Good day. And thank you for standing by. Welcome to the Oil-Dri Corporation of America Third Quarter 2021 Investor Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session.

[Operator Instructions] I would like to hand the conference over to one of your speakers today, President and Chief Executive Officer, Dan Jaffee. Please go ahead..

Thank you. Welcome everyone to the third quarter and nine months investor teleconference.

Joining me remotely, again this will probably be our last remote one, we will see, hopefully our last one, is Susan Kreh, our Chief Financial Officer; Molly VandenHeuvel, our Chief Operating Officer; Jessica Moskowitz, Vice President and General Manager of the Consumer Products Division; Fred Kao, our Vice President of Global Sales for Amlan International; Laura Scheland, General Counsel; and Leslie Garber, our Manager of Investor Relations.

And Leslie if you would walk me through our Safe Harbor, please..

Thank you, Dan, and 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.

And now, I'll turn the call back to Dan..

Great, and before I turn it over to Susan for a detailed review of the quarter and nine months, I just want to say we are painfully aware that we are outnumbered, and we have lessons learned in Oil-Dri. And one of them is, just because you can explain something doesn't make it acceptable.

And we certainly can explain what's going on with the margin pressure and really rampant cost increases. And my career as President, which started in 1995, I haven't seen this since Hurricane Katrina, back in August of 2005, when natural gas when through the roof. So, I think we're seeing it everywhere.

Supply chains are being squeezed, materials are being -- demand is exceeding supply, i.e., prices are going up. And so we are obviously working very hard to get increases to offset these, but fell woefully short in the quarter. And that's why you saw top line look fine, but gross profit and bottom line not fine. So, Susan, I will turn it over to you..

Thanks, Dan. Well, let me jump right in. For the third quarter of fiscal year 2021, Oil-Dri delivered net sales of $76.3 million, which was on par with our record third quarter in fiscal 2020.

My three key themes for this morning's discussion are our continued net sales growth, significant challenges in the forms of increasing market-based costs, which Dan just referenced, and the timing of price increases that will help offset the financial pressures of these costs.

Staying with net sales, I would remind you that our third quarter compares to a unique third quarter in the prior year, where we experienced very high sales in our cat litter products that were driven by consumer pantry loading as the pandemic began to close down many businesses, schools, [ball fields] [Ph], et cetera, and consumers stocked up on cat litter, toilet paper and other essential goods in anticipation of potential supply chain disruptions.

On the positive side, during the quarter, our industrial and sports businesses began to rebound from the pandemic as businesses and ball fields, that had been shut down as a result of the pandemic, began reopening. In addition, we experienced steady growth of our agricultural and our animal health products.

The third quarter net sales in our Business To Business Products Group decreased 1% from the prior year, to $26.3 million.

The higher demand of agricultural and animal health products, that I mentioned earlier, was offset by decreases in co-packaging [coarse] [Ph] cat litter, a result of the prior year's pantry loading, as well as decrease in bleaching clay sales.

Agricultural product revenues rose 7% in the third quarter compared to the last year, primarily resulting from increased sales to our existing customers. Sales of animal feed additives increased 3% in the quarter versus the prior year, driven by higher demand within Asia and Latin America that was partially offset by lower revenues in China.

This decreased demand within China was really primarily due to the shift in timing of the Chinese New Year, when many businesses temporarily shut down in observance of the holiday. That occurred during the second quarter in fiscal year 2020, but in the third quarter of fiscal year 2021, making the quarter comparison a little bit differ.

Third quarter sales of our bleaching clay and fluids purification products declined by 3% from the prior year due to the timing of orders, improved crop conditions that require less material for purification, and then negative impacts of the pandemic, as many edible oil manufacturing plants have delayed plant tests or have unused product on hand due to lower production.

The pandemic has also negatively affected our sales of our Ultra-Clear products, which are used for jet fuel processing. Now, switching our Retail and Wholesale Products Group, third quarter net sales reached a record of $50 million, a 1% increase over the strong quarter in the prior year.

