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spk00: Thank you for standing by and welcome to Oil Dry Corporation's second quarter fiscal year 2022 investor teleconference. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. I would now like to hand the call over to Dan Jaffe, President and CEO. Please go ahead.
spk02: Thank you very much. Welcome to our first six-month teleconference. With me today, Susan Cray, CFO, Molly Vanden Heuvel, COO, Chris Lamson, Group Vice President of Retail and Wholesale, Jessica Moskowitz, Vice President and General Manager of our Consumer Products Division, Fred Cowell, Vice President of our Global Sales for Amlin International, Dr. Wade Roby, Vice President of our Amlin Marketing and Product Development, Tony Parker, Assistant General Counsel and Assistant Secretary, and Leslie Garber, Manager of Industrial Relations. Leslie, will you walk us through the safe harbor?
spk05: 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-drive stock. Thank you for joining us.
spk02: Thank you. And before I turn it over to Susan, I just want to give some 50,000-foot comments. I can tell you no one has been prepared for what we're all dealing with. You know, anyone literally goes back to 79 and 80 for inflation, but when you factor in the global pandemic, the supply chain crunch that's going on, labor shortage, and then a war. I mean, this is, other than that, how'd you like to play, Mrs. Lincoln? I mean, it's very dynamic times. I'm very proud of the oil dry team. As I tell them, we are being graded on a curve, and we are doing very well. I mean, you can go to the shelves, you can see our products. Yes, there's some thinning in certain product lines, but the other guys are seemingly doing worse than we are. And that's, you know, really exemplified by the fact that we delivered 17% organic Sales growth in the quarter, just a fantastic job by our team. Obviously, we're not keeping up with the cost increases. We're getting price increases, but it's like catching a falling knife at this point in time, and we're just chasing a moving target. The good news is we're in a rational market, and our customers understand it, and we're just passing through price increases left and right, and it's going to keep happening. I mean, I just don't see this inflation abating anymore. anytime soon. Susan, I'm going to turn it over to you for some highlights. We're assuming you guys have read the Q and the K, so take it through the highlights.
spk01: Thanks, Dan. Right, we're going to change it up a little bit this time in order to leave more time for questions. So just a couple of key highlights. Dan mentioned the continuing cost pressure, but taking a look at the results, it was an exciting quarter during the second quarter. We see the benefit of our growth strategies coming through our financials A particular highlight was an all-time record second quarter for Amlin, our animal health business, and an all-time record second quarter for retail and wholesale and for the company as well. So our strategies are working, and Dan mentioned we're chasing the cost. So a little bit about pricing and costs. We get a lot of questions around that. We do have one major customer that has a pricing reset clause based on a major economic indicator that's embedded in the contract. And by definition, that's backward-looking. But most of our pricing tends to be backward-looking. We're in a rational marketplace, and our customers don't want us to set pricing based on forward projection, but really want to be factually based. So we continue to chase it because the costs continue to move and an unprecedented rate. Now, our processes are better and tighter, and you see us going to market much more quickly with these cost increases. And in fact, we've announced several here for April 1st for our domestic cat litter business and our sports product businesses. And we continue to monitor these and work them into the market as quickly as we can. That being said, I wanted to switch a little bit to capital allocation during the quarter. We issued a 10-year note for $25 million at an annual interest rate of 3.25%, so a nice, nice rate. We have that note set so that we make $5 million each repayments in years 6 through 10. One of the primary reasons we took out this, and there's multiple reasons, but is to support our growth. So, if you think about our repayment schedule being scheduled down the road, that gives us time to actually make investments in our plants and other initiatives which we're pursuing, and for them to become accretive before we have to start paying back the principal. So, it was a very, very opportunistic but nice placement for us. In the near term, we're supporting our growth through inventory builds. So, if you had a chance to read our 10-K, you saw that we're investing more in inventory. as both prices go up and as we increase our inventory levels in order to better serve our customers during these times when there are many disruptions in the supply chain. We're also making investments in our plants. Normally, our plant investment, our capital spending in the plants runs in that 14 to 16 million annual run rate. Year to date, we've spent 10.6 million, so a run rate that's a little higher. And we anticipate that run rate to continue for the second half of the year as the increase in volume of our sales continues to push on capacity constraints and the opportunities in some of the businesses with newer products also offers us opportunities for growth. So that's one thing. During the quarter, we've also continued to repurchase shares of our stock. The pricing is pretty favorable right now. Year-to-date, we've done that to the tune of $6.2 million. And as we've said before, and we'll continue to say, is we opportunistically repurchase our shares to offset dilution. So those were just some of the highlights. Dan, I'll hand it back to you, and we can open it up for questions.
