Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter 2020 Oil-Dri Corporation of America Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] And as a reminder, today’s program may be recorded.I would now like to introduce your host for today’s program, Dan Jaffee, President and Chief Executive Officer. Please go ahead, sir.

Thank you. Good morning, and welcome everybody to the Oil-Dri second quarter and six-month investor teleconference. With me in the Chicago conference room is Susan Kreh, our Chief Financial Officer; Tony Parker, our Assistant General Counsel; and Leslie Garber, our Manager of Investor Relations. Leslie, will you walk us through the Safe Harbor?

Yes. 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 SEC filings, we highlight a number of important risk factors, trends and uncertainties that may affect our future performance. We ask that you review and consider those factors in evaluating the company’s comments and in evaluating any investment in Oil-Dri stock.Thank you for joining us. Dan?

Great. Thank you. I’m going to turn it over to Susan. She’s going to walk you through a bunch of the details of the quarter and the six months, and then I’ll make some comments and we’ll open it up to Q&A. So, Susan, take over?

Yes. Thanks, Dan, and good morning, everybody. Pleased to be here to talk to you about our second quarter and we released those earnings yesterday. Overall, it was a very strong quarter for us. And especially as you compare it to other second quarters on key metrics that would be a record as far as net sales, net income and earnings per share. So good quarter.So let’s start with net sales of $71 million, or 2% higher than net sales in the same quarter last year. Now embedded within that growth is a tale of two cities. On the one hand, we continue to experience strong growth in our Retail and Wholesale Group, where year-over-year growth of 7.2% was driven by 10% growth in our Cat Litter business during the quarter. The strong growth was offset by our other city, our Business to Business Group, where we experienced a year-over-year decline of 7.5%.Now, there’s a couple of things there that I think are important to note. The decline year-over-year was caused in part by the loss of a large customer in our agricultural business that impacted our top line unfavorably. However, the impact on our gross profit as a result of the loss of this business was negligible, because it wasn’t profitable business for Oil-Dri in the second quarter of fiscal 2019.And while net sales in our Animal Health business were basically flat year-over-year in the quarter, we experienced year-over-year decline in net sales in China that we’ve talked about previously, where the market has been impacted by the African swine fever that was offset by growth in other regions as customers adopt our products.Our gross profit of $19 million was 23% higher than the same quarter a year ago. Reductions in freight, natural gas costs, as well as improvements…

Great. Thanks. Before I open up, I love getting into the analytics of our business. And I just thought, those of you who’ve been longtime holders will recognize a lot of these trends. But those of you who are new to the company may not be able to put this quarter in perspective like these numbers well.I look back and I saw that while we sold 192,000 tons this quarter, our all-time record for a quarter was back in 2002, we actually sold 282,000 tons. So our tons were actually down 90,000 tons from 18 years ago. And – but here are some of the key facts. Our average selling price back then was $155 a ton. This year, it was $370 a ton.And back then, our net income per ton was $0.01. Actually, the EPS was $0.01 – sorry, the net income was $0.26 a ton and we made $0.01 EPS. As you know, when we report $0.67 this quarter. And instead of making $0.26 a ton, we made $25 a ton on those dramatically less tonnage.So you can see that our strategy of creating value from Sorbent Minerals, and as Susan said, yes, we’ve lost a big ag account versus last year. But we were break-even to losing money on that account when you put all the costs of having to deal with it. So actually, losing it was a positive from a cash flow and a reported income standpoint.So we’re going to continue to run the business on these guidelines, where we’re going to keep plowing money into R&D. We’re going to keep trying to get closer and closer and closer to our customers. So that we can figure out unmet needs they might have and where our minerals might play a role in meeting those needs. So that we can help them create value, so that they’re then happy to share some of that value with us and everybody wins in the equation.So it’s working. And again, continue to be very bullish. We’re proud of the quarter. But we sort of think long-term, the best is yet to come.So let’s open it up to Q&A. Let’s hear what’s on our investors’ minds. As always, ask your most important question first, then go to the end of the queue. And we’ll – if we have time, you’ll get a second question and maybe even a third. But let’s let everyone get at least one question in.

