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Operator: Good day, and thank you for standing by, and welcome to Oil-Dri Corporation of America Second Quarter Fiscal 2024 Earnings Discussion via webcast. [Operator Instructions] 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. Welcome to our second quarter and six month teleconference. Joining me either in person or virtually for the call to answer your questions: Susan Kreh, our CFO and 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 Scheland, Chief Legal Officer and Vice President and General Manager of the Consumer Products Division; Bruce Patsey, our 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. 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 Kreh.

Susan Kreh: Thank you, Leslie. And just a quick shout out to you, Leslie, you 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’s 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. The 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 growth on a consolidated basis was 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 is 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, we’ve 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 to increase. During the second quarter, we also booked a onetime or unusual item related to the modification of our only landfill, which is located at our Ochlocknee, Georgia manufacturing site.

Now 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 Ochlocknee landfill. That modification work is now underway. So 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 initiative, 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 have repurchased 40,075 shares of Oil-Dri stock for $2.1 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 is 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 if 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 our question-and-answer session.

Dan Jaffee: Sure. Thank you, Susan. Great job. Great recap. The only comment I can make is because a lot of our long-time investors did know and had interaction with my father. He’s got to be smiling looking down on these results. It’s just — it’s been, what, 84 years of [indiscernible] to my dad, 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-Dri teammates. I need to get to mountains. I 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 it up to Q&A, because I’d rather answer the questions that are foremost for our shareholders.

A – Leslie Garber: Okay. I’m going to take over. Please submit your questions using the Ask A Question field on the webcast and click submit. And I’m going to read the first question. This question comes from Robert Smith for Center for Performance Investing. And he asks the softness at Amlan 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 Wade to answer that question.

Wade Robey: Thank you, Leslie, and thank you, Robert, for that question. I’m going to separate those two geographies slightly and how I answer the question. In Mexico, as I think our investors know, we have been participating in that business through AgroMex, 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 temporal 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 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 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 really the strongest performer for us in the Latin American market going forward.

Leslie Garber: Great. Thank you, Wade. 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. Our consumers purchasing the antibacterial litter switching from other Cat’s Pride products or competing brand. Chris, I’ll have you answer that.

Chris Lamson: Yes. Good morning, Ethan, thanks for another good question as we expect from you. So antibacterial, really, there’s 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 our key retailers on the brand, our grocery wise are up and down the East Coast. And I think you can find antibacterial in virtually all of them as well as — as well as in a lot of stores, and I think the U.S.’s largest retailer. So we feel great about distribution. I would say we feel good about velocity. So specifically, velocities are running at 80% of those of a typical 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 — it was really kind of a shelter awareness month, and we focused our platform, our marketing platform in store with retailers on clean up the shelters, a bit of a play on words and put antibacterial at the center of that. We’ve got great break merchandising up and down, particularly the East Coast. So — and we’ll continue to focus on trial-generating activities through the end of the fiscal. Lastly, how incremental, good question, difficult to measure in the marketplace. Our research going into watching the product told us it would be highly incremental, which is consistent with the product’s uniqueness in the marketplace.

And again, while difficult to read, it would appear that while it’s obviously coming into the market and generating good velocities, other items do not appear to be suffering. So that read on positive incrementality appears to be the right one.

Leslie Garber: Great. Thank you, Chris. The next question comes from Robert Smith. He says, Chevron recently announced it is closing two of its biodiesel plants because of 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 Patsey.

Bruce Patsey: Robert, thanks for the question. Yes. Chevron did close some plants. We were aware of 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 numbers is the renewable diesel industry. And so we see continued growth in that marketplace.

Leslie Garber: Right. Thank you. 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 that 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 U.S. at 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 purchased. As we’ve done that over the last two years, we’ve been able to retain those customers, and we’ve not seen that move to what we would 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 straight pricing with some rebate programs based on the growth that we see in our large accounts. So that’s how we address it. And naturally, as that goes forward, we expect to see positive impacts on both revenue and the margins or profit we’ll earn for that business.

Leslie Garber: Thank you for your question. 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: Hi. Thank you. I would say aging infrastructure, which you heard Susan cover and the fact that our depreciation is a lagging indicator. We’re depreciating our fully depreciated assets that were put into service 10, 15, 20 years ago and having to replace them with new assets that cost a lot more money today to put into service than they did those 10 or 15 years ago. So while focusing on margins is interesting, it’s really the cash generation that’s going to pay the way there. My dad used to always say, earnings 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, deserve and appreciate.

So they’ve been very appreciative of or and receptive to our conversations with them on that, and they understand 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-something million a year in capital, and we’re depreciating $18 million, $19 million a year, that delta is going to start to narrow as you replace zeros with new equipment. So in 10 years, it should frankly be $30-something million. Well, that’s going to take a hit on the reported earnings. But those are — the cash will 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 on that are either starting to come to fruition now or hopefully will come to fruition over the next 6, 12, 18 months. And then we’ve been — we’ve got some really exciting cost savings opportunities that look pretty hard. They don’t look very soft that haven’t affected us yet, but will maybe 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: Thanks Dan. Great. 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 Lamson.

Chris Lamson: Hi again, Ethan. So let me first kind of take a pinhole view and then I’ll 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 goods or pre-pandemic, had a bit of a wall in the marketplace as did all the players in the category where we work through service issues and then came back, focusing really on the lightweight litter and the lightweight litter message. Overall, from a results perspective, the great news about digital advertising, if you can follow all your payouts and check and adjust as you go. And that is 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, as we measure and we look back at the litter for good campaign, our results are even better. That’s sort of the pinhole view about kind of program to program as we check and adjust and optimize we feel good. More broadly, I also shared at the shareholder meeting that while we were very happy with our share growth, both on our private label lightweight business and branded lightweight was not growing share relative to the market. 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. Now 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 hasn’t been relative to — as measured by growing share for about the year prior.

So that broader perspective, I think we’re getting — we’re impacting the marketplace in that narrow perspective, we’re getting good returns.

Leslie Garber: Great. Thanks Chris. Okay. We have another question from Bob Smith. Is your most important cat litter retailer pressuring for lowering prices. Chris, do you want to answer that?

Chris Lamson: Sure. Again, I guess. And I guess I don’t want to answer it specifically to answer your question, honestly, Leslie. 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 units. So as it plays out in the retail shelves, the retailers are acknowledging. There’s still inflation presence. Now is that cost inflation for us, still real, absolutely. Is it real at a lesser rate than we were experiencing a year ago absolutely. Said differently, costs continue to rise when we compare year-over-year just at not as greater rate.

Our sales team without revealing our cost structure is well armed to talk to that story when pushed by retailers. And I think they’ve done so effectively to this point. I believe they’re going to continue to tell that story really effectively. They speak to a few different buckets in general. And when you aggregate those buckets, costs are still right when we tell that story very well.

Leslie Garber: Great. We have a few minutes left in the call, and I would like to encourage other investors to please submit questions via the webcast, and we will wait a few minutes to see if anything comes up.

Dan Jaffee: Okay. Well, I guess, I mean, we’ve asked and answered all the questions. Thank you for your interest. Thanks for your support, and we will be back with you. We will be back with you in three months. Thanks, everybody.

Operator: And thank you, everybody, for participating, and you may now disconnect.