Oil-Dri Corporation of America 2026 Q4 Earnings Call

Please go ahead. Thank you, and welcome everybody to the fourth quarter and fiscal year-end 2026 teleconference.

Before we get started, Leslie, will you walk us through the Safe Harbor and also let everyone know who's on the call so they can ask questions?

Yes, sure. Thank you, Dan. Welcome, everyone. Today on the call, we have Susan Kreh, Chief Financial Officer and Chief Information Officer, Aaron Christiansen, our VP of Operations, Chris Lamson, Group Vice President of Business to Business and Strategic Growth Initiatives, Wade Robey, VP of Agriculture and President of Amlan International, Laura Scheland, Vice President and General Manager of Consumer Products Division, Jonathan Blake, VP Corporate Controller, Tony Parker, VP General Counsel and Secretary. Unfortunately not in attendance today is Bruce Pacey, Vice President of Fluids Purification, but Dan Jaffee, our CEO, will be able to answer those questions. Right now, I'll read the Safe Harbor. 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 again for joining us. Dan, I'll turn it back over to you.

Great. Thank you, Leslie. Before I turn it over to Susan, I'd like to make some general comments. My Grandpa Nick used to always say, "Don't debate, demonstrate." I was wondering, how did he get this industry started? My sister Karen's been digging through our archives, and if you don't follow me on LinkedIn, I hope you'll go look at it, because we found some ads that he ran on the front page of newspapers that communicated the benefits of using Oil-Dri versus sawdust, which was very flammable, very strong, compelling advantage. It was interesting that started that. Then Bud Selig, who's been on our board since 1969, his father, Ben, used to always say, "Nothing is good or bad except by comparison." If you look at our year, many of the indices are extremely positive.

You could, if you wanted to, you could look at some of the comparison numbers, and say, "Okay, well, that was sort of flat," or, "That was slightly down." But any kind of perspective of 3, 4, 5 years and you see how great this team is performing and how well we're doing. Then finally, my dad always said, "Earnings are an opinion, cash is a fact." Susan will highlight this, but our cash generation has been fantastic and that's really what fuels the growth and the health of the business. We've never been more happy or positive with how the company is doing. I would say the final thing is, we did give some forward guidance back in the first quarter and second quarter.

We said the first part of F26 was going to be a tough comparison, but that we fully expected to equal or more than make up the distance in the back half. You see the really great fourth quarter we had, which allowed us to do just that, pull ahead, in many key indices, sales, net income, things like that, EBITDA, all were up for the fiscal year. So, very proud of what the team has delivered, and thank you for your questions. We'll spend most of the time answering them, but before we do, I'd love to turn it over to Susan so she can walk you through the results.

Thank you, Dan. Cash is a fact, and I will get into that in a minute. So it's a pleasure to be here with all of you this morning, especially coming off the headline we released that states, "Oil-Dri delivers record annual financial results, including all-time high fourth quarter sales and historic cash generation." Leslie Garber did a really nice job in the press release of highlighting the drivers of our performance. Therefore, like Dan said, I'll keep my comments brief to allow for more time for your questions in the Q&A session. That being said, I would like to highlight that our continued strong performance has resulted in very strong financial position from which we're well positioned to grow. The key words there being strong performance and strong financial position.

From a performance perspective, fiscal 2026 demonstrated the strength of Oil-Dri's diversified product portfolio and efficient operating model, and we will talk about cost reductions in a minute. As we stated at the onset of the fiscal year, and as Dan just reiterated in his opening comments, we knew the first half was going to be a challenge on a year-over-year comparative basis. We noted that although in the first half, we faced a very tough comparison, we expected to achieve meaningful growth during the second half of the year as we gained incremental business and launched new products. The focus team here at Oil-Dri delivered on that forecast, achieving record full-year sales and net income, and closing the year with a record fourth quarter revenue.

That fourth quarter growth was broad-based across both product groups, with business-to-business sales rising 4% to a record $50 million, and retail and wholesale increasing 3% to $79 million. Improved product mix was the primary driver of the growth in the fourth quarter revenue, supported by strong growth in animal health sales, agricultural product sales, and co-packaged cat litter sales, as we had anticipated. While net sales grew nicely in the fourth quarter compared to the prior year, gross profit as a percent of sales or gross margin was under pressure and remained steady at 27.8%. During the quarter, our gross per ton domestic cost of goods sold increased 3% over the same quarter in the prior year, primarily due to higher freight and transportation expenses, which were pressured by geopolitical impacts on diesel prices, as well as reduced capacity in the trucking industry.

This pressure was especially impactful in the Retail and Wholesale Products Group, which experienced significantly higher costs to transport cat litter products, contributing to a 5% decline in segment operating income despite the higher sales. Depreciation and amortization, a non-cash component of our expenses, was also up 6% in the quarter due to the ongoing strategic investments we are making in our business. These increases were offset by the favorable mix and targeted price increases, some of which will get implemented on a lagged basis with some of our customers. In addition, cost reduction and expense management initiatives were a key to holding the margin steady at 27.8%. While gross margins did remain steady, fourth quarter operating income increased by 17% over the same quarter in the prior year, demonstrating the resilience of the portfolio and our ability to manage through a challenging cost environment.

Now, switching gears from strong performance to strong financial position, let us discuss cash and financial flexibility. The substantial cash generated as a result of the strong performance we just discussed enables us to continue to invest in the business and return capital to our shareholders. Cash and cash equivalents reached an historic high of $74 million a year-end, up from $51 million a year ago, marking a significant 45% increase. We generated operating cash flow of $80 million in EBITDA or earnings before interest, taxes, depreciation, and amortization of $93 million, underscoring the growth and the cash-generating power of our portfolio. Back to Dan's opening comments, cash is a fact.

EBITDA is a notable metric for us as we have made the strategic decision to reinvest significantly in our business, particularly in funding infrastructure and growth opportunities in our manufacturing facilities, as well as funding the building of enterprise-wide capabilities such as data analytics and business intelligence. While those investments are funded in cash, as they are put into service, the non-cash depreciation expense that they generate puts pressure on our gross margins and will continue to do so as we have been investing steadily at this rate for about four years now. As a result of that impact on our margins, we do monitor EBITDA very closely to track the underlying performance of the business.