[Operator Instructions] Our first question comes from the line of Ethan Star, private investor. Your question, please?

Good morning. Great quarter.

Thank you.

The first question is about Nutrapath. It sounds like a very exciting product that can be used with both poultry and swine. And can you just discuss the prospects for Nutrapath? And I’m also wondering, are there any competing products already on the market?

Yes. I would say too soon to talk about Nutrapath. Again, I’m a broken record. I hate to signal the competition, which way – what plays we’re going to run before we run, because you tend not to get as many yards on them. So I’m going to pass on that question. When it’s material, we will certainly cover it, but it’s another line of new products in our Animal Health business that we’ve put a lot of time and energy into and we feel real positive about it.

Okay. Can I ask you other question then?

Sure. Since I punted on that one, we’ll give you a bonus question.

Okay. I mean, in the 10-Q, it says you’re going to increase spending on advertising in the back-half of the year for cat litter. What are the plans for that? If you can – what you can discuss?

I’ll take that one as well. Yes, it’ll be up. It won’t be large – hugely material up over the prior year. And it’s going to be a lot of what we call direct spending, where we get actual movement for the spending. So, you’re not going to be seeing a lot of new TV commercials and things like that in the back-half of the year. It’ll be a direct spend, working dollars that will help us continue to accelerate.And since I’m sort of not punting on two of your questions, I brought some information that I’ve talked about in the past that I think you’ll see that our focus on trying to be the player in private label lightweight is working and that category is growing. And then for our brands to be value priced, popularly priced to make sure that – the – when the consumer is getting the appropriate price value relationship for their purchase.So 52-week data shows that ending February 24. In 2018, we were in 13%, 2018, we were in 13% of all the market baskets. This is unit share, up to 13.7% and then jumped up to 15.4%. So, we’re up to a 15.4% of all market baskets for the 52 weeks and the 12 weeks is even stronger with 13.4% than 14.8% and it’s actually 15.8%. So our 12-week share is greater than our 52-week, which kind of tells you we’re on the upswing.So, we’re in almost one out of every six market baskets of – in America that someone who’s buying cat litter, and that’s critical mass. We’re doing well.

Okay, that’s branded?

That’s branded and private label.

Okay.

Branded is – well, I can tell you that the breakdown of the 15.8% is – 3.9% is branded and 11.9% is private label.

Okay. Any plans to emphasize the value price of the branded and in advertising?

Yes. I mean – well, yes. So I mean, that’s the whole idea. We emphasize. It could be different things. It could be in-store features. It could be all sorts of things that definitely try and incentivize the consumer to either repeat, load up and/or try our product for the first time.

Great. I’ll get back in the queue. Thank you.

Thanks.

Thank you. Our next question comes from the line of John Bair from Ascend Wealth Advisors. Your question, please?

Thank you. I’ll echo Ethan here and say, really, really nice quarter. Got a question with regards to the Animal Health, it looks like the revenue were kind of flat this quarter. And I’m wondering if that’s some seasonal impact if there isn’t any seasonality there? And kind of paralleling with that is – or what are you seeing in your Indonesian operations? Are they being impacted by this coronavirus business that’s going on? Thanks.

Yes. So this is Susan. There’s a couple of things going on inside that flat year-over-year performance in Animal Health. And seasonal impact, I’m not sure I’m seeing a seasonal impact. What I’m seeing is when we look at that is the impact of the continued decline year-over-year in China, where we were primarily in the swine market and that’s been – was heavily impacted by the African swine fever virus over there.That is still in decline year-over-year, but we are starting to see growth in other regions, where we’ve been running trials and other products with customers and we’re starting to see success there. So while it’s looking flat, there’s growth offsetting a decline. And so when that poultry market or the swine market comes back in China and that turns around, we expect to see more momentum.

How’s that affecting…

Yes, listen – okay.

Yes.

Go ahead, John.

Are you having any effect in your ramp-up in Indonesia or…?

