Q3 2022 Oil-Dri Corporation of America Earnings Call

June 8, 2022

Good day, and thank you for standing by and welcome to the third quarter fiscal year 2022 Investor teleconference. At this time all participants are in a listen only mode. If you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today.

And Chief Executive Officer, Dan Jaffee. Please go ahead.

Thank you and thank you and welcome everyone to our third quarter teleconference. With me here either physically or on the line of Susan Craig <unk>, Our Chief Financial Officer.

Eric Richardson, Vice President of operations, Chris Lamson group VP of retail and wholesale Jessica Moskowitz, Vice President General manager of our consumer products Division Wade Roby, Vice President of Agriculture, and Amylin marketing or Sheila Vice President General Counsel and Secretary David Atkinson.

Vice President controller, and Leslie Garber, our manager of Investor Relations Leslie.

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.

Ask that you review and consider those factors in evaluating the company's comments and in evaluating any investment in oil Greg. Thank you for joining us.

And thanks, everyone for attending.

A whole host of questions really good questions and so we've done.

Very informative session for you so I will not waste a lot of time.

Covering what you you didn't want to hear so let's turn it over to Susan for some financial results.

And we'll go from there.

Alright, Thanks, Dan.

This morning, we have a special guests with us that is.

And corporate controller, David Atkinson.

They've been with us about a year.

Joining us today to discuss the details of a significant accounting charge during the quarter, a one time non cash charge and so those are the details with you and then be available to answer any questions you might have a rate isn't that an accounting event.

Do you want to.

Sure. Thank you Susan for the opportunity to be here today and to talk about in a onetime noncash goodwill impairment charge that we took in the third fiscal quarter for background goodwill goodwill intangible assets established during acquisition accounting when the purchase price exceeds the net fair.

Value of assets acquired and liabilities assumed.

In the case of this particular goodwill asset as it relates to multiple acquisitions that took place eight years ago or longer.

Goodwill for impairment each year as of May one and performing this task we determined that we experienced a triggering event in the third fiscal quarter due to continued adverse impact of rising costs and supply chain constraints and gross margins, we determined in the third quarter, the carrying value of the retail and wholesale reach.

Rail and wholesale segment was higher than its fair value based on a discounted cash flow model. As a result, we recorded a goodwill impairment of $5 million 644000, which have no remaining goodwill in our retail and wholesale segment.

Tax impact this resulted in a reduction of earnings of $4 million 397.

Or 6%.

<unk> five per common share.

<unk> goodwill on our balance sheet $3 million 618000 relates to our higher margin business to business segment, which is not required impairment based on having fair value in excess of the carrying value. In addition, we do not expect future goodwill impairment charges related to the businesses in that segment.

Please state.

So the goodwill charge that Dave described.

The impact of liquidity.

<unk> itself was a noncash charge.

Further we have strong relationships with our lending partners and we've worked with both of them will exclude the impact of the goodwill impairment in our covenant calculation.

<unk> and monetize documents were filed with our fiscal third quarter 10-Q for any of those who might be interested.

Yes.

Transitioning from liquidity to cash year to date, we have issued $25 million in notes.

Tangible rate is three 5%.

We've used those proceeds to fund our growth.

As to building inventory and we're doing that not only because of the increased cost of the supply chain because of the fact, they can be straight out is taking longer. So we have more finished goods on hand.

And just to provide overall higher service levels to our customers.

Also making investments to support our growth in our manufacturing facilities as well through capital investment.

We also have opportunistically repurchase shares in fact, as we believe they are currently at a very good value.

So while we've allotted time for questions because I know there will be a few highlights.

Highlights for the quarter.

Strong strong revenues in all of our businesses and we're seeing the benefits of our pricing.

Initiatives as well as volume growth. So if I break that down and had strong revenue growth is about three quarters pricing in any other quarter in volume.

I'm, particularly optimistic about the quarterly growth in our animal health products.

13% and this is a business, which is strategic and we are making strategic investments in both capital as well as in SG&A to build out sales and leadership to drive the growth opportunities there.

And on that positive note.

Turn it back over to Dan Great. Thank you.

Before we address some other questions. We've prioritized the couple just because I'm going to take them a combined two John Bear wrote and what does your both positive takeaway from the results of this quarter and then the positive encouraging trends Youll see unfolding I think Susan covered the above I'm going to go with the trends.

And then.

Ethan Star wrote what will it take to significantly grow Hamlin sales and what progress is being made towards the two of them combined together.

We're seeing really positive trends and there was even a third question that we may or may not get through.

Ethan was more interested in our newer products, but I will tell you, what's really driving the excitement and the growth.

Older products stuff that mother nature put in the ground billions of years ago.

Clay.

And as we say.

Minerals by nature performance by design.

<unk> selectively bind so.

