Thank you for standing by. Welcome to Oil-Dri Corporation's Second Quarter Fiscal Year 2022 Investor Teleconference. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. I would now like to hand the call over to Dan Jaffee, President and CEO. Please go ahead.

Thank you very much. Welcome to our first six-month teleconference. We me today are Susan Kreh, CFO; Molly VandenHeuvel, COO; Chris Lamson, Group Vice President of Retail and Wholesale; Jessica Moskowitz, Vice President and General Manager of our Consumer Products Division; Fred Kao, Vice President of our Global Sales for Amlan International; Dr. Wade Robey, Vice President of our Amlan Marketing and Product Development; Tony Parker, Assistant General Counsel and Assistant Secretary; and Leslie Garber, Manager of Investor Relations. Leslie, will you walk us through the Safe Harbor.

Thank you, Dan. Welcome, everyone. On today’s call, comments may contain forward-looking statements regarding the company’s performance in future periods. Actual results in those periods may materially differ. In our press release and in our SEC filings, we highlight a number of important risk factors, trends, and uncertainties that may affect our future performance. We ask that you review and consider those factors in evaluating the company’s comments and in evaluating any investment in Oil-Dri stock. Thank you for joining us.

Thank you. Before I turn it over to Susan, I just want to give some 50,000 foot comments. I can tell you no one had been prepared for what we're all dealing with. It literally goes back to '79 and '80 for inflation, but when you factor in the global pandemic, the supply chain crunch that's going on, labor shortage and then a war, this is other than that, how do you like the play, Mrs. Lincoln? I mean it's very dynamic times. I'm very proud of the Oil-Dri team. As I tell them, we are being graded on a curve and we are doing very well. You can go to the shelves, you can see our product. Yes, there’s some thinning in certain product lines, but the other guys are seemingly doing worse than we are, and that's really exemplified by the fact that we delivered 17% organic sales growth in the quarter, just a fantastic job by our team. Obviously, we're not keeping up with the cost increases. We're getting price increases, but it's like catching a falling knife at this point in time, and we're just chasing a moving target. The good news is, we're in a rational market, and our customers understand it, and we're just passing through price increases left and right, and it's going to keep happening. I just don't see this inflation abating anytime soon. Susan, I'm going to turn it over to you for some highlights. We're assuming you guys have read the Q and the K, so take us through the highlights.

Thanks, Dan. We're going to change it up a little bit this time in order to leave more time for questions. So just a couple of key highlights. Dan mentioned the continuing cost pressure. But taking a look at the results, it was an exciting quarter during the second quarter. We see the benefit of our growth strategies coming through our financials. A particular highlight was an all-time record second quarter for Amlan, our animal health business; and an all-time record second quarter for retail and wholesale and for the company as well. So our strategies are working. And Dan mentioned, we're chasing the cost. So a little bit about pricing and costs. We get a lot of questions around that. We do have one major customer that has a pricing reset clause based on a major economic indicator that's embedded in the contract. And by definition, that's backward looking. But most of our pricing tends to be backward looking. We're in a rational marketplace and our customers don't want us to set pricing based on forward projection, but really want to be factually based, so we continue to chase it because the costs continue to move at an unprecedented rate. Now our processes are better and tighter, and you see us going to market much more quickly with these cost increases. And in fact, we've announced several here for April 1 for our domestic cat litter business and our sports product businesses, and we continue to monitor these and work them into the market as quickly as we can. That being said, I wanted to switch a little bit to capital allocation. During the quarter, we issued a 10-year note for $25 million at an annual interest rate of 3.25%, so a nice, nice rate. We have that note…

Yes, thank you. And first of all, I want to thank people who submitted questions in advance. And so we have a bunch to go through. But I encourage you, if you're online, Leslie, how do they give us questions?

There's a Q&A field. And if you submit your question in that field and push the button (ph), you should be able to quickly submit it and we'll be able to see it right away.

Great. So, well, good luck. We've only used up 10 minutes, and so we're going to be able -- we've been listening, we'll be able to dedicate the final 20 minutes to Q&A. So Leslie, let's go through the questions that were submitted.

Okay. So the first question was submitted by Ethan Star [ph], a private investor. It's really a two-part question. I'm going to read the first question. Last quarter, you spoke very optimistically about the prospects for Amlan International and said you are shipping to major companies that are very sophisticated. What kinds of results are your Amlan customers seeing, and are you still optimistic that a tsunami is coming?