spk02: Yeah, thank you. And first of all, I want to thank people who submitted questions in advance, and so we have a bunch to go through. But I encourage you, if you're online, Leslie, how do they give us questions?
spk05: There's a field, a Q&A field, and if you submit your question in that field and then push submit, you should be able to quickly submit it, and we'll be able to see it right away.
spk02: Great. So, well, good luck. I mean, we've only used up 10 minutes, and so we're going to be able – we've been listening, and we'll be able to dedicate the final 20 minutes to Q&A. So, Leslie, let's go through the questions that were submitted.
spk05: Okay. So the first question was submitted by Ethan Starr, a private investor. It's really a two-part question. I'm going to read the first question. Last quarter, you spoke very optimistically about the prospects for Amlin International and said you're shipping to major companies that are very sophisticated. What kinds of results are your Amlin customers seeing, and are you still optimistic that a tsunami is coming? Mm-hmm.
spk02: Ethan, thank you for your question. Tsunami, I'm not sure I'm going there just because that could be a forward-looking comment. But I will tell you I couldn't be more happy with where we are at. We are making a lot of progress. We are putting on new accounts. We're getting traction. And as we said, we had a record quarter for Amlin. I can tell you in the U.S., which has been a focus, the team we've put together as contacts, from coast to coast with every major producer. Our clays work. We had the IPPE show down in Atlanta. We had all the major players into our booth. It couldn't have been more positive. And they all get it. We lead with our clay, and we finish with our clay. And our clay, as we say, the minerals by nature and then performance by design, we take this selectively mined mineral, we process it very carefully to do specific things And really, we believe we have the absolute best all-natural, non-antibiotic solution to the replacement of antibiotics in food production. So we're very excited about it. Couldn't be happier with where we're at at this point in time. Let's go to Part 2.
spk05: So Part 2 is, could you please explain Amlin's product strategy for the United States? Are you seeing orders already, and how did Amlin's presence at IPPE make a difference?
spk02: Yeah, and I covered some of that, but I'd love Wade, Roby to take it head on.
spk07: Yeah, thank you, Dan, and thank you, Ethan, for that question. As Dan mentioned, we just did our U.S. rollout at the IPPE show in January of this year. It's the world's largest show for poultry, meat, and animal food, Even with the pandemic, we had over 20,000 registered attendees. Normally it's about double that, 1,000 exhibitors. So there was a great opportunity to demonstrate the M1 technology and to meet with our customers. As Dan mentioned, we're already taking orders in the United States. That's after the last six, nine months of field trials with some of the largest integrators in the poultry industry. We're also beginning to make sales in the dairy side in the U.S. as well as swine. So really cross-species interest in our products. When you look at our strategy, it's really the same as we look around the world. Our products, as Dan mentioned, are non-antibiotic, non-pharmaceutical, and they provide a range of benefits in animal production to improve the economic performance and doing that through helping to ensure good gastrointestinal tract health, helping to maintain the productivity, the microbial ecology of the animal. So I have generalized benefits for the animal that promote optimum growth. Our product line in the U.S. is a new branded product line that we're launching for sale here, and it's been very well accepted by our customers.
spk02: Hey, Wade, great. And you know what, Fred, I'd love your perspective on the IPPE from a sales perspective. I know the attendance was down, but we felt the impact was actually equal or greater. So I'd love to hear from you.
