Good day, and thank you for standing by, and welcome to the Third Quarter Fiscal Year 2022 Investor Teleconference. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to hand the conference over to your speaker today, President and Chief Executive Officer, Dan Jaffee. Please go ahead.

Thank you, and thank you, and welcome, everyone, to our third quarter teleconference. With me here either physically or on the line is Susan Kreh, our Chief Financial Officer; Aaron Christiansen, Vice President of Operations; Chris Lamson, Group VP of Retail and Wholesale; Jessica Moskowitz, Vice President and General Manager of our Consumer Products division; Wade Robey, our Vice President of Agriculture and Amlan Marketing; Laura Scheland, Vice President, General Counsel and Secretary; David Atkinson, Vice President and Controller; and Leslie Garber, our Manager of Investor Relations. Leslie?

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, Leslie, and thanks, everyone, for sending in a whole host of questions, really good questions. And so, we've got a very informative session for you. So, I'll not waste a lot of time. I'm not covering what you didn't want to hear. So, let's turn it over to Susan first for some financial results, and we'll go from there.

All right. Thanks, Dan. This morning, we have a special guest with us that is our Vice President and Corporate Controller, Dave Atkinson. Dave’s been with us about a year. He's joining us today to discuss the details of the significant accounting charge we took during the quarter, a onetime non-cash charge. And he'll go through the details with you and then be available to answer any questions you might have related to that accounting event. So, with that, Dave, do you want to talk to us about goodwill impairment, please?

Sure. Thank you, Susan, for the opportunity to be here today and to talk about our onetime noncash goodwill impairment charge that we took in the third fiscal quarter. For background, goodwill -- the goodwill intangible asset is established during acquisition accounting when the purchase price exceeds the sum of the net fair value of assets acquired and liabilities assumed. In the case of this particular goodwill asset, it relates to multiple acquisitions that took place eight years ago or longer. We test goodwill for impairment each year as of May 1st. In performing this test, we determined that we had experienced a triggering event in the third fiscal quarter due to continued adverse impact of rising costs and supply chain constraints on our gross margins. We determined that in the third quarter, the carrying value of the Retail and Wholesale segment was higher than its fair value based on our discounted cash flow model. As a result, we recorded a goodwill impairment of $5,644,000, which has no remaining goodwill in our Retail and Wholesale segment. Now tax impact, this resulted in a reduction of earnings of $4,397,000 or $0.65 per common share. The remaining goodwill on our balance sheet of $3,618,000 relates to our higher-margin Business to Business segment, which does not require impairment based on having fair value in excess of its carrying value. In addition, we do not expect future goodwill impairment charges related to the Business to Business segment.

Thanks, Dave. So, the goodwill charge that Dave described does not impact our liquidity. The charge itself was a noncash charge. Further, we have strong relationships with our lending partners and we worked with both of them to exclude the impact of the goodwill impairment from our covenant calculations. So, the amended and modified documents were filed with our fiscal third quarter 10-Q for any of those who might be interested. Transitioning from liquidity to cash. Year-to-date, we've issued $25 million in notes at a very favorable rate of 3.25% and we've used those proceeds to fund our growth through building inventory, and we're doing that not only because of the increased cost of the supply chain, because of the fact that getting freight out is taking longer, so we have more finished goods on hand, and just to provide overall higher service levels to our customers. We are also making investments to support our growth in our manufacturing facilities as well through capital investment. We also have opportunistically repurchased shares of stock as we believe they are currently at a very good value. So, I’ll leave a lot of time for questions, because I know there will be a queue. But if I think about highlights for the quarter, strong, strong revenues in all of our businesses, and we're seeing the benefits of our pricing initiatives as well as volume growth. So, if I break that down, I said strong revenue growth is about three quarters pricing and the other quarter is volume. I'm particularly optimistic about the quarterly growth in our animal health products that was 13% and growing. This is a business, which we -- is strategic, and we're making strategic investments in both, capital as well as in SG&A to build out sales and leadership to drive the growth opportunities there. We'll end on that positive note and turn it back over to you, Dan.

