Dan Jaffee - President and CEO Laura Scheland - Assistant General Counsel Doug Graham - General Counsel and Vice President Dan Smith - Chief Financial Officer.

Robert Smith - Center for Performance Investment Ethan Starr - Jim Schwartz - Harvey Partners.

Good day, ladies and gentlemen. And welcome to the Second Quarter 2015 Oil-Dri Corporation of America Earnings Conference Call. My name is Tony, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session.

[Operator Instructions] I would now like to turn the conference over to Mr. Dan Jaffee, President and CEO. Please proceed..

Thank you, Tony. And welcome everyone to our second quarter and six months teleconference for Oil-Dri. And with me in the conference room today is Laura Scheland, playing the role of Reagan Culbertson. Laura is our Assistant General Counsel and Reagan is on maternity leave. So congratulations for baby girl, Lowden.

Doug Graham is here our General Counsel and Vice President; and our Chief Financial Officer, Dan Smith. And so I think we’ll cover the Safe Harbor provision..

Sure. Thank you, Dan. Welcome, everyone. On today's call, comments may contain forward-looking statements regarding the company's performance and future periods. Actual results in those periods may materially differ.

In our press release and 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 evaluating any investment in Oil-Dri stock. Thank you for joining us..

Thanks, Laura. And Dan will you cover the quarter and six months..

Sure. I will, Dan. Thanks. Good morning, everyone. Oil-Dri sales for the second quarter of fiscal '15 were down 7% to approximately $65 million and our year-to-date sales were down about 2% to about $131 million. Our second quarter gross profit percentage was better than the first quarter ‘15 due to improved sales mix.

Our EPS was $0.39 per diluted share for the quarter, was down from $0.60 earned in the second quarter fiscal of ’14. Year-to-date, we have generated EPS of $0.69 versus a $1.01 EPS in the first six months of fiscal ‘14.

Our gross profit percentage for the quarter was approximately 24%, which was comparable to the second quarter of fiscal ‘14 and improved sales mix and a 23% reduction in the cost of natural gas used at our manufacturing facilities helped to increase our gross profit percentage.

However, increased manufacturing, packaging costs adversely impacted our gross profit as compared to the second quarter and the first six months of fiscal ’14. Our Retail and Wholesale business team reported 6% sales, decline for the quarter compared to the second quarter of fiscal ’14.

Year-to-date, Retail and Wholesale sales were flat with the first six months of fiscal ’14. Earnings for Retail and Wholesale group were down for the second quarter and year-to-date compared to the same periods last year. Higher packaging, manufacturing costs along with reduced branded cat litter sales all contributed to the income decline.

On the positive side, sales and income grew for our industrial products which helped both the quarter and the year-to-date values. Also we introduced our new Cat's Pride Fresh & Light Ultimate Care and new lightweight private label cat litter products at the end of the second quarter.

We anticipate these products will provide opportunities for sales growth in the second half of fiscal 2015. B2B sales were down 9% for the quarter and 5% for the first six months as compared to fiscal ‘14. Sales of Fluids Purification products and co-pack cat litter were down for both the quarter and year-to-date.

Sales of Ag products were down for the quarter, partially offsetting the sales declines or improved sales for animal, health and nutrition products. Really the sales reduction one of the primary drivers for the income reduction for the quarter and first six months for the B2B team compared to fiscal ’14.

From a balance sheet perspective, our cash and investment balances at the end of the quarter was little under $14 million, which was up about $3 million from the end of the first quarter fiscal ’15, but down about $6 million from the second quarter of fiscal ’14.

Year-to-date our capital expenditures were up about $3 million from the same period in fiscal ‘14. Thanks. I’ll turn the meeting back over to Dan Jaffee..

Great. Thank you, Dan. And Tony, at this time, we would like to open up the lines to Q&A. As always, I’d like our participants to just ask their most important question first and then go to the back of the queue, so that everyone has a chance to ask at least one question. Thank you..

[Operator Instructions] Your first question comes from the line of Mr. Robert Smith, Center for Performance Investment. Please proceed..

Good morning.

Could you give us some color on what's happening in China?.

Bob, sure. So I would say, a bright spot for the first six months has been our performance in the overall Amlan business, with particular strong performance in Asia in general. No doubt having our feet on the street and real senior management focus with Ron Cravens -- Dr. Ron Cravens living in China now is paying off.

It’s still in the -- I'll call the ramp-up phase but growing nicely and still giving us every reason to believe that was a good investment and will pay off in the future quarters..

