Thank you for standing by, and welcome to Oil-Dri's Q2 Fiscal Year 2023 Investor Conference Call. At this time, all participants are in a listen-only mode. I would now like to hand the call over to Chairman, President and CEO, Dan Jaffee. Please go ahead.

Thank you very much and welcome, everyone, to our second quarter and first six months of fiscal 2023 investor teleconference. With me today virtually is Susan Kreh, our CFO; Aaron Christiansen, VP of Operations; Chris Lamson, Group Vice President of Retail and Wholesale; Laura Scheland, VP of Strategic Partnerships and General Counsel; David Atkinson, VP Controller; and Leslie Garber, Manager of Investor Relations. I'd like everyone to know you'll see that Wade Robey is not on the call today. Our Animal Health team is currently at the VIV, V-I-V show in Asia. It's in Bangkok, Thailand. And I'm getting texts and videos. It's going very well. But due to the time change and their commitments, we will be answering any questions that we can related to Amlan and our Animal Health business, but if there are questions that are better answered by Wade we will save those for the third quarter earnings teleconference when he will be back on the call. And again, Wade is our President of Amlan International. So Leslie, please walk us through the Safe Harbor.

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

Great. Before I turn it over to Susan Kreh for her to walk us through the financials, just some general 50,000 foot comments that are highlighted in the release but are worth rementioning. So first of all, very excited. We broke $100 million for the quarter. We're at $200 million through the halfway point in revenues, which is great. You can see that we have had improved margins. We only made 17.3% last year in the quarter, now 22.6%. But the point being from first quarter to second quarter, relatively flat around the 22.5% margin. And we are very mindful that we need to get back to historic norms of 27%, 28%. We still have pricing action and fortunately, some costs are starting to come down. You'll hear about those. And so we do feel confident that we will continue to show sequential margin improvement going forward, and we're very much living our mission of creating value from sorbent minerals. So I don't want to steal too much of her thunder, so I'll turn it over to Susan to walk us through the financials.

Thank you, Dan. As a reminder from our last quarterly call, our investors have asked us to reserve more of the time on this investor call for questions and to spend less of the call on formal comments. So we understand that you've read the materials or we'll assume that, that we published. So I'll just make a few brief comments on the quarter. First of all, as Dan highlighted, net sales of $102 million represent an all-time record quarter for Oil-Dri and a 17% increase over the same period in the prior year. This increase was driven by pricing actions across multiple products in order to cover the input cost increases that Oil-Dri has had to absorb. Overall, pricing was up 19% in the quarter compared to the same period last year, and the pricing increase was offset by a 2% decrease in volume, primarily attributable to low-margin products in our consumer catheter business. The strong year-over-year performance in pricing drove a significant 48% improvement in gross margin dollars. That being said, and as Dan pointed out in his opening comments, our gross margin percent of 22.6% remained flat with the first quarter of fiscal 2023. So we still have some work to do in pricing in order to cover our costs and return to pre-pandemic gross margin levels. During the quarter, we booked a onetime charge of $1.977 million net of tax to establish a reserve. I thought I would provide a little bit of the back story here. And if you have further questions, we have Dave Atkinson, our Vice President, Corporate Controller on the line; as well as Aaron Christiansen, our VP of Operations, who have in-depth knowledge around this matter. But to go back, in 1996, Oil-Dri began operating a landfill at our Ochlocknee, Georgia…

Great. Thank you. And Leslie, let's go through the questions. We appreciate it. We had a lot of good questions come in, and we'll cover as many of them as we can.

[Operator Instructions] So we have a few in the queue already. The first one comes from Brad Evans at Heartland Funds. He says, I'm hearing from multiple players that private label is taking share from branded players across categories based on widening price gaps and struggling consumer finances. What are you seeing on private label demand? And how that might be helping or hurting your branded product shelf space with your retail partners. Chris, do you want to address that?