Ethan, thank you for your question. Tsunami, I'm not sure I'm going there just because that could be a forward-looking comment. But I will tell you, I couldn't be more happy with where we are at. We are making a lot of progress. We are putting on new accounts. We're getting traction. And as we said, we had a record quarter for Amlan. I can tell you, in the U.S., which has been a focus, the team we put together as contacts from coast to coast with every major producer, our clays work. We had the IPPE show down in Atlanta. We had all the major players into our booth that couldn't have been more positive, and they all get it. We lead with our clay and we finish with our clay. And our clay, as we say, the minerals by nature and then performance by design, we take this selectively mined mineral, we process it very carefully to do specific things, and it really we believe we have the absolute best, all natural, non-antibiotic solution to the replacement of antibiotics in food production. So we're very excited about it, couldn't be happier with where we're at, at this point in time. Let's go to part two.

So part two is could you please explain Amlan's product strategy for the United States? Are you seeing orders already and how did Amlan's presence at IPPE make a difference?

Yes, I covered some of that, but I'd love Wade Robey to take it head on.

Yes. Thank you, Dan, and thank you, Ethan, for that question. As Dan mentioned, we just did our U.S. rollout at the IPPE show in January of this year. It's the world's largest show for poultry, meat, and animal food. Even with the pandemic we had over 20,000 registered attendees. Normally, it's about double that, a 1,000 exhibitors, so there was a great opportunity to demonstrate the Amlan technology and to meet with our customers. As Dan mentioned, we're already taking orders in the United States. That's after the last six, nine months of field trials with some of the largest integrators in the poultry industry. We're also beginning to make sales in the dairy side in the U.S. as well. So, really cross species interest in our products. When you look at our strategy, it's really the same as we look around the world. Our products, as Dan mentioned, are non-antibiotic, non-pharmaceutical, and they provide a range of benefits in animal production to improve the economic performance and doing that through helping to ensure good gastrointestinal tract health, helping to maintain the productivity, the microbial ecology of the animals, so have generalized benefits for the animals and promote optimum growth. Our product line in the U.S. is a new branded product line that we're launching for sale here, and it's been very well accepted by our customers.

Hey, Wade, great. And you know what, Fred, I'd love your perspective on the IPPE from a sales perspective. I know that attendance was down, but we felt the impact was actually equal or greater, so I'd love to hear from you.

Yes, that's true. Dan. Good morning and thanks for the question. Yes, we have a lot of interest, right? Attendance was down because of COVID. However, we got a lot of people come into our booth, asking very specific questions and have specific interests on our product. And I don't think -- I just believe that the interest level was so high even though customers that did not intend to join the show, they just show up and just surprised us. And we had a lot of interest not just in North America, but across the world, South America specifically had our people attending the show as well. So, Dan, you're absolutely right. The show was not very well attended, but our booth was very, very busy the entire time.

Great. And before we open up to the next question, I think I forgot to mention at the start, and I wanted to, that our support of the boycott of Russia. So I just want to let you know. We have suspended all shipments to Russia. I'll let you know it's not material in our grand scheme of things. We've never done that much business, but we did and as a show of unity and trying to help what's a horrific situation in the Ukraine, we will be supporting that boycott. Leslie?

Okay. Thanks. The next question comes from John Bair from Ascend Wealth Advisors. He asks, your press release indicates higher sales for cat litter product lines. That is as much if not more a unit volume increase rather than just a price increase. If that is correct, to what do you attribute the increased demand for your lightweight cat litter products given your lower advertising spend, new customers, higher market penetration? I would think the stay at home, get a cat or pet surge has largely passed up.

Yes. So this is Chris. I'll take that question. Thanks, Dan. So really, it's about distribution. So we're growing distribution, points of distribution actually in a market where you see this across categories where retailers are really tightening up. So total points of distribution as tracked by Nielsen are down in the category, but our points of distribution are up. As importantly or maybe even more importantly, our points of distribution are up most with retailers that are winning, okay, so retailers where traffic is growing, where they're growing share themselves. So sort of said differently, we're winning with retailers that are winning, or in-game retailers. The second half of that question?

Will we partner with Ethan's question?

Okay, right. So the second part is from Ethan Star. What new business are you adding in the cat litter area? And in light of the inflationary environment, to what extent do you see customers switching to lower priced brands such as Cat's Pride or private label brands?

So I think to the second half of that question, as Dan talked about to begin the call, such unprecedented times that I don't think we're prepared to say, yes, private label and value brands are going to get a huge tailwind in this market, we just don't know. Again, if you look at the data at this point, the most recent quarter would show private label and value-oriented brands growing share modestly. And then really the upper end of the market, the alternatives that are at a premium price on a per use basis are also growing. So a bit of a barbell effect in the market. So we are seeing that modest growth in value, but not to an extraordinary extent to this point.

