Good day, ladies and gentlemen, and welcome to the Oil-Dri Corporation of America Q3 2014 Earnings Conference Call. My name is Lisa, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr.

Dan Jaffee, President and CEO. .

Thank you, Lisa, and welcome, everybody, to our third quarter teleconference. Joining me in the conference room here in Chicago are Dan Smith, CFO; Doug Graham, VP and General Counsel; and back by popular demand, Ronda Williams, who will be covering our Investor Relations and our Safe Harbor.

So Ronda?.

Right, thank you. It's great to be back here. 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 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. .

Thank you, and don't panic, Reagan is just on vacation. We didn't punish her for this quarter.

Dan, do you want to take it through?.

Sure. Good morning. Oil-Dri sales for the third quarter and the first 9 months have benefited from enhanced private label cat litter business from the MFM acquisition and improved branded cat litter sales.

However, our earnings reflect our long-term promotional investments in our consumer brands; continued packaging, freight, material and fuel cost pressures; and some weakness in our B2B area. Sales of $67.4 million for the quarter and $200.3 million for the first 9 months reflected solid business growth over the same periods last year.

Our EPS was $0.10 per diluted share for the quarter, which was down significantly from fiscal '13's quarter EPS of $0.46. The quarter's results book brought our year-to-date EPS to $1.11 versus $1.40 for the same period in fiscal '13. Our retail and wholesale team reported strong top line sales growth for both the quarter and the year.

Overall, cat litter sales increased about 18% for the quarter with both private label and branded business showing improvements. However, the Retail and Wholesale Group reported a loss for the quarter due to increased costs and our continued investment in advertising and promotional spending.

We continue to expect that our advertising and promotional spending for the fiscal '14 will be greater than fiscal '13. .

In the B2B area, quarterly sales for B2B team was behind the third quarter of fiscal '13 by about 8%. Our Ag products reported a 38% drop in sales, driven primarily by a reduction in business with our Corn Rootworm formulators. Our animal health business was also down, but our Fluids Purification product sales were up for the quarter.

The combination of reduced sales and increased costs adversely impacted the group's income for the quarter. The quarterly results led to 9-month income amounts that were less than the year-to-date values for fiscal '13. Our gross profit percentage for the quarter was down roughly to 21% as compared to the 26% reported in the third quarter fiscal '13.

Our gross profit percentage for the first 9 months was approximately 24% versus 27% last year. We have experienced increased packaging, freight and material costs throughout fiscal '14. The cost of natural gas used in our manufacturing processes increased 25% for the quarter and 30% for the first 9 months as compared to same periods last year.

Increased manufacturing labor, mining and hauling costs have all been seen in the quarter and the year-to-date. Finally, private label cat litter products generated lower gross profit per dollar sale. .

We remain strong from a balance sheet perspective. Our cash investment balance at the end of the quarter was about $20 million, which was down about $20 million from the third quarter of fiscal '13.

The decrease was driven in large part by the approximate $13 million expenditure on November 1 of 2013 for the asset acquisition of MFM Industries Incorporated. Finally, we continued our strong dividend payments to our stockholders with approximately $1.2 million paid off during the quarter. .

Thanks. I'll turn the meeting back over to Dan Jaffee. .

Great. Thank you, and as always, we'll open it up to Q&A. We encourage you to ask your most important question first, and then go back to the end of the queue so that everyone can get a question asked if they want to. So Lisa, let's open up the question-and-answer line. .

[Operator Instructions] And your first question comes from the line of Ethan Star. .

Just wondering, you've appointed a new Chief Operating Officer in early April. I'm just wondering what's behind that, and could you give us a little bit more flavor for that? And is he filling a traditional COO role or a different role. It'd be just helpful to know that. .

Well, it's a great question because it's a significant turning point in our organizational history. And probably the best way to answer it is also to segue into something I definitely want to cover, which is the continued success of our Fresh & Light brand.

As you know, that's -- I came up through the cat litter side of the business, and I'll get to those details at some point in the call, but that's an area that with Paul Ziemnisky, I wanted to be able to spend a lot of time.

Paul is our GM, but it's, obviously, this is something I've spent 20-something years watching happen in the launch of lightweight litter and the revolution that's really taking place right now in the United States on that.

