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spk00: Good day and thank you for standing by. Welcome to the third quarter fiscal year 2022 investor teleconference. At this time, all participants are in a listen-only mode. If you require any further assistance, please press star zero. I would like to hand the conference over to your speaker today, President and Chief Executive Officer Dan Jaffe. Please go ahead.
spk01: Thank you, and thank you, and welcome, everyone, to our third quarter teleconference. With me here, either physically or on the line, is Susan Cray, our Chief Financial Officer, Aaron Christensen, Vice President of Operations, Chris Lampson, Group VP of Retail and Wholesale, Jessica Moskowitz, Vice President and General Manager of our Consumer Products Division, Wade Roby, Vice President of Agriculture and Amlin Marketing, Laura Sheelan, Vice President, General Counsel, and Secretary of David Atkinson, Vice President and Controller, and Leslie Garber, our Manager of Investor Relations. Leslie?
spk02: 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-dried stock. Thank you for joining us.
spk01: Thank you, Leslie, and thanks, everyone, for sending in a whole host of questions, really good questions. And so we've got a very informative session for you, so I'll not waste a lot of time not covering what you didn't want to hear. So let's turn it over to Susan first for some financial results, and we'll go from there.
spk03: All right, thanks, Dan. This morning we have a special guest with us. That is our Vice President and Corporate Controller, Dave Atkinson. Dave's been with us just about a year. He's joining us today to discuss the details of the significant accounting charge we took during the quarter, a one-time non-cash charge. And he'll go through the details with you and then be available to answer any questions you might have related to that accounting event. So with that, Dave, do you want to talk to us about goodwill impairment, please?
spk05: Sure. Thank you, Susan, for the opportunity to be here today and to talk about our one-time non-cash goodwill impairment charge that we took in the third fiscal quarter. For background, the goodwill intangible asset is established during acquisition accounting when the purchase price exceeds the sum of the net fair value of assets acquired and liabilities assumed. In the case of this particular goodwill asset, it relates to multiple acquisitions that took place eight years ago or longer. We test goodwill for impairment each year as of May 1st. In performing this test, we determined that we had experienced a triggering event in the third fiscal quarter due to continued adverse impacts of rising costs and supply chain constraints in our gross margins. We determined in the third quarter the carrying value of the retail and wholesale segment was higher than its fair value based on our discounted cash flow model. As a result, we reported a goodwill impairment of $5,644,000 which left no remaining goodwill in our retail and wholesale segment. Now, tax impact, this resulted in a reduction of earnings of $4,397,465 per common share. The remaining goodwill on our balance sheet of $3,618,000 relates to our higher margin business-to-business segment, which does not require impairment based on having fair value in excess of its carrying value. In addition, we do related to the business and business segment.
spk03: Thanks, Dave. So the goodwill charge that Dave described does not impact our liquidity. The charge itself was a non-cash charge. Further, we have strong relationships with our lending partners, and we've worked with both of them to exclude the impact of the goodwill impairment from our covenant calculations. So the amended and modified documents were filed with our fiscal third quarter PENQ for any of those who might be interested. Transitioning from liquidity to cash, year to date, we've issued $25 million in notes at a very favorable rate of 3.25%. And we've used those proceeds to fund our growth through building inventory, and we're doing that not only because of the increased cost of the supply chain, because of the fact that getting freight out is taking longer so we have more finished goods on hand, and just to provide overall higher service levels to our customers. But we are also making investments to support our growth in our manufacturing facilities as well through capital investment. We also have opportunistically repurchased shares of stock because we believe they are currently of very good value. So I want to leave a lot of time for questions, because I know there will be a few. But if I think about highlights for the quarter, strong, strong revenues in all of our businesses. And we're seeing the benefits of our pricing initiative, as well as volume growth. So if I break that down, I'd say the strong revenue growth is about 3 quarters pricing, and the other quarter is volume. I'm particularly optimistic about the quarterly growth in our animal health product. That was 13% and growing. This is a business which is strategic, and we're making strategic investments in both capital as well as in SG&A to build out sales and leadership to drive the growth opportunities there. So let me end on that positive note and turn this back over to you, Dan.
