic investment opportunities that may become available. So that's my summary for the second quarter. And with that, Dan, I'm going to turn it back over to you so people can ask questions.

Perfect. Thank you very much. Great, great summary. So yes, at this time I'd like to open up the Q&A, and as always, I'd like to encourage you to ask your most important question first, ask one, and then go to the back of the line, which will allow everybody a chance to at least get one question in. And then if we have time for extra questions, we'll just keep cycling through.

Thank you. Ladies and gentlemen, if you have a question at this time, please press star then one. And once again, we do like to encourage you to just ask one question and then get back into the queue as time allows. Our first question comes from the line of Ethan Starr, private investor. Your question, please.

Yes. Hi. Good morning. I know you're in trials with some of the top poultry integrators in America, and I'm wondering how are those trials going and how long might it take to convert those trials into sales?

Sure. Well, if you know that, then you know more than I do. So we have not disclosed nor am I going to confirm nor deny we are in any trials with large poultry integrators in America. And even if we were, I wouldn't tell you because, honestly, as you know me well enough, until we're in the end zone, we don't celebrate. So we have nothing material to report at this time on that front. But I'll let you ask another question because I didn't really answer your question.

Thank you. Once again, if you have a question, please press star then 1. Your line is open again.

Do you see the sales cycle decreasing in terms of length of time to sales? Yes.

I'll let Fred talk about the sales cycle. Fred?

Can you repeat that? Sales cycle decrease? I didn't understand that.

Yeah, I mean, I don't think it's really going to decrease, so I'll lead you in the right direction. Just generally talk about the sales cycle. I mean, what do you think it takes to go from the first time we contact an account to potentially getting a real order, not a trial, but a real order?

Okay, I understand. And good question. So it really depends on the species, right? You know, if we have a chicken poultry company that contacted us, the sales cycle will likely be anywhere between three to six months because usually for the customers to be convinced, they would like to have a couple of trials in place. So that's the normal time. If it's for a swine market, this is going to be much longer. Depending on the usage, if they're using on the breeding stock themselves, then that cycle is going to be dragging out for more than a year and a half. But if they're using on the piglets, it's a little bit shorter, but we're still looking at a year cycle, a year cycle timing.

So it's clearly a lengthy cycle, but then on the flip, if and when they adopt, they're very slow to change. So then you're in there for a while, and hopefully forever, obviously, is the goal. But they don't make quick decisions. There's too much at stake. and they're going to be very methodical in their decision-making process. But great question. Next.

Our next question comes from Robert Smith from the Center for Preparation. Your question, please.

Yes. Good morning. Thanks for taking my question. Hi. So congratulations on, you know, I've for a long time felt that Amlin was going to be the tail that wagged the cat, so to speak, and I I'm glad to see the initiatives that are being taken. My first question would revolve around you mentioned 11 markets. Can you name the markets for me?

I mean, we could, but, again, it would only hurt your investment. So, no, other than America, we're not going to name exactly which markets we're going to. That just tips off the competition too well.

Well, I assume they're the larger countries and the countries that have been named in the past.

Well, I mean, I just wouldn't make any assumptions other than the opportunity is what you need to focus on is that it's two-thirds of the $1.2 billion opportunity. So it's large. It's not like it's 11 countries that together only are buying $50 million worth of antibiotics. So it's a great opportunity.

So you mentioned in the prepared remarks that China – had this big increase, I assume it's off a very, very low number, so to speak.

I'll let Fred talk about China.

Bob, not really. I won't say it's based on very low number. So, you know, as Dan and Susan mentioned earlier, we were able to close on an existing customer, one of the biggest companies in China. And based on that, it was giving us a huge boost on our existing business. And on top of that, we're able to bring back some of the old distributors that we had a relationship with where we kind of lost connection because of the previous team. And we're able to gain on that. And so that 140% growth that we're seeing in quarter two really has a lot to do with we had before, but really because of the potential we're building on, right? So you'll be able to see that in upcoming quarters. So I guess that's probably the best way to explain that.

Thank you. Our next question comes from the line of John Beer from Ascend Wealth and Admission. Your question, please.

Good morning. First off, I wonder what, Dan, what brand coffee you're drinking. I don't think I've ever heard you quite as animated in your opening comments as you are, so But that aside, you can get back to me on that. So it sounds like there's a shift. Your emphasis is shifting from maybe from the international, let's say from your focus on China previously and now more of a focus domestically. And also, I guess that would mean going from focusing on the swine market versus the poultry But I've read a lot about how the swine market is trying to be rebuilt in China and so forth. So I'm just wondering how that aspect of Amlin's business is proceeding.

All right. Well, I'm going to let Fred answer the question about China. I'll answer the question about my coffee. It's peppermint bark iced coffee. And, yes, I am. But I'm really excited about the opportunity. I drink that every morning. So what you're sensing in me. is I'm excited. But Fred, talk about China and what species we're seeing business from and where we see maybe the future.