And so, what Mark Lewry is doing, and he's got a wealth of experience, I've competed in and around Mark for 20-some-odd years, so we've always had a mutually respectful, healthy competitive relationship, highest integrity, highest skill set. And so, he's come in and taken all of the nonconsumer stuff away from me. So he's got all the B2B.

So our animal health, our Ag products, our Fluids Purification, our B2B marketing, all of that reports now into Mark, and that's allowed me now to spend really the bulk of my time and energy on what we're calling this lightweight tsunami. .

Your next question comes from the line of Robert Smith. .

So my interest in the company is long term, and I'm not interested in the next quarter. But I just want to preface my comments by saying that in the past, it seems that a spoiler has kind of appeared when unexpected and that happened for me here in that the only thing that really concerns me is the decline in animal health sales.

I thought that this was really a secular trend upward, and I was really taken aback and surprised by this, and I'm wondering if you can really give me some color and dig down and just tell me what just happened here. .

Yes, Mark, it's a great question. And I share your concern. It's a small entity that's growing rapidly, but then in any short period of time, you can see big fluctuations when a couple of things hit. And what hit really was -- it depends on where you want to go, but in South America, we had a lot of inventory out there supplying a major customer.

That major customer shifted the product they're taking from us, they're still buying from us, but now we're stuck with this big inventory hangover and we've been trying to work out of that. So not a lot of new sales coming out of South America, which was a horse for us. Instead, it's trying to work out inventory of a product line.

Over in Asia, and I was just there for the grand opening, it's really a lot about putting a lot of expense and energy into getting something started but that it isn't yielding a whole lot of benefits in the short run. But I don't think that's a surprise.

I mean, it's anytime you start an entity from scratch, you're going to -- your expenses are going to get out in front of your revenues. I can tell you, though, the team is extremely experienced, focused, excited. 50% of the world's pigs are in China. Literally, 50%.

And our Calibrin-Z is our highest-value product, and it's the best product on the market for zearalanone binding, which is the mycotoxin that impacts pig production. Give you some random stats that I learned over there, but it really shows you that the future for our type of technology is very bright. And don't quote me on this.

You got an accountant who's also a cat litter salesman now talking to you as an animal health DVM. But that never stopped me in the past, and it won't stop me now. So my understanding is the sow is the most valuable animal on the farm because it's producing the piglets and that's really where you want to maximize your efficiency.

And so, the average sow in the United States is yielding about 22 piglets a year, give or take a piglet or so, let's say, because I saw a bunch of numbers thrown at me. But it's north of 20, and that's due both they have more piglets per litter and they get more litters in, in a year.

And so, you combine that together and their -- they're yielding 22 piglets a year. The average sow in China is yielding under 14, it's about 13.5 piglets a year. So you can imagine, you got 1.2 billion people, you got 500 million pigs in China and they're very inefficient.

So they're absolutely heading down the path of anything they can do to improve their production of piglets per sow is -- they're not going to get there by throwing more sows at the equation. They're not going to get there by throwing more land at the equation. They're not going to get there by throwing more farmers at the equation.

They're only going to get there by being more efficient. And so it isn't just mycotoxin binding, although that's a big piece of the equation. It's water management. It's land management. It's all sorts of things.

But we were sitting down, we made customer calls, and we're sitting down with nutritionists and people that are well engrained in the Chinese food production industry, and they get it loud and clear. And so, we're there at the right time. How high up that is, I don't know, but I share your concern.

In the short run, the expenses are going to eclipse the revenues. But we almost can't help but win in China because our products work, our people are focused. And it's like that old thing they taught me in MBA school, they asked Willie Sutton, the bank robber.

They asked him, "Why do you rob banks?" And he said, "Because that's where the money is." And it's the same thing, why do you open an office in China when you're in the animal health business? Because that's where the pigs are. That's where 40% of the world's feed production is. I mean, they're #1 in so many categories.

So did I answer your question at all?.

You really didn't because just circling back, so -- for me, it was a question that revenues or dollars were down 11% in animal health.

Are you just telling me that there was an inventory adjustment in South America?.

One of our key customers in South America had quite a bit of inventory holdovers, so there wasn't a lot of new sales this year. .

Compared to 1 year ago. .

Compared to 1 year ago. .

