Q2 2024 Oil-Dri Corporation of America Earnings Call
Participants
Dan Jaffee; Chairman, President & CEO; Oil-Dri Corporation of America
Leslie Garber; Director of IR; Oil-Dri Corporation of America
Susan Kreh; Chief Financial Officer; Oil-Dri Corporation of America
Wade Robey; President, Amlan International, and Vice President of Agriculture; Oil-Dri Corporation of America
Christopher Lamson; Group Vice President of Retail and Wholesale; Oil-Dri Corporation of America
Bruce Patsey; VP, Fluids Purification; Oil-Dri Corporation of America
Presentation
Operator
Good day, and thank you for standing by, and welcome to all direct Corporation of America Second Quarter Fiscal 2024 Earnings Discussion via webcast. At this time, all participants are in a listen only mode. After the presentation, there will be a question-and-answer session. Please note that today's conference is being recorded. I would now like to pass the call over to the President and CEO, Dan Jaffee.
Dan Jaffee
Great. Thank you and welcome to our second quarter and six-month teleconference. Joining me either in person or virtually for the call to answer your questions. Susan Craig, our CFO, and the CIO., Aaron Christiansen, VP of Operations, Wade Robey, VP of ag and President of Amlan International, Chris Lamson, Group VP of Retail and Wholesale. Laura, she was Chief Legal Officer and Vice President and General Manager of the Consumer Products division, who is a Senior Vice President of fluids, purification and Leslie Garber, our Director of Investor Relations, who will lead us through the Safe Harbor.
Leslie Garber
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.
Now I'm going to turn the call over to Susan. Craig?
Susan Kreh
Thank you, Leslie. And just a quick shout out to you. Leslie did an excellent job of highlighting records and providing color on our very positive second quarter results in the press release. So thank you and great job. And since Leslie did such a thorough job, I'll just highlight a few key points and then I'll be happy to answer any further questions during our Q&A session.
For the quarter, consolidated net sales were up 4%, which was a record for Oil-Dri. Consolidated net sales for the second quarter. This was driven in part by growth of fluids, purification and cat litter products, including co-packaged items. Strong sales of co-packaged items was partially a result of a large customer restocking during the second quarter following a first quarter disruption caused by a cyber event in analyzing the split between pricing and volume on the quarter, higher prices across all principal products drove the improvement in net sales. And while we did experience strong volume growth for our fluids purification products that grow on a consolidated basis, it's more than offset by the purposeful shedding of some low profit volume within our retail and wholesale segment.
Consolidated gross profit was $30.9 million for the second quarter, representing a 34% increase over the same quarter in the prior year. Our gross margins expanded to 29.3% in the second fiscal quarter from 22.6% in the second quarter of fiscal 2023.
Our gross margin expansion as a result of our teammates keen focus on restoring our margins in order to fund our future. This is necessary because of the financial impact of our aging infrastructure. We have a 5-year capital plan that addresses replacing key aged and fully depreciated assets in our manufacturing facilities. It is imperative that our pricing enables Oil-Dri to generate adequate cash to fund the asset infrastructure that's required to sustain our future ability to serve our customers and grow our business.
To highlight this point, I would call your attention to the bottom of the consolidated balance sheet that was presented in the earnings release year to date made capital investments of $15.5 million compared to a depreciation and amortization expense of $8.9 million for the same period. That depreciation and amortization expense represents 57% of capital invested. And as we continue to replace our aged infrastructure. We expect that ratio of depreciation as a percentage of capital investment two increase during the second quarter. We also booked a onetime or unusual item related to the modification of our only landfill, which is located out at our classic Georgia manufacturing site.
As a reminder, during the second quarter of last year, we established an accrual of $2.5 million to perform the work required to modify the old class new landfill. That modification work is now underway. But today we have a better estimate of the cost to complete the modification. As a result, we have taken an additional charge of $500,000 to add to this accrual during our second fiscal quarter of 2024.
Now let's hit a couple of points related to cash. Year over year, cash and cash equivalents are up substantially from $14 million at the end of the second fiscal quarter of 2023 to $27.8 million at the end of our second fiscal quarter in 2024.
