Oil-Dri Corp of America (ODC) Q4 2021 Earnings Call Transcript

Oil-Dri Corp of America (ODC 1.14%)
Q4 2021 Earnings Call
Oct 15, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the Q4 2021 investor teleconference for Oil-Dri Corporation of America. [Operator instructions] I would now like to hand the conference over to your speaker today, Mr. Dan Jaffee, president and CEO.

Thank you. Please go ahead. 

Dan Jaffee -- President and Chief Executive Officer

Thank you, Kevin. Welcome, everyone, to our fourth-quarter and fiscal-year ending teleconference as we completed our 81st fiscal year in business, very exciting. Joining me on the call today is Susan Kreh, CFO; Molly VandenHeuvel, COO; Jessica Moskowitz, VP and general manager of our consumer products division; Fred Kao, vice president of global sales for Amlan International; Laura Scheland, vice president and general counsel; and Leslie Garber, manager of investor relations. Leslie, will you walk us through our safe harbor?

Leslie Garber -- Manager of Investor Relations

Yes, thank you. Welcome, everyone. On today's call, comments may contain forward-looking statements regarding the company's performance in future periods. Actual results in those periods may materially differ.

In our press release and in our SEC filings, we highlight a number of important risk factors, trends and uncertainties that may affect our future performance. We ask that you review and consider those factors in evaluating the company's comments and in evaluating any investment in Oil-Dri's stock. Thank you for joining us. Dan? 

Dan Jaffee -- President and Chief Executive Officer

Great. Thank you. And before I turn it over to Susan, for what I call a play-by-play, I'll give a little color on the year, and I'll try not to steal too much of her thunder. But obviously, very happy with the top-line growth.

Overall 8% growth, all organic, no acquisitions during the year and then 20% in the fourth quarter. So you can imagine what that did, especially what everyone knows about global supply chains, what a great job our team did of getting all that out. However, costs, we are in a whole new cost environment. I mean, whatever we thought we were seeing, it's way worse.

And so we were in a constant game of catch-up. And we just put out a news release this week about it. So we're still playing catch-up. But the good news is the strategies are working.

The supply chains, it's -- my father used to always joke at when people would to ask him, "How's your wife?" And he'd say, "Compared to who?" And so how's our supply chain? Compared to who? I mean, when you go to the shelf, certainly in the consumer area, you see out of stocks everywhere. And generally, you see the competition more out of stock than we are, which is why I think we were up so much in the fourth quarter. So it is tough, challenging times. Heads are down, trying to execute on price increases and cost control as we are also in the midst of really some very exciting growth opportunities in many of our businesses.

So it's very challenging times, but very proud of the team. They've done a phenomenal job with certainly stressed. One of our core values, which is the W, which is work-life balance, we've definitely been leaning too much toward work and not enough toward life these last 90 to 120 days. But the team has stepped up, and I'm very appreciative of what they've done.

So Susan, I'm gonna turn it over to you for some details, and then, you can kick it back to me for Q&A. 

Susan Kreh -- Chief Financial Officer

Sounds good. Thanks, Dan. 2021 was a year of momentum of challenges and of opportunities. We experienced momentum, as Dan was just describing, in our sales growth as full-year consolidated net sales reached an all-time record high of $305 million or 8% growth over the prior year.

This was primarily due to higher demand of our cat litter and agricultural products, which increased by 9% and 19%, respectively, over the prior year. Revenues from our fluids purification products were 3% higher than last year, while sales of animal health and nutrition products were essentially flat. Industrial and sports products revenues grew 9% year over year, and we experienced steady sales growth of 2% from our co-packaging coarse cat litter business. Annual consolidated gross profit was a different story, as Dan mentioned, and it decreased by $3.5 million year over year as we experienced the significant challenges of market-based inflation.

Commodity-based cost increases caused our cost of goods sold per manufactured ton, a key financial metric for Oil-Dri, to increase approximately 8% compared to the prior year, with a very significant portion of those cost increases occurring in the back half of the year. Packaging costs, which include resin-based jugs and pails, as well as pallets, experienced the most dramatic increase at 19% year over year, followed by natural gas, which increased 15% year over year. Domestic freight, which has been under pressure due both to rates and availability, increased 13%. These increases were only partially offset by operating cost reductions and efficiencies that Molly and the entire supply chain team worked hard to achieve during fiscal 2021.

