Oil-Dri Corp of America (ODC) Q2 2022 Earnings Call Transcript

Oil-Dri Corp of America (ODC -2.49%)
Q2 2022 Earnings Call
Mar 14, 2022, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for standing by, and welcome to Oil-Dri Corporation's second quarter of 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.

Dan Jaffe -- President and Chief Executive Officer

Thank you very much. Welcome to our first six-month teleconference. With me today, Susan Kreh, CFO; Molly VandenHeuvel, COO; Chris Lamson, group vice president of Retail and Wholesale; Jessica Moskowitz, vice president, and general manager of our Consumer Products Division; Fred Kao, vice president of our global sales for Amlan International; Dr. Wade Robey, vice president of our Amlan Marketing and Product Development; Tony Parker, assistant general counsel, and assistant secretary; and Leslie Garber, manager of Investor Relations.

Leslie, will you walk us through the safe harbor.

Leslie Garber -- Investor Relations Manager

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-Dri stock. Thank you for joining us.

Dan Jaffe -- President and Chief Executive Officer

Thank you. Before I turn it over to Susan, I just want to give some 50,000-foot comments, so I can tell you no one has been prepared for what we're all dealing with. 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, how do you like the play Mrs. Lincoln? I mean, it's very dynamic times. I'm very proud of the Oil-Dri 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 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 anytime soon. Susan, I'm going to turn it over to you for some highlights. We're assuming you guys have read the Q in the K, so take us through [inaudible].

Susan Kreh -- Chief Financial Officer

Thanks, Dan. 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 Amlan, 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 for us 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 projections, but really want to be factually based. So, we continue to chase that because the costs continue to move in 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 working them into the market as quickly as we can. And 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 interest rate, annual interest rate of 3.25%, so a nice, nice rate. We have that note set so that we make $5 million each repayment 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 B schedule down the road, that gives us time to actually make investments in our plants, and in 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 build.

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. And 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 as we opportunistically repurchase our shares to offset dilution. So those are just some of the highlights, with Dan, I'll hand it back to you, and you can open it up for questions.

Dan Jaffe -- President and Chief Executive Officer

Yeah, thank you. And first of all, I want to thank the 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?

Leslie Garber -- Investor Relations Manager

There's a field, Q&A field, and if you submit your question in that field, then push the bet. You should be able to quickly submit it, and we'll be able to see it right away. Great.

Dan Jaffe -- President and Chief Executive Officer

Great. So, well, good luck. I mean, we've only used up ten minutes, and so we're going to be able, we've been listening, we'll be able to dedicate the final 20 minutes to Q&A. So Leslie, let's go through the questions that were submitted.

Leslie Garber -- Investor Relations Manager

OK. 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 Amlan International, and said you're shipping to major companies that are very sophisticated.

What kinds of results are your Amlan customers seeing? And are you still optimistic that a tsunami is coming?

Dan Jaffe -- President and Chief Executive Officer

Ethan, thank you for your question. You know, tsunami, I'm not sure I'm going there just because that can 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 Amlan.

I can tell you, in the US, which has been a focus of the team, we've put together as contacts from coast to coast with every major producer, our clays work. We have the IPPE showdown at Atlanta. We had all the major players into our booth that 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 it really, we believe, we have the absolute best all-natural nonantibiotic 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 two.

Leslie Garber -- Investor Relations Manager

So part two is could you please explain Amlan's product strategy for the United States? Are you seeing orders already, and how did Amlan's presence at IPPE make a difference?

Dan Jaffe -- President and Chief Executive Officer

Yeah, I covered some of that, but I'd love Wade Robey to take it out at.

Wade Robey -- Vice President, Amlan Marketing and Product Development

Yeah. Thank you, Dan, and thank you, Ethan, for that question. As Dan mentioned, we just did our US rollout at the IPPE show in January of this year. It's the world's largest show for poultry, meat, and animal food.

It 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 Amlan 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 US, as well as [inaudible].

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 they're mentioned, are nonantibiotic, 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 have generalized benefits for the animals that promote optimum growth.

Our product line in the US is a new branded product line that we're launching for sale here, and it's been very well-accepted by our customers.