spk06: Yeah, that's true, Dan. Good morning, and thanks for the question, Dan. Yeah, I mean, we have a lot of interest, right? Attendance was down because of COVID. However, we got a lot of people coming to our booths asking very specific questions and have specific interests on our product. And I don't think, I just believe that the interest level was so high, even though customers that did not intend to join the show, they did show up and just, you know, surprise us. And we had a lot of interest, not just in North America, but across the globe. across the world. South America specifically have a lot of people attending the show as well. So Ben, you're absolutely right. The show was not very well attended, but our booth was very, very busy the entire time.
spk02: Great. Hey, and before we open up to the next question, I think I forgot to mention at the start, and I wanted to, that our support of the boycott of Russia. So I just want to let you know that, yeah, we have suspended all shipments to Russia. Let you know it's not material in our grand scheme of things. We've never done that much business, but we did. And as a show of unity in trying to help with the horrific situation in the Ukraine, we will be supporting that boycott. Leslie?
spk05: Okay, thanks. The next question comes from John Bear from Ascend Wealth Advisors. He asks, your press release indicates higher sales for cat litter product lines, That is as much, if not more, a unit volume increase rather than just a price increase. If that is correct, to what do you attribute the increased demand for your lightweight cat litter products given your lower advertising spend? New customers, high market penetration. I would think the stay-at-home, get-a-cat, or pet surge is largely passed off.
spk08: All right. Yep. So this is Chris. I'll take that question. Thanks, John. So Really, it's about distribution. So we're growing distribution, points of distribution, actually in a market where, and you see this across categories, where retailers are really tightening up. So total points of distribution, as tracked by Nielsen, are down in the category, but our points of distribution are up. As importantly, or maybe even more importantly, our points of distribution are up most with retailers that are winning. So retailers where Traffic is growing. Where they're growing, share themselves. So sort of said differently, we're winning with retailers that are winning or in-game retail winners. Is there a second half of that question? Well, we partner with Ethan's question.
spk05: Okay, right. So the second part is from Ethan Starr. What new business are you adding in the cat litter area? And in light of the inflationary environment, to what extent do you see customers switching to lower-priced brands such as Cat's Pride or private label brands?
spk08: So I think to the second half of that question, you know, as Dan talked about to begin the call, such unprecedented times that I don't think we're prepared to say, yeah, private label and value brands are going to get a huge tailwind in this market. We just don't know. Again, if you look at the data at this point, the most recent quarter would show private label and value-oriented brands growing share modestly. And then really the upper end of the market, the alternative is that are at a premium price on a per-use basis are also growing. So a bit of a barbell effect in the market. So we are seeing that modest growth in value, but not to an extraordinary extent to this point. Perfect.
spk02: And then, Jessica, I didn't know if you wanted to add a little color to Chris's play-by-play. Great answer. But, Jessica, anything you want to add?
spk04: No, I think he covered it. Thanks.
spk02: Okay, great.
spk05: Okay, great. The next question is from John Baer. Your 10Q references manufacturing capabilities are strained, due to age of equipment, availability of repair parts, and may limit production capabilities to meet your product demand. Do you anticipate increased CapEx spending on new equipment this year?
spk06: Molly?
spk03: Yes, so this is Molly. Thanks for the question. And Susan alluded to this, but I really don't expect capital to increase significantly this year, and partly because we've been investing in the business as required this current year. So whether that be repairs, as you mentioned, but also for business growth and cost reduction. So we'll be doing that for this last year plus this coming year, which should keep our capital investments relatively flat. Our business growth investment is to meet current demand, but also planned growth. And we are seeing some inflationary pressures on parts and equipment, but we're seeing it this year, so I expect to see something similar next year.
spk02: Great. Thank you.
spk05: Great. The next question is also from John Bear. Recognizing that avian flu is a respiratory issue rather than an intestinal issue, has there been any uptick in AMLIN product interest due to the recent and growing number of avian flu outbreaks in the United States? Is there any R&D focus on products to address avian flu?