I mean, in general, I – Fleming will be available on the next call. And actually, I’m going to have Leslie talk about a little bit about our upcoming investor presentations we’re going to be making. So we’re actually going to be out talking publicly and we’ll talk to you guys about that.But I talked to Fleming beforehand. He said, “Look, there has been a few delayed vessels, but all orders are placed, they’re all scheduled for delivery. Our office in China is closed. The people are not allowed to come in, but they’re all working remotely and they’re staying productive.” Is it impacting us? Of course, but our exposure to it is slim, because our supply chain isn’t decimated. We control our minerals. So that’s the beauty of it.When you see these companies like Apple and automobile companies are getting crushed, it’s because the supply chain has been devastated. And they now have to find workarounds to just get the parts, so they can build the product, so they can sell them. So the good news for us is, we’re making. We’re manufacturing. We’re ready to go. It’s just in the vessels and maybe some of the inland logistics that have been a little bit challenging, but nothing devastating by any stretch of the imagination.

Yes. And so is this helping you domestically with the Animal Health products towards the swine market and so forth? Have you seen any?

No, I wouldn’t. I wouldn’t say that, yes, but it’s helping.

Yes.

[Multiple Speakers]

I’ve got other questions. I’ll get back in the queue.

Okay. Thank you.

Okay. Yep.

Thank you. Our next question comes from the line of Robert Smith from Center for Performance. Your question, please?

All right. Can you hear me?

Yes.

Oh, yes. Yes, congratulations on an excellent quarter. Also, I’d love to see a continuation of that and maybe a shred of the record earnings here bottom line. So my question is, Dan, with the penetration of private label lightweight, how much further do you have to go as far as vendors? I mean, what percent, I think, you mentioned something like you had 80% of the private label lightweight?

Yes. So we have a huge share. The goal now is to make the size of the pie bigger. So – and the way we’re doing that is with high-quality product offerings, introducing new private label lightweight offerings, whether it be untended with baking soda in terms of formulas or different sizes, both smaller and larger pails and so forth. And then getting the consumer to try it and adopt it.Yes, our share is currently at 75%. You were right there, it’s right around 80%, I think, it’s what I’ve said. And so it’s ginormous. Our old share was under 2% of the scoopable private label market, because we didn’t have the heavy mineral, so we really couldn’t compete. So it’s really just a matter of going and growing. I’m not sure how much detail I want to get into. I can just tell you, there are both retailers and actually manufacturers who are testing going all lightweight and so far the tests look positive.And the more they do that, the better it is for us, because we’ll then win on the private label lightweight side, as we supply our partners with those products. So it’s all good for the environment, it’s good for the retailers, it’s good for the cat owners, and it’s good for Oil-Dri. So it’s a great trend.

Thank you.

Thanks.

Thank you. Our next question is a follow-up from the line of John Bair from Ascend Wealth Advisors. Your question, please?

Great. Thank you. Really nice drop in your freight costs. And I was just wondering, can you quantify or attribute some of that to the new ERP system, or is it more fully a function of general drop in, in energy prices and perhaps a greater availability for lining up your trucking fleet and so forth?

It’s a couple of things. It’s certainly just the overall prices we’re paying out in the market. But when you look at it quarter-over-quarter, second quarter last year, we were still moving a lot of product around more than we should have, because we were struggling to get our ERP as effective as inefficient as we wanted it to be. That is completely behind this at this point.And, in fact, our fulfillment for our customers is at an all-time high now and that is probably due to the ERP. The head of our logistics definitely says that now that we’ve got a better tools and more transparency, more visibility, things are going better. So our – that results in our customer finds being down as well. So it’s kind of a three-part answer.

Yes. But the bottom line is, yes, you’re seeing benefits from the implementation of the new program there?

We are. We are seeing them here and we’re seeing them in other areas as well. So yes.

Okay. Okay. And one on the sidecar you have a…

[Multiple Speakers]

….yes, you have a share buyback authorization that’s open ended, or have you done any, I mean, you’ve been seeing any evidence of that in the queue? But is there any consideration thoughts to executing on that at all?

Certainly, it’s a fair question. And with having no debt and cash on the books and the stock price now that’s below 30, where every time you buy a share, you retire a dividend, that’s 3.2% at that price, 3.3%. Certainly, a good question to ask in something that certainly we will be considering.