Dan Jaffe -- President and Chief Executive Officer

Hey, Wade, great. And you know what, Fred, I love your perspective on the IPPE from a sales perspective. I know that attendance was down, but we felt the impact was actually equal or greater, so I'd love to hear from you.

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

Yeah, that's true, Dan. Good morning, and thanks for the question. I mean, we have a lot of the interest rates, attendance was down because of cold air. However, we got a lot of people come into our booths, asking very specific questions and have specific interest on our product.

And I don't think, I just believe that the interest level was so high even though the customers that did not intend to join the show, they did show up, and just surprise us. We had a lot of interest, not just in North America, but across the world. South America specifically, have people attending the show as well. So, Dan, you're absolutely right.

The show was was not very well attended, but output was very, very busy the entire time.

Dan Jaffe -- President and Chief Executive Officer

Great. Before we open up to the next question, I think I forgot to mention at the start, and I wanted to add that our support of the boycott of Russia. So I just want to let you know that yes, we have suspended all shipments to Russia. To let you know, it's not material in our grand scheme of things.

We've never been done that much. But we did. And as a show of unity and trying to help with the horrific situation in the Ukraine, we will be supporting that boycott. Leslie.

Leslie Garber -- Investor Relations Manager

OK. Thanks. The next question comes from John Bair 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 past us.

Chris Lamson -- Vice President of Retail and Wholesale

Yeah. So, it's Chris, I'll take that question. Thanks, Dan. 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 distribution are up. As importantly, or maybe even more importantly, our points of distribution are up most with retailers that are winning.

Ok, so retailers where traffic is growing, where they're growing share themselves, so said differently, we're winning with retailers that are winning or in-game retailers. The second half of that question.

Dan Jaffe -- President and Chief Executive Officer

Well, we partner with Ethan's question.

Leslie Garber -- Investor Relations Manager

OK, 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 Pride or private label brands?

Chris Lamson -- Vice President of Retail and Wholesale

So I think that to the second half of that question, 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 alternatives 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.

Leslie Garber -- Investor Relations Manager

Perfect.

Dan Jaffe -- President and Chief Executive Officer

And Jessica, got to know if you want to add a little color to Chris's play by play. A great answer, but just got it. Anything you want to add?

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

No, I think he covered it. Thanks.

Dan Jaffe -- President and Chief Executive Officer

OK. Great. 

Leslie Garber -- Investor Relations Manager

OK. Great. The next question is from John Bair. Your 10-Q 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? 

Molly VandenHeuvel -- Chief Operating Officer

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 plant 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.

Dan Jaffe -- President and Chief Executive Officer

Great, thank you.

Leslie Garber -- Investor Relations Manager

Great. The next question is also from John Bair, recognizing that avian flu is a respiratory issue rather than an intestinal issue. Has there been any uptick in Amlan 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?

Dan Jaffe -- President and Chief Executive Officer

Wade.

Wade Robey -- Vice President, Amlan Marketing and Product Development

Yeah. John, thank you for that. So a couple of things if I could. First, as you appropriately indicate avian flu is a respiratory issues, 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 the 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.

Dan Jaffe -- President and Chief Executive Officer

Thank you, well said. 

Leslie Garber -- Investor Relations Manager

OK. Great. The next question is from John Bair. Can you speak to the progress of Amlan product sales as it relates to the US swine market?

Dan Jaffe -- President and Chief Executive Officer

Yeah, I mean, it will be simple. 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 put together in the US 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-Dri to get up and running and going. So we're really leaning heavily into poultry. Fred, any comment you?

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

Yeah, I'd like to add something, Dan. We are focusing on poultry because that's where our operating budget is. For the same time, we are not, like we mentioned earlier, we are still doing business in other markets as well, where we're not overlooking a swine of the dairy market. As we discussed, China is a huge dairy opportunities, so as swine opportunities, like that. 

Dan Jaffe -- President and Chief Executive Officer

But in the US, this question was specifically targeted to the United States.

