Ladies and gentlemen, thank you for standing by and welcome to the Third Quarter Oil-Dri Corporation of America Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session.

[Operator Instructions] I would now like to hand the call over to Dan Jaffee, President and Chief Executive Officer. Please go ahead..

Thank you. Welcome everybody to the Oil-Dri third quarter investor teleconference joining me both physically and virtually.

So we are in this COVID reality, Susan Kreh, our Chief Financial Officer; Molly VandenHeuvel, our Chief Operating Officer; Jessica Moskowitz, Vice President and General Manager of the Consumer Products Division; Flemming Mahs, President of Amlan International; Laura Scheland, General Counsel; and Leslie Garber, Manager of Investor Relations.

Leslie, will you walk us through the Safe Harbor?.

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

In our press release and 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?.

Great. And before I turn it over to Susan to walk us through the financial results, just some high-level comments which are very proud of the Oil-Dri team. This is a very, very challenging environment. We had to go virtual, we had to figure out what essential meant, and we had people pantry loading cat litter.

So, we had to meet incredible demand, and our entire Oil-Dri team did a fantastic job staying healthy both physically and financially and where it enabled us to deliver an incredible quarter in an incredibly challenging time reflecting -- I will tell you those investors who have been with us 2 years or longer, I had to live through this go-live pain of our ERP system when we launched that in August a year and a half ago, almost 2 years ago now, and we would not have made it without that system.

If we were on the old system, we would not have made it. We would have been worse than a Lucille Ball skit. And so, I just feel very fortunate. Timing is everything.

When this hit, we had the right team in place, we had the right systems in place, we have been far enough and along on the implementation of our S&OP process so that we could get out in front of the demand and more than meet it, we have 99% and 100% fill rates from really all of our major customers and received a lot of kudos from them.

So just recognize that your Oil-Dri team really delivered during this quarter. Susan, I will let you go through the specifics from a financial standpoint..

Thanks, Dan. And although I usually jump right into the numbers, I want to reiterate a few things that you just said. I mean this was truly an unprecedented quarter and I just want to thank all our team members who enabled us to achieve such good financial results, and we are going to talk about those shortly.

As Dan said, in mid-March, our teammates were asked to work from home and they pivoted very quickly. They embraced new technologies practically overnight in order to deliver the results required to support our business and our customers and not just at ordinary levels, but at an all-time record levels of net sales.

I particularly want to thank our frontline workers who maintained safe practices to keep each other healthy and we put in a lot of extra effort to keep our customers’ shelves stocked. And with that, now I will shift to our financial results.

Consolidated net sales for our fiscal third quarter 2020 were as I just mentioned a minute ago an all-time record of $76.3 million, an 8% increase compared to net sales in the same quarter of fiscal 2019.

We saw strength during the quarter in both of the products, where we are focusing our growth investments in those products or cat litter, which is in our retail and wholesale products group, and animal health in our business-to-business products group.

In our B2B group, net sales for the third quarter of fiscal year 2020 were $26.7 million, an increase of 2% over the prior year. And within that, there were some ups and downs by product line, but we were pleased to see that our increased focus on our animal health products is paying off.

Net sales of our animal health and nutrition products increased 25% year-over-year during the third quarter driven by increases in many of our markets for our animal feed additives, particularly in Latin America, Mexico, Africa, the Middle East and Asia outside of China.

Additionally, net sales within B2B of our agricultural and horticultural chemical carrier products increased 11%, and offsetting this growth was year-over-year decrease of 8% for our fluids purification products where sales were impacted in part due to decreases in edible oil sales resulting from closures of restaurants and schools due to the outbreak of COVID-19.

Sales were also unfavourably impacted by the closure of one of our customers’ bio-diesel processing plant. Now, switching to our retail and wholesale products group. Net sales for the third quarter were $49.6 million, an increase of 11% over the same quarter in the prior year.

This increase was driven by 20% year-over-year growth in net sales of cat litter in both private label and branded litters.

In addition to the organic growth that we have been experiencing throughout the previous quarters here in fiscal 2020, as Dan mentioned, we had incremental increases in cat litter sales during the third quarter as customers purchased more cat litter and related products in anticipation of future potential shortages or store closures caused by COVID-19.

