Q3 2021 Oil-Dri Corporation of America Earnings Call
Good day and thank you for standing by welcome to the oil Dry 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 to ask a question during the session you will.
Star 1 on your telephone please be advised today's conference made the required re recorded if you require any further assistance. Please press Star then zero I would like to hand, the conference over to 1 of your speakers today, President and Chief Executive Officer, Dan Jaffee. Please go ahead.
Thank you welcome everyone to the third quarter.
Need of prime months of Investor teleconference, joining me remotely.
Probably be our last remote 1 will see hopefully on the last 1 is Susan Craig Our Chief Financial Officer, Molly Vandenheuvel, Our Chief operating Officer, Jessica Moskowitz, Vice President and general manager of the consumer products Division.
Fred <unk>, our vice President of global sales for Hamlin International Laura Sheila General Counsel and Leslie Garber, our manager of Investor Relations on Leslie If you would work force.
Safe Harbor.
Thank you Dan and welcome everyone on today's call comments may contain forward looking statements.
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.
Regarding and in evaluating any investment in the oil dry stack.
You for joining us and now I'll turn the call back to Dan.
Before I turn it over to Susan for a detailed review of the quarter on 9 months I just want to say we are clean.
Painfully aware of that we on our number.
And we have lessons learned in the wild.
1 of them adjusted you can exploit something doesn't make the acceptable and we certainly can explain whats going on with the margin pressure in the real.
Early ramp of our call.
The increases in my career of President, which started in 1995 I haven't seen this the encouraging Katrina back in August of 2005 when.
Brian went through the roof. So I think we're sitting of everywhere supply chains are being squeezed on materials.
Materials are being dimmed.
Demand is exceeding supply I E. The prices are going up and so we are obviously working very hard to get increases to offset these but.
You know fell woefully short in the quarter and that's why you saw top line look fine.
But but the gross profit and bottom line are not fun.
So Susan I will turn it over the years.
Thanks, Dan well, let me jump right in.
For the third quarter of fiscal.
The year 'twenty 'twenty, 1 oil dry delivered net sales of $76.3 million, which was on par with a record third quarter in fiscal 2020.
My 3 key themes for this morning's discussion are 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 the spot.
Staying with net sales.
To remind you that our third quarter compares to a unique third quarter in the prior year.
We experienced very high sales on our cat litter products that were driven by.
Tumor pantry loading as the pandemic began to close down many businesses, Google Voll field et cetera.
And consumers stocked up on cat litter toilet paper and other essential goods.
In anticipation of potential supply chain disruption.
On the positive side during the quarter our industrial.
That's real 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 on our business of business.
Business products group.
The 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 of coarse cat litter are result of the prior year's pantry loading.
As well as decrease in bleaching.
<unk> 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 out of the sales increased 3% in the quarter versus the prior year driven by higher demand with in Asia and Latin.
That was partially offset by lower revenues from China.
The decreased demand within China was really primarily due to the shift in timing of the Chinese new year. When many business was temporarily shut down in observance of the holiday.
That occurred during the second quarter and 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 the negative impact of the pandemic as many edible oil manufacturing plants of delayed plant pests or of unused product on hand due to the lower production.
The pandemic has also negatively affected our sales of our ultra clear pilots, which are used for jet fuel processing.
Now switching to our retail and wholesale products group.
Third quarter net sales reached a record of $50 million of 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 of Ricky.
Covering from pandemic, and many sports fields and of reopen.
Although we continued 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 from the third quarter compared to the prior year.
<unk>, which as I mentioned earlier benefited from the unprecedented pantry loading.
In the early stages of the pandemic.
Now switching the 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 draw.
Driven by higher free.
Packaging materials natural gas and non fuel manufacturing costs.
Domestic trucking supply constraints and elevated fuel costs.
In the 28% increase in freight costs per manufacturer tons compared to the same period last year.
A 19% increase in packaging costs per manufactured tons due to higher resin prices also contributed to the reduction in margin.
Natural gas and material costs per manufactured.
Results on increased by 11, and 9% respectively in the third quarter over the prior year.
So Dan mentioned, we certainly did experience some market based increases in costs.
And and to offset the significant cost increases the general managers of our businesses have been implementing.
<unk> and continue to evaluate price increases many of which are effective as of May 1st which will result in us the and the impact during our fiscal fourth quarter.
Further some of those price increases required 90 days' notice to our customers and costs of continued to rise since those increases were set.
Therefore, we continue to evaluate the need for further price increases.
<unk> on 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% decrease.