Selling, general and administrative expenses for the year decreased 8% from the prior year, primarily due to lower advertising spending, a lower annual incentive bonus accrual and lower pension expense. As for opportunities, we increased our investment in SG&A in our animal health and nutrition products business by $1 million year over year. And we are excited about the new customers and the activity with those customers that this enhanced team has been able to generate. While we were disappointed with our ability to maintain our margins during the rising cost environment that we experienced in fiscal 2021, I would like to point out that our prior-year fiscal 2020 results included a onetime pre-tax gain of $13 million related to a confidential licensing agreement.

Excluding that prior-year onetime gain, our operating income of $13 million in fiscal 2021 equates to 10% growth over the prior year. Full-year net income for fiscal 2021 attributed to Oil-Dri was $11.1 million, and net income per diluted common share was $1.57. That compares to $2.65 per diluted common share in the prior year, but that amount included the $13 million pre-tax onetime gain I mentioned earlier. Excluding the impact of that onetime gain, which equated to $1.26 per share, last year's net income per diluted common share would have been $1.39, meaning that this year's result was 13% higher than fiscal 2020, excluding the onetime gain.

Now switching gears to some fourth-quarter highlights. Dan mentioned our fourth-quarter consolidated net sales grew 20% and reached an all-time quarterly high of $78 million. Sales from our cat litter, industrial and sports and agricultural businesses drove the majority of this growth. Demand for fluids purification products and co-packaged course cat litter also increased in the fourth quarter compared to the prior year, while revenues from our animal health and nutrition products were essentially flat.

As a result of commodity prices that continued to rise rapidly during the fourth quarter, our consolidated gross profit decreased by approximately $1.5 million even after the price increases that we implemented during the quarter. Due to extreme inflation on resin and lumber prices, our packaging costs per manufactured ton increased 40% in the quarter compared to the same quarter in the prior year. Further contributing to the reduction in margin, with higher natural gas per manufactured ton, which increased 67% in the fourth quarter over the same quarter in the prior year. The macroeconomic environment remains challenging and we are working with our customers to implement additional price increases to help cover these rapidly increasing input costs.

Now let me talk a little bit about our product groups. The business-to-business products group fourth-quarter revenues reached a record $30 million, a 13% increase over the same quarter in the prior year. That was primarily driven by strong revenue growth from agricultural and fluid purification businesses. Sales of agricultural products increased by 37% over the prior year, as demand from one of our largest customers rose in the quarter.

The B2B products group also benefited from a 7% increase in revenues within the fluids purification business, where sales of bleaching clay products were strong in North America and Latin America. Our co-packaging coarse cat litter products experienced increased sales of 16% in the fourth quarter compared to the prior year, primarily due to increased pricing. And while fourth-quarter revenues of animal health and nutrition products remained flat compared to the same period last year, we were encouraged by strong year-over-year sales growth of 66% in the quarter in China. Operating income from the B2B products group was $3.8 million in the fourth quarter, compared to $6.3 million in the fourth quarter of fiscal 2020 as the favorable impact of strong revenue growth was more than offset by the rapidly rising input costs we've been discussing.

The retail and wholesale products group's fourth-quarter revenues were $48 million, a 26% increase over the same quarter in the prior year, driven by our branded and private-labeled cat litter products. We continued to benefit from our strategic focus on lightweight litter where sales were up 43% in the fourth quarter over the prior year. And our e-commerce business also experienced double-digit revenue gains for the fourth quarter. Our financial position remains strong as is reflected in our balance sheet.

We ended the year with cash and cash equivalents of $25 million, and we carry very little debt, equating to a debt to total capital ratio of about 5%. One of the primary uses of our cash is to fund our trade working capital. During fiscal 2021, our accounts receivable increased $6 million, reflecting our strong sales growth. The decrease in our current liabilities of $4 million for the fiscal year was primarily driven by a reduction in the annual incentive bonus.

We also used 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. At times, we used cash to opportunistically repurchase stock to help offset dilution as shares of our restricted stock vests. And for fiscal 2021, we repurchased approximately 88,000 shares of our common stock for $3.1 million. I opened by saying that 2021 was a year of momentum of challenges and of opportunities, and we have momentum in sales growth across many of our product groups.