Great. Thank you. And before we address some other questions, we've prioritized a couple just because I'm going to take them combined. Two, John Bair wrote in. What is your most positive takeaway from the results of this quarter? And any positive encouraging trends you see unfolding? I think Susan covered the positives, I'm going to go with the trends. And then, Ethan Star wrote, what will it take to significantly grow Amlan sales and what progress is being made towards that? And the two of them can be combined together, because we're seeing really positive trends. And there was even a third question that we may or may not get to of -- I think Ethan was more interested in our newer products. But I will tell you what's really driving the excitement and the growth of the older products, the stuff that Mother Nature put in the ground billions of years ago. Our play is -- and as we say, minerals by nature, performance by design. Our play selectively mined, selectively processed, to maximize what Mother Nature did billions of years ago, is really what's driving all the excitement with the actual end user, the actual customers. So, we have had incredibly positive tests. This is an industry that you -- thankful to hear [Technical Difficulty] move, because it's impacting the human food chain. So, it wouldn't be good if they were just bouncing back and forth changing things left and right without being very methodical and getting deep into the data and making sure they see repeat, repeat, repeat performance. Having said that, all major entrees into new accounts are moving forward with results better than what they had even hoped for when they went ahead and agreed to test the products. So what do we need…

So, the next question is from John Bair from Ascend Wealth Advisors. And he asked, are you seeing any shift by the consumer away from your premium cat litter products to lower-end offering?

Yes. Good morning, John. This is Chris. I'll take the question. Thanks for the question. And I think we had a similar question last quarter, and the answer largely remains the same. So, as we look at the total category, really what we see is a bit of a barbell effect. So, super premium products, so real price premium per use, specifically litter crystals are growing very nicely. And then, at the other end of the market, those brands and retail brands, private label brands that are obviously more value-oriented, are also seeing growth that is in excess of the category. I would put both of our significant businesses within litter into that latter bucket. And as a result, I'd say, we're benefiting from what I'd call fairly modest tailwinds above the category. Category is already doing well, right, tracked in the low teens. Those, what I'll call value brands that perform particularly well, can't pull the consumer for long. Value brands performed particularly well, premium private label and our Cat’s Pride and Jonny Cat brands are performing ahead of either the segment that they play in or the overall category.

Okay, great. Thank you. Our next question comes from Ethan Star. What kind of results are Amlan customers seeing with Amlan products, both in the United States and around the world, and especially interested in hearing about results for the newer Amlan products?

Wade?

Yes. Thank you, Dan. Good morning, Ethan, and thank you for the question. We're seeing excellent results around the world. As we've discussed in previous calls, part of the sales cycle with Amlan products in this industry is to evaluate in the field, our products in customer operations. We certainly share R&D results. We do at CROs or universities, but customers really want to try the products first hand. In the trials we've been conducting over the last 12, 18 months, we've universally seen excellent results. Our customers are seeing improved performance with our products. As we look around the world and the launch of our new products, we're beginning to evaluate those as well. As we mentioned, again, in a previous call and with our IPP launches, we're launching two new products internationally, our NutriPat [ph] product and our product. Both of those products are in testing now with customers. And again, we're seeing them perform as expected, and we're starting to make great progress in moving those products into the market.

Okay, great. Thank you, Wade. Our next question also comes from Ethan Star. The 10-Q indicates that you'll be spending $6.5 million to renovate one of your manufacturing facility. Which plant are you renovating, what improvements are you making and what benefits will result from this?

And Aaron Christiansen, our newly promoted Vice President of Operations, will take that one. Aaron?

Yes. That's a great question. Thanks for asking, Ethan. Susan already largely alluded to the answer. Our capital spend continues to be heavy in our aging infrastructure. The bulk of the spend is in the areas where we support the Amlan business and lightweight cat litter. It's a combination of investments that add capacity, flexibility, redundancy in some cases and address our cost structure. The question specifically states the location, I'd rather avoid that detail, but it is most definitely clear to indicate that the capital spend is definitely targeted in the areas where our commercial teams are targeting strategic growth.

Great. Thank you. The next question comes from Curt Cornwell, [ph] who is a long-time shareholder. Was the decision to take the goodwill impairment charge in this quarter related to the substantial increase in inventories year-to-year? And are you satisfied with current inventory levels?