<unk> processed.

Maximize what mother nature did billions of years ago is really what's driving all of the excitement with the actual end user or the actual customers. So we have incredibly positive test. This is an industry that view thankful to hear is slow to move because it's impacting the human food chain. So it wouldn't be good but it we're just.

Bouncing back and forth changing things left and right without being very methodical.

And getting deep into the data and making sure they see repeat repeat repeat performance, having said that all.

Major entrees.

<unk> accounts are moving forward with results better than what they have even hoped for when they want it hadn't agreed to test the products. So what do we need to grow it started with building the team it started with bringing Jay and Chuck.

In the U S and really because we never really had a U S presence and their reps.

Our reputation in the industry is so strong that when they left cob and joined us because.

Truly believe in our mineral before they joined the company each of them.

Same.

Feel which was look I'm, an accountant I'm excited about our play but I don't really understand this industry go to go out to the research center or go to the mid Jeffrey.

Innovation Center, and the Duke Jeffrey Microbiology lab data into the data and come back to me and these are telling me Dan Jason Rainbow. So theres nothing here I'm staying in my 22 year career here John .

Job or no it's real.

Even better than we thought and they all join the proof is in the books.

So it's very exciting the results are very positive and while we don't generally disclose too much of just animal health I know in the Q. We said, we did about $14 4 million in animal health sales.

Pending on revenue recognition because the global supply chain is such a mess right now, but we have a product that's sitting on the water sitting in docs that until it gets in the hands of the customer and it can be properly recognized.

Our revenue streams I can't really tell you exactly where it will be.

And so but we believe we have enough on hand already to be around <unk>.

$18 million, sorry over $20 million. We did 18 last year that was last year's number was 14, 4% to three quarter pull this year. We believe we will be north of 20.

Everything that's on the water, it's invoiced, we could push 'twenty, two but it will be somewhere in between 2020 two and then we already have enough.

Confidence.

In the US we've seen the commitments, we've got and the expansion in the trial to be budgeting for around 40 next year. So you kind of see what we're what we're what we're seeing which is continued snowfall growth and again as slow as this industry is to move they are also going to be slow to move away from it.

Meaning once they build their diets and it really does I'm learning run word of mouth.

Not really going to hit a single in this industry you are going to hit a grand slam or youre going to strike job, but they talk these nutrition is talk.

We saw when they should because theyre all trying to help the U S food chain in the global food chain and so when someone starts to have success at just around the industry pretty well and that's why we're doing trials with such a wide variety of customers all at the same time so Brian .

Sure.

Definition than that it's a little more than I, usually do but I felt like I needed to because the results are still not what we want them to be on the bottom line. The top line results have been great. You can see some benefit of price increases, but but while we did show gross profit up on a dollar basis. It still was down on a percentage basis from a prior year.

Here in the quarter and.

It's because our second and third round of price increases really didn't hit until May 15th of June 1st we are bunches of hit and you can see it but fourth quarter is when you really should start to see us get on top of this the rollout of global inflation gas prices tripling diesel prices are rising.

Everything's sort of happening at the same time and so we are taking absolute price increases we're implementing surcharges and we're increasing those surcharges adjust price goes up we will certainly will lead those surcharges as the gas price goes down and we did have a question on hedging and look I've been pretty consistent.

We're in a rational market and if we hedge and we hedge wrong.

We'll go to our customers and say look we thought gas.

And we thought it was going to 15, so we forward bought and now it's back down to three but we don't want to relieve the few.

Fuel surcharges, because we just wrong.

That's not going to be a real fund sales call to have as we all know the definition of the market is for every buyer or seller. So everyone buying gas at 930, there's someone's settlement at $9, meaning that there is someone thinking that's going down there some of them they give us going up and our best move is to ride the wave and then really handled the dollars.

We've never profess to be natural gas experts.

We don't profess to be going forward.

We're just going to stay in line with the market and if that means we're 30 days late to the market and so we believe that's in our customers' best interest than trying to Jeff and potentially guess wrong, which would be really detrimental to either us or our customers or both so that knocked off about three or four clubs.

So locally where are we going back. So the next question is from John Bair from ascend wealth advisors.

Are you seeing any shift by the consumer away from your premium cat litter products to lower end offerings.

Yes. Good morning, John This is Chris I'll take I'll take the question. Thanks for the question and I think we had a similar question last quarter and the answer largely remains the same so as we look at the total category.

Really what we see is a bit of a barbell effect.

So super premium products, so real price premium per use specifically that our crystals are growing very nicely and then at the other end of the market those brands and retail brands private label brands.

Obviously more value oriented are also seeing growth that is in excess of the category.

I would put both of our significant businesses within litter into that latter bucket and as a result, I'd say, we're benefiting from what I call fairly modest tailwind above the category category is already doing well.