A 20% increase in our sales from our industrial and sports products drove much of this growth, as commercial businesses are recovering from the pandemic and many sports fields have reopened.

Although we continue to experience the positive impact of increased pet adoption, resulting from COVID-19 and the overall macro trend of higher spending on pets, net sales of cat litter decreased in the third quarter compared to the prior year, which as I mentioned earlier, benefited from the unprecedented pantry loading during the early stages of pandemic.

Now, switching to costs, our third quarter gross profit of $16.5 million was approximately $4.9 million lower than the third quarter of fiscal 2020. This decline can be attributed to a 14% increase in cost of goods sold per manufactured ton, driven by higher freight, packaging materials, natural gas, and non-fuel manufacturing costs.

Domestic trucking supply constraints and elevated fuel costs resulted in a 28% increase in freight costs for manufactured tons, compared to the same period last year. A 19% increase in packaging costs for manufactured tons due to higher resin prices also contributed to the reduction in margin.

Natural gas and material costs for manufactured tons increased by 11% and 9% respectively in the third quarter over the prior year. As Dan mentioned, we certainly did experience some market-based increases in costs.

And to offset these significant costs increases, the General Managers of our businesses have been implementing, and continue to evaluate price increases, many of which are effective as of May 1, which will result in us seeing the impact during our fiscal fourth quarter.

Further, some of those price increases require 90 days notice to our customers and costs have continued to rise since those increases were set. Therefore, we continue to evaluate the need for further price increases, particularly in our consumer business that is significantly impacted by increases in freight and resin-based packaging costs.

Shifting to total selling, general and administrative expenses for the third quarter, they were approximately $1.1 million lower than the prior year, representing a 7% in decrease.

The increase advertising and marketing expenditures were offset by reduced travel, reduced bad debt expense, and a lower estimated annual incentive bonus for fiscal year 2021 compared to fiscal year 2020.

Our effective tax rate in the quarter as earlier mentioned during the third quarter, it was a negative 1% compared to 17% in the same period in the prior year.

This reduction reflects not only a decrease in our expected annual taxable income as we have better line of sight to the impact of cost increases versus price increase on our fiscal year ending July 31 2021. It also includes certain employment related tax credits, of which we were able to take advantage during the quarter.

In addition, we were able to claim a new tax deduction for foreign derived income, which further reduced the effective tax rate for the third quarter.

Net income attributable to Oil-Dri was $2.6 million in the third quarter compared to $4.6 million during the third quarter of fiscal 2020, resulting from the impact primarily of the increased costs we discussed earlier and for the same reasons, our earnings per diluted common share of $0.32 compared to $0.65 in the third quarter of the prior year.

All that said, our financial position remains strong as reflected in our balance sheet. We ended the quarter with cash and cash equivalents of $30 million and have very little debt, equating to a debt to total capital ratio of about 6%. One of the primary uses of our cash flow is to fund our trade working capital.

Taking a year-to-date perspective here, during the first nine months of fiscal 2021, our accounts receivable increased $3.9 million, reflecting our sales growth, as well as a shift in our customer mix, which includes an increase of sales to foreign customers, who tend to have longer-term.

Our income taxes shifted from a $2.6 million payable balance, included in accounts payable as of July 31 2020, to a prepaid balance of $2.3 million as of April 30 2021, representing a use of cash of $4.9 million during the first nine months of fiscal 2021.

The decrease in accrued expenses, of $4.1 million, for the nine months ending April 30, was primarily driven by a reduction in the incentive bonus accrual.

During the year, we used our cash in line with our plan 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.

We also used cash to opportunistically repurchase stock to help offset dilution that occurs as shares of our restricted stock [indiscernible]. Year-to-date, we have repurchased approximately 82,000 shares of our common stock for $2.9 million.

In conclusion, Oil-Dri remains in a strong financial position, with low leverage, and is well-positioned to capitalize on the strategic investment opportunities that may become available. And with that, Dan, I'll turn it back over to you..