Perfect.

And then, Jessica, I don't know if you want to add a little color to Chris' play by play. Great answer, but Jessica, anything you want to add.

No, I think he covered it. Thanks.

Okay, great.

Okay, great. The next question is from John Bair. Your 10-Q references manufacturing capabilities are strained due to age of equipment, availability of repair parts, and may limit production capabilities to meet your product demand. Do you anticipate increased CapEx spending on new equipment this year?

Molly?

Yes. So this is Molly. Thanks for the question. And Susan alluded to this, but I really don't expect capital to increase significantly this year and partly because we've been investing in the business as required this current year. So whether that be repairs, as you mentioned, but also for business growth and cost reduction. So we'll be doing that for this last year plus this coming year, which should keep our capital investments relatively flat. Our business growth investment is to meet current demand, but also land growth. And we are seeing some inflationary pressures on parts and equipment, but we're seeing it this year, so I expect to see something similar next year.

Great. Thank you.

Great. The next question is also from John Bair. Recognizing that avian flu is a respiratory issue rather than an intestinal issue, has there been any uptick in Amlan product interest due to the recent and growing number of avian flu outbreaks in the United States? Is there any R&D focus on products to address avian flu?

Wade?

Yes, John, thank you for that. So a couple of things, if I could. First, as you appropriately indicated, avian flu is a respiratory issue. So our current product line would not be effective in treating or mitigating that condition. Our products are not absorbed by the animal and don't work systemically. So there really is no tie in or opportunity for us to benefit with AI. In general, AI has a suppressive effect on the market frankly. Really, there's only the option of destroying or depopulating flocks that become infected with AI. So the net result is you do see at times a downward movement in the total number of birds produced per year, as poultry companies try to replace those with new hatch. So no, there won't be any direct application of our products. We're also not a pharmaceutical company or drug company, so we don't anticipate developing vaccines or antiviral products that would work for respiratory type diseases.

Thank you. Well said.

Okay, great. The next question is from John Bair. Can you speak to the progress of Amlan product sales as it relates to the U.S. swine market?

Yes. This will be simple. We're focusing heavily on poultry, not to say we would turn away opportunities and there may be some in other animals. But the team we've put together in the U.S. has incredible contacts, reputation in poultry. It's -- I don't know, Fred, you can or Wade -- my understanding, it's about 40% of the opportunity is in poultry and that's plenty big for Oil-Dri to get up and running and going. So we're really leaning heavily into poultry. Fred, any comment you have?

Yes, I'd like to add something, Dan. We [indiscernible] some poultry because that's where our bread and butter is; but at the same time, we are not. Like Wade mentioned earlier, we are still doing business in other markets as well. We're now overlooking the swine and dairy market. As we discussed, China is a huge dairy opportunity so is swine opportunity. That's all.

But in the U.S., this question was specifically targeted to the United States.

Yes, so U.S. is the same like Wade mentioned earlier, we do have sales in the swine and dairy market. U.S. has opened up a lot more focus in poultry and that's a big chunk of the business opportunity for us in the poultry market in U.S. alone. I just want to say that we are not only focusing on poultry and not looking at other opportunity as well, we are trying to do the [indiscernible] opportunities there. We are targeting also poultry as a primary focus.

Okay, good. Well said. Thank you for the question, John.

Okay. Next question is from John Bair. Do any of your clay deposits have associated lithium in them which might lend themselves for extraction for the EV battery market? There are several USGS bulletins, special reports that discuss lithium association in clay deposits.

So I sent this question for a friend to Dr. Marc [ph] who has a PhD in clay mineralogy. He's been with us for forever. And he answered me back. Unfortunately, both our Georgia attapulgite and Mississippi, Illinois calcium bentonite deposits do not contain any lithium-bearing clay mineral phases that would be of any conceivable economic value as a trace source of lithium metal. There are some well known clay deposits in the western U.S. that contain smectite clays with a fairly high trace lithium concentration as part of their mineral structure. These are the lithium hectorites and saffronites located in California. However, the current technical and economic viability of such clays as a significant domestic source for this metal is very low especially compared with the abundance of currently mined lithium brine salts and lithium silicate rock deposits in many parts of the world. Great answer, Marc, and he's available for parties and bar mitzvahs if you need entertainment, because he's very, very -- no, I'm teasing you Marc. You know I love hearing from you, but Holy Cow, do you know your stuff? Thank you for your answer.