spk01: Great. Thank you. And before we address some other questions, we've prioritized a couple just because I'm going to take them. I've combined two. John Baer wrote in. What is your most positive takeaway from the results of this quarter and any positive encouraging trends you see unfolding? I think Susan covered the positives. I'm going to go with the trends. And then Ethan Starr wrote, what will it take to significantly grow Amlin sales and what progress is being made toward that? And the two of them can be combined together because we're seeing really positive trends. And there was even a third question that we may or may not get to. I think Ethan was more interested in our newer products. But I will tell you what's really driving the excitement and the growth are the older products, the stuff that Mother Nature put in the ground billions of years ago. Our clay is, as we say, minerals by nature, performance by design. Our clay is selectively mined, selectively processed to maximize what Mother Nature did billions of years ago. is really what's driving all the excitement with the actual end user, the actual customers. So we have had incredibly positive tests. This is an industry that you'll be thankful to hear is slow to move because it's impacting the human food chain. So it wouldn't even be good if they were just, you know, bouncing back and forth, changing things left and right without being very methodical and getting deep into the data and making sure they see repeat, repeat, repeat performance. Having said that, all of you know, major entrees into new accounts are moving forward with results better than what, you know, they had even hoped for when they went ahead and agreed to test the products. So, you know, what do we need to grow? It started with building the team. It started with, you know, bringing in Heath and Jay and Chuck in the U.S. And really, because we never really had a U.S. presence. And their, you know, reputation was, in the industry is so strong that when they left Cobb and joined us, because they truly believe in our mineral, before they joined the company, I gave each of them the same spiel, which was, look, I'm an accountant. I'm excited about our clay, but I don't really understand this industry. Go out to the research center. Go to the Nick Jaffe Innovation Center and the Nick Jaffe Microbiology Lab. Get into the data and come back to me and either tell me, Dan, you're chasing rainbows, there's nothing here, and I'm staying in my 22-year career here at Cobb. Or, no, it's real. In fact, it's even better than we thought. And they all joined, and, you know, the proof is in the pudding. And so it's very exciting. The results are very positive. And while we don't generally disclose too much of just animal health, I know in the queue we said we did about 14.4 million in animal health sales. You know, depending on revenue recognition, because, you know, the global supply chain is such a mess right now, that we have products that are sitting on the water, sitting in docks, that until it gets in the hands of the customer and can be properly recognized in our revenue streams, I can't really tell you exactly where we'll be. But we believe we have enough on hand already. to be around, you know, 18 million, sorry, over 20 million. We did 18 last year. That was last year's number. We're at 14.4 at the three-quarter poll this year. And we believe we'll be north of 20. If everything that's on the water gets invoiced, we could push 22. But we'll be somewhere in between 20 and 22. And then we already have enough confidence in the tests we've seen, the commitments we've gotten, the expansion in the trials, to be budgeting for around 40 next year. So you kind of see, you know, what we're seeing, which is this continued snowball growth. And, again, as slow as this industry is to move, they are also then going to be slow to move away from it, meaning once they build their diets. And it really does, I'm learning, Ron, word of mouth, that, you know, you're not really going to hit a single in this industry. You're going to hit a grand slam or you're going to strike out. But they talk. These nutritionists talk, rightly so, and they should because they're all trying to help the U.S. food chain and the global food chain. And so when someone starts to have success, it gets around the industry pretty well. And that's why we're getting trials with such a wide variety of customers all at the same time. So I'm probably not going to get any more definition than that. It's a little more than I usually give. But I felt like I needed to because, you know, the results are still not what we want them to be on the bottom line. You know, the top line results have been great. You can see some benefit of price increases. But, you know, while we did show gross profit up on a dollar basis, it still was down on a percentage basis from a prior year in the quarter. And, you know, it's because our second and third round of price increases really didn't hit until May 15th and June 1st. We had bunches of hit, and you can see it. But, you know, the fourth quarter is when you really should start to see us get on top of this gorilla of global inflation, gas prices tripling, diesel prices rising, everything sort of happening at the same time. And so we are taking absolute price increases. We're implementing surcharges. And we're increasing those surcharges as the gas price goes up. We will certainly relieve those surcharges as the gas price goes down. And we did have a question on hedging. And, look, I've been pretty consistent. We're in a rational market. And if we hedge and we hedge wrong, we cannot go to our customers and say, look, we thought gas was at 9 and we thought it was going to 15, so we forward bought. And now it's back down to 3, but we don't want to relieve the fuel surcharges because we guessed wrong. You know, that's not going to be a real fun sales call to have. As we all know, the definition of a market is for every buyer, there's a seller. So when buying gas at 9.30, there's someone selling it at 9.30, meaning that there's someone thinking it's going down, there's someone thinking it's going up, and our best move is to ride the wave and then merely handle the dollars. We've never professed to be natural gas experts, and we don't profess to be going forward, and we're just going to stay and ride with the market. And if that means we're 30 days late, to the market, then so be it. We believe that's in our customer's best interest than trying to guess and potentially guess wrong, which would be really detrimental to either us, our customers, or both. So that knocked off about three or four questions. So Leslie, where are we going next?