Dan, how many on staff now?.

I think about 10. 10 full time..

That’s right..

Okay. Thanks. I will get back in the queue..

Okay. Thank you..

Your next question comes from the line of [Mr. Ethan Starr] [ph]. Please proceed..

Good morning..

Hi, Ethan.

Given the purviews of the competitions lightweight litters have been getting, what we’d be doing to differentiate your Cat's Pride Fresh and Light litters in the marketplace?.

Great question. So we were just at the Global Pet show down at Orlando and I can tell you lightweight with all the rage, it was very gratifying as it’s being the inventors of lightweight litter, that’s all very good. And you are hitting the nail on the head.

Our approach to lightweight is everything in the product has to perform and be something that is helping to contribute to either odor control or clump strengths or low dust I suppose. Those are the major performance attributes.

Our competitors, unfortunately, have taken a tact that says really if we are going to take what is a good cat litter and then dilute it with lightweight fillers. We are going to put stuff in there that does not control odors, does not help to clump strengths and certainly doesn’t reduce dust. It merely helps the scale get lighter.

So they are putting in lighter aggregates in there that don't perform as a cat litter. So we've started a two-pronged approach. The umbrella is light done right, that's our mantra but then underneath that is the science of no fillers added.

And so at the tradeshow, we were all-in lab coats and we were bringing the obvious presence that science matters and we were doing demonstrations, live demonstrations for all the major accounts and got a lot of wows.

I mean, they saw the difference of what happens and we put a lot of these demonstrations out on the web for them to also access on the Internet. So the concern would be that somehow the inferior products that are out there would poison the well that consumers would try lightweight and say, boy! Lightweight don't work.

We are not seeing that at the moment. What we are seeing is that the selling proposition of lightweight is so compelling that it is such a major consumer frustration of how heavy cat litter is that they are staying with it and they are willing to try it and even the inferior products are selling at high prices.

So to me, that validates the proposition of lightweight is and is here to stay and pretty much all the retailers agreed with the general proposition that over time the whole category is going to go lightweight. The whole category in liquid detergent when concentrated and at some point in time, you won't see any of the heavies.

Everyone’s going to have to reformulate and give consumers the performance they want, at the price they want but with the light density..

Okay.

Are they almost available everywhere on the web?.

I think so. I think they're out there. I think they are out. I don’t know what you need to Google, maybe we can…..

Are those topics that are flying but concern is I don’t want people to just give up on lightweight to a private competitor because I don’t like it?.

Totally agree and fortunately at the moment, we are not seeing that at all. The ramp-up rate is continuing to see it. I think we mentioned in the news release that literally 25% of the year-over-year growth in the category is in lightweight.

Lightweight at its current ramp-up rate will pass course -- the core segment in about 4 to 6 months on a running rate basis at its current ramp operate. So we will see how that happens. And for the first time in 20 years, the scoopable segment of traditional heavy scoopable is in decline.

So you are saying people switch to lightweight, which is very gratifying because like I said for last one year since scoopable was launched, it was growing every single period, 2%, 3%, 4%, 5%, 6%, obviously more early on and now it’s actually declining.

And so you're seeing the consumers change and look, the retailers want this thing to change because they can put more units on the truck. They can bring in less trucks through their DCs. It’s easier for their teammates to handle the product getting it onto the shelves.

Frankly what we didn't even realize and they said back to us at the show, it even expands the amount of retail space. They can dedicate the cat litter because the heavy stuff they could never put on the top shelf, because they were afraid of consumers trying to pull that down and get them hammered.

But one that only weighs 12 pounds that can be a top shelf item. 20 pounds, they weren’t putting up there, 12 pounds, they’ll put up on the top shelf. So now they feel like they just got an extra 10%, 15%, 20% of retail space to dedicate towards what is a very high profit, high growth area for them. So the retailers wanted to succeed.

We wanted to succeed and the consumers wanted to succeed. I really believe it’s going to succeed..

Okay. The press release mentioned new product start-up costs for branded cat litter.

Is that machinery slotting or what?.

I missed it, new product, what cost?.

New product start-up cost?.

I mean it’s all the above. It’s certainly on a promotional side or the trade side that the slotting that it takes to get the consumer or the retailers to put it on shelf and display it and so forth and so on. And then the plans obviously, it’s a ramp-up in a learning curve and you get better over time.

So we’re not going to be as good today as we’re going to be a year from now and two years from now. So yes it’s all the above..