Increased advertising and marketing expenditures were offset by reduced travel reduced bad debt expense and.
And of lower estimated annual incentive of bonus for fiscal year 2000.
'twenty, 1 compared to fiscal year 2020.
Our effective tax rate in the quarter is worthy of mention 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 of decrease on our expected annual.
Book income as we have better line of sight to the impact of cost increases versus price increase on.
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.
The claim of new tax deduction for foreign derived income, which further reduced the effective tax rate for the third quarter.
Net income attributable the oil dry was $2.2 million in the third quarter compared to $4.6 million during the third quarter of fiscal 2020.
Resulting from.
On the impact primarily of the increased costs, we discussed earlier and for the same reasons our earnings per day.
Diluted common share of 32% compares to <unk> 65 in the third quarter of the prior year.
All of 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.
Waiting 2 of debt to total capital ratio of about 6%.
1 of the primary uses of our cash flow is the fund our trade working capital.
Taking a year to date perspective here.
During the first 9 months of fiscal 2021, our accounts receivable increased $3.9 million, reflecting our sales growth as well as the 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 of 2.6 million payable balance included in accounts payable as of July 31.2020.
2 of prepaid balance of $2.3 million as of April 32021, representing of use of cash of $4.9 million during the first 9 months of.
The 2021.
The decrease in accrued expenses of $4.1 million from the 9 months ending April 30th was primarily driven by a reduction in the incentive bonus accrual.
During the year, we used our cash in line with our plans to fund capital investments.
The physical business, including those required for growth.
Of those required to drive cost reductions in addition to normal repair and replacement capital.
The use cash to opportunistically repurchase stock to help offset dilution that occurs and shares of our restricted stock vest.
Year to date, we've repurchased.
And are currently 82000 shares of our common stock for $2.9 million.
In conclusion oil dry remains on 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 then.
Approximate back over to you.
Thank you Susan Thank you for the recap and at this time I would like to open up the Q&A. So we can cover the issues that are most important to our investors as always I ask you to prioritize your questions out of your most important question first and then go to the end of the Q, which will allow everybody.
He had chance to at least ask 1 important question. So let's open up the the Q&A on.
Thank you as a reminder to ask a question you will need of press star 1 on your telephone to withdraw your question. Please press the pound key we do ask that you limit yourself to 1 question before return into the queue with others. Please standby.
While we compile the Q&A roster.
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 amyloid in terms of sales and sales of related metrics and what will it take to significantly increase amlin revenue the product sounds so good I don't know why you weren't selling more.
Okay.
Without going into too many specifics, but the specific customers and things like that but we do all of a lot of really positive momentum I guess before I turn it over to Brad I will tell you the.
The biggest thing we've had since I took over the division November 1st as we've added I don't know of 6 to 8 people globally.
Who are who are just world class.
The.
Poultry experts, whether it's on the sales side or the truck service side.
So we've really built this what I call the dream team, but it obviously it takes time to turn that <unk> into production, we've got a lot of great opportunity.
But the I'll turn it over to Fred but on that side, you know that still to come but I couldnt be more happy with the team we've assembled and the progress they've made to date.
Thanks, Dan I'll, just kind of piggyback on what Youre, saying right.
So we have added quite a lot of people with the industry I understand.
I've experienced people.
The industry as well so I think.
But then like you said the <unk>.
It does take time to build that relationship that we add.
Somewhat dependent.
Perspective, meaning the wood honors in the poultry we wanted to make sure. They also partnered with us in the fee.
Hey, thanks.
Kind of where we do have the lot of tremendous opportunities that we're currently working on the we're not able at the schools, but.
I mean, I think that's all we can talk about right I mean, but definitely a lot of things are happening right now.
You know I guess, Fred the follow on to what are you from saying is okay. So you joined the company 9 months ago.
Right, Okay, and obviously you joined because you saw you spent a lot of time researching the product line and our data and what we can do and then that.
In juxtaposed against the market opportunity 1 of the globe is going antibiotic free so 9 months later, how do you feel I mean.
Do you feel.
We feel more confident less confident of the market opportunity weaker stronger what do you see today versus what made you join us 9 months ago.
Okay got it.
More and more confident that we have right now and I think this has a lot to do with.
The size that we are seeing more positive feedbacks from the customers where the different.
Yeah.
The duration of push we are focusing on all of the Neurotechnology drive, which is something that we are focusing strongly on right now.
And I think the contract that was not just need is high with all the customers or the distributors with dealing with the also showing the same congress level. However, it does take time because they do have.