Tracked in the in the low teens.

Those.

What I'll call value brands performed particularly well for the consumer for long.

Value ramp, particularly our premium private label on our Cat's Pride and Johnny Cat brands are performing ahead of either the segment that they plan or the overall category.

Okay, great. Thank you. Our next question comes from Ethan Star, what kind of results, our aniline customer seeing with aniline products.

As states and around the world and especially interested in hearing about results for the newer aniline products.

Yes.

Good morning.

Yes. Thank you Dan good morning, Ethan and thank you for the question.

We're seeing excellent results around the world as we've discussed in previous calls.

The sales cycle with amylin products in this industry is to evaluate in the field, our product and customer operations. We certainly share R&D results, we do at Crows or universities, but customers really want to try the products firsthand in the trials we've been conducting over the last 12 18 months, we universally seen egg.

<unk> results, our customers are seeing improved performance with our products as.

As we look around the world and the launch of our new products are beginning to evaluate those as well.

As we mentioned again in our previous call in with our IPP launches, we're launching two new products internationally, our nuclear path product in our biologic product both of those products are in testing now with customers and again, we're seeing them perform as expected.

We're starting to make great progress in moving those products into the market.

Okay, great. Thank you Lee.

Our next question also comes from Ethan Star.

10-Q indicates that youll be spending $6 5 million to renovate one of your manufacturing facility, which plant are you renovating what improvements are you, making and what benefits will result from that.

And Aaron Christiansen, our newly promoted Vice President of operations will take that one Aaron.

Yes, that's a great question.

Thanks for asking Ethan Susan already largely alluded to the answer.

Our capital spend continues to be heavy in our.

Aging infrastructure the bulk of the spend is in the areas, where we support the almond business and lightweight cat litter.

It's a combination of investments and add capacity flexibility redundancy in some cases.

And address our cost structure.

The question, specifically states the location I'd, rather avoid that detail, but it is most definitely unclear to kind of indicate that the capital spend is definitely targeted in the areas, where our commercial teams are targeting strategic growth.

Great.

Thank you. The next question comes from Kurt Cornwell.

Who is a longtime shareholder what's the decision to take the goodwill impairment charge in this quarter related to the substantial increase in inventories year to year and are you satisfied with current inventory levels.

And then I'll hand, it over to Aaron has that.

Thanks for the question, yes, the inventory levels one heart.

Triggered the impairment charge of the partner.

Second half of your question are we satisfied with the inventory levels certainly we've seen an increase in finished goods.

And the whole situation with freight and Milan, new types of getting our product to customers has contemplated the increase this year.

As to the rest of inventory levels on the I'll, let Erin.

Operations answer what that what do you think about inventory levels.

Extremely hard to predict where we go over the next quarter.

The market dynamics right now in particular in freight and export freight are incredibly unpredictable on stable.

The bulk majority of the increase in working capital over the past quarter has been in export.

Reduction in volume for several pieces of our business, where we simply have not been able to move the product at the rate that we have historically.

All indications are export freight in particular is not going to improve over the coming quarter, we're finding unique ways to manage our working capital down.

But obviously, we have to have the product to begin with to be able to move freight.

So we'll monitor as the freight market and other aspects of the supply chain stabilizes the months ahead.

Great. Thank you and we have a couple of questions. Ethan asked what does the number of different countries, we have already sold them on products.

Jon Bear us to what do you attribute the sales decline in Mexico and Asia.

<unk> drop or logistic issue or both and Wade I'm going to call on you to take on those too.

Yes, Thank you Dan and thank you for the questions guys.

Start with the.

The question related to the countries were targeting.

We're targeting approximately 27 countries today and selling around the world really in all key where Larry geographies except for.

The EU.

And we've discussed why we have an approach that market. Yet. These are really are the countries that we're that we're focusing on we're not going to have a large expansion in that number over the next 12 months, we will see instead more significant investment in the key geographies like in the Americas, North America South America.

As well as in key countries in Asia, but that list will gradually expand in time.

As we look at Mexico, and the change that we saw there.

If you look at the third quarter of fiscal year 2022 versus 2021, which I think is the referenced question you're asking we saw decrease in AR.

Net sales of approximately $147000, which constituted about 25% for the quarter and that really was related to a discontinuation of certain product lines that were sold by agreements that were more.

Equipment or mechanical in nature, it wasn't related to our core products, but rather products that we chose to just continue that weren't core to our strategy and so we see that really as a temporal event.

Yes.

Okay, great. Thank you.

Our next question comes from Ethan Star.

In the slide presentation at the annual meeting.

Oil dry noted that Ameren has an opportunity to target companion animal ration I have three questions related to that first has the innovation center already developed a scientifically proven product second are you already working with the pet food manufacturer, either informally or with a contractual agreement and third what can you tell us about when this product.