However, as highlighted in the consolidated statement of cash flows for the first six months of fiscal 2024, we reduced our cash by $4 million. In addition to funding the $15.5 million of capital investments that I mentioned earlier, we paid our teammates their annual bonus during the first quarter, and we deliberately increased inventories by $3.7 million to support our historically high service levels with our customers. One of the drivers of this strong performance in service levels has been having the right inventory in the right place at the right time.
In addition to that, we also built inventory in advance of some specific onetime customer initiatives, which we expect to occur during the third and fourth quarters of this fiscal year. I would also point out that during fiscal 2024, we had repurchased 40,075 shares of Oil-Dri stock for [$2.0 million] that were surrendered by teammates to pay taxes as part of the vesting process under our restricted stock award program. We have not purchased any shares on the open market during fiscal 2024.
And finally, let's talk about our strong balance sheet which as a result of our continuing strong financial performance, along with our low net debt position, Oil-Dri remains well-positioned to invest in our growth opportunities. Our cash priorities continue to be investing and reinvesting in our business with a focus on future growth opportunities, while at the same time maintaining our existing asset base supporting our dividend, which we have increased for 20 straight years and paid for 50 straight years, maintaining enough financial strength to support strategic M&A targets become available. And that is all followed by opportunistically assessing the repurchasing of shares of our stock when the valuation warrants an acceptable return for our shareholders. So those are some of the key highlights for the quarter.
And with that, Dan, I'll turn it back over to you for question-and-answer session.
Dan Jaffee
Thank you, Susan. Great job. Great recap of the only comment I can make is because a lot of our long-time investors didn't know and had interaction with my father. You've got to be smile and looking down on these results. It's just it's been a, what, 84 years of grab the mic to my dead to me, and it's just it's very humbling and I'm very, very appreciative of the team. I was down in our Mississippi plants last week. I was at our Georgia plants about six weeks before that and to interact with the teammates who are making this happen on a daily basis is just so rewarding and so fulfilling.
So thank you, oil by teammates, I need to get them out. They need to get to tap soon. And I will and I definitely want to get up to Canada as soon as I can. So let's open up the Q&A because I'd rather answer the questions that are foremost for our shareholders.
Question and Answer Session
Leslie Garber
(Event Instructions) This question comes from Robert Smith for Center for Performance Investing and he asks, the softness at Amlin for Latin America and Mexico surprised me specifically what's happening in those two geographies and what actions are needed to turn them around. I'm going to have wait and see.
Wade Robey
Thank you, Leslie, and thank you, Robert, for that question. I'm going to separate those two geographies slightly and how I how I answer the question in Mexico. As I think our investors know, we have been participating in that business through agronomics, which was an acquisition we partially made a few years ago and now have completed in the last year. The softness in Mexico at the moment was really caused by a couple of things, but chiefly we completed the acquisition of that business. We did some restructuring which caused what I would call a temporary pause in some of the commercial activity we had with a couple of the products that we were selling in that region. We've reestablished that and we're very bullish on the growth of Mexico for the for the future.
There's a lot of key accounts in Mexico that are very, very large that we had not approached previously, and we're excited about the prospects of gaining business with them. And as I said, growing that business, when you look at Brazil, it's somewhat of a similar story of what we've seen with the economy in North America, where feed prices have been high and there's been a bit of a depression of productivity or economic productivity in that market that has caused some in and out of products in diets in the in Brazil, rations for poultry. We've had to deal with that over the last six, nine months. On a positive note, we see gaining momentum there as feed prices have started to come down and we expect to continue to have Brazil be a really the strongest performer for us in the Latin American market going forward.
Leslie Garber
Great. Thank you. And the next question comes from Ethan Starr, an individual investor. He asks, how successful is the new antibacterial cat litter, both in terms of retail distribution and consumer purchases? Are consumers purchasing the antibacterial litter switching from other classified products or competing? Chris, I'll have you answer that.