spk07: Wait. Yeah, John, thank you for that. So a couple of things, if I could. First, as you appropriately indicate, avian flu is a respiratory issue, so our current product line would not be effective in treating or mitigating that condition. Our products are not absorbed by the animal and don't work systemically, so there really is no tie-in or opportunity for us to benefit with AI. In general, AI has a suppressive effect on the market, frankly. really there's only the option of destroying or depopulating flocks that become infected with AI. So the net result is you do see at times a downward movement in the total number of birds produced per year as poultry companies try to replace those with new hatch. So no, there won't be any direct application of our products. We're also not a pharmaceutical company or drug company, so we don't anticipate developing vaccines or antiviral products that would work for respiratory-type diseases.
spk02: Thank you. Well said.
spk05: Okay, great. The next question is from John Bear. Can you speak to the progress of Amlin product sales as it relates to the U.S. swine market?
spk02: Yeah, I mean, this will be simple. You know, we're focusing heavily on poultry. Not to say we would turn away opportunities, and there may be some in other animals, but the team we've put together in the U.S. has incredible contacts, reputation in poultry. It's I don't know, Fred, you can, or Wade, my understanding, it's about 40% of the opportunity is in poultry. And that's plenty big for oil dry to get up and running and going. So we're really leaning heavily into poultry. Fred, any comment you have?
spk06: Yeah, I would like to add something, Dan. Yeah, so, you know, I mean, we are focusing on poultry because, you know, that's where our bread and butter is. But at the same time, we are not, you know, like Wade mentioned earlier, we are still doing business in other markets as well, right? We're not overlooking the swine and the dairy market. As we discussed, China has a huge dairy opportunity, so it's a swine opportunity, right? That's all.
spk02: But in the U.S., this question was specifically targeted to the United States.
spk06: Yeah, so U.S. is the same. Like Wade mentioned earlier, we do have sales in the swine and the dairy market in the U.S., but definitely we're more focused in poultry. And that's a big chunk of the business opportunity for us in the poultry market and sectors in the U.S. alone. I just want to say that we are not only focusing on poultry and not looking at other opportunities where we are trying to do, you know, the business opportunities there that are targeting all of the poultry as a primary focus.
spk02: Yeah. Okay, good. Well said. Thank you for the question, John.
spk05: Okay, next question is from John Bear. Do any of your clay deposits have associated lithium in them, which might lend themselves for extraction for the EV battery market? There are several USGS bulletin special reports that discuss lithium association in clay deposits.
spk02: So I sent this question, I phoned a friend to Dr. Mark Hooper, who is a Ph.D. in clay mineralogy. He's been with us forever. And he answered me back. Unfortunately, both our Georgia adipolgites and Mississippi, Illinois calcium bentonite deposits do not contain any lithium-bearing clay mineral phases that would be of any conceivable economic value as a trace source of lithium metal. There are some well-known clay deposits in the western U.S. that contain smectite clays with a fairly high trace lithium concentration as part of their mineral structure. These are the lithium hectorites and saponites located in California. However, the current technical and economic viability of such clays as a significant domestic source for this metal is very low, especially compared to the abundance of currently mined lithium brine salts and lithium silicate rock deposits in many parts of the world. Great answer, Mark, and he's available for parties and bar mitzvahs if you need entertainment. because he's very, very, no, I'm teasing you, Mark. You know I love hearing from you, but holy cow, do you know your stuff. Thank you for your answer.
spk05: Great, thank you. The next question comes from Lawrence Richards. He asks, I have seen a product named Pretty Kitty advertised lately that purports to track the health of cats through changing colors based on the color of the litter after the cat uses the litter box. Have you heard of this product, and does Oil Dry have any reaction to it?
spk02: So, yes, we've heard of it. I'll take part of this. If you guys want to jump in, you can. We've worked on indicator litter for years. The problem is the cost of using that product all year round for what could be a very specific time-sensitive problem, it really, the cost is greater than the benefit. If you look, I think it's retailing for $24.99 at Wal-Mart. You compare that to our opening CPS jug, and they both provide about the same volume of material, which I think is at 648. But, Jessica, you can confirm that. So you're talking that it's almost four times the cost. And so at the end of the year, you'd be spending hundreds, maybe even $1,000 more, to try and figure out if your cat had a urinary tract infection or You're better off if the cat, you know, has an issue, take him to the vet. So we just have never seen that it's worthwhile from a cost-benefit standpoint to put those kind of indicators in a litter every single day. It's very expensive. It would be like taking a health test every day, even when you feel good. There's no point to doing it. So not a fan, as you can tell. Very expensive. Jessica, I don't know if you have any comments.