Also included in our retail and wholesale product group’s results were lower sales of our industrial and sports products compared to the third quarter of fiscal year 2019.

Sales of industrial and sports products decreased 22% or $2.2 million, primarily driven by the impact of businesses and sports fields shutting down beginning in March due to COVID-19.

If we take look at our consolidated gross profit for the 3 months ended April 30, it was $21.4 million, which was an increase of 27% over the third quarter of fiscal 2019.

This improvement had two primary drivers being a decrease in the costs of freight and natural gas, which on a per-ton basis, which is the way we look at it declined 20% and 32% year-over-year respectively. That’s 20% for freight on a per ton basis and 32% for the natural gas on a per ton basis year-over-year.

During the quarter, we did incur some additional employee compensation costs to meet increased customer demand as well as some incremental cleaning and sanitation process due to COVID-19 where reduced costs didn’t have a significant impact on our consolidated gross profit, and in fact were basically offset by the reductions we saw in travel and expense in our SG&A expenses for the quarter.

Our third quarter income from operations of $5.7 million is more than double our income from operations of $2.3 million during the same period in fiscal 2019 driven by the stronger sales and the improved gross profit resulting from lower freight and natural gas.

The third quarter net income attributable to Oil-Dri of $4.6 million compares to $5.6 million during the third quarter of fiscal ‘19 and that result included a material one-time benefit of proceeds under a confidential agreement resolving legal proceedings that was included in other income during that period.

Net income per diluted common share for the third quarter of fiscal 2020 was $0.61 compared to $0.74 in the third quarter of fiscal 2019, which again included the one-time material legal settlement.

If you look at it on a 9-month year-to-date basis, net income per diluted common share of $1.69 for 2020 year-to-date compares to $1.17 for the same fiscal year-to-date period in fiscal 2019, that’s a 44% increase year-over-year. So that is a really good news.

And shifting from that good news I would like to highlight two subsequent events that have substantially improved our liquidity during these uncertain times.

Because our final debt payment of $3.1 million is coming due on August 1 of this year we opportunistically amended our note agreement with Prudential details of which you can find in our 10Q that was filed with the SEC this past Monday.

Under the amended agreement Oil-Dri issued 10 million in new notes further 10 year tenor and that cash is on hand today. Another event that occurred subsequent to the end of the quarter was that Oil-Dri entered into a confidential agreement to grants and non exclusive perpetual license for 13 million. This amount has been received by Oil-Dri.

Both of the aforementioned items will be included in our fourth quarter financial results which we expect to release on October 13. So all in all really strong quarter and really good liquidity position and with that Dan I will turn it back over to you..

Great thank you Susan obviously great quarter great year to date results so we are going to open up for questions as always ask your most important question first and then go back to the end of the queue and so forth and so on this allows everybody the chance to at least get one question in and maybe two or three so let's please open it up. .

[Operator Instructions] Our first question comes from Ethan Starr. Your line is open..

Good morning. Nice quarter considering all the challenges..

Yes thank you..

I understand from a recent article that Oil-Dri has improved results in customer service leading to significant improvements in cost reduction.

Can you please explain this in more detail and give some idea of maybe how much money has been saved please?.

Sure, I am going to let Molly answer the question. .

Sure, thanks Dan, so as the article said, we really focused on customer service first, and once we get our customer service levels at benchmark levels, we focused on cost reduction. You really can see that in the operating income, so I think the amount becomes evident in our cost of goods sold.

We focused on a lot of the basics making things more efficient, making sure we have the right pricing and contracts in place, and just overall operational effectiveness. .

Yes. And I'll add because she doesn't want to toot her own horn, but Molly has led our team, and increased quality leads to lower costs. It always does because you have less rework.

You have greater customer satisfaction which leads to more sales which also can lower your costs if you could get to spread your fixed costs over a greater base, so the results you are seeing, you are seeing the topline growth led by our general managers and then you are seeing the bottom line growth led by our supply chain who's just functioning very, very well.

So, it's been a win-win, but thank you for your question. .