It's a small business. It just is. So you're going to see big, wide fluctuations. You may see them in quarters where it's up 50%, and that doesn't mean it's going to be up 50% every quarter. It's just working off a small base. It's really is -- are we fishing in the right pond? And that was my way of telling you we are.

But did we pull any fish out this quarter? No. So you're right. .

[Operator Instructions] Your next question comes from the line of John Bair. .

I -- in the last couple of quarters, and it's kind of historical, I guess here, the increase fluctuations in the cost of natural gas and so forth. And so, my question is sort of twofold here.

I know with prices having gone up, that's obviously an impact, but how much additional gas usage in volume sense have you incurred with the acquisition of the Florida assets? And how much is that really coming into play here? Does my question make sense?.

Okay. Yes, it definitely does. We've reported our annual tonnage pretty much at the end of every year. And last year, we did 815,000 tons-ish. And you can do the math because we sort of said how much sales revenue we're generating in all of this.

So let's just say you've added about 10% of our tons to that 815,000, but you couldn't straight-line that and say, you're adding 10% to your natural gas because cat litter is what's called RVM, which means we don't have to dry it twice, we dry it once. And so, it uses less fuel than an LVM product.

So you can probably say 5% to 6%, and I think you'd be pretty accurate. .

Okay.

And that kind of leads into a parallel question, such as how -- what are you doing about -- or is there anything further you can do with regards to your plant efficiency? In other words, are you able to run -- cure more cat litter since your overall volume production is up? Is there some efficiencies there that you're working on? Or are you pretty well where you think you can maximize that at this point?.

That's another great question. I mean, when we took it on, it was a Lucille Ball skit. There's no doubt about it. We took this big acquisition.

We dropped all this tonnage into our existing facility, so we had to throw a lot of people at it and just made sure we fill the orders because these accounts -- Publix, Dollar General, Meyer -- They were absolutely partners of us before and even bigger partners of us after. So we had to make sure we were supplying them.

Now we're getting to where we absolutely -- our goal is by 8/1 to really get those efficiencies in place where we start to have it be incrementally more efficient than it was historically.

However, as I say that, anytime you're growing rapidly in a certain area, it's very difficult to do 2 things, which is both grow rapidly, meet all orders as they come, keep your supply chain solid and cut costs and focus on what we call munda [ph] or waste and driving that out of the system.

So I mean, maybe it's a good sign because I want to get this out on to the call whether anyone is going to ask me about it or not.

So John, if you don't mind, can I segue into our cat litter business and how the results have been going?.

Yes, absolutely. And I guess, where I was ultimately driving with this was can -- hopefully, there'll be a tapering off of the impact as you get the stuff -- the new production and so forth kind of under control. But I mean, I recognize that gas prices where I track them very closely as well.

So I understand that that's pretty well out of your control, and I hope you don't ever go back in and hedge like you did a number of years ago. I think that was post-Katrina, if I'm not mistaken. So anyways, yes, go ahead and segue in, and then I'll get back in the queue. .

Target, Walmart, Kroger, you name it. So you're getting a good, good healthy sample size. So the category grew at 5.6% in dollars for the 24-week period, which is a healthy category. And that growth is driven by lightweight cat litter. So Cat's Pride Fresh & Light, which you guys know we launched 3 years ago, our distribution was up 5.6%.

So that gives you an idea. If our velocity stayed the same, if we sold the same per point of distribution and we grow our distribution by 5.6%, you would say your sales would go up by 5.6%. Anything above that and you're increasing your velocity, and even below that and you're really playing a churn game.

You're just putting on new real estate, but you're losing more as you put it on and you're not growing. So again, up 5.6%, which is exactly what the category dollar sales work. For the 24-week period, Cat's Pride Fresh & Light Dollars were up 56%, 5-6 then the decimal point, not 5.6%; 56% for the 24-week period. It's astounding.

I mean, I can give you the 4-week, the 12-week, the 52-week, they're all in line with what you would want to see. So I like that that's sort of a half year because you really can't juice it too much by 1 promotion or 2 promotions, but it's not so long that you're missing what is a very important trend line.

So the lightweight phenomenon is here, Tidy Cats is into it. We heard Cat -- Fresh Step is going to be launching, and this is something we started that we've got a lot of intellectual property around, we've got a lot of mineral reserves around, and we got, at the moment, the consumers bet is -- betting every week on this.