Okay. I’ll get back in the queue..

Thank you..

[Operator Instructions] Your next question comes from the line of Mr. Robert Smith, Center for Performance Investing. Please proceed..

Yeah.

So then, what are the prospects for private label lightweight?.

Great question. So I think I mentioned this just formally that -- on previous calls that we've had about a 2 share historically and very low profitability because we really weren’t basic in the raw material that made up the historic private label lightweight, private label scoopable segment, which is sodium bentonite.

So we would have to source it like our competitors, a lot of them. But it was not something that that we were really operationally excellent at or had a low cost or really at it. So it was very low margin for us, so 2 share. We've already got commitments and/or are shipping retailers that represent 19% of the category. So what does that mean to you.

That means, if 100% of the category went lightweight, a scoopable private label went lightweight, we’d have 19 share, what isn’t down weight yet.

So really what you can say to yourself is we have a 10 share because we've gotten a lot of the heavyweight business along with the lightweight, because now we’re supplying the lightweight and they didn't want to add two suppliers, so they gave us heavyweight business too and we’re hoping we’re making money on the heavy.

But we’re making good healthy margins on the lightweight, because we’re basic in it. We have plans all away from the west to the east coast. So we have a low-cost high-quality business model. And so I took a little look at the top retailers, the top 12 retailers. I didn’t go through whole laundry list.

But the top 12 retailers represent about 68% of the private label scoopable category, okay. And of those, like I said, 19% were already shipping or are committed to ship, we’re just looking on the packaging and when they are going to cut it in and so forth and so on. 22 more percent were pending and feel good, real good about it.

We’re getting all the signals that we’re going to get it but we don't have it yet. So you got 19% firm, I call that green; 22%, I sort of call it orange, if you want, another 22% we play on and then only 5% have said no to us. So we've lost 5% of the 68%, we still are in play or have commitments from 63% of the 68%.

Does that help?.

Yes. And I assume that shipping began very late in the quarter.

We see the preponderance of this in the third quarter?.

No, not preponderance, you'll see a continued ramp-up. Your first part of your sense was correct. Very little of it hit the quarter in the second quarter. There's more ramp-up going on in the third quarter. We’re expecting more ramp-up again in the fourth quarter with other green accounts that are committed.

And then a lot of what I'm talking about in the yellow and so forth category that’s not going to hit until fiscal ‘16..

Okay. And then just circling back to animal health and nutrition? In prior calls, we’ve talked about the trials that products have been involved with.

And I was wondering if you can give us an update on that?.

I really can't. I think what I’ll do is, I’ll commit, they have Ron Cravens, I think was on that call in particular and I'll commit to having him come back and give you details, because for me to give it to you second or third hand, I’ll just get myself in trouble..

On the next call?.

No..

No..

I don’t know, I mean, he is in China right now. So, I mean, I’ll work on it, Bob, look, I’m not trying to duck you, I’m better off getting you the right answer. But so maybe on the next -- so hopefully in the next call, not the next call, the one after that, let’s commit to that..

Okay.

And as far as the geographies go away, was the strength more apparent than in this past quarter in animal health and nutrition?.

Asia, I mean, clearly, Asia was very strong, where we have direct and now we’ve try to replicate the model of where we don't necessarily have direct employees, but we have dedicated employees through an agents in some other Asian markets and it's working very well. So having a physical presence there is absolutely helping us grow that business..

And we should see further strong growth throughout this fiscal year?.

In animal health?.

Yeah..

Yes..

Okay. All right. Thank you..

Thank you..

Your next question comes from the line of [Mr. Ethan Starr] [ph]. Please proceed..

Yes.

Can you identify any of the customers for lightweight private label or you not care to do so?.

It’s sort of somewhere in between. Some of the customers we have a confidentially obligations, so until they become material in the eyes of the SEC, we really can't disclose who they are..

Okay..

But I do think, I’ve told you that there are numbers of them in the top 12 and I’ve also -- let me give -- put a little more meat on the bone here. I have told you, our approach to lightweight is to have nothing but clay for -- absorb the mineral in the product..

Sure..

So if you go out to the retailers, there’s only one that's not taken us, like I said, of these top 12. And you just look at what they're selling. The one who didn't pick us, pick the company that is blending recycled newspaper shreds into the products. You can literally see red and blue and yellow newspaper in the product and it doesn't perform.

The newspaper doesn't perform. The clay they’re putting in does, but they’re diluting the performance. Everybody else, when you go on shelf and looked at it, you'll see clay and you’ll know we’re making it..