spk02: So the next question is from John Bear from Ascend Wealth Advisors, and he asks, are you seeing any shift by the consumer away from your premium cat litter products to lower-end offerings?
spk06: Yep. Morning, John. This is Chris. I'll take the question. Thanks for the question. And I think we had a similar question last quarter, and the answer largely remains the same. So as we look at the total category, really what we see is a bit of a barbell effect. So super premium products, so real price premium per use, specifically litter crystals are growing very nicely. And then at the other end of the market, those brands and brands Retail brands, private label brands that are obviously more value-oriented are also seeing growth that is in excess of the category. I would put both of our significant businesses within Litter into that latter bucket. And as a result, I'd say we're benefiting from what I'd call fairly modest tailwinds above the category. Category is already doing well, right, up, you know, tracked in the low teens category. Those, what I'll call value brands that perform particularly well, can't fool the consumer for long, value brands that perform particularly well, Premium Private Label and our Cat's Pride and Johnny Cat brands are performing ahead of either the segment that they play in or the overall category.
spk02: Okay, great. Thank you. Our next question comes from Ethan Starr. What kind of results are Amlin customers seeing with Amlin products, both in the United States and around the world? I'm especially interested in hearing about results for the newer Amlin products.
spk07: Yeah, Wade, will you take that? So good morning. Yeah, thank you, Dan. Good morning, Ethan, and thank you for the question. We're seeing excellent results around the world. As we've discussed in previous calls, part of the sales cycle with Amlin products and in this industry is is to evaluate in the field our products in customer operations. We certainly share R&D results we do at CROs or universities, but customers really want to try the products firsthand. In the trials we've been conducting over the last 12, 18 months, we've universally seen excellent results. Our customers are seeing improved performance with our products. As we look around the world in the launch of our new products, we're beginning to evaluate those as well. As we mentioned, again, in a previous call and with our IPP launches, we're launching two new products internationally, our NutriPath product and our Phylox product. Both of those products are in testing now with customers, and, again, we're seeing them perform as expected, and we're starting to make great progress in moving those products into the market.
spk02: Okay, great. Thank you, Wade. Our next question also comes from Ethan Starr. The 10Q indicates that you'll be spending $6.5 million to renovate one of your manufacturing facilities. Which plant are you renovating, what improvements are you making, and what benefits will result from this?
spk01: And Aaron Christensen, our newly promoted Vice President of Operations, will take that one. Aaron?
spk04: Yeah, that's a great question. Thank you for asking, Ethan. Susan already largely alluded to the answer. You know, our capital spend continues to be heavy in our – Aging infrastructure, the bulk of the spend is in the areas where we support the ambulance business and lightweight cat litter. It's a combination of investments that add capacity, flexibility, redundancy in some cases, and address our cost structure. You know, the question specifically states the location. I'd rather avoid that detail, but it is most definitely clear to kind of indicate that the capital spend is definitely targeted in the areas. where our commercial teams are targeting strategic growth.
spk02: Great. Thank you. The next question comes from Kurt Cornwell, who is a longtime shareholder. Was the decision to take the goodwill impairment charge in this quarter related to the substantial increase in inventory year-to-year, and are you satisfied with current inventory levels?