spk04: Yeah, I can build on that. I mean, I think like you, very much consistent with what you said, Dan, as we evaluate innovation, obviously we need to continue to look at the size of the market and the overall appeal with consumers. And we always keep a pulse on innovation that we see, but at the same time need to make sure that it's strategic for oil dry and aligns with our long-term strategy of pursuing lightweight. So yeah, I would just echo what Dan said and obviously continue to see these things and and market them to look and see for future opportunities and where we can grow. And that's it.
spk02: Thank you.
spk05: Great. Our next question comes from Ethan Starr. How is the cat litter business in Canada doing, and what are the growth opportunities? In the United States, are you adding new customers for cat litter that you had not previously sold to?
spk08: So litter in Canada is doing great. Actually, top line is slightly ahead of the really strong growth in the U.S., And, you know, it's a lightweight market. We're the leading share brand up there. Nestle's product has gone lightweight across the board and so we're, you know, very well positioned, particularly with our private-level business, to grow. And we're seeing that growth today. Second half of the question, as I mentioned earlier, I think we've really, you know, the majority of our growth in the U.S. is stemmed from distribution growth at existing customers. That said... You know, we have a few tests at various customers that are performing well where expanding distribution, you know, going forward based on those tests performing well is, you know, we're optimistic about that.
spk05: Okay, great. We don't have any more questions.
spk02: Well, I'll ask a question and then I'll answer it. So I think we've mentioned this before, but, you know, renewable diesel is starting to hit in the U.S., which is another demand source for our bleaching earths, which is great. But what is happening is demand is going to exceed supply in a hurry. And so, you know, whether we get the renewable diesel business or just continue to support ADM and Cargill on the fluids purification side, either way, there's a lot of incremental demand coming in the U.S. for our bleachingers, which is great. And so we're going to continue to play money ball like we've always done where we will lean into those customers, that are long-term partners where we can make an acceptable margin and supply them with the value they need to then purify whatever fuel or oil they're purifying. And so it's really an exciting time for Bruce Batesy and his division because the edible oil business grows by 2%, 3% a year, usually with population. But now when you layer in this renewable diesel, it's really exciting. So we're definitely looking to – to play money ball as this thing starts to hit. Well, good. Well, listen, thank you, guys. I love the format. I appreciate your questions. You can tell we have a lot of optimism for our business. We're not happy with the margins, obviously. I mean, we're chasing a moving target, and we're going to keep doing it. I will just tell you the good news is it's a rational market. We're able to get price increases. We're trying to work closely with our partners so that they can get their, if they're a consumer, they can get their retails up. If they're a B2B, they can pass those along. And so, you know, but it doesn't seem like it's abating either. Every month I read it, and every month the CPI and the PPI keep setting record levels dating back to 82, 81, 80. So this is a first-time thing in 40 years. So these are dynamic times. But I'm very proud of the Oil Dry team. I appreciate our long-term loyal investors. And, again, we're continuing to generate cash and do well there. And so, you know, we're a value stock with a growth potential, which, you know, doesn't happen all that often. But certainly we're definitely focused on the value side and protecting that dividend. And then hopefully getting a big chunk of organic growth on top of it would be fantastic. So, yeah. You know, I think we'll close by just saying I think we referenced it in the news release, but we did buy back shares last open window. The window will open again. And at this stock price and at this dividend yield and the cash that we got sitting earning not a whole lot in our bank, you know, we'd be crazy not to be continuing our stock repurchase program. So I'm sure that we will be opportunistic there. So thank you, everybody. We'll talk to you again in three months.
spk00: This concludes today's conference call. Thank you for participating. You may now disconnect.
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