Differentiator of the products. They do have to know that the efficacy of the product works for them, we know it works.
<unk> seen the other working everywhere that the thing into so far but it does take a little bit times within the cash would go through their process full well that decision could be made.
Definitely the comfort of confidence level is super high right now.
Yep Yep.
And he said I would say you know I'm I'm more confident than ever the team the threat has assembled.
And wait or our new vice president of marketing.
They are just well respected throughout the globe in this area and so the they brought instant credibility to oil dry and the Hamlin and so we.
To come out getting phone calls and sort of trials scheduled and traction. We're on the path. We were just 1 of many people to the customers that never heard of trying to sort.
The HOKA and now it's a totally different ballgame. So it's going to take time, there is no doubt about it but we are on.
We're very very confident about the future, let's let's go to the next question.
Thank you and our next question comes from the line of Robert Smith of your line is open. Please go ahead.
So I just wanted to on a little more color from a friend.
The fiscal.
'twenty 2.
'twenty 2.
What kind of man.
Is this going to be the take off here.
And so that then how you can answer generally if you go too far on I'll I'll I'll hit your mute button.
[laughter].
Okay.
Aye.
That's very good question on right. So the way I look at it is if you look of swine business. It does take no longer than the poultry cycled out of the reason I'm, saying cyclists in the poultry cycle, we took about.
2 months of time chicken will be harvested from the swine business going from.
Most of all the way to the the cause of the peak rate of it takes more than the year. So forth decision to be made on key customers that we focus on that right now it really depends on which animal species the talked about so for chicken from drawn debt you're going to see lots of activity that we're seeing right now and then I think that you would definitely translate into.
On the salad on sort of business in <unk>, but in swine.
On being honest about this is that the would definitely seeing something by the same time. It does take a longer cycle for that decision to be made.
I don't know.
Yes, no thats really going Bob I can answer your question somewhat this way because obviously everything you're.
Santa Barbara are concerned about the same thing that the board and I are interested in is we've invested heavily in building the team and when are we going to start seeing some of the monetization I can tell you that you know the.
We don't have a lot in the first 6 months of the F. 'twenty 2 plan nothing of material material of new we've got some existing accounts.
So, we're actually growing with them or giving us a lot of positive vibes, which is great, but the new new customers that we started with trials and then actually turn it into sales would repeat sales, it's really going to be in the back half of the year. So youre talking February and be on is when you could hope to see a material.
The impact from from new business.
Thank you.
Yep.
Some of them back into queue.
Thank you good growth.
Thank you and again if you have the question at this time. Please press Star then 1.
We do have another question from the line of Ethan Star. Your line is open. Please go ahead.
Yes at the end of last quarters call you mentioned the study attached with the big player in a big country, where England's products on the similar feed conversion ratio to the control, but at much better mortality rate and I'm wondering if the test resulted in sales to this big player and also whether ammons product outperforms many different competing products.
Right.
Yeah, Yeah. So we are definitely seeing the steady growth from that particular country on medicine into the back last quarter definitely were seeing that at the same time, we have a lot more field trials or customer studies that have come back.
Made the same positive net meaning.
Meaning that we outperformed the competitors.
The control.
The trials right definitely from the same thing.
And the kind of comes back to my right as of your.
Earlier for all companies to make decisions like that it takes more than of 10 trial of small size, though we're seeing customers. They go from a small pin trial through a couple of chicken houses to.
On.
We have customers right now, there's 3 or 4 of whole 6 months period.
As a way to doing the <unk> per validation.
So definitely we're seeing the same trend that we've been seeing for the last months.
Okay. Thank you.
Thank you.
The whole. 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 it on the price increases of what are we talking about is the magnitude of the price increases.
That you've put into place sort of expect to put into place.
How much of the recapture of of what you've given up and margin will you be able to.
We will be able to see in the fourth corner.
So I'll take some of that and then I'll, probably turn it over to Jessica from a little more detail on the consumer side of the BBB is easy.
<unk>.
It seems to be of 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 and beat of B cell.
Should see you know the margins right, where they need to be historically in the fourth.
And we feel very good about be the boots on the beat of T 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 have the ability to take price increases and we've been very transparent with you know where are we have price you know.
Our product leadership.
And where we're more of a follower.
On the Super Bowl branded side, we have of 3 share we are not the price leader.
You guys all know if you've been following the company of your access to the public data of the 3 largest players are not fully drawing up you got church, and Dwight and many of Clorox themselves rush, though.
Sure I know the branded leader.