spk03: I'll start, and then I'll hand it over to Erin. How's that? Thanks for the question. No, the inventory levels weren't part of what triggered the impairment charge of the quarter. The second half of your question, are we satisfied with the inventory levels? Certainly we've seen an increase in finished goods as the whole situation was great and the long week past getting our product to customers has caused quite an increase this year. As to the rest of inventory levels, I'll let Aaron, our VP of operations, answer what he thinks about inventory levels.
spk04: Extremely hard to predict where we go over the next quarter. The market dynamics right now, in particular in freight and export freight, are incredibly unpredictable and unstable. The bulk and majority of the increase in working capital over the past quarter has been in export production and volume for several pieces of our business, where we simply have not been able to move the product at the rate that we have historically. All indications are export freight in particular is not going to improve over the coming quarter. We're finding unique ways to manage our working capital down, but obviously we have to have the product to begin with. to be able to move the freight. So we'll monitor as the freight market and other aspects of the supply chain stabilize in the months ahead.
spk01: Great. Thank you. And we have a couple questions. Ethan asks, what is the number of different countries you have already sold Amlin products in? And John Bear asks, to what do you attribute the sales decline in Mexico and Asia? Is it a demand drop or a logistic issue or both? And Wade, I'm going to call on you to take on those two.
spk07: Yeah, thank you, Dan, and thank you for the questions, guys. I'll start with the question related to the countries we're targeting. Ethan, we're targeting approximately 27 countries today and selling around the world, really, in all key world area geographies except for the EU, and we've discussed why we haven't approached that market yet. These are really the countries that we're focusing on. We're not going to have a large expanse in that number over the next 12 months. We'll see instead more significant investment in the key geographies like in the Americas, North America, South America, as well as in key countries in Asia. But that list will gradually expand in time. As we look at Mexico and the change that we saw there, if you look at the third quarter of fiscal year 2022 versus 2021, which I think is the reference question you're asking, we saw a decrease in a in net sales of approximately $147,000, which constituted about 25% for the quarter. And that really was related to a discontinuation of certain product lines that were sold by Agromets that were more equipment or mechanical in nature. It wasn't related to our core products, but rather products that we chose to discontinue that weren't core to our strategy. And so we see that really as a temporal event.
spk02: Great, thank you. Our next question comes from Ethan Starr. In the slide presentation at the annual meeting, OilDry noted that Amlin has an opportunity to target companion animal rations. I have three questions related to that. Has the Innovation Center already developed a scientifically proven product? Second, are you already working with a pet food manufacturer either informally or with a contractual agreement? And third, what can you tell us about when this product might begin to generate revenue for oil drive? Wade, do you want to take that question?
spk07: Yeah, sure. And again, thank you, Ethan, and thank you for the breadth of the question because it is an opportunity that we see is pretty significant for the company in the future. What's great about our product, and Dan mentioned this, and certainly our core clay mineral products is that they are effective in a broad range of species. So although we're initially targeting, say, poultry and swine in the key geographies we're looking to penetrate, we're also pursuing markets like the ruminant market, specifically in dairy, and also companion animal. And the reason is that the products work across species really the same. This is basically true for our formulated products as well with some exceptions, but we have a breadth of portfolio that we can target not only production animals but also companion animals. We're in the process currently of talking with large companion animal feed or food producers. What's fortunate about that is a lot of these very large food companies that we do business with today are vertically integrated and cross species. They might produce both poultry feed, ruminant feed, and sometimes companion feed as well. So it makes it a very efficient way for us to penetrate the market. We're not testing yet in companion animal rations. We're going down a cycle of providing them data and convincing them to do validation tests, but we hope to do that in the near future. And I would hope that in fiscal year 2023, we begin to see some sales into the companion animal market. But again, we'll have to validate the product with customers and then begin sales in that order.
spk02: Great. Thanks, Wade. We have a question from Eric Cinnamon. Oil Dry has a long history of maintaining a very strong balance sheet. Given it's been a capital-heavy year with elevated capital expenditures, working capital growth, dividends, and buybacks, leverage has increased. Does the company have a maximum net debt or leverage ratio in mind, and should we expect free cash flow to improve over the next year, or will cash needs remain high? Susan?