Sure. Thanks, Leslie and thanks Brad. And Brad, you're hearing right. That is, I think, a broader trend in fast-moving consumer goods and definitely holds true in litter as well from a total category perspective. And we've been asked this question kind of in different forms, probably over the last three quarters. The answer really remains the same, and I'll talk about it from a category perspective first and then how it impacts us at Oil-Dri in our consumer litter business. Really, we're seeing -- again, you're right, we're seeing a bifurcation in the market where private label and value brands are gaining share. And by bifurcation, I also mean the upper end of the market is gaining share as well. So crystal alternatives are doing very well as well. Getting squeezed in the middle is really -- and we saw probably most significantly in this last quarter private label gain share well ahead of the big three consumer brands in the category. I would also note and maybe a new trend consistent with price value, the coarse segments or the non-scoopable segment which has been on a slow decline in favor of scoopable and alternatives over many, many, many years, actually showed a modest uptick relative to scoop. So actually the segment gained a slight amount of share over the last quarter. So lots of signs pointing to the consumer with -- in the face of inflation being very price value sensitive and cash outlay sensitive. For us, the question may have been framed a little bit of, hey, could that be hurting you. The short answer is no. It's not. So it's not from a standpoint of value brands. We're also benefiting along with private label. And it's not from the perspective of -- we still have a decent sized business in course. And finally, it's also not hurting us and in fact helping us from the perspective of we've got a strong and growing and premium private label lightweight business that we feel very good about, and it is experiencing tailwinds just as the rest of private label is in the segment. So across the board, these trends are providing, I'd call them, modest to solid tailwinds that we don't see letting up. Back to you, Leslie.

Great. Thank you. Okay. The next question comes from Robert Smith from the Center for Performance Investing. I'm actually going to combine two of his questions. Are you capable of reaching $40 million in revenues for Amlan this fiscal year? And what are the parameters for pricing Amlan products? And then his second submission was, what is a reasonable gross target range for Amlan over the next several years? Dan, do you want to take that?

Sure. So the blunt answer is no. We are not going to make $40 million this year. At the midway point, we're up a good 30%. We feel we'll finish the year up about 33%. And last year, we did about $21 million. We think we can do about $28 million. Will our running rate be in the 30? We sure hope so. Still showing growth, but it's a long cycle and they're slow to move in and they're slow to move out, but we're still gaining, obviously, as we move forward. Our pricing is very simple. It's value pricing. So we're replacing antibiotics and we price our products so that they are of a significant value to our customer as they use our products to do all sorts of beneficial things, live birth rate and obviously less mortality, weight gain, all the different metrics that they use and then we try and share in that value. Regarding going farther out, Bob, your guess would be as good as mine at this point. It's so dependent. It's like I've said all along. I'm amazed that we are hitting some singles here or doubles, being up 33%, but it's pretty much a business of grand slams or strike outs. And we're still in the testing phase at a lot of major customers. We're getting a lot of activity. We had a great show in Atlanta. I'm hearing feedback. We're having a great show in Bangkok. So we are still very bullish on it. And in the meantime, all of our other businesses are also doing well. So it's sort of a good time to be Oil-Dri.

Great. Thank you. The next question comes from Ethan Starr, a private investor. And he asks, are you expanding your capacity to manufacture Amlan products? If so, if the previous capacity was x, what will the new capacity be as a multiple of x. Aaron, do you want to field that?

Ethan, I'm happy to field your question. I believe we've provided a similar update in past quarters. So it's a great opportunity to update on the work. Simple answer is we already have and are continuing to invest in added capacity in front of the Amlan growth. A large appropriation was made in the prior fiscal year '22 and in fiscal '23 to add capacity in at least one of our facilities for Amlan. Approximately two-thirds of that work is complete. The remaining third will take place in front of the anticipated animal growth curve. Timing is to be determined. We would prefer for a number of reasons to not devote the details of the size of the capital allocation and specifics of the capacity that is added, but I can assure you we have a very well-put together plan to have capacity in front of the animal growth.

Great. Thanks, Aaron. The next question is from Eric Cinnamond from Palm Valley Capital. And he asks, there was a time when Oil-Dri hedged half of its natural gas use. Given the sharp decline in natural gas prices, has there been any consideration of reimplementing the natural gas hedging program? Aaron, do you want to take that one also?

Yeah. Eric, that's a great question. I'll start with saying, yes, Oil-Dri has reenacted the purchase of buying natural gas forward. I do want to speak to the word hedge that's inferred in your question. We don't think of it as a means to beat the market. We are purchasing natural gas in a very conservative and algorithmic way to average price over time. It provides our businesses a better visibility to allow for pricing decisions and takes volatility out of the cost structure. Our purchase strategy will have no more than 40% of the required volume in a given month that's bought in a mechanism that has gas secured forward.

Great. Okay. Thank you. The next question is from Bill Patterson, individual investor, and he asks, how much stock has been repurchased by the company year-to-date and how much left under authorization. Susan?