Christopher Lamson
Thanks for another good question. As we come to expect from you. So antibacterial, you really have three questions within distribution velocities and then how incremental do we think our sales on antibacterial are distribution. And I think I have shared this over the last couple of quarters is very good. So, you know, our key retailers on the brand on our grocery wise are up and down the East Coast. And I think you can find there have actuarial in virtually all of them as well as as well as in a lot of stores in, I think the US's largest retailer, and we feel great about distribution. I would say and we feel good about velocity.
So specifically, velocities are running at 80% of those of that Tenneco Cat's Pride item. And I'd say we feel good, but we're definitely not satisfied there. We're focusing a pretty good amount of spend in trial generating activities tying into our existing merchandising events. We did a big push in the month of February around really kind of a shelter awareness month in May. We are focused on it platform, our marketing platform in store with retailers on the cleanup of the shelters, a bit of a a bit of a play on words and put antibacterial at the center of aggregate great merchandising up and down, particularly the East Coast. And so and we'll continue to focus on crowd generating activities through the end of the fiscal.
Lastly, how incremental good question difficult to measure in the marketplace. Our research going into launching the product told us it would be highly incremental, which is consistent with the product's uniqueness in the marketplace. And again, we'll difficult to read. It would appear that well, you know, it's obviously coming into the market and generating good velocities on other items do not appear to be suffering. So that read on positive incrementality appears to be there.
Leslie Garber
Great. Thank you, Chris. The next question comes from Robert Smith, he asks Chevron recently announced it is closing two of its biodiesel plants because of the falling demand. Do you see continuing strength in this area for you in the immediate future and I'm going to turn that over to Bruce pace by Robert.
Bruce Patsey
Thanks for the question. Yes, Chevron did close some plants. We were aware that we didn't have any business with those companies. Biodiesel is a very small segment of the market and we do have some business in biodiesel. But where all the growth is in renewable diesel, this is a very large oil refineries that are building plants where they use a fixed bed catalyst to turn vegetable oil and waste oils into diesel fuel and where biodiesel you can add into fuel at about 5% to 10% to diesel; renewable diesel, you can add 100% of it into the line with diesel fuel. So all the growth in this industry and what's starting to drive some of our number or is the renewable diesel industry. And so we could we see continued growth in that marketplace and banking.
Leslie Garber
And the next question comes from Ethan Starr. In the 10-Q, it noted that some North American Amlin customers shifted from trials to purchasing products at full price. What will this shift mean for Amlin revenue in the upcoming quarters, and do you expect more trial users to become full-price customers. And if so, when I'm going to turn it over to Wade.
Wade Robey
Thank you, Leslie, and thank you Ethan, this is a question we've had previously, but I know it's a little bit complicated, so I'll certainly address it again, Ethan, as you know, and as I've indicated previously, we do start out with trial pricing in the US and some of the largest integrators as we've launched our products there. And as we're growing our business, that is a time-based program that then results ultimately in those customers moving to our full pricing based on the volume that they that they purchased. As we've done that over the last two years, we've been able to retain those customers. And we've not seen and that move to what we call our list pricing at those volumes to be an impediment to our growth going forward.
As Amlin becomes more established in the North American market. I would suspect that the need to offer trial pricing to customers who have never experienced our products previously that will become less of a necessity or an opportunity, I would say. And we'll move more to a straight pricing with some rebate programs based on the growth that we see in our in our large accounts. So that's how we address it. And naturally, as that as that goes forward, we expect to see positive impacts on both revenue and the margins or profit will earn for that business. Thank you for your question.
Leslie Garber
Thanks, Wade. The next question is from Robert Smith. What are your two chief concerns going forward? I'm going to turn that over to Dan Jaffee.
Dan Jaffee
I would say, aging infrastructure, which you heard Susan cover and the fact that our depreciation is a lagging indicator we're depreciating were fully depreciated assets that were put into service 10, 15, 20 years ago and having to replace them with new adds of that cost, a lot more money today to put into service than they did those 10 or 15 years ago. So well, you know, focusing on margins is interesting. It's really the cash generation that's going to that's going to pave the way there on my dad used to always say earnings are an opinion. Cash is a fact. And so we're going to be very focused on cash generation going forward so that we can make sure that we can continue to supply our customers with the quality and quantity that they require and deserve and appreciate. So they've been very tough appreciative of her and receptive to our conversations with them on that and they understand what we're what we're presenting.