We're experiencing significant inflationary challenges that require us to increase our pricing to our customers, and we are capitalizing on our strategic opportunities in our lightweight cat litter products and positioning ourselves for future growth in our animal health and nutrition products. Oil-Dri remains in a strong financial position with low leverage, and we are well positioned to fund our future strategic growth opportunities. So with that, Dan, I'll turn it back over to you. 

Dan Jaffee -- President and Chief Executive Officer

All right. Thank you, Susan. [Operator instructions]

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from the line of Ethan Starr, a private investor. Ethan, you may ask your question.

Ethan Star -- Private Investor

Good morning. What progress are you making in marketing and selling Varium and NeoPrime? What feedback are you getting from the trials? And when do you think we might see increased sales of these products? 

Dan Jaffee -- President and Chief Executive Officer

Well, I think I mentioned in the -- was in the fourth of the third quarter that we're -- the third quarter that we are hoping for some activity in the second quarter, which is coming up? So I'll stick with that for now. As you know, I'm not going to get into too many details. but it's still very positive. But I will tell you that we're in such a dynamic cost environment that, yes, we are still doing a lot of things for the future.

But our heads are down, just trying to execute, trying to get product out the door. Trying to get trucks to show up. Trying to get pallets to put our products on top of. Trying to get all the additives that we need.

Everything is under just unbelievable pressure, and I'm sure you're seeing it all the articles you read. So I will say still long term, very bullish on animal health. We did hire a couple more people to help fill out the team during the quarter. So it continues to validate that they're seeing what those who joined us before them saw that we really do have one of the best solutions.

I don't know if you saw in the most recent month or two, but the EU now has mandated that all imported meat be antibiotic-free, and therefore, that causes repercussions throughout their supply chain. They're a major importer from Brazil. And so then that ripples into Brazil. So anyway, all good news.

Further down on the call, but I really -- I don't wanna get into too many details because it's just not productive. But it's all happening, and it's all good. 

Ethan Star -- Private Investor

OK, I'll get back in the queue. Thank you. 

Dan Jaffee -- President and Chief Executive Officer

Thank you, Ethan.

Operator

The next question comes from the line of Robert Smith of the Center. Robert, you may ask your question.

Bob Smith -- Center for Performance Investing -- Analyst

Yes, good morning, everyone. Center for Performance Investment. Dan, you know that I've been investing member of the Oil-Dri family for a long time, now more than 25 years. So I just want to share with you that in the greater part of the last decade, we've been missing in action, so to speak, from the -- one of the greatest bull markets in history.

And in part, I feel that that's because we're missing in action from investor relations and sharing the story with the investment community. You're a small-cap stock. There are numerous ways and means of getting your story out. You have a transformative story to tell about animal health and the future of the company.

A great story, but you've got to tell it. And I hope that you'll give much greater consideration to doing that. 

Dan Jaffee -- President and Chief Executive Officer

Well, Bob, you and I can debate this all you want, and it's just gonna make me look worse. But the facts are the facts. I mean, we're trading at 16.5 times earnings. What do you think our multiple should be? If I had been out in the street hawking the stock, where do you -- you think we should trade at 20? We're not a growth stock.

I mean, we hope to be, but we are a value stock. We pay a good dividend, high yield. So what do you think our multiple should be? 

Bob Smith -- Center for Performance Investing -- Analyst

The multiple is not that important, it's the future earning power of the company and the transformative business. So --

Dan Jaffee -- President and Chief Executive Officer

Yes, but even the multiple is reflective of that.

Bob Smith -- Center for Performance Investing -- Analyst

I'm suggesting to you that if the Street knew about your animal health potential, the stock would be closer to $60 than $35. 

Dan Jaffee -- President and Chief Executive Officer

All right. But I mean, given what they can see, I hear you, but we're going to keep agreeing to disagree. And for better or for worse, in edging out, [Inaudible] who took us public back in 1971, and we served on our board for years and has revered in the investment world, the managing partner of William Blair. Absolutely hammered to me between hacking your stock and getting expectations out in front of your performance, all you're gonna end up doing is disappointing somebody, put your head down and run the business, and they will find you.

And I think our multiple is very relevant. I think we are well priced. When we start to deliver on animal health, it will move. But to get it going in front of that performance, to me, I don't see the value of that.

Bob Smith -- Center for Performance Investing -- Analyst

Dan, the stock market is a discounting mechanism. No one is buying a stock on present day's value. They want to see the future. You've got a story to tell about your future, tell it. 