Thank you, Susan. Thank you for the recap. And at this time, I would like to open it up to Q&A so we can cover the issues that are most important to our investors. As always, I ask you to prioritize your questions, ask your most important question first.

And then go to the end of the queue, which will allow everybody a chance to at least ask one important question. So, let's open up the Q&A line..

Thank you. [Operator Instructions] And it looks like our first question is going to come from the line of Ethan Star. Your line is open. Please go ahead..

Good morning. Please discuss the progress you are making with Amlan in terms of sales and sales-related metrics, and what will it take to significantly increase Amlan revenue? The product sounds so good; I don't know why you aren't selling more of them..

Okay, Fred. I mean that you know we're not going to get into too many specifics, like specific customers and things like that, but we do have a lot of really positive momentum.

I guess before I turn it over to Fred, I will tell you that the biggest change we've had since I took over the division, November 1, is we've added, I don't know, six to eight people globally who are just world-class poultry experts, so whether it's on the sales side or the tech service side. And so, we've really built this, what I call a dream team.

But it obviously takes time to turn that dream team into production. We've got a lot of great opportunities out there -- but I'll turn it over to Fred. But on that side, that's still to come. But I couldn't be more happy with the team we've assembled and the progress they've made to date..

Thanks, Dan. Now, I'm just going to piggyback on what you were saying. So, we have added quite a lot of people from the poultry industry. At the same time, we've added experienced people in the feed additive industry as well.

So, I think like Dan, like he said, that it does take time to build that relationship that we have, and form a different perspective. Meaning either there were partners in the poultry, we want to make sure they are also partner with us in the feed additive side. And it takes time, but we do have a lot of tremendous opportunity.

So, we're currently working on, so we're not able to disclose. But -- I mean I think that's all we can talk about, right. But definitely a lot of things are happening right now..

I guess, Fred, to follow on to what Ethan is saying is, okay, so you joined the company nine months ago?.

Right..

Okay. And obviously, you joined because you saw -- you spent a lot of time researching our product line and our data, and what we could do, and then that - and juxtaposed against the market opportunity where the globe is going, [antibiotic-free] [Ph].

So, nine months later, how do you feel? I mean do you feel more confident, less confident? Is the market opportunity weaker, stronger? What do you see today versus what made you join us nine months ago?.

Okay, got it, understand. I mean it's just more and more confidence that we have, right. And I think this has a lot to do with those sites that we are seeing more positive feedbacks from the customers, with a different direction or push. We are focusing on mineral technology, right, which is something that we are focusing strongly on right now.

And I think the confidence, that was not just me, that's high with all the customers, with the distributors we're dealing with, they are also sharing the same confidence level. However, it does take time because they do have to compare the products. They do have to know that the efficacy of the product works for them. We know it works.

And we're seeing that in working everywhere that we've been into so far. But it does take a little bit of time for them to actually go through their process flow for that decision to be made. But definitely the confidence level is super high right now..

Thank you..

Great. Yes. Yes, and Ethan, I would say I'm more confident than ever that the team that Fred has assembled and Wade, our new Vice President of Marketing, they are just well respected throughout the globe in this area. And so, they have brought instant credibility to Oil-Dri and to Amlan.

And so we are now getting phone calls answered and trials scheduled, and traction, where, in the past, we were just one of many people that these customers had never heard of, trying to hawk our wears. And now, it's a totally different ballgame. So, it's going to take time, there's no doubt about it.

But we are in -- we're very, very confident about the future. Let's go to the next question..

Thank you. And our next question comes from the line of Robert Smith. Your line is open. Please go ahead..

So, I just wanted a little more color from Fred there.

Fiscal 2022, what kind of an -- is this going to be the takeoff year?.

Can I answer that, Dan, how --.

I mean you can answer generally. If you go too far I'll hit your mute button..

Okay. And Robert, that's a very good question, right. So the way I look at it is, if you look at swine business, it does take longer than the poultry cycle. And the reason I'm saying cycle is in the poultry cycle it took about probably two month of time chicken will be harvested.