So aging infrastructure is one. The other one is lapping these results. I mean, first of all, just as I said, depreciation is going to start catching up with your spend. So if we're spending [$30 million-something] a year in capital, and we're depreciating $18 million, $19 million a year you know that delta is going to start to narrow as you replace zeros with new equipment. So in 10 years, it should frankly be [$30 million-something].
Well, that's going to take a hit on the reported earnings, but those are the cash have already been spent. And so we're going to very much be focused on cash generation, but lapping the current results is definitely a challenge. The good news is we've got some really exciting growth businesses that we've already planted seeds that are either starting to come to fruition now or hopefully will come to fruition over the next six, 12, 18 months. And then we've been we've got some really exciting cost-savings opportunities there. Look pretty hard. They don't look very soft that hasn't affected us yet, but will maybe out in fiscal 25 and 26. So we're not going to really disclose what those are, but they're definitely going to help offset some of that incremental depreciation expense. So those are the two aging infrastructure and lapping current results.
Leslie Garber
The next question is from Ethan Starr. What results are you seeing from the light in your life advertising campaign for Cat's Pride? I'm going to turn that over to Chris land.
Christopher Lamson
Yes, Doug, anything of So let me first kind of take a tenable view and then I'll and then I'll move to take a step back and broaden I talked about around our digital marketing focus and you obviously picked up on. We shifted from really focusing on Litter for Good for pre-pandemic had a bit of a lull in the marketplace that all the players in the category, while we worked through service issues and then came back focusing really on on lightweight litter and the liquid message.
And overall from a from a results perspective, the great news about digital advertising, as you can you can follow your all your payouts and check and adjust as you go. And that has both, I think the campaign and our agility there, along with our agencies and our tools to measure ROI are driving great results. So we feel very good about our return on our spend and candidly that we measure and we look back at that filter for good campaign. Our results are even better. That's sort of the Pinnacle view about, you know, kind of program a program as we check and adjust and optimize and get more broadly.
I also shared at the shareholder meeting that we were very happy with our share growth. And both our private label lightweight business and branded lightweight was not growing share relative to the market. And that was, of course, two quarters ago, for the last two quarters, we've seen lightweight actually grow faster than heavyweight, so get back to share growth and with our strong shares, particularly on private label lightweight, that's key for us.
No correlation or causation is a little bit difficult to discern, but we turned this program on two quarters ago and lightweight in the marketplace is winning again and it hadn't been.
And relative to Brent, yes, as measured by growing share for about the year prior. So sort of that broader perspective, I think we're getting we're impacting the marketplace in that narrow perspective, we're getting to it.
Leslie Garber
Great. Thanks, Chris. Okay. We have another question from Bob Smith on is your most important cat litter retailer pressuring for lowering prices? Chris, you want to answer that?
Christopher Lamson
Sure. And I guess I don't want to answer it specifically to answer your question, honestly, especially But Bob I'll answer it a little more generally. What I mean by that is we don't talk to specific plans with specific retailers. I'll start more broadly on this one and say that when you look at marketplace data, when you look at syndicated data, sales in the category are still growing faster than new. So as it plays out on the retail shelves, the retailers are acknowledging there's still inflation present. And now is that cost inflation for us still real?
Absolutely. Is it is it real at a lesser rate than we were experiencing a year ago, absolutely set differently. Our costs continue to rise when we compare year over year just not as great a rate. Our sales team without revealing our cost structure is well arm to talk to that story when pushed by retailers. And they've I think they've done so effectively to this point, I believe they're going to continue to tell that story really effectively. And I think they speak to a few different buckets in general. And when you aggregate those buckets, costs costs are still rising and they tell that story.
Leslie Garber
Thank you. We have a few minutes left in the call, and I would like to encourage other investors to please submit questions via the web and we will wait a few minutes to see if anything comes.
Dan Jaffee
Okay. Well, I just I mean, we've answered asked and answered all the questions. Thank you for your interest. Thanks for your support, and we will be back with you. I hope -- we will be back with you in three months.
Thanks everybody,
Operator
And thank you, everybody, for participating, and you may now disconnect.