Dan Jaffee -- President and Chief Executive Officer

Well, then I'm gonna ask you again. What do you think our multiple should be? If we were to decide, six or eight, I'd be agreeing with you. It's at 16.5 times.

Bob Smith -- Center for Performance Investing -- Analyst

The multiple -- average multiple in the market is in the mid-20s now. So what I'm suggesting is --

Dan Jaffee -- President and Chief Executive Officer

For small caps?

Bob Smith -- Center for Performance Investing -- Analyst

If you told the story, the stock would be closer to $60 than $35. That's my feeling.

Dan Jaffee -- President and Chief Executive Officer

All right. All right. Did you have a question or took the cap? 

Bob Smith -- Center for Performance Investing -- Analyst

Well, I do have the questions. So my question is, can you tell us anything further about the trials? Where are the several trials being held and the time line, so when they might come to greater fruition?

Dan Jaffee -- President and Chief Executive Officer

Well, unfortunately, we're out of time. So I would have gotten into that. No, I'm just kidding about. No, I will not be telling you where the trials are being held.

We go through this every single quarter. You guys push me to have longer teleconferences, but the questions seem to be the same. And I have to keep giving you the same answer. In football is my analogy, it doesn't seem to help to yell to the competition, what plays you're going to run.

So I know, I will not be telling you where our trials are. But -- so thank you for your question. 

Bob Smith -- Center for Performance Investing -- Analyst

OK, thank you.

Operator

The next question comes from the line of John Bair of Ascend Wealth. John, you may ask your question.

John Bair -- Ascend Wealth Advisors -- Analyst

Thank you. Interesting banter there. I guess, Bob was disappointed. There is an option as to what he can do with his holdings.

But in any case, congratulations on actually having a profitable quarter, as well as you would like or any of us would like. But given the backdrop of commodities, I was, frankly, concerned that perhaps that wouldn't be the case. So kudos in that regard. My question is -- first question is read recently that the swine and pork prices in consumption in China has decreased due to the Asian flu impact and a shift by consumers to consume more poultry.

And so my question is, have you seen an increase in demand for your poultry-related product versus swine products in China? Or has the swine product sales remained consistent or actually increasing? In other words, have they been cannibalized by an increase in interest in poultry consumption? 

Dan Jaffee -- President and Chief Executive Officer

Sure. Hey, John, great question. And Fred, you take it, but start with the swine because you and I have had a lot of conversations about that. What's going on with swine in Asia, in general, and China in particular? And then, talk about the other areas that we may be able to see some benefit of our products going into.

Fred Kao -- Vice President of Global Sales for Amlan International

OK, sure, Dan. John, it's a very, very good question, right? So as I'm in China right now. I think I can answer that pretty well. Let me start with the swine.

The ASF, African Swine Fever, has really taken its toll on the Chinese swine market. The reason I'm saying that is not because of there is not enough pork meat in the market. It's actually the reverse. There's too much pork meat floating around, because they were able to get the populations back from where it was back in 2018 before ASF.

Now they actually had the same population with the peak population back three years ago. And now the reason the price is so bad is exactly what you mentioned, John, is when poultry meat or other meat came in as a substitute for the last three years, people got used to a better taste of healthier products. And because of that swine market is not going to rebound back to where it was kind of like one of the things that hurt in the past is when you get used to the taste, you're not going to get back to the same -- the oily pork meat. And that's exactly what I'm seeing in China.

And then, I'll give you a little bit more example on that is the price. Cost of production per kilo of pork meat is roughly $3 to $4, let's say, close to $4. They're selling it for $1.30 right now per kilo at the farm gate. So all the big producers are losing a lot of money because of that.

So to answer your second part of your question, poultry market is definitely being very small, may -- I mean, the price has remained on a profitable level now until maybe about two weeks ago, you kind of dropped below. But the recent last three or four days, it came back up again to where the breakeven price needs to be. And that shows how important the poultry sector is gonna be in case of swine market not doing so well, and then -- and also give us a great confidence on that that strategy we put over quarters ago that we're going to focus on the poultry market front. And then, the last thing I want to add to it is the dairy market in China, maybe the whole the animal product that's produced in China that has had very, very stable price ever since the pandemic.

So people eating less meat because of lesser meals eating outside, but dairy consumption and table consumption have remained pretty steady throughout the last few, I said that -- say at least last 18 months. I hope I answered your question, John. 