But in the swine business, you're going from the sows all the way to the piglet it takes more than a year. So, for a decision to be made on key customers that we're focusing on right now, it really depends on which animal species we're talking about. So, for chickens we're going to see lots of activities, like we're seeing right now.

And then I think that it will definitely translate into some sort of business in '22. But in swine, I'm being honest about this, is that you will definitely see something, but at the same time it does take a longer cycle for that decision to be made. I don't know if that --.

Yes. And I guess, Bob -- yes, no, that's - [multiple speakers]. Bob, I can answer your question somewhat this way, because obviously everything you're asking about and concerned about, the same thing that the Board and I are interested in, is we've invested heavily in building this team, and when are we going to start seeing some of the monetization.

I can tell you that we don't have a lot in the first six months of the F'22 plan, nothing material material of new. We've got some existing customers that we're actually growing with, and they've giving us a lot of positive vibes, which is great.

But the new new customers that we started with trails and then actually turn it into sales, with repeat sales, it's really going to be in the back-half of the year. So, you're talking February and beyond is when you could hope to see a material impact from new business..

Okay, thank you..

Yes, next question..

I'll be back in the queue..

Yes, thank you. Good question..

Thank you. [Operator Instructions] And we do have another question from the line of Ethan Star. Your line is open, please go ahead..

Yes. At the end of last quarter's call you mentioned a study, a test with a big player and big country, where Amlan's products had a similar feed conversion ratio to the control, but a much better mortality rate.

And I'm wondering if that test resulted in sales to this big player? And also whether Amlan's product outperforms many different competing products?.

Fred, you want to?.

I could take that, Dan..

Yes..

Yes, so we definitely are seeing a steady growth from that particular country I mentioned to you, Ethan, back last quarter, definitely we're seeing that.

At the same time, we had a lot more field trials or customer study that came back and it remains the same positiveness, meaning that we outperformed the competitors or the control in the trails, right, we definitely see the same thing.

And it kind of comes back to my answer to you earlier is, for companies to make a decision like that it take more than a pen trial or a small farm size. And we're seeing customers that go from a small pen trial to a couple chicken houses, to a whole farm.

We have customers who are now that's doing for a whole six-month period as a way to doing the [indiscernible] validation, right. So, definitely we're seeing the same trend that we have been seeing for the last months..

Okay, thank you..

Thank you..

Thanks, Ethan..

Thank you. And we do have a follow-up question from the line of Robert Smith. Your line is open, please go ahead..

So, I'm wondering how much of the price increases, what are we talking about as the magnitude of the price increases that you've put into place or expect to put into place? And how of a recapture of what you've given up in margin will you be able to see you in the fourth quarter?.

So, I'll take some of that, and then I'll probably turn it over to Jessica for a little more detail on the consumer side. The B2B is easy. It seems to be a very rational market, and there you don't necessarily have the 90-day clause in your customer service agreements, where you can't put in price increases. So we feel fully covered in B2B.

So you should see the margins right, where they need to be historically in the fourth quarter. We feel very good about B2B. On the B2C side, as we mentioned in the release, we've got a couple of dynamics working against us. The first was the 90-day lag, where we had the ability to take price increases.

And we've been very transparent with where we have price or product leadership, and where we're more of a follower, clearly on the scoopable branded side, we have a three share. We are not the price leader.

You guys all know if you've been following this company or if your access to public data, the three largest players are [indiscernible] and they're the branded leader. And we are going to be fast followers. We're watching to see what they do. We've got to believe that they're experiencing the same price, cost increased pressures worse things.

And so our ears to the ground and we will move as fast as we can, but it's obvious as the distance of player there that we're not in the driver's seat on that side of the equation. So that's where you did see in our -- either the K or the Q wherever we put it, so we do expect advertising expenses to be lower than they were a year ago.