Okay. Very good. Well, again, congratulations.

Thank you.

Thank you. Our next question is a follow-up from the line of Robert Smith from Center for Performance. Your question, please?

Yes. I echo the comment about the compelling value of the stock price here. And I want to just remind you then that the stock has gone nowhere for the last seven years. I’m a long-term investor. But I’d like to see some more robust Investor Relations effort, so to speak. And you mentioned that you might have a couple of things coming up, and I’d like to hear about that as well? Thank you.

Hi, Robert. It’s Leslie Garber. We are actually planning on presenting at three different investor conferences. We have one coming up June 23, it’s called the East Coast IDEAS Conference. It’s put out by three-part investors, and that will be in Boston on June 23. Then we also have scheduled a Midwest IDEAS Conference in Chicago, August 27. And then in November, it’s the Southwest IDEAS Conference, and that will be in Dallas on November 19.So all this information I will be posting on our website. And as I get more details from the people who are putting on the conference, I will upload all the information. But those are the dates right now. And so we really do hope to get out there and spread the message about Oil-Dri’s growth to everyone.

Congratulations, again.

Yes, Bob, that point is well taken. Yes, we did it last year in Chicago and we noticed increased interest, increased activity. And so no doubt, we got to get our message out there. And so we’re going to do three of them this year.

And it’ll be a change to….

Thank you.

…highlight what we’re pursuing in Animal Health.

Yes.

..which is what people are interested in.

Yes, I’m as well. Thanks.

Okay, great.

Thank you. Our next question is a follow-up from the line of Ethan Star, private investor. Your question, please?

First, let me just say, I’m thrilled that you’ll be doing three conferences. That’s wonderful. And second, Id’ like to echo the buyback suggestion, even 1% of the stock would be very nice to see, or as even 0.5%. My question is how much bigger can the pie get in the private label lightweight market as far as the size of the pie?

Well, if it just mirrored what has gone on in heavy, so, for instance, heavy roughly in the U.S. is – 18% to 20% of the market is private label and the rest is branded up. In Canada, 35% to 40% is private label, it’s always been more like European, more private label-driven.In the U.S. and I’m totally looking at these numbers at the moment. It’s still a small percentage. It’s the lightweight – sorry, the the lightweight as a percentage of the total category on private label, I’m looking at my little sheet. If I can find it quickly, I’ll do it. Otherwise, we’ll just – I’ll just give you, it’s less than 4%. So it’s got a long way to go. I’m going to say it’s between 2% and 3%.So if we could get it up to 18% to 20%, you’re talking they could go six times. It’s going to take time to do it, but it is growing and the adoption rate is going well. And we do have customers that are starting to see the benefits of lightweight. The retail customers who are saying, “Well, I’m not even carrying this heavy.” So it’s – the discussions are starting to happen, and we believe this is a good mid to long-term trend that’s just in our favor.

Okay. That’s one part of the question. I guess, I was really thinking about how big can the pie grow as far as adding more retailers?

I guess, if it gets to be a big enough percentage of the category, you could start adding some of the club stores. They’re not participating in the moment, because they still see that the lion’s share of scoopable is heavy. So their private label offerings are of the heavy variety. If the market tipped, they carry so few SKUs at Costco and Sam’s and DJ’s and the Club stores.If the market started to tip, where over half the market was lightweight, then they would reconsider that. And it certainly without them, because walking out of their stores with a 40 pound heavy. When you could be selling a 20 pound heavy, I’m convinced that their unit velocity would go up, not down, because I’ve been watching in their stores. I like to do that.And I’ve seen people buy cat litter – sorry, cat food, cat products and then not get their cat litter at these clubs and I intercept them and I like to ask why and they’re like because it’s too heavy. I’m not picking up 42 pounds, I’ll just go to grocery and get my cat litter, but I’ll get my food here at Costco.So I do believe that if the category starts to flip, they would be heavily incentivized to switch. So, it’s in every other major retailer pretty much, you might say, well, wait a minute, what about Walmart? I do Walmart and why isn’t – why aren’t you doing their private label lightweight? We have our Cat’s Pride scoopable there and it is their opening price point.So, it’s our brand, and we’re getting that shopper who wants a real good value, but wants a lightweight offering. So we just be cannibalizing ourselves at that point. So we’re – we kind of feel like we are everywhere we can be at the moment, and now it’s a matter of increasing velocity and increasing the offerings you get a greater share of shelf.