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

Yeah, so US it's the same like Wade mentioned earlier, we do have [inaudible]. And there's a lot more focus in poultry. And that's a big chunk of the business opportunity for us in the coaching market sectors in the US at all. I just want to say that we are not only focusing on poultry and now looking at opportunity as well.

We are trying to do the business opportunities they're targeting. Of course poultry is the primary focus.

Dan Jaffe -- President and Chief Executive Officer

Yeah. OK, good. Well said, thank you for the question.

Leslie Garber -- Investor Relations Manager

OK. Next question is from John Bair. 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.

Dan Jaffe -- President and Chief Executive Officer

So I sent this question. I phone a friend to Dr. Mark, who is a Ph.D. in Clay Mineralogy, who's been with us for forever.

And he answered me back. Unfortunately, both our Georgia [inaudible], 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 US 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 [inaudible] if you need entertainment. Because it's very, very 90s in you, Mark.

You know, I love hearing from you, but holy cow, do you know your stuff? Thank you for your answer.

Leslie Garber -- Investor Relations Manager

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 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-Dri have any reaction to it?

Dan Jaffe -- President and Chief Executive Officer

So yes, we've heard of it. I'll take part of this if you guys want to jump in again. We've worked on an 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 Walmart. You compare that to our opening CPS jug, and they both provide about the same volume of material, which I think is at $6.48. But Jessica, you can confirm that.

So you're talking it, it's almost four times the cost. And so at the end of the year, you'd be spending hundreds, maybe even a thousand dollars more to try and figure out if your cat had a urinary tract infection. You're better off if the cat 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, if you have any comments.

Jessica Moskowitz

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 people focus on innovation that we see, but at the same time need to make sure that it's strategic for Oil-Dri, and aligns with our long-term strategy of pursuing lightweight.

I would just echo what Dan said, and obviously continue to see these things, and market them to it to look and see for future opportunities and where we can grow. And that's it.

Dan Jaffe -- President and Chief Executive Officer

Thank you.

Leslie Garber -- Investor Relations Manager

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?

Chris Lamson -- Vice President of Retail and Wholesale

So literally, Canada is doing great. Actually, top-line's slightly ahead of the really strong growth in the US. And it's a lightweight market where we're the leading share brand up there that sells product has gone lightweight across the board. And so we're very well positioned, particularly with our private label 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 US is stemmed from distribution growth at existing customers. That said, we have a few tests of various customers that are performing well, we're expanding distribution, going forward based on those tests performing well is we're optimistic about that.

Leslie Garber -- Investor Relations Manager

OK. Great. We don't have any more questions.

Dan Jaffe -- President and Chief Executive Officer

Well, I'll ask a question and then I'll answer it. So I think we've mentioned this before. But renewable diesel is starting to hit in the US, which is another demand source for our bleaching earth, which is great. But what is happening is demand is going to exceed supply in a hurry.

And so whether we get the renewable diesel business, or just continue to support adm and Cargill and the fluids purification side. Either way, there's a lot of incremental demand coming in the US for our bleaching earth, which is great. And so we're going to continue to play Moneyball 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, whatever fuel or oil they're purifying.

And so it's really an exciting time for Bruce Bates, and his division because the edible oil business grows by 2% or 3% a year, usually with power with population. But now when you layer in this renewable diesel, it's really exciting. So we're definitely looking to play Moneyball 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, it's that 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 there. If they're a consumer, they can get the retailers up. If there are B to B, they can pass those along. But it doesn't seem like it's abating either.

Every month I read it 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-Dri team. I appreciate our long-term loyal investors.

And again, we're continuing to generate cash and do well there. We're a value stock with a growth potential, which 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. 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 if this stock price, and if this dividend yield, and the cash that we got sitting earning not a whole lot in our bank, 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.

Questions & Answers:

Operator

[Operator signoff]

Duration: 28 minutes

Call participants:

Dan Jaffe -- President and Chief Executive Officer

Leslie Garber -- Investor Relations Manager

Susan Kreh -- Chief Financial Officer

Wade Robey -- Vice President, Amlan Marketing and Product Development

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

Chris Lamson -- Vice President of Retail and Wholesale

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

Molly VandenHeuvel -- Chief Operating Officer

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