Begin to generate revenue for oil dry.

Wade do you want to take that question.

Yes, sure and again, thank you Ethan and thank you for that the breadth of the question because it is it is a.

An opportunity that we see is pretty significant for the company in the future.

What's great about our product and Dan mentioned, this and certainly our core claim mineral products is that they are.

<unk> in a broad range of species. So although we're initially targeting say poultry and swine in the key geographies. We're looking to penetrate we're also pursuing markets like the ruminant market specifically in dairy and also companion animal and the reason is that the products work.

Cross BCS is really the same.

This is this is basically true for our formulated products as well with some exceptions, but we have a breadth of portfolio that we can target not only production animals, but also companion animals. We're in the process currently of talking with large companion animal feed or food producers, what's fortunate about that as a lot of these <unk>.

Very large food companies that we compete with today are vertically integrated and cross species. So they would might produce both poultry feed ruminant feed and sometimes companion feed as well. So it makes it a very efficient way for us to penetrate the market. We're not in testing yet in companion animal rations were going down a cycle.

<unk>.

Providing them data and convincing them to do validation tests, but we hope to do that in the near future and I would hope that in fiscal year 2023, we begin to see some sales into the companion animal market, but again, we'll have to validate the product with customers and then begin sales in that order.

Yes.

Great. Thanks Wayne.

We have a question from Eric sentiment.

<unk> has a long history of maintaining a very strong balance sheet, given it's been a capital heavy year with elevated capital expenditures working capital growth dividends and buyback leverage Hasnt Creek does the company have a maximum net debt or leverage ratio in mind and should we expect free cash flow to improve over the next year, although cash need.

Remain high.

Yes.

There.

So let me start.

Yes.

Free cash flow.

We expect to continue spending capital because we've got identified opportunities at the level that we're spending it here.

Fiscal 2022.

So we've got.

Opportunities.

Inventories Aaron talked about full year.

We have made an investment in our inventory to serve our customers and just because of.

The volatility we're seeing in freight and shipping.

On balance sheet, we still are sitting with a debt to total capital of 18, 4%, So really pretty low and that means we've got we've got.

Got dry powder.

To fund opportunities as they come on.

Yes.

Specific ratio in mind.

I think we've had conversations where unless the opportunity with something.

Anyone can we imagine that we would not see that going above 40%.

A lot of opportunity for things that are accretive.

Sure.

With that as far as dividends.

Supporting the dividend and share buybacks will be opportunistic but to be honest very attractive.

Is that right now.

We have any that's why.

Out of $11 million year to date on share repurchases.

As we sit here today, we don't have any more plans to do so but that is a good opportunity for us.

It comes less than our ranking of opportunities both in our business.

That would be the first use of our cash in the form.

Capital and working capital.

Thank you and then the only thing I would add is.

As I look at our balance sheet, we've got $200 million.

Assets and the question is does that mean that.

Could we replace all five of our major U S locations, Georgia, two in Mississippi, one of the mountains in Illinois, and one in California for $240 million and the answer is no.

Not even close these are historic values are depreciated values and so forth and so.

These get older and as Aaron and his team upgrade.

Not even upgrade and some sense of just maintain keep up to standard.

And then as you layer on the fact that you don't want <unk>.

Higher metal compliance only gets more strict the amount of particular you can amid all of that kind of stuff. So you have to have more and more air quality equipment and things like that.

It's a capital intensive business, that's the bottom line.

So on the dividend side obviously.

Very important we've always.

We've been paying a continuous dividend.

Sure.

In Europe .

Looking back I mean.

One of our really sort of a number but I don't want to say over 40 years, we paid a continuous dividend and we've raised it 18 19 years in a row and its always on 19 years in a row aging that's what I thought.

Anything there that are noteworthy.

We always looked at it in June .

This is June so it's certainly on the agenda for today's board meeting that will be a subject for discussion in our review and approval by the board.

They're going to want to see us.

So we believe that.

Our margins are going to come back that will start generating the cash necessary to not only fund.

The maintenance and growth of the business, but also to then increase the dividend. So I would say you will know more by the close of business today.

That will be a strong signal one way or the other.

Susan and her team will be presenting some cash flow information and so forth, but they can make a more informed decision.

So we have one more Colombian time for one more question, which comes from Ethan Star in the most recent 10-K this data that will drive.

Our revised terms with a significant customer so that the customer would pay freight charges directly in such costs wouldn't be included in the price of oil dry charges by product what is the approx precedent impact of the change on the top line per quarter. If you can't give a precise figure could you at least tell us, whether it's more or less than $1 million per quarter.

So Ethan it's Chris I think the key point here and from the nature of your question I think you understand this but just really want to emphasize that there is no real net bottom line impact of this so it's simply a.