Okay, sounds good. Thank you.

Yep. Thanks.

Thank you. Our next question is a follow-up from the line of John Bair from Ascend Wealth Advisors. Your question, please?

Thanks. One thing I think going back to the share buyback aspect, this is just a comment on my part. With the rather low float, although I – makes it good value buy from the company standpoint, and hopefully from an investor standpoint, I think that perhaps that’s one of the reasons – it’s – to address Robert’s comment. So many institutions may just not feel comfortable buying shares in a company that doesn’t trade high amounts of volume, and so that may be part of that thing.But my other question, actually, my question was, are you seeing any increase in activity of online buying as a litter through as opposed to people picking it up in the grocery stores and so forth? Are you seeing any traction in getting more volume from that platform, if you will?

Definitely, another really good question. But Chewy.com is doing very well. Amazon, Walmart.com now is trying to go directly after Amazon Prime and they’re selling cat litter online. It’s a heavy low value item. So it’s not high on their profit list. It is trending. I mean, it’s growing period-over-period. We’ve started to buy some data. And it was, I think, I’m not going to get into the data, because I don’t totally understand what I’m looking at it at the moment.But regardless, it is growing rapidly. We believe that lightweight is going to skew better to e-commerce, because again, the value per pound is double what heavy is. So if you’re selling a heavy 20 pound jug for $10, you can sell a lightweight 10 pound jug for $10 at parity pricing and you’re paying for half the weight that needs to be shipped around.So it’s definitely a high area focus for us. We’re putting a lot of attention on it. Our business is growing rapidly in e-commerce. And we also feel, it’s the most level playing field. If you think about it historically, the major consumer product companies, whether it’s P&G and Unilever in the health and beauty side, or if you want to go into the pet aisle, Nestle Purina, their dominance was because they control the physical reality of the shelf. They have dog chow, cat chow all their other cat litter items.So you go to launch a new item, and you’re getting 1/40th of the shelf, because they’ve already got 30 SKUs lined up there. And e-commerce, it’s a level playing field. We get the same page they get. Now they can pay for being a quicker hit. If you’re doing a search on cat litter and so forth and so on, there’s no doubt. But when you go to Chewy and you go to buy, you look at Cat’s Pride versus Tidy Cat, it’s not like we get squeezed behind the clip strips off in the corner. It’s a pretty level playing field. So we actually feel like we can do better long-term in e-commerce than we can in brick-and-mortar with our brand.

Well, I would think also, from a consumer standpoint, rather have judges – the jugs delivered to the front door, and maybe more jugs rather than what you might pick up in the retail setting where you actually walk in and pick them up. So I don’t know if you’re seeing any of it evidence of, say, a higher order number with the online stuff or whether you get to see any of that or not, as opposed to an individual at the checkout line, so?

Yes. I mean, the category is growing at 3%-ish and e-commerce seems to be growing at 40%. So there’s no doubt e-commerce is taking share. And I think you hit the nail on the head. It’s a bulky item that doesn’t go bad. I mean, you don’t want to be buying milk and having it sitting on your doorstep on 100 degree day. But you cat litter get shipped, while you’re work and it just sits there. It’s not a problem. So there’s no doubt that it has an appeal to consumers.

And probably less likely to be a victim of porch bandits, too. So anyways, very good. That’s all I have.

All right, good. Well, listen, that thing was our – we’re out of time. We’ve hit our 10:30 pumpkin time, and appreciate everyone’s focus and attention. You are going to be getting a better access or more access to us through these investor presentations we’re going to be doing. Leslie will be getting you all the information, but the next one will be June 23rd in Boston, and we will look forward to speaking with you then. Thank you.

Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.