We've got the best lightweight product. It's the best blend of performance and lightweight. We now call it a hybrid. It's sort of like the Prius. Yes, you're going to sell a few Volts and you'll sell some Teslas, but the dominant winner in the car market is the hybrid. It's sort of the one that does both.

It has performance and you're getting a good job in gas mileage.

Well, that's what you're getting out of Fresh & Light because it is 25% lighter than the pure sodium bentonite players out there, so there's a huge carbon footprint impact for the retailers, the efficiency impact for the retailers and then a real noticeable difference for women 25 to 54 who are our demographic purchaser of cat litter.

When they go and take cat litter home, they want it lighter, but guess what, they don't want it too light. I encourage you guys to go out to Amazon, go out to walmart.com and read the reviews on Fresh & Light, and then read the reviews on the other guys. And you'll start to see a dramatic difference.

We're getting rave reviews, and that's why we're growing so fast. Some of the other guys have gone too light, where their density is below 30 pounds a cubic foot. So that we know at that point, migration out-of-the-box or what's called in the industry as tracking goes way up. And so they're getting a lot of complaints on dust and tracking.

The stuff is ending up all over the house. So we believed it, and the market is proving it, we found the sweet spot. You want light, you don't want too light and you got to have performance. And so I wanted to make sure you guys who are long-time investors realize the investment we're making in trying to feed this tiger as it's running.

You got a tiger by the tail, you got to let them run. But it's working. And it's working in a big, big way. Lisa, I'd like to open it back up to questions. That was sort of my little Cat's Pride Fresh & Light soliloquy. .

Your next question is a follow-up from the line of Ethan Star. .

Very exciting to hear the news from Fresh & Light.

And can you elaborate a little bit more on the -- there's currently a new product for the pet specialty stores?.

Well, you've got to be more specific. There's always new products in the pet specialty stores. .

Okay, that was mentioned in the Q, so... .

Oh, our new product. I thought you meant a competitor's. I thought you're saying you've spotted something, which -- because you do a lot of retail. Yes, we've got a specific product that we've tailored for the pet specialty. It's doing well right now.

Advanced and -- just all I can tell you, it's outperforming our expectations, and I think it's meeting or exceeding PetSmart's expectations. It's been a positive turn of events. .

Okay.

Is it considered a Fresh & Light derivative or not?.

I don't know, so I'm not going to answer that question. I don't know how they positioned it, and I don't remember the final formula, so I'm not going to answer the question. I don't know. .

Okay, could I do a quick follow-up?.

Sure. .

Just for a different thing, however.

How is MD-09 doing?.

Okay, well, it's doing very well, actually. This is all about what are known as wet droppings, which is basically chicken diarrhea and a subject near and dear to my heart.

And I can tell you, when I was in Asia, for instance, we have a big distributor and I don't want to get into too much specifics, but they've been using MD-09 [indiscernible] into the call because the product works very well and then once they sell the MD-09, they've been able to sell to A and Z on the back end to them to be able to solve the mycotoxin problems.

So it's been a 2-for win for us. The product itself is doing well, but it's also been a great sort of support to solve the problem that everybody knows they have, which is visual. The mycotoxin problem, everyone kind of gets it, but it's the things [ph] around it, it's difficult. I mean, I was so -- if my sows took this, would I get 13.8 and not 13.4.

There's no guarantees in life. There's a whole bunch of different variables that go into production. But wet droppings is visual, it's obvious, you use this product, the wet droppings go away and they can see the benefit. So we're very happy with MD-09. .

Okay. Just one last thing and that's that I would hope for another dividend increase this year. .

I'm sure you and my family will all be in line for that one. So we'll -- as you know, we take that up at the June meeting every year. .

Your next question comes from the line of Robert Smith. .

So the capacity and expansion for Fluid Purification, how much would it increase -- the capacity increase?.

Interestingly enough, you got a 2-for going on there. So when we hit the wall on capacity, it really forced us in a greater way to focus on the efficiency of the existing mills. And then now we have the new mill coming on, so joint total capacity and I'm going to say 33%. .

Okay. So now it's third mill, so by nature it's 1/3, so. .