Okay, I will get back in the queue. Thanks..

Thanks.

Our next question comes from John Bair of Ascend Wealth Advisors. Your line is open. .

Thank you. Yes, I will echo nice quarter.

I also appreciate more detailed information in the press release and commend you for the aspect of helping the frontline workers, so I'm wondering to what sense or to what degree do you have a sense that those extra orders and so forth in March and April may have pulled forward orders and kind of parallel to that is, did you see an increase in orders through online vendors like a Chewy or somewhere like that that you think might continue on in the future.

Thanks. .

Alright. Well John, thank you; and Jessica who runs our Consumer Products division, she will answer that question..

Hi good morning..

Good morning..

So in terms of the shift from Q3 -- end of Q3 from Q4, if we look at kind of the first half, I would say we were benchmarked up 10% and then Q3 was up around closer to 19%.

So I would say that 9% to 10% difference is likely what shifted up into Q3 from Q4, and year-to-date still we had had strong sales year to date, so we could expect that to continue, but again the shift would likely be 9% to 10%. In terms of Chewy and Amazon, we continue to focus on e-commerce.

We have seen strong sales in e-commerce as a result of COVID, and we do expect it to continue going forward. To what extent, I don’t think we can disclose that at this point, but it is something we are investing in and obviously have seen a consumer momentum into those channels, so intend to continue to focus on it..

Well, I would think that sometimes when you are forced into a habit change that you weren’t expecting to do like this pandemic has caused a lot of people whether it’s work or shopping or whatever that you might have a sense of whether those trends are continuing, in other words as online ordering as opposed to going into a store to pick it up.

And just curious whether you are seeing some momentum continue in that area?.

Yes. I think the macro level trends would suggest that consumers are shifting into those channels, and our results would continue to support that kind of ongoing shift into e-com..

Alright. Great, thank you. I will get back in queue..

Thank you, John..

Our next question comes from Robert Smith of Center for Performance. Your line is open..

Yes, good morning and congratulations on the good quarter and also on the dividend increase. My question focuses on animal health. It’s a two-part question.

First part Dan if animal health were a standalone unit, at what revenue level would it become profitable, at what kind of a ballpark number?.

I mean, I will take that, and I can tell you I don’t know. So I have no idea. I don't look at it that way. I mean everything is so comingled. I mean if it was a standalone, it couldn’t be, I mean, the products are co-generated and we make money by being in all aspects of our business. I once used this analogy to Clorox.

We have been supplying them Fresh Step for over 40 years now. And I said, we can’t just sell the fillet to make money. We have to sell the [indiscernible] the tail, the whole thing and then the fillet becomes very profitable, but if all you did was sell the fillet, you wouldn’t make any money in the steak business at Oil-Dri.

So honestly, it’s an unanswerable question. So, I don't know..

The second part of the question is with COVID entering the Southern Hemisphere more vigorously now, how do you see the animal health possibilities in the remaining quarter of the year?.

Great. Fleming, who is the President of that division will field that question..

Yes. Hi, great question. Thank you. Yes. So right now, we are continuing to see good support for our products globally in all the regions. The COVID-19 is of course with the shutdown affecting more of the industrial kitchens, the schools are starting to come back. So, at this point, we are not anticipating any huge impact to the business..

Well, I meant in particular, in the animal health, I think Brazil is an important market, so they are having quite a bit of difficulty down there..

Yes. I mean, they are seeing challenges, but they are also seeing additional improved exports into China. So, there’s different resources and sources pulling in different directions that we would normally see..

Okay, thank you. I will get back in the queue..

And before we go for the next question, I will just – I think we are all recognizing that there is a new world now, we used to divide equities into large cap and small cap and micro cap and growth versus value and all these different cuts. I think what we are going to be seeing forever more now is essential versus non-essential.

No one ever thought about this before COVID, but boy, am I better to be lucky than good. I feel very sorry for fellow CEOs and businesses who were run every bit as well as Oil-Dri, but there are non-essential businesses and nothing they can do about it.