John Bair -- Ascend Wealth Advisors -- Analyst

Yeah, so I guess, so you are seeing an increase in demand for your poultry-related animal health products. Is that what I'm hearing? 

Fred Kao -- Vice President of Global Sales for Amlan International

That's correct. Yes. We do see an increase because the poultry market has been pretty stabilized and they know -- stabilizing means the prices remain stabilized. Last year, the population of poultry has increased tremendously in the last three years.

So that's a really good sign. 

John Bair -- Ascend Wealth Advisors -- Analyst

Is that some -- is that a trend that translates into other geographical areas as well? 

Fred Kao -- Vice President of Global Sales for Amlan International

We're seeing some of that in Asia. Yes, definitely we're seeing some of that trend in Asia, but it's quite difficult to project that just because if you look at Asia, the predominantly poor consumption countries are China, Vietnam, Philippines, Japan and Thailand, right? So in these countries, definitely, we are seeing some of that. But the difficult thing to see is they don't really have the same effect as ASF has pulled through China in the last three years. So we're not quite seeing that just yet, if that makes sense. 

Operator

The next question comes from the line of Ethan Starr, a private investor. Ethan you may ask your question.

Ethan Star -- Private Investor

Yes. I prefer to avoid open-ended discussions on investor relations on these calls. My question is, could you please give more detail on the increase in sales of both your branded and private-label cat litter? And also I'm wondering to what extent was revenue growth in the last year due to price increases versus increase in tons sold?

Dan Jaffee -- President and Chief Executive Officer

Jessica, you take the first one, and then, I'm not sure I have the data for the second one, but if Susan does, that's great. Jessica?

Susan Kreh -- Chief Financial Officer

I do.

Dan Jaffee -- President and Chief Executive Officer

OK, good. So Jessica, you go first. 

Susan Kreh -- Chief Financial Officer

I think you're on mute. 

Dan Jaffee -- President and Chief Executive Officer

I'm not on mute.

Susan Kreh -- Chief Financial Officer

Jessica is on mute. 

Dan Jaffee -- President and Chief Executive Officer

Jessica, you might be on mute?

Jessica Moskowitz -- Vice President and General Manager, Consumer Products Division

Thanks, Ethan, for the question. The growth in cat litter has been driven duly by both organic growth, driven by overall growth and people having cats and pets overall. Additionally, reflecting new customer acquisitions. So bringing on new private-label lightweight customers and new customers.

And then, also, by overall building the branded business and the launch of new items, the 15 pound -- under our 15 pounds, which is our best performing line. 

Ethan Star -- Private Investor

Great. Thank you.

Dan Jaffee -- President and Chief Executive Officer

And Susan, do you have what?

Susan Kreh -- Chief Financial Officer

Can you repeat the question?

Dan Jaffee -- President and Chief Executive Officer

Yeah, how much was pricing? And how much was volume? 

Susan Kreh -- Chief Financial Officer

Right. Jessica, I think you need to mute. Yes, the volume accounted for half of the growth. And then, the rest was pricing and improved mix.

So volume was half of the revenue growth. 

Operator

That's all the time we have for the Q&A session. I will now turn the conference over to Mr. Dan Jaffee. Thank you. 

Dan Jaffee -- President and Chief Executive Officer

Well, thank you, everybody. Again, we're very happy with the demand. Again, validating not only our successful strategies, but also our ability to get stuff out the door. I mean, I'm sure as you do retail checks, you see a lot of empty shelves out there.

Very dynamic times. We're gonna continue to get prices up, control our cost and get as much out the door as we can in the next 90 days. And no one has a crystal ball, but no one, that I'm talking to, thinks this is going to end any time in the next 90 days, meaning this is going to be the new reality for at least a year, maybe even into two years. So I appreciate your support and patience, and we'll be back with you in 90-ish days for the next teleconference.

Thank you. 

Operator

[Operator signoff]

Duration: 30 minutes

Call participants:

Dan Jaffee -- President and Chief Executive Officer

Leslie Garber -- Manager of Investor Relations

Susan Kreh -- Chief Financial Officer

Ethan Star -- Private Investor

Bob Smith -- Center for Performance Investing -- Analyst

John Bair -- Ascend Wealth Advisors -- Analyst

Fred Kao -- Vice President of Global Sales for Amlan International

Jessica Moskowitz -- Vice President and General Manager, Consumer Products Division

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