Lower sales over the last year, we will annualize this effect going into this next quarter going into Q4.

With an offset.

In early in the freight line in our in our detailed P&L if you will.

So.

Roughly how much does that does that approximate two over the last year.

<unk> a couple of points of sales.

That were depressed.

And again, no bottom line impact simply a shift.

So more than $1 million a quarter.

So good question well, thank you everybody and look.

We're all looking forward to the fourth quarter.

The significant price increases already.

Showing but then more coming and all around trying to recapture cost and protect our margins and we're very focused on it most of the grindstone and we'll be back with you in whenever that is not quite 90 days, probably a little longer but.

After we closed the fourth quarter, we will talk to you then.

Thank you.

That concludes our call.

This concludes the conference call you may now disconnect.

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Executive Officer, Dan Jaffee. Please go ahead.

Thank you and thank you and welcome everyone to our third quarter teleconference. With me here either physically or on the line of Susan Cray, Our Chief Financial Officer, Eric Richardson, Vice President of operations, Chris Lansing Group VP of retail and wholesale Jessica Moskowitz, Vice President and general manager of our consumer.

Our products Division Wade Roby, Vice President of Agriculture, and Amylin marketing or Sheila Vice President General Counsel and Secretary, David Atkinson, Vice President controller, and Leslie Garber, our manager of Investor Relations Leslie.

To review and consider those factors in evaluating the company's comments and in evaluating any investment in oil <unk>. Thank you for joining.

Thank you Leslie and thanks, everyone for sending them.

The whole host of questions really good questions and so we've done a.

Very informative session for you so I will not waste a lot of time.

Covering what you you didn't want to hear so let's turn it over to Susan for some financial results.

And we'll go from there alright, thanks, Dan.

We have a special guests with that that ends our vice president and corporate controller David <unk>.

They spend with us about a year.

He is joining us today to discuss the details.

I can Tony charge, we took during the quarter, a one time non cash charge and they'll go through the details with you and that will be available to answer any questions. You might have a rate isn't that an accounting event does that Dave do you want to.

Goodwill impairment sure. Thanks for the opportunity to be here today and to talk about in a onetime noncash goodwill impairment charge that we took in the third fiscal quarter for background goodwill the goodwill intangible assets established during acquisition accounting when the purchase price exceed the sum of.

The net fair value of assets acquired and liabilities assumed.

In the case of this particular goodwill asset as it relates to multiple acquisitions that took place eight years ago or longer we test goodwill for impairment each year as of May one and performing this task we determined that we experienced a triggering event in the third fiscal quarter due to continued adverse impact of rising costs and supply chain constraints and gross margins.

We determined in the third quarter, the carrying value of the retail and wholesale retail and wholesale segment was higher than its fair value based on a discounted cash flow model. As a result, we recorded a goodwill impairment of $5 million 644000, which has no remaining goodwill in our retail and wholesale segment net of tax.

This resulted in a reduction of earnings of $4 million 397.

Or 6%.

<unk> five per common share.

The remaining goodwill on our balance sheet 3.618 million relates to our higher margin business to business segment, which is not required impairment based on having fair values in excess of the carrying value. In addition, we do not expect future goodwill impairment charges related to the business.

Okay.

Thanks, Dave.

The goodwill charge that Dave described does not impact that liquidity.

Large itself was a noncash charge.

Further we have strong relationships with our lending partners and we've worked with both of them will exclude the impact of the goodwill impairment in our covenant calculation.

Amendment and monetize documents were filed with our fiscal third quarter 10-Q for any of those who might be interested.

Transitioning from liquidity to cash year to date, we issued $25 million in notes at a very favorable rate is 325% and we've used those proceeds to fund our growth.

As to dumping inventory and we're doing that.

Because of the increased cost of the supply chain because of the fact that in a straight out is taking longer. So we have more finished goods on hand and to provide overall higher service level to our customers.

Also making the investments to support our growth in our manufacturing facilities as well through capital investment.

We also have opportunistically repurchase shares in fact, as we believe they are currently at a very good value.

So I'll leave a lot of time for questions in order.

Yes.

Think about highlights in Florida.

Strong revenues in all of our businesses and we're seeing the benefits of our pricing.

As well as volume growth, if I break that down and had strong revenue growth is about three quarters pricing in any other quarter in volume.

Particularly optimistic about the quarterly growth in our animal health products.

13% and Robyn this is a business, which is strategic and we are making strategic investments in both capital as well as in SG&A to sales and leadership to drive the growth opportunities there.

And on that positive now.

Back over to.

Great. Thank you.

Before we address some other questions. We've prioritized the couple just because I'm going to take some of combined two John Bear wrote and what is your both positive takeaway from the results of this quarter and then the positive encouraging trends Youll see unfolding I think Susan covered above I'm going to go with the trends.