And so most of our sales are essential either tied to food production or animal, care of pets and so we got very lucky there. So all I can tell you that Bob is that yes, there is COVID going on throughout the world, but you may or may not die from COVID, you will die if you don’t eat.

So, food is absolutely essential and we feel very lucky and fortunate that our core businesses are tied to things that will – were not and really won’t be impacted too much by global pandemic.

Next question?.

Out next question is a follow-up from Ethan Starr. Your line is open..

Yes.

First, the quick question is the license fee, is that related to cat litter?.

Laura, you wanted to answer?.

I am sorry, we can’t provide any detail..

Okay, that’s fine.

My meal question is this, what are your biggest challenges in getting more consumers to purchase lightweight scoopable litter or the lowest cost litter, which is Cat’s Pride among the major brands and how do you plan to address those challenges?.

I mean, Jessica, I am happy to – you may answer it, I am happy to jump in, give me a thumbs up or thumbs down, she is not on the screen. If you want to take it give me a thumbs up. Okay, Jessica is going to field that..

Yes. I can take it, Dan and feel free to build on it. As you would like, I think I wouldn’t really view it as a challenge. I think it’s an opportunity.

Lightweight cat litter continue to – we continue to improve quality, while lowering the price and I think that our brands and our private label and branded is well positioned as a value player to really continue to dominate the market.

So, I feel optimistic and our goal is to continue to delight our consumers and that’s through offering them great products at a great price. And as we kind of increase the quality and are able to lower prices or offer at the same value, that value continues to delight consumers even more..

Well said. And I think the only thing I would add is we all – we are in a recession. They have announced that and actually they think now it started before COVID even hit and COVID put it into hyper gear, but clearly, when you are in that position, people will be more incentivized to save money in their weekly or monthly grocery bill.

And so competing in the value segment whether it’s through private label or through OPP opening price point quality brands is a good place to be. So, having cat’s lightweight scoopable at $5.98 at Walmart is a good place to be. Being the OPP – well Lehmann market is a bad example because they want bankrupt.

But you get the idea, you don’t want to be the cheap guy at a premium retailer, but clearly, when it’s price related and we are leaning heavily into and Jessica’s team was doing a phenomenal job, Walmart, Target, Albertsons, Safeway, Dollar General, Family Dollar, the e-commerce, all these areas where people can shop and compare on price, we believe we are well positioned to supply them with high-quality products at affordable prices..

Okay, are you taking share?.

Well, you can see our growth. I mean we are growing faster than the category. So by definition we are taking share..

Okay, I will get bank in queue..

Our next question is a follow-up from John Bair. Your line is open..

Thank you. Kind of a simple question, what is the most exciting part of your business, I think part of the business that you are most excited about and offers what you think will be best opportunities going forward and conversely, where do you see the biggest challenges right now? Thanks..

But that's like you asked me which of my children do I love the best, I mean that's a telephone, but okay..

Simple question, yes..

I love our businesses that are around creating value from sorbent minerals, how about that one? No, I am excited about all of our businesses. We have got great people in place.

We have got great strategy and we play various ones, I mean, you said which ones are we targeting for the highest growth, well that’s clearly on a cat litter side, it’s with our high-quality lightweight litters and then it’s on the animal health side, where as you well know, there is a global push away from antibiotics in the human food chain.

So they are pulling them out of raising the animals. And so now they have a real unmet need they need to figure out how to maximize production and we have a fantastic antibiotic free solution. So we are very excited about those in terms of the growth potential.

But I will tell you very excited and thankful for our Oil-Dri floor absorbent, industrial absorbents business, our agricultural business, our fluids purification business, these are all solid differences where we have a real reason to be and a real reason to compete and are doing well.

So excited about all of them biggest challenge that is staying disciplined I would say we all when we started doing really well and we have done really well for a long time but you can see the momentum is gaining is staying disciplined not just chasing every hand but knowing when to fold for those of you who play poker so we are going to stay disciplined we are going to focus our resources on the businesses we think can grow most rapidly and those are the consumer products and the animal health and we will support the other division to but they are fighting a different war and so I would say that’s our challenge is just as a team to stay as hungry as you are when things are going poorly as you need to be when things are going well.

.