So, I'll start and then I'll hand it over to Aaron. How's that? Thanks for the question. Now, the inventory levels weren't part of what triggered the impairment charge of the quarter. The second half of your question, are we satisfied with the inventory level? Certainly, we've seen an increase in finished goods as the whole situation was great and the long lead times getting our product to customers has increased this year. As to the rest of inventory levels, I'll let Aaron, our VP of Operations answer what that -- what do you think about inventory levels?

Extremely hard to predict where we go over the next quarter. The market dynamics right now, in particular in freight and export freight are incredibly unpredictable, unstable. The bulk majority of the increase in working capital over the past quarter has been in export production and volume for several pieces of our business, where we simply have not been able to move the product at the rate that we have historically. All indications are export freight, in particular, is not going to improve over the coming quarter. We're finding unique ways to manage our working capital down. But obviously, we have to have the product to begin with to be able to move the freight. So, we'll monitor as the freight market and other aspects of the supply chain stabilize in the months ahead.

Great. Thank you. And we have a couple of questions. Ethan asked, what is the number of different countries you have already sold Amlan products in? And John Bair asked what do you attribute the sales decline in Mexico and Asia? Is it a demand drop or a logistic issue or both? And Wade, I'm going to call on you to take on those two.

Yes. Thank you, Dan, and thank you for the questions, guys. I'll start with the question related to the countries we're targeting. Ethan we're targeting approximately 27 countries today and selling around the world really and all key world area geographies, except for the EU, and we've discussed why we haven't approached that market yet. These are really the countries that we're focusing on. We're not going to have a large expansion in that number over the next 12 months. We'll see instead more significant investment in the key geographies, like in the Americas, North America, South America as well as in key countries in Asia, but that list will gradually expand in time. As we look at Mexico and the change that we saw there, if you look at the third quarter of fiscal year 2022 versus 2021, which I think is the reference question you're asking, we saw a decrease in net sales of approximately $147,000, which constituted about 25% for the quarter. And that really was related to a discontinuation of certain product lines that were sold by Agromex that were more equipment or mechanical in nature. It wasn't related to our core products, but rather products that we chose to discontinue that were core to our strategy. And so, we see that really as a temporal event.

Okay, great. Thank you. Our next question comes from Ethan Star. In the slide presentation at the annual meeting, Oil-Dri noted that Amlan has an opportunity to target companion animal rations. I have three questions related to that. First, has the innovation center already developed a scientifically proven product? Second, are you already working with a pet food manufacturer, either informally or with a contractual agreement? And third, what can you tell us about when this product might begin to generate revenue for Oil-Dri? Wade, do you want to take that question?

Yes, sure. And again, thank you, Ethan, and thank you for the breadth of the question because it is an opportunity that we see is pretty significant for the Company in the future. What's great about our product, and Dan mentioned this, and certainly, our core clay mineral products is that they are effective in a broad range of species. So although we're initially targeting, say, poultry and swine in the key geographies we're looking to penetrate, we're also pursuing markets like the ruminant market, specifically in dairy and also companion animal. And the reason is that the products work across species really the same. This is basically true for our formulated products as well with some exceptions, but we have a breadth of portfolio that we can target, not only production animals but also companion animals. We're in the process currently of talking with large companion animal feed or food producers. What's fortunate about that is a lot of these very large food companies that we do business with today are vertically integrated and cross species. So, they might produce both poultry feed, ruminant feed and sometimes companion feed as well. So it makes it a very efficient way for us to penetrate the market. We're not in testing yet in companion animal rations. We're going down a cycle of providing them data and convincing the validation test, but we hope to do that in the near future. And I would hope that in fiscal year 2023, we begin to see some sales into the companion animal market. But again, we'll have to validate the product with customers and then begin sales in that order.

Great. Thanks, Wade. We have a question from Eric Simon. [Ph] Oil-Dri has a long history of maintaining a very strong balance sheet. Given it's been a capital heavy year with elevated capital expenditures, working capital growth, dividends and buybacks, leverage has increased. Does the Company have a maximum net debt or leverage ratio in mind? And should we expect free cash flow to improve over the next year, or will cash needs remain high?