Great. Thank you. The next question comes from Lawrence Richards [ph]. He asks, I have seen a product named Pretty Kitty advertised lately that purports to track the health of cats changing colors based on the color of their litter after the cat uses the litter box. Have you heard of this product? And does Oil-Dri have any reaction to it?

So yes, we've heard of it. I'll take part of this and you guys want to jump in, you can. We've worked on an indicator in litter for years. The problem is the cost of using that product all year round for what could be a very specific time sensitive problem, it really -- the cost is greater than the benefit. If you look, I think it's retailing for $24.99 at Walmart. You compare that to our opening CPS jug, then they both provide about the same volume of material, which I think is at 6.48. But Jessica, you can confirm that. So when you target [ph], it's almost 4x the cost. And so at the end of the year, you'd be spending hundreds, maybe even $1,000 more to try and figure out if your cat had a urinary tract infection. You're better off if the cat has an issue, take him to the vet. So we just have never seen that it's worthwhile from a cost benefit standpoint to put those kind of indicators in a litter every single day. It's very expensive. It'd be like taking a health test every day even when you feel good. There's no point to doing it. So not a fan, as you can tell, very expensive. Jessica, I don’t know if you have any comments?

Yes, I can build on that. I think like you -- very much consistent with what you said, Dan, as we evaluate innovation, obviously we need to continue to look at the size of the market and the overall appeal with consumers and we always keep a pulse [ph] on innovation that we see but at the same time need to make sure that it is strategic for Oil-Dri and aligns with our long-term strategy of pursuing lightweight. So yes, I would just echo what Dan said and obviously continue to see these things and market them to look and see for future opportunities and where we can grow. And that's it.

Thank you.

Great. Our next question comes from Ethan Star. How is the cat litter business in Canada doing and what are the growth opportunities? In the United States, are you adding new customers for cat litter that you had not previously sold to?

So litter in Canada is doing great, actually top lines, slightly ahead of the really strong growth in the U.S. And it's a lightweight market, where we're the leading share brand up there. And so this product has gone lightweight across the board and so we're very well positioned particularly with our private label business to grow, and we're seeing that growth today. Second half of the question, as I mentioned earlier, I think we've really -- the majority of our growth in the U.S. is stemmed from distribution growth at existing customers. That said, we have a few tests at various customers that are performing well. We're expanding distribution going forward based on those tests performing well is we're optimistic about that.

Okay, great. We don't have any more questions.

I'll ask a question, and then I'll answer it. So I think we've mentioned this before, but renewable diesel is starting to hit in the U.S., which is another demand source for our bleaching earths, which is great. But what is happening is demand is going to exceed supply in a hurry. And so whether we get the renewable diesel business or just continue to support ADM and Cargill on the fluids purification side, either way, there's a lot of incremental demand coming in the U.S. for our bleaching earths, which is great. And so we're going to continue to play Moneyball like we've always done, where we will lean into those customers that are long-term partners where we can make an acceptable margin and supply them with the value they need to then purify whatever fuel or oil they're purifying. And so it's really an exciting time for Bruce Patsey and his division, because the edible oil business grows by 2%, 3% a year usually with population. But now when you layer in this renewable diesel, it's really exciting. So we're definitely looking to play Moneyball as this thing starts to hit. Well, good. Well, listen, thank you guys. I love the format. I appreciate your questions. You can tell we have a lot of optimism for our business. We're not happy with the margins, obviously. We're chasing a moving target and we're going to keep doing it. I will just tell you, the good news is it's a rational market. We're able to get price increases. We're trying to work closely with our partners so that they can get their consumers, they can get their retails up, if they're a B2B, they can pass those along. And so -- but it doesn't seem like it's abating either. Every month, the CPI and the PPI keep setting record levels dating back to '82 to '81, '80. So this is a first time thing in 40 years. So these are dynamic times, but I'm very proud of the Oil-Dri team. I appreciate our long-term loyal investors. And again, we're continuing to generate cash and do well there. And so we're a value stock with a growth potential, which doesn't happen all that often. But certainly, we're definitely focused on the value side and protecting that dividend. And then hopefully getting a big chunk of organic growth on top of it would be fantastic. So I think we'll close by just saying, I think we referenced it in the news release. We did buy back shares last open window. The window will open again. And if the stock price and if this dividend yield and the cash that we got sitting earning not a whole lot in our bank, we'd be crazy not to be continuing our stock repurchase program. So I'm sure that we will be opportunistic there. So thank you, everybody. We'll talk to you again in three months.

This concludes today's conference call. Thank you for participating. You may now disconnect.