spk03: Yeah, a lot of different questions there. So let me start. Do we expect free cash flow to improve? We expect to continue spending capital because we've got identified opportunities at the level that we're spending it here in fiscal 2022. into the next year or two. So we've got some really good opportunities there. Inventories, Erin talked about earlier. We have made an investment in our inventory to serve our customers and just because to support the volatility we're seeing in freight and shipping. We do have a strong balance sheet. We still are sitting with a deficit total capital of 18.4%, so really pretty low, and that means we've got got dry powder and to fund opportunities as they come along. Do we have a specific ratio in mind? I think we've had conversations where, unless the opportunity was something we can't even really imagine, that we would not see that going above 40%, but that leaves a whole lot of opportunity for things that are accretive. So with that, as far as dividends, we intended supporting the dividend, and share buybacks will be opportunistic, but to be honest, it's very attractive at the price we're talking about right now. So do we have any, we spent about $11 million year-to-date on share repurchases. As we sit here today, we don't have any more plans to do so, but that is a good opportunity for us, but it comes last in our ranking of opportunities. Growth in our business would trump that, and and working capital investment.
spk01: Thank you. The only thing I would add is, you know, as I look at our balance sheet, we've got $200 million of assets. And the question is, does that mean that, you know, could we replace all five of our major U.S. locations, Georgia, two in Mississippi, one in Mounds in Illinois, one in Taft, California, for $240 million? And the answer is not even close. You know, these are historic values. They're depreciated values and so forth. And, you know, so as these get older and as Aaron and his team upgrade, and just not even upgrade in some sense, just maintain, keep up to standard, and then as you layer on the fact that, you know, environmental compliance only gets more strict, the amount of particulate you can emit, all that kind of stuff. So you have to have more and more air quality equipment and things like that. It's capital-intensive business. That's the bottom line. So on the dividend side, obviously, very important. We've always, you know, we've been paying a continuous dividend for him or ever. I mean, I was looking back. I mean, it's in one of our releases. I don't remember, but I want to say over 40 years we've paid a continuous dividend, and we've raised it 18, 19 years in a row. And it's always on 19 years in a row. 18. That's what I thought. Okay. 18 years in a row. No worries. And we always look at it in June. And this is June. So, it's certainly on the agenda for today's board meeting. And, you know, that will be a subject for discussion and a review and approval by the board. And what they're going to want to see is, you know, do we believe that our margins are going to come back, that we'll start generating the cash necessary to not only fund the maintenance and growth of the business, but also to then increase the dividends. So, I would say you'll know more by close of business today. because, you know, that will be a strong signal one way or the other. And, you know, Susan and her team will be presenting some cash flow information and so forth so that they can make a more informed decision. Good. So we have, what, one more question?
spk02: We have time for one more question, which comes from Ethan Starr. In the most recent 10-K, it is stated that oil dry provides in terms with the significant customer so that the customer would pay freight charges directly and such costs wouldn't be included in the price oil dry charges for its products. What is the approximate impact of the change on the top line per quarter? If you can't give a precise figure, could you at least tell us whether it's more or less than $1 million per quarter?
spk06: So, Ethan, it's Chris. I think the key point here, and from the nature of your question, I think you understand this, but just really want to emphasize that there is no real net bottom line impact to this. So it's simply a lower sales, Over the last year, we will have annualized this effect going into this next quarter, going into Q4, with an offset really in the freight line in our detailed P&L, if you will. So, you know, roughly how much does that approximate to over the last year? Approximately a couple points in sales that were depressed. And, again, no bottom line impact, simply a shift. So more than a million and a quarter.
spk01: Yeah, yeah. So good question. Well, thank you, everybody. And, look, we're all looking forward. to the fourth quarter, we will have significant price increases already showing, but then more coming, and all around trying to recapture costs and protect our margins, and we're very focused on it, nose to the grindstone, and we'll be back with you in whenever that is, not quite 90 days, probably a little longer, but after we close the fourth quarter, we'll talk to you then.
spk02: Thank you. That concludes our call.
spk00: This concludes the conference call. You may now disconnect.
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