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Text: We are still in a virtual environment, so our usual cast of characters will be on the call, but we're all in different places or most of us are anyway.
Susan Kreh, CFO; Molly VandenHeuvel, our COO; Jessica Moskowitz, vice president and general manager of the consumer products division, Fred Kao, our VP of global sales for Amlan International; Laura Scheland, our VP and general counsel; and Leslie Garber, our manager of investor relations, are all on hand today.
And Leslie, please walk us through the safe harbor.
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As you guys know, I took over as General Manager of Amlan International, right around November 1, and we have made some really, really good changes together.
It's been a complete team effort cross-functionally.
We brought in some new players.
I can distill it to people, poultry, clay and target markets.
And let me start with the people.
I mean, Fred and I, Fred Kao, who's our global VP of sales, have worked really hard at building our team.
Fred joining Oil-Dri was an initial badge of validation for the incredible opportunity we have because he's a 20-plus year, very successful career.
He's made great contacts, and people took notice when he joined the company.
And so we've been in the enviable position of being able to attract a lot of talent quickly as these people first got to know Oil-Dri through Fred, but then spend a lot of time with Molly and Hangyu and our team out at the research center, getting to get comfortable with our data that they knew had to have existed because they knew Fred was joining us for a reason.
And it's because this global vacuum that's been created by the elimination of antibiotics in the food chain, has created an incredible market opportunity for Oil-Dri.
So just in this short period of time since November 1, we've been able to onboard Heath Wessels, who is covering all North America for us; Jay Hughes, who is our Americas tech service; , who's covering APAC; and then Dr. Wade Robey, who is our vice president of marketing and product development, who has had a stellar career in the animal health.
We've put out news releases on this, so I encourage our investors, if you miss them, to track them down.
You can just search Amlan, and you'll find our latest news releases.
But we really have created a dream team in general, but in particular, they have incredible poultry experience.
So no means are we walking away from dairy or swine, but we are going to lean heavily into poultry.
Poultry represents about 40% of the $3 billion global opportunity that's been created by the elimination of antibiotics in the human food chain.
And so you're talking a $1.2 billion opportunity, where from Fred to that team that I just mentioned, their -- with a quick phone call, they can get to every level at all the major decision-makers around the world, and we are getting interest like never before.
So it's very, very exciting.
So I mentioned people, poultry.
Why didn't I mention clay?
Because clay is our unique entrée into this market.
We are the only player that has quality to the source.
So we have, as you well know, if you're a long time Oil-Dri investor, we have hundreds of millions of tons.
We have 100 million proven, but we have to equal that amount inferred, meaning we don't even bother doing the drilling because we're not going to need it in any of our lifetimes, but mother nature put it there.
So we have hundreds of millions of tons of clay to choose from, and we have specifically identified a particular reserve that has given us the highest quality and quantity of these animal health products that we're actually discovering new applications for as we speak because the more we understand our mineral, the more beneficial things we realize it's doing in the animals gut and to the animals well-being.
And so we selectively mine these.
We have always a minimum of 40 years reserves in every product line.
So you have no worries.
As this product explodes, we have the capacity to mine and supply this industry.
You look, we may have to spend some capital along the way, but we have the reserves, and that's very exciting.
So our people, our poultry and our clay.
And then, finally, our target markets.
We're going to fish where the fish are.
And 11 markets really are where we think we have a unique position to go after a large percentage of that $1.2 billion opportunity.
My math is it's between $700 million and $800 million of that $1.2 billion, so maybe two-thirds.
Don't hold me to it, but it's, obviously, large enough to dramatically change the financial landscape of Oil-Dri.
And the best part is one of our most exciting markets is pristine because we have stayed away from it.
I'm not really sure why, honestly, but our prior management had decided that the South America and Asia was more important than North America.
But our current team realizes we have a great right to win in America, and we are getting a lot of interest right in our backyard.
It's a language I speak.
It's a currency we trust.
It's contracts that are honored.
And so -- and we don't have to open up new business entities to do business here.
So very excited about the opportunity in the United States, and we are hitting the ground running.
But as I mentioned, things financially were going to get worse before they get better.
We put on a lot of SG&A, a lot of infrastructure.
And while these guys are getting a lot of interest, we are not getting a lot of orders.
We've actually gotten some orders, but not enough to cover the investment we're making in people.
So you're going to see our SG&A continue to trickle up in the short run, but these are all long-term investments for Oil-Dri.
None of them will impact -- it is expected, I don't think I have to qualify.
Laura will definitely want me to do this, I will qualify, that it is expected that none of these will impact our ability to continue our dividend policy.
These are all just using cash flow in a very wise investment pattern for the B2B side.
You'll be hearing from Jessica on the retail side, and we are continuing to really gain share both with our brand and our private label lightweight.
You did see in our news release that short term, we got hit with a lot of cost pressures, all at once and what she's been able to do to offset those going forward.
But none of that was -- none of that pricing was able to impact the second quarter, but the cost certainly did.
So that's my color.
And today, I'm going to recap the second quarter for you.
So in our second quarter of fiscal 2021, Oil-Dri delivered another solid quarter of top-line growth with net sales of $74.5 million, growing 5% over net sales during the same quarter in the prior year.