Then Ethan Star ROE, what will it take to significantly grow Hamlin sales and what progress is being made towards them. The two of them can be combined together, because we're seeing really positive trends and there was even a third question that we may or may not get through <unk>.

<unk> was more interested in our newer products, but I will tell you, what's really driving the excitement and the growth of the older products stuff that mother nature put in the ground billions of years ago. Our play is.

And as we say.

<unk> minerals by nature performance by design, our play selectively bind selectively processed.

To maximize what mother nature did billions of years ago is really what's driving all of the excitement with the actual end user of the actual customers. So we have incredibly positive so the industry the.

So I think for the year is slow to move because it's impacting the human food chain. So it wouldn't be good but it would just bouncing back and forth changing things left and right without being very methodical.

And getting deeper into the data and making sure. They see repeat repeat repeat performance, having said that all major entrees into new accounts are moving forward with results better than what they had even hoped for when they want it hadn't agreed to test the products. So what do we need to.

It started with building the team it started with bringing Jay and Chuck.

In the U S and really because we never really had a U S presence.

There.

Reputation in the industry is so strong that when they left cob and joined us because they.

They truly believe in our mineral before they joined the company I gave each of them.

The same.

Steel, which was what kind of an accountant I'm excited about our play but I don't really understand this industry totally go out to the research center grow to the mid Jeffrey <unk>.

Innovation Center, and the Duke Jeffrey Microbiology lab data into the data and come back to me and these are telling me Dan Jason Rainbow Theres, nothing here and understand in my 22 year career here.

Job or no. It's real value is even better than we thought and they all joined the proof is in the books.

And so it's very exciting the results are very positive and while we don't generally disclose too much of just animal health I know in the Q. We said, we did about $14 4 million in animal health sales.

Depending on revenue recognition because the global supply chain is such a mess right now that we have a product that's sitting on the water sitting in docs that until it gets in the hands of the customer.

Properly recognized.

Revenue streams I can't really tell you exactly where it will be.

So, but we believe we have enough on hand already to be around.

18 million Saar over $20 million. We did 18 last year that was last year's number were 14, 4% to three quarter pull this year. We believe we will be north of 20, if everything that's on the water invoice, we could push 'twenty two but it will be somewhere in between 2020 two and then we already have.

Confidence in the tests, we've seen the commitments, we've got and the expansion in the trial to be budgeting for around 40 next year. So you kind of see what we're what we're what we're seeing which is continued snowball growth and again as slow as this industry is to move there.

We're also going to be slow to move away from it meaning once they build their diets and it really does I'm learning run word of mouth.

Not really going to hit a single in this industry you are going to have a grand slam or youre going to stretch out but they talk these nutrition is talk.

We saw in the short because theyre all trying to help the U S food chain in the global food chain and so when someone starts to have success is just around the industry pretty well and Thats why were getting trials with such a wide variety of customers. All at the same time, so Brian how can we get it anymore.

Sure.

<unk> in the quarter and.

That's because our second and third round of price increases really didn't hit until May 15th of June 1st we are bunches of head and you can see it but fourth quarter is when you really should start to see us get on top of the store rollout of global inflation gas prices tripling diesel prices are rising.

Everything's sort of Japanese at the same time and so we are taking absolute price increases, we're implementing surcharges and we're increasing those surcharges as the gas price goes up we will certainly relieve those surcharges as the gas price goes down and we did have a question on hedging and look I've been pretty consistent.

We're in a rational market and if we hedge and we hedge wrong. We can go to our customers and say look we thought gas nine and we thought it was going to 15. So we forward bought and now it's back down to three but we don't want to relieve the hydrogen fuel surcharges, because we just wrong.

That's not going to be a real fund sales call to have as we all know the definition of a market is for every buyer or seller.

One buying gas at 930, there are some months element at 930, meaning that there is some of the units going down there are some of the units going up and our best move is to ride the wave and then merely handle the dollars we've never profess to be natural gas experts.

We don't profess to be going forward and we're just going to stay in right with the market and if that means we're 30 days late to the market and so we believe that's in our customers' best interest than trying to Jeff and potentially guess wrong, which would be real detrimental to us our customers or.

So that knocked off about three or four questions. So locally where are we going back. So the next question is from John Bair from ascend wealth advisors. He asked are you seeing any shift by the consumer away from your premium cat litter products to lower end offerings.

Good morning, John This is Chris I'll take I'll take the question. Thanks for the question and I think we had a similar question last quarter and the answer largely remains the same so as we look at the total category.

Really what we see is a bit of a barbell effect, so super premium products. So real price premium per use specifically that our crystals are growing very nicely and then at the other end of the market those brands and retail brands private label brands.