And you know we're gonna be fast followers, we're watching to see what they do.
We've got to believe the bone springs in the same price increase cost increase pressures worsening.
And so you know where are your sort of the ground and we will move as fast as we can.
All of these.
All of the distance of player there.
We're not we're not on the driver's seat on that side of the equation. So that's where you did see in the.
Sure.
Sort of the carry of the queue of wherever we put it the we do expect the advertising expenses to be lower than they were a year ago.
But some of the who's going to have to come true cost, it's not all going to come through.
Price increases we're going to have to do both dove channel nobody stole all of your Thunder you want to add anything, but what's the sort of what I wanted to get on to you. Yeah, you capture that thanks Dan.
Okay.
Thank you and again.
On the 2 question at this time. Please press Star then 1.
And we do have another question from the line of Ethan Star. Your line is open. Please go ahead, yes, how would your ecommerce efforts for cat litter going it looks at you guys from good new talent working on the E Commerce area.
Jessica.
Yeah, I can take that 1 so e-commerce has continued to.
If you have area of focus for US we have continue to upgrade our talent across the board and in E. Commerce is no difference Ah you know, you'll 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.
The in Aero and and focus on this part of the business.
What about marketing is the people, who don't who buy it in the store.
On line.
What's your can you what are the marketing question what are the marketing online to people who buy in the store do you do any of that.
Absolutely I mean, Mark you know our marketing efforts.
Birds have been have evolved as head of you know where the consumers' eyeballs are so you know we know that consumers are looking digitally for digital marketing digital marketing has become an increase increasing percentage of our overall marketing budget and that's just because of where you know in line with where consumers are.
Of the Blade go are you know continued on about that as the sea changes in consumer trends.
But yes. It has has digital marketing efforts both at East Hot for E Commerce as well as from retail.
Okay, great. Thank you.
Thank you and we do have another question from the line of Robert Smith. Your line is open.
Yes.
So do you on doing that have price increases being first in the cat litter.
Yeah.
I mean, Jessica I'll, let you answer that.
We do have we have taken price increases in the cat litter area yet.
Okay, and then Uh huh.
Yeah.
Spent on that that was a question of wasn't answered sort of at least my last go around but I wanted to ask about the China.
Hum swing so the you mentioned the China.
The difference in falling into the different corners, so what kind of a swing of what we're talking about on the reporting period.
If I'm wrong I don't have.
All of the members of my head.
Approximately ballpark.
Half of them.
Okay, Yeah, I know so well.
On the dry so for example, if you look at Chinese new year of time Bob.
What have what you see is you know.
Usually you from <unk>.
Every month on average if we have a back of the ex.
Condo of total sales in China, and the Chinese new year went from X to maybe $40.30 per cent of that right.
Alright that makes that just in the Chinese sales right I can't I can't really give you a number of this is not there.
But I think you can think of the percentage wise, it's very different and then there's the 2.
On the weeks all of China.
Any new year.
If both of them right on the 19th of February.
So if you look at it they start traveling a week before Chinese new year to go on and then they take to resolve the whole blood.
We're pretty much out of 1 week of.
The business, which of course of of February.
No actually the price can get the fabric business in that month on me, but that's the reason why you see a swing back.
Okay.
So in the fourth quarter would be more robust.
Yes, that's the only that's why we see all of it.
Thank you.
Right.
Yeah.
I'm not sure Duane on 1 more question or are we pretty much of that I've done.
Yeah.
1 more.
We do have another question from the line of Ethan Star.
Your line is open all right.
And you'll be our final question, Yeah, I really would like to emphasize that I think you should present at conferences again of soon I mean, I know you did 3 I guess it was last year 3 or 4 in the last year or 2 but then you know you might try somebody different like Sidoti, which has microcap virtual microcap conferences, and I would really encourage you to do that and try some of the different even though you didn't get maybe you didn't get the response.
Income from the other ones.
Okay well thank.
Thank you.
Well listen thank you guys and we're heading into the fourth quarter I can't believe we're coming due at the end of another fiscal year.
I'll tell you that.
Relative to last year, Youre going to start seeing SG&A bubble up going forward because of the.
Sponsor opens up sort of travel and.
Entertainment expenses G&A.
We don't do a lot of entertaining what we do shows and the Tradeshows are back on the back of physical.
For the most part and so youre going to start seeing some incremental SG&A, but obviously, that's all being spent to try and drive.
The 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 close.
This concludes today's.
The conference call. Thank you for participating you may now disconnect everyone have a great day.
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