Yeah, thank you. So for China, the species, actually we are working on multiple. So right now, The biggest opportunity, like you mentioned earlier, is swine, because I think that's where African swine fever and companies are coming out of African swine fever. They're focused on making sure that the population of the pigs are actually healthy. So we're seeing a huge boost in that field. At the same time, we're seeing a really nice increase in the remnant market as well. So I think it's not just on the swine market, but both. But just to add a little bit on the swine market, also with African swine fever, that's definitely increased risk of the vulnerability of the market, right? Because, you know, we don't really have a way of, you know, making sure the pigs are, you know, stay, you know, not harmful away from the virus. So that's a challenge. but at the same time, you actually give us opportunity because people are willing to invest more on making sure the healthy flock is maintained, right? So that gives us a different opportunity to get into the market as well. Great. Thank you.

Thank you. Our next question is a follow-up from Ethan Starr. Your question, please.

Yes, I'm just wondering, so what kind of feedback do you get from your existing customers for Amlin, you know, the NeoPrime and Capcom? Varium, what feedback do you get in the results and their return on investment, that kind of thing? And does that help you get additional customers?

Yeah, I can take that right there. Okay. Well, very, very positive, Ethan. So what we're seeing right now is if the customers, and you're asking about a turnaround kind of circle, right? If we have customers using Variant, the only thing we've seen, they're increasing the number of the tonnage they're ordering. You know, we have not seen a customer that just started using Variant and started reducing the tonnage they've ordered since, you know, since I've joined the company. So it's a very, very nice and positive trend. For Neoprim, it's the same. You know, we see But once they start using it and seeing that the effect it has as an advice alternative, we only see the trend going up. And that's really encouraging. And that's a key message that I think I can give you here.

Hey, and, you know, I'm going to add on to this just anecdotally or generally, because Fred and Jay and Heath and Wade really and Harold are really able to understand the data in the test and turn it, because they've got so much experience in this industry, put it in terms that the decision makers are motivated to keep moving forward. So, for instance, we've been myopically focusing historically on feed conversion ratio, which is, you know, what's the cost of the input and what do you get out of it in terms of weight gain or whatever it is you're trying to get out of the reason why you're raising the animals. So let's just call it in poultry weight gain. Well, we recently did a study, a test with a big player in a big country, and I'm not going to get into the details, but we need to get into why is Dan so excited. It's twofold. I've always believed in our products. I've always believed in it. But we had a test with them where the feed conversion ratio of us against the control was about identical. So there were members of our team that were perceiving this as a failed trial because why would you buy our product if you're not going to increase the feed conversion ratio? Fortunately, Fred was on the call. It was 11 o'clock at night his time. He works 24 hours a day. And he's like, but look at the mortality rate. Meaning, so our mortality rate was so much lower with our product that we could have actually had a lower feed conversion ratio and still had it been a positive spend for the customer. But to be able to achieve an equal FCR and decrease your mortality rate, for example, let's say you put 1,000 birds in, And I'm just making up numbers. We decreased the mortality rate by 10%. So we get out 1,000 birds, but the control only got out 900 birds. Yes, the FCRs are the same, but by using our product, they have 100 more birds to sell, which is an 11% increase over the 900s. So it's an unbelievable economic windfall. And once the customer looked at the data in that way, they were very excited. So it went from where we were thinking we had failed the test because we didn't really understand how to look at the data to someone with Fred's experience being able to say, not only is this not a bad test, these are the best results pretty much he's ever seen. I'll let him speak for himself. And it was a glowing success. So, yes, I'm very excited about this opportunity. Fred, did I recap that pretty well?

Yeah, and I just want to add, thanks, Dan. You know, it's really the thing we're talking about is the total number of outputs, right? So, you know, if we're able to have more birds in the chicken house, The output, I mean, right, and it means that, you know, you don't really see it in terms of on a statistical sheet, but if you do a calculation based on dollar amount, that's a huge advantage on our product. And that's what Dan says, interpretation of the data, right, needs to be done properly, and we need to educate the customers and customers. and to understand that's where we come in. We may not win on one thing, but at the bottom line, that's the most important number, right? If we win a dollar amount, then we're actually a big winner.

Excellent. And we're out of time, but, you know, it's fine. We've covered, honestly, as an investor, and, you know, I'm the biggest investor here, we've covered what you need to know to be, hopefully, as enthusiastic about the long-term prospects. It's going to take time. But the ship is starting to turn, and it starts with the people and the strategy. And then we've got the support team. By the way, thank God we invested in the ERP system a few years ago. Thank God we dramatically improved the talent level of the company, from Susan to Molly to Laura to Jessica to Fred. And I could go on and on and on. I hate to eliminate anybody. But the fact of the matter is Oil Dry is well-positioned and well-poised. at this point in time to take advantage of this opportunity. Had this opportunity hit three years ago, it would have killed us. And now we're ready for it. I'm not telling you we're not going to have problems and that we won't feel some stress fractures. Those will be nice problems to have because it will mean the business is booming. But we are in great shape to take advantage of this. And so thank you for your interest. We'll be back at you again after the third quarter in nine months. and I'll stay on my coffee because it's working. Take care.

Thank you, ladies and gentlemen, for your participation at today's conference. This does conclude the program. You may now disconnect. Good day.