Obviously more value oriented are also seeing growth that is in excess of the category.

Tracked in the in the low teens.

Those.

What I'll call value brands that performed particularly well can't pull the consumer for long.

Value ramp, particularly our premium private label on our Cat's Pride and Johnny Cat brands are performing ahead of either the segment that they plan or the overall category.

Okay, great. Thank you. Our next question comes from Ethan Star, what kind of results, our aniline customers seeing with aniline products throughout the United States and around the world and especially interested in hearing that results for the newer aniline products.

Yes.

Good morning.

Yes. Thank you Dan good morning, Ethan and thank you for the question.

We're seeing excellent results around the world as we've discussed in previous calls part of the sales cycle with Amazon products. In this industry is to evaluate in the field our products and customer operations. We certainly share R&D results, we do add crows or universities, but customers really want to try the products.

<unk> and the trials, we've been conducting over the last 12 18 months, we've universally seen excellent results our customers are seeing improved performance with our products.

We look around the world and the launch of our new products, we're beginning to evaluate those as well as.

We're starting to make great progress in moving those products into the market.

Okay, great. Thank you Lee.

Our next question also comes from Ethan Star.

In Q indicates that youll be spending $6 5 million to renovate one of your manufacturing facility, which plant are you renovating what improvements are you, making and what benefits will result from that.

And Aaron Christiansen, our newly promoted Vice President of operations will take that one Aaron.

Yes, that's a great question.

For asking Ethan Susan already largely alluded to the answer.

Our capital spend continues to be heavy in our.

Aging infrastructure the bulk of the spend is in the areas, where we support the ammo business and lightweight cat litter to.

So a combination of investments and add capacity flexibility redundancy in some cases.

And address our cost structure.

Great.

Thank you. The next question comes from Kurt Cornwell.

Who is a longtime shareholder what's the decision to take the goodwill impairment charge in this quarter related to the substantial increase in inventory year to year and are you satisfied with current inventory levels.

And then I'll hand, it over to Aaron has that.

Thanks for the question, yes, the inventory levels were heart as well.

The impairment charges and partner.

Second half of your question.

On the EBIT level, certainly seeing an increase.

Finished good.

And the whole situation with strength in Milan executing our products in customers' hands.

The increase this year.

As to the rest of inventory levels on that ill, let Erin <unk>.

These operations answer what that what do you think about inventory levels.

Extremely hard to predict where we go over the next quarter.

The market dynamics right now in particular in freight and export freight are incredibly unpredictable on stable.

The bulk and majority of the increase in working capital over the past quarter has been in <unk>.

Export.

<unk> volume for several pieces of our business, where we simply have not been able to move the product at the rate that we have historically.

All indications are export freight in particular is not going to improve over the coming quarter, we're finding unique ways to manage our working capital down.

But obviously, we have to have the product to begin with to be able to move freight.

So we'll monitor as the freight market and other aspects of the supply chain stabilized in the months ahead.

Great. Thank you and we have a couple of questions. Ethan asked what does the number of different countries. You are already sold and wound products and John bearer to what do you attribute the sales decline in Mexico, and Asia, the demand drop our logistic issue or both and Wade I'm going to call on you to take on those too.

Yes, Thank you Dan and thank you for the questions guys.

I'll start with the question related to the countries were targeting.

Even we're targeting approximately 27 countries today and selling around the world really in all key where Larry geographies except for.

The EU.

And we've discussed why we have an approach that market. Yet. These are really are the countries that were that were focusing on and we're not going to have a large expansion in that number over the next 12 months will see instead more significant investment in the key geographies like in the Americas, North America South America.

As well as in key countries in Asia, but that list will gradually expand in time.

As we look at Mexico, and the change that we saw there.

If you look at the third quarter of fiscal year 2022 versus 2021, which I think is the referenced question you're asking we saw a decrease in AR.

In net sales of approximately $147000, which constituted about 25% for the quarter and that really was related to a discontinuation of certain product lines that were sold by agreements that were more.

Yes.

Okay, great. Thank you.

Our next question comes from Ethan Star.

In the slide presentation at the annual meeting.

Oil dry noted that Ameren has an opportunity to target through canyon animal ration I have three questions related to that first as the innovation center already developed the scientifically proven product second are you already working with the pet food manufacturer, either informally or with a contractual agreement and third what can you tell us about when that product.

Begin to generate revenues for oil dry.

Wade do you want to take that question.

Yes, sure and again, thank you Ethan and thank you for that the breadth of the question because it is it is a.

An opportunity that we see is pretty significant for the company in the future.

What's great about our product and Dan mentioned, this and certainly our core claim mineral products is that they are.

Cross BCS is really the same.