Susan?

Yes. A lot of different questions there. So, let me start. We expect free cash flow to improve. We expect to continue spending capital, because we've got identified opportunities at the level that we're spending in here in fiscal 2022 into the next year or two. So, we've got some very good opportunities there. Inventories, Aaron talked about earlier, we have an investment in our inventory to serve our customers and just because support the volatility we're seeing in freight and shipping. We do have a strong balance sheet. We still are sitting with a debt to total capital of 18.4%. So really pretty low, and that means we've got -- we've got dry powder and -- to fund the opportunities as they come along. So, we have a specific ratio in mind. I think we've had conversations where unless the opportunity was something we -- and you would really imagine that we would not see that going above 40%. So, that leaves a whole lot of opportunity for things that are accretive. So with that -- as far as dividends, we intend to supporting the dividend. And share buybacks will be opportunistic. But to be honest, very attractive at the price of stock right now. So, do we have any -- we spent about $11 million year-to-date on share repurchases. As we sit here today, we don't have any more plans to do so, but that is a good opportunity for us, but it comes last in our ranking of opportunities, growth in our business would trump that and would be the first use of our cash in the form of capital and working capital investment.

Thank you. And the only thing I would add is, as I look at our balance sheet, we've got $200 million of assets. And the question is, does that mean that could we replace all five of our major U.S. locations, Georgia, two in Mississippi, one in Mounds in Illinois, one in Taft, California for $240 million. And the answer is not even close. These are historic values, they're depreciated values and so forth. And so, as these get older and as Aaron and his team upgrade and just not even upgrade, in some sense just maintain, keep up to standard. And then, as you layer on the fact that environmental compliance only gets more strict, the amount of particular you can admit, all that kind of stuff. So you have to have more and more air quality equipment and things like that. It's just -- it's a capital-intensive business. That's the bottom line. So, on the dividend side, obviously, very important. We've always -- we've been paying a continuous dividend forever -- I mean, I was looking back. I mean it's in one of our release. I don't remember, but I want to say over 40 years, we've paid a continuous dividend. We've raised it 18, 19 years in a row. And it's always on 19 years in a row.

18.

18. That's what I thought. 18 years in a row, no worries. And we always look at it in June, and this is June. So, it's certainly on the agenda for today's Board meeting, and that will be a subject for discussion and a review and approval by the Board. And what they're going to want to see is, do we believe that our margins are going to come back, we'll start generating the cash necessary to not only fund the maintenance and growth of the business, but also to then increase the dividend. So, I would say, you'll know more by close of business today, because that will be a strong signal one way or the other. And Susan and her team will be presenting some cash flow information and so forth, and so that they can make a more informed decision. Good. So, we have what, one more question?

We have time for one more question, which comes from Ethan Star. In the most recent 10-K, it is stated that Oil-Dri [Technical Difficulty] with a significant customer, so that the customer would pay freight charges directly and such costs wouldn't be included in the price Oil-Dri charges for its products. What is the approximate impact of this change on the top line per quarter? If you can't give a precise figure, could you at least tell us whether it's more or less than $1 million per quarter?

So, Ethan, it's Chris. I think the key point here, and from the nature of your question, I think you understand this, but I just really want to emphasize that there is no real net bottom line impact to this. So, it's simply a lower sales over the last year, we will annualize this effect going into this next quarter, going into Q4 with an offset in -- really in the freight line in our detailed P&L, if you will. So roughly, how much does that approximate to over the last year, approximately, a couple of points of sales that were depressed. And again, no bottom line impact, simply a shift.

So more than $1 million a quarter. Yes, yes. So good question. Well, thank you, everybody. And look, we're all looking forward to the fourth quarter. We will have significant price increases already showing, but then more coming and all around trying to recapture costs and protect our margins, and we're very focused on it and nose to the grindstone, and we'll be back with you and whenever that is not quite 90 days, probably a little longer. But after we close the fourth quarter, we'll talk to you then.

Thank you. That concludes our call.

This concludes the conference call. You may now disconnect.