Yeah, sure. Hey, Bill, thanks for the question. We've actually made no open market share repurchases year-to-date. However, we have repurchased 7,493 shares at a cost of $225,000 that were surrendered by employees to pay taxes related to restricted stock awards. So that's the only activity we've had in that category. As far as what's left outstanding, we have authorization to repurchase 429,033 shares left under our current authorization.

Great. Thank you. The next question is from Ethan Starr. Recently, there's been an increase in expenses to support strategic initiatives, including money spent on outside services. Could you please discuss these strategic initiatives and how they will make a difference? Dan, do you want to talk about some of the B2B?

Yeah, I'll take the B2B, and then I'll turn it over to Chris for the retail and wholesale. And as I alluded to in one of my answers, it is a good time to be Oil-Dri. We have winning strategies in each of our major business units. And so you know about Amlan, and it is winning. It is growing. We're continuing to attract global talent. We just hired a person to take over Latin America for us. We hired him from Tyson-Cobb. He's joining his fellow Cobb teammates. We have a whole new team there. But he's very talented, very successful, and we're excited about the impact he's going to have on our business south of the border and all the way south through Latin and South America. And so our strategies are working in Amlan. We are continuing to leverage our play as our unique sustainable competitive advantage, and it's what gives us traceability and quality all the way to the mine. Then over in our next largest B2B business, it's in the fluids purification side and the trend towards renewable diesel is great for us, and specifically, it's in our backyard, a lot of new plants opening up in the United States, and they use our clay to remove trace metals. And the beauty of it is they're buying oil that's already been refined many times by our clay to remove other things. And then when they get the oil, they then need to use another one of our products as a final polishing step. And so that strategy is working very well. The ag business is continuing to grow our specifically tailored spherical granules, our Verge granules, which has been a big investment over the years. We are basically sold out and putting in more capacity there. And that's all very much in line with creating value from sorbent minerals. So our strategies are working on B2B. And we've got some exciting strategies over on the consumer side as well that I'll let Chris talk about.

And I think we highlighted these and put a pretty good spotlight on them in the shareholder meeting or annual meeting last time around. But we continue to be extremely excited about the lightweight segment of the catheter category. And what our unique mineral does within that category and the strong performance that drives within the category, but we really see it as our role to do everything we can to ignite the lightweight segment. We've talked this before. It's just below 20% of the overall scoopable segment. But if you look up to Canada, it's well above 50% now and the opportunity to move the U.S. in that direction is obviously enormous to Oil-Dri. It's enormous from an environmental benefit. You take upwards of 30,000 truckloads a year off the roads in the U.S. So we're doing a number of things, really, what I think of as kind of a 360-degree consumer approach to get there. In the short term, and you'll see this over the next -- over the back half of the year, we're totally focusing our consumer demand spend on the lightweight segment really shifting from previously where we focused litter for good. That's probably the closest and most tangible thing that you'll be able to see play out in the marketplace again over the next -- over the coming months through the end of the fiscal year and beyond. In addition to that, we're extremely focused on and Dan says it well, if the product performed as well as heavyweight, why wouldn't everybody -- who's going to choose heavyweight. Who's going to want to log 50% more weight up the stairs of their apartment building? Really nobody. Our product performs well, can it perform better? Yeah, and we're extremely focused on our IP against that product performance improvement. And candidly, we'd be under and here and a little more bailed, but we would be interested in helping other players in the category ignite lightweight as well, so through selling innovation, for instance. Now that clearly is further out. So a ton of effort focused on growing lightweight and sort of unintended. We do see what's happened in the Canadian market as a bit of our North Star.

Great. Thanks, Chris. So we have two remaining questions in the queue, but they are really best answered by Wade Robey, our President of Amlan International. And as we mentioned before, he is not on the call this quarter. So we're going to save those for next quarter when he is in attendance. And Dan, I'm just going to turn it back to you for any closing remarks.

Great. Well, thank you, and thanks to the Oil-Dri team and for our loyal shareholders. It was a very good quarter. We believe we have a lot of positive momentum heading into the third and then finally into the fourth quarters of this fiscal year. And as always, we look to the long term. So we are making investments that may or may not pay out this year. But we're confident they will pay out in the long run. And we're benefiting this year from investments that were made years ago that are starting to come to fruition. So thank you for your patience. And I think you know we've got the -- what the next Board meeting is in March, but then in the June Board meeting is when we will discuss any kind of dividend action. But we're certainly proud of our record of increased dividends, and I'm sure dividend increase will be a hot topic of conversation at our June meeting. So thank you for your support. And we will talk to you again in about three months.

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