Okay, okay I will get back to the queue..

Okay.

Our next question is a follow up from Robert Smith. Your line is open..

Hi Dan.

Can you give us some additional color on your approach to digital advertising and within the context of the advertising and promotion budget?.

Sure.

And Jessica take that one?.

Sure.

So our approach is that going to lead to be hyper targeted I think digital offers us an opportunity to do that and to really understand who are consumers and reaching our consumers where she already is where testing we continue to do kind of the main digital advertising social search kind of typical digital tactics that has been also testing new tactics like video.

Here is an idea for you carry on carry less..

Got it..

Our next question comes from Ethan Starr. Your line is open..

Yes I am wondering I guess my impression is that Oil-Dri saved much more money due to COVID on like things lower energy prices and travel expenses that you actually spent extra for COVID and I am just if you can expand on that and may be go into some number of possible and also to what extent when energy prices drop does that benefit Oil-Dri or does it benefit your customers or how does that where does that when did the shift prices stopped to reflect that thank you.

.

Yes. And Molly, just so that I can earn my keep, I'll do the play by play. You can do the color if I need anything else but I'm proud of the fact that yes we save some money on travel and entertainment as Susan said but during….

We have 2 minutes remaining for this conference..

Okay, thank you.

Yes, during the peak of the demand when we were pushing our people really hard we gave the equivalent of a $2 an hour shift premium to all of our frontline workers and that more than equips the savings now when things started to dive down we then went to $1 an hour shift premium and that was a break even to a slight benefit none of this was material to the bottom line so I'm not really going to give you the dollars but I'm just telling you we took the money away that we were saving and gave it to those people that were what I called heavy combat pay and so proud that we did that I now don't remember the second part of your question.

Well just to what extent this energy prices drop how much is the benefit for Oil-Dri and what extent does it shift at some point you said that was customers. .

Okay Molly will take this one although I can take the pricing part because I was telling you to the board yesterday look we are in a rational industry and when gas prices go crazy one way or the other if our competition moves we move with them and vice versa so we are in a rational business but Molly I will let you put some more.

Right and it is not a straight answer for energy and fuel prices for transportation we do see immediate savings where we pay for freight as part of our product costs as part of our fuel surcharges part of our contracts typically that’s aligned with the fuel index.

And sometimes, we get that when we pay for it, but we have a lot of customers who pay for freight and then they would see the benefit of that for natural gas we have seen some benefit in the third quarter so that was pretty immediate and then for other material costs savings there is a bit of a lag that’s really due to commodity usage and lagged timing so it is not really straight forward answer some of immediate some is longer term and the savings that we saw in the third quarter are more than just commodity we really have built a good processes in place to drive sustainable savings within the operation.

Okay, great. Appreciate that. And I'm assuming that the lag is probably mostly in the resin price – plastic packaging package prices. Well thank you very much again..

[indiscernible].

Yes, thanks for the dividend increase also Dan..

Great.

And I hope you also spotted the share repurchase which again was a way of trying to deliver value back to our shareholders and we like we saw we are opportunistic so that we had a chance to buyback shares with higher dividend and our cash is earning 0.2% so and we have plenty of opportunity that we can deploy that cash on but we are going to still stay opportunistic on the share repurchase program so hopefully spotted that in the queue as well thank you guys its been a half an hour and we look forward to talking to you it will be our end of the year that will be our fourth quarter and fiscal year end I would tell you on one of our major metrics which is we look at pre tax pre bonus income and then we divvy up that income between the shareholders and then the teammates.

We already, through nine months have made more than we have ever made and any fiscal year we have ever had so as I joke we are playing with a house of money at this point but we are having a record year it feels really good it feels really good that all the investments we have made in the last two and half years on people and infrastructure are why this is happening and its just it feels good it is predictable and we are up in front of our businesses and we just we have always taken a long term approach and the seeds we planted years ago are sprouting now and seeds we plant today will start in a few years so thank you for the long-time holders and we are happy to reward you with I think will results 17 year in a row of dividend increases which is fantastic.

So thanks everybody. We will talk to you again in a quarter..

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect. Everyone have a great day..