And that some of this is going to have to come through cuts. It's not all going to come through price increases. We're going to have to do both. Jessica, I don't know if I [indiscernible] and you want to add anything, but that's sort of what I wanted to get out of this..

Yes, you captured it. Thanks, Dan..

Okay..

Thank you. [Operator Instructions] Now we do have another question from the line of Ethan Star. Your line is open. Please go ahead..

Yes, how are your e-commerce efforts for cat litter going? It looks like you guys have good new talent working in the e-commerce area?.

Jessica?.

Yes, I can take this one. So, e-commerce has continued to be an area of focus for us. We have continued to upgrade our talent across the board and e-commerce is no different, you probably see our presence on Amazon and Chewy and other e-commerce retailers continue to grow.

So, obviously just looking for continued ways to continue to profitably grow and focus on this part of the business..

What about marketing to people who buy it in the store online?.

What's your -- can you explain on the question?.

What are marketing online to people who buy in the store? Do you do any of that?.

Absolutely, our marketing efforts have been -- has evolved as have, where consumer's eyeballs are. So we know that consumers are looking digitally for digital marketing has become an increasing percentage at our overall marketing budget. And that's just because we're in line with where consumers are.

So continue to evolve that as we see changes in consumer trends, but yes, have digital marketing efforts both for e-commerce as well as for retail..

Okay, great. Thank you..

Thank you. And we do have another question from the line of Robert Smith. Your line is open..

So, do you or do you not have price increases being first in the cat litter area?.

I mean, Jessica, I'll let you answer..

We do have -- we have taken price increases in the cat litter area, yes..

Okay.

And then -- is that I feel that was a question that wasn't answered, certainly, my last go round, but I wanted to ask about the China swing, so that you mentioned the China, the difference in falling into the different quarters, so what kind of a swing were you talking about in the reporting period?.

I don’t have the numbers off the top of my head..

Approximately ballpark, half a million --.

Okay. Yes, I know -- so [indiscernible] for example, if you look at Chinese New Year, Bob, what have -- what you see is, usually you come every month on average, if we have about to say X [indiscernible] total sales in China in the Chinese New Year, you went from X to maybe 40% 30% of that, right that make sense just in the Chinese sales.

I can really give you a number, because this is not fair. But I think you could look at the percentage wise, it's very different. And the reason is they two weeks off in China, Chinese New Year, and this year it falls right on the 9th of February.

So if you look at it they start traveling a week before Chinese New Year to go home, and then they take to return the whole month, right. So pretty much that one week of this is which first week of February, and actually that means first if you get the February business in that month only, but that's a reason why you see a swing as significant..

Okay.

So, the fourth quarter would be more robust?.

Yes, definitely. That's what we seeing already..

Okay. Thank you..

Great. I'm not sure do we have time for one more question or we're pretty much out of the time? One more..

We do have another question from the line of Ethan Star. Your line is open..

All right. Ethan, you will be our final question..

Yes, I really would like to emphasize that. I think you should present at conferences again soon. I mean, I know you did three, I guess was it last year three or four in the last year or two. But then you might try something different, like Sidoti, which has Virtual Microcap Conferences.

And I would really encourage you to do that, I mean try something different. Even though you didn't get -- maybe didn't get the response, you're hoping to from the other ones..

Okay, now duly noted. Thank you..

All right, well, listen, thank you guys, and we're heading into the fourth quarter. I can't believe we're coming to an end of another fiscal year. We’ll tell you that relative to last year, you're going to start seeing SG&A bubble up going forward. Because as the world opens up, so there is travel and like entertainment expenses SG&A.

We don’t do a lot of entertaining, but we do shows, and the trade shows were back on, they’re back physical, for the most part, and so you're going to start seeing some incremental SG&A. But obviously, that's all being spent to try and drive incremental sales and profit.

So, but year-over-year, SG&A is going to start going up, just as we ramp up and the world opens back up. So thank you everybody, stay safe. And we will talk to you again after our fiscal year-end is closed..

That concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day..