Both our business-to-business products group, which grew 7%, and our retail and wholesale products group, which grew 4%, contributed to this growth, demonstrating that as Dan said, we are achieving success in two of the key areas of our strategic focus, and those are mineral-based animal feed additives and lightweight cat litter.
Additionally, it was a very strong quarter within our business-to-business products group as all product lines experienced year-over-year growth in net sales.
We are seeing evidence that the focus on our mineral-based strategy in animal health and nutrition products is paying off, with 20% net sales growth during the quarter over the second quarter of the prior year.
During the quarter, we saw the benefit of enhanced distribution of Varium and natural alternative to antibiotic growth promoters for poultry.
We also experienced strong growth in China, Latin America and Mexico.
So an all-around good story for Amlan and the investments that we're making there.
Now switching to other business-to-business products.
Agricultural and horticultural products also had a strong quarter, achieving 10% growth over the same quarter in the prior year, driven primarily by increased sales with existing customers.
And in our fluids purification products, the decrease in sales of our jet fuel purification products that have been adversely impacted by the reductions in air travel due to the global pandemic were more than offset by the growth of our other products as our overall fluids purification products grew 3% in the quarter over the prior year.
This growth was favorably impacted by increased sales to our foreign customers during the quarter.
And finally, our co-packaged cat litter product, which sits within our business-to-business products portfolio, grew 5% during the second quarter of fiscal 2021.
Now similarly, within our consumer products group, cat litter sales grew 6% over the prior year.
We believe that our continued strategic focus on growing our lightweight litter products contributed to this growth in both the U.S. and Canada.
We also experienced increases in private label and branded scoopable litter sales, as well as growth through e-commerce sales.
Our second-quarter gross profit of $18.2 million was down $800,000 from the same quarter in the prior year, representing a 4% year-over-year decrease.
Despite the favorable growth in net sales, the quarter was unfavorably impacted by cost increases particularly in the categories of freight, which was up 13% per manufactured ton over the same quarter in the prior year due to domestic trucking supply constraints that resulted in significant increases in transportation costs.
Our packaging costs were also up 13% per manufacturing ton as increased resin pricing resulted in increased costs, particularly in our jugs and pales, and natural gas costs were up 8% per manufactured tons, which we used to operate kilns to dry our clay.
Overall, our cost of goods sold per manufactured ton was up 8% over the same quarter in the prior year, driven, in large part, by these market-based factors that were partially offset by operating cost reductions and efficiencies during the quarter.
We responded to the significant cost challenges posed by these economic headwinds through implementing mid-fiscal-year price increases.
So all of our products are impacted to various extents.
consumer cat litters particularly impacted due to the amount of freight and resin-based packaging costs that are included in those products.
Switching to our total selling, general and administrative expenses for the second quarter of $13.9 million, they were $843,000 higher than the prior year, representing a 6% increase.
However, the second quarter of the prior fiscal year included a onetime curtailment gain of $1.3 million related to the freeze of the company's supplemental executive retirement plan, which has since been terminated.
Excluding that $1.3 million onetime gain in the prior year, SG&A was down 3% during the quarter.
However, there was also an underlying shift in costs as corporate expenses, including the impact of the fiscal 2020 onetime gain or excluding the impact of the onetime gain of $1.3 million, decreased from the prior year and SG&A costs to support our business-to-business products, particularly the investments that we're talking about in our animal health and nutrition products, grew 26% or approximately $600,000 over the same quarter of the prior year.
This incremental expense is consistent with our commitment to invest in this high value-add product line to drive growth for our future, and Dan did share some of those highlights at the beginning of the call.
Our second-quarter other income of $1.1 million included an $800,000 gain upon the annual actuarial valuation of our pension plan.
So as a reminder, during the fourth quarter of fiscal 2020, the company executed a lump sum buyout for the terminated vested participants in our defined benefit pension plan who had elected to take this buyout payment option.
A majority of the participants that were eligible for this lump sum buyout opted to take it, which contributed to the favorable annual actuarial valuation of this obligation.
And finally, net income attributed to Oil-Dri for the second quarter of fiscal 2021 was $4.3 million, which represents an 11% decrease from the prior year for the cost and investment reasons we just reviewed.
Our financial position remains strong, as is reflected in our balance sheet.
We ended the quarter with cash and cash equivalents of $31 million and have very little debt, equating to a debt to total capital ratio of only 6%.
The one of the primary uses of our cash flow is to fund our trade working capital.
During the first six months of fiscal 2021, our accounts receivable increased $3.8 million, reflecting our sales growth and a shift in our customer mix, including an increase of sales to foreign customers who tend to have longer payment terms.
We also use our cash to fund capital investments in our business, including those required for growth and those required to drive cost reductions, in addition to normal repair and replacement capital.
Because of our strong position during the quarter, we also repurchased 33,594 shares of Oil-Dri common stock for $1.2 million at an average price of $36.09 per share.
So based on our strong financial position, we often get asked if we are interested in pursuing acquisitions.
And the answer is, yes, for the right opportunity.
Because of our low leverage, we are well-positioned to capitalize on strategic investment opportunities that may become available.
So that's my summary for the second quarter.
So yes, at this time, I'd like to open up to Q&A.

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q2 sales rose 5 percent to $74.5 million.

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