Yes, right, yes, well, [indiscernible], but I would go 33%. .

Okay, and the comment about the sales of Agsorb and Corn Rootworm, can you just give me a little color on that? What's going on there?.

I talked to our General Manager, and he said it's twofold. There really are only 3 or 4 Corn Rootworm major customers anymore. The ones we have are actually down a little bit because their business is down, but we actually lost one, too. It was a price-type bid thing.

And so, it was down not just because the market is down, we also lost share in the Corn Rootworm business this year. So that was disappointing because that was the exact question I asked them. And we're doing everything we can to try to get it back. .

Okay. And is there anything you can say about new product development at this point? You said you had things on the burner for next fiscal year and beyond. .

No, we do. We absolutely do. And no, I would say nothing that -- that's ready to be publicly disclosed at this point. .

So all the points that you enumerated that added to increased costs for the quarter, what's the totality of that? Is there a number that -- so we could -- I could kind of back it out and just say, what would have happened if that money had not been spent?.

Well, Robert, overall, gross profit went down 5 points, so there's a lot of factors going on. We tried to list them out in the Q in terms of percentages. .

I know you did, yes. .

Yes, but I mean, you got a fairly substantial drop. Packaging is up, freight's up, material is up, fuel is up. To John's earlier question, that fuel change is not a usage change, that's a rate change. So... .

For example, the MFM thing was a onetime deal, I mean -- so you can back that out and things like that, I mean.

The additional incremental costs for marketing of Fresh & Light?.

Yes. We usually disclose our advertising spend at the end of the year. It's in the K. We're saying it's going to be higher than fiscal '13, and I think that's where the guidance we're providing at this time. .

And for 9 months, it was higher also?.

It was higher. .

Okay, good, and you reminded me of a good point that I definitely want to get out there, which is, we are going to be going out and already talking to our customers about price increases because costs are going up, and every year, you get farther and deeper, it's the nature of the clay business.

And every year, pretty much, regulations get in and on to the books. I can't remember any ever getting taken off the books. So every year, it gets more and more complex and expensive to mine and process in the United States. And then with natural gas on top of it, there's no doubt, everyone in our industry is experiencing the same thing.

So we're out there raising prices all effective 8/1, 9/1 type stuff. And so, that hopefully will help repair some of the margin damage we saw here in the third quarter and as we finish the year. I think we're pretty much out of time.

If we had any other new questioners who didn't get to ask anything, but -- if not, I think I'm going to just say, look -- Lisa, are there any new questioners?.

No, there are not. .

Okay, well then, listen, again, very much appreciate your guys' patience and understanding that -- we like to think of ourselves as bigger than we are. We are a small business. We're really only doing $250 million in sales.

And when you get a couple of big things all happen at the same time, i.e., building a new plant in the Fluids Purification side, opening an office in China and growing your consumer business, this brand that you launched.

So I mean, this I can tell you on a 52-week basis now, at retail, for 70-some-odd percent of the market, it achieves $35 million in sales. This is something we launched 2, 3 years ago. And you guys can put your own multiple on what a consumer brand is worth in terms of a multiple of sales.

But it definitely -- when they get sold, not that we're selling, you just want to value it, they command a higher ring than private label sales or something like that. And for the first time in, I want to say, 15, 20 years, we're no longer #5. So we leapfrogged above the #4 player, and we are now #4. We'll see how all this shakes out.

But if you take the growth of the category and then say what has Oil-Dri's share been of that growth, it will make us a major, major player in this category. So what that means is, if the category started over 6 months ago and you say, okay, what percentage of the growth of that does Oil-Dri represent, We'd be 1 of the top 2 players in this category.

And so, will it keep playing out that way? Well, that remains to be seen. But at the moment, the consumer is voting, and it's very exciting, so we got to keep feeding this thing. It's very hard to monetize your return on investment in the short run when this is happening.

But eventually, what happens is the sales will plateau, we'll get the spending, it will dictate what the appropriate level of spending is, and then, that's when my family and I, as the biggest shareholders, expect there to be a bottom line payout, but in the short run, we're very comfortable with continuing to let this thoroughbred run because it's winning in the marketplace.

So thank you. We will see you and talk to you again at the end of the fourth quarter, our fiscal year end. And until then, be well. .

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day..