This is basically true for our formulated products as well with with some exceptions, but we have a breadth of portfolio that we can target not only production animals, but also companion animals. We're in the process currently of talking with large companion animal feed or food producers, what's fortunate about that as a lot of these <unk>.

Very large food companies that we.

So with today are vertically integrated and cross species. So they would might produce both poultry feed ruminant feed and sometimes companion feed as well. So it makes it a very efficient way for us to penetrate the market. We're not in testing yet in companion animal rations were going down a cycle.

Providing them data and convincing a Z validation tests, but we hope to do that in the near future and I would hope that in fiscal year 2023, we begin to see some sales into the companion animal market, but again, we'll have to validate the product with customers and then began sales in that order.

Thanks Wade.

We have a question from Eric sentiment.

<unk> has a long history of maintaining a very strong balance sheet, given it's been a capital heavy year with elevated capital expenditures working capital growth dividends and buybacks leverage Hasnt Creek does the company have a maximum net debt or leverage ratio in mind and should we expect free cash flow to improve over the next year, although cash need.

Remain high.

Yes.

Thank you.

So.

We are.

Free cash flow.

We would expect.

Spending capital because we've got identified opportunities at the level that we're spending it here.

Fiscal 2022.

You'll hear.

Year warranty so we've got.

Opportunities.

Inventories Aaron talked about earlier.

Sure.

And our inventories to serve our customers and just because that's where the volatility we're seeing in France.

On balance sheet, you still are sitting with a debt to.

Total capital of 18, 4%, so really pretty low and that means we've got that.

Dry powder.

To fund opportunities as they come along.

Specific ratio in mind.

I think we've had conversations where unless the opportunity.

Yes.

And even when we imagine that we would not see that going above 40%. So that leaves a whole lot of opportunity for things that are accretive.

With that.

Higher dividends.

According to the dividend and share buybacks will be opportunistic, but honestly very attractive at these prices.

Right now.

We have any.

That's about $11 million year to date on share repurchases.

As we sit here today, we don't have any more plans to do so.

But that is a good opportunity for us.

It comes last in our ranking of opportunities both in our business.

Trump that University.

Cash and deploying capital and working capital.

Yes.

Thank you and then the only thing I would add is.

As I look at our balance sheet, we've got $200 million of.

Assets and the question is does that mean that could we replace all five of our major U S locations, Georgia, two in Mississippi, one of the mountains in Illinois, and one in California for $240 million and the answer is not even close no. These are historic values are depreciated values and so forth.

So.

These get older and as Aaron and his team upgraded.

Just not even upgrade and sometimes it just maintain zip up to standard.

And then as you layer on the fact that.

Higher metal compliance only gets more strict the amount of particular you can amid all of that kind of stuff. So you have to have more and more air quality equipment and things like that.

It's a capital intensive business, that's the bottom line.

So on the dividend side obviously.

Very important we've always.

We've been paying a continue with dividend.

Sure.

In Europe .

Looking back I mean.

One of our really sort of a number but I don't want us there are over 40 years, we paid a continuous dividend and we've.

Raised at 18 19 years in a row and its always on 19 years in a row aging that's what I thought.

So anything there that are noteworthy.

And we always looked at it in June .

This is June so it's certainly on the agenda for today's board meeting that will be a subject for discussion that a review and approval by the board and what Theyre going to want to see us.

So we believe that.

Our margins are going to come back and we'll start generating the cash necessary to not only fund.

The maintenance and growth of the business, but also to then increase the dividend. So I would say you will know more by the close of business today.

That will be a strong signal one way or the other.

Susan and her team will be presenting some cash flow information and so forth and supervoting major more informed decision.

Good so we have one more Colombian time for one more question, which comes from Ethan Star in the most recent 10-K this data that will drive.

Our revised terms with a significant customer so that the customer would pay freight charges directly in such costs wouldn't be included in the price of oil drive charges by product what is the approx precedent impact of the change on the top line per quarter. If you can't give a precise figure could you at least tell us, whether it's more or less than $1 million per quarter.

Lower sales over the last year, we will annualize this effect going into this next quarter going into Q4.

With an offset in.

In early in the freight line in our in our detailed P&L if you will.

So.

Roughly how much does that does that approximate two over the last year.

<unk> a couple of points of sales.

That were depressed.

And again, no bottom line impact simply a chef.

So more than $1 million a quarter.

So good question well, thank you everybody and look.

We're all looking forward to the fourth quarter.

Significant price increases already showing but then more coming and all around trying to recapture cost and protect our margins and we're very focused on it most of the grindstone and we'll be back with you in whenever that is not quite 90 days, probably a little longer but.

After we closed the fourth quarter, we will talk to you then.

Thank you.

That concludes our call.

This concludes the conference call you may now disconnect.

Q3 2022 Oil-Dri Corporation of America Earnings Call

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