Interesting..

So. Yeah. So I’ll let you do that. It will be a fun little mystery, yes, scavenger hunt. So you'll know instantly who we are doing and who we are not doing..

Okay. So there are people who have not been -- actually I am really surprised by that..

I was stunned and it’s actually an account we have a good relationship with. They just decided to go. They thought light and their mind is more about recycled than it is about performance. So they were leaning towards. We’d rather see recycled newspaper shreds in there that's what the light customers going to want. I don't agree with that.

I think that’s an alternative approach and the mainstream customer wants a performing lightweight litter..

Sure. Understandable.

I think there were -- I’m not sure they have this right, but there was a project to add capacity in Ochlocknee, I think maybe for Fluids Purification, is that done?.

It is in the final stages. It is -- we are probably thinking it’s going to come online….

By August..

… by August 1st to begin with our new fiscal year..

Okay.

In light of the, I guess, better crop this year for soybeans makes sense to have more capacity? I mean, you never know crops going to be like but it seems by capacity that there was sales were down in the field area?.

Well, the beauty --look, if we had a crystal ball now, if we knew it was a crop but it’s a cyclical thing that’s what we tried to point out.

So, yes, if for this cyclical change becomes a permanent change and they never ever need to use the same quantities of bleaching earth that they used in the past then no, we’re not going to need this for a while. It’s still a growing market. As the world continues to want to eat more like western civilization, they want more and more processed oil.

But we don't believe that. We don’t believe that all of a sudden what’s been cyclical forever is now going to become a permanent change. So next year, all of a sudden, the crop could be bad and all of a sudden, they could be needing a lot more clay. And we’ll look like the smartest guys on the planet, so you never know..

Okay.

Roughly, what percentage of the time do you have crop like this past year that was better than average or really quite good?.

I don’t know..

Okay..

I really don’t know. To me, it seems like it’s every four years or something like that. I remember this happening but I don’t remember it happened last year or the year before. So maybe once every four, five years it seems to go this way. But that’s just me talking..

Sure. It could be different. Okay.

And I assume the pricing of that is better than average?.

The pricing on…?.

Yes.

Better than your average ton?.

Let’s see. So it probably represents our average pricing. The margins tend to be a little better. I mean, you can definitely make that conclusion. I mean as you guys will know, I mean the majority of our business is in cat litter and yet the majority of our gross profit is in B2B..

Sure..

Clearly the B2B have always had higher margins than gross margins than the cat litter. So yeah So, I mean, bleaching earth has always been a healthy product line for us..

Okay. I’ll get back in the queue. Thank you..

Thank you..

Your next question comes from the line of Mr. Jim Schwartz of Harvey Partners. Please proceed..

Hey, Dan.

How are you?.

Good, Jim.

How are you doing?.

Good. Thanks. Could you just paint, kind of the revenue opportunity in private-label, lightweight private-label? I mean you talked about the percentage that you're targeting.

What’s the long-term revenue opportunity here for Oil-Dri?.

Yes. I guess I'll leave you guys to water and then you guys are going to have to make your own conclusions. But I mean what I am looking at is the total private-label scoop segment, this is in the United States, all outlets at retail. For the last 52 weeks is $245 million, okay.

I will tell you based on my personal experience, but there's no way of knowing what this number is in exactitude, that they tend to average about 40% margins. So if you take 60% of that number, you're almost at a $150 million. That's what's available at wholesale to manufacturers to compete for, okay..

Yes..

That’s in revenue. And as I said, historically, we had about a two share and made very little money. So you’d say maybe you were selling $2 million, $3 million a year of that stuff and you weren’t making a whole lot of money, wasn’t having a big financial impact. So, we've already got commitments from accounts that represent 19% of the category.

So if you set yourself what if the whole category goes lightweight, okay, then 19% of that number, if it doesn't grow private-label and I actually think it’s going to grow the private-label segment because I believe we are giving the best quality that private-label’s ever had. It's not even national brand equivalent.

When you cut against national brands, it does better. But let's just say it holds its share. So you take 19% of that and instead of getting $3 million in sales, you are at $28 million in sales and instead of making no money you're at good margins, good healthy margins, good Oil-Dri margins, okay.

So that's just on what we've already presented to and have been committed. But as I said of the 60 -- the top 12 accounts represent 68% of the market. 63% of them have either committed to us or given us a signal that they are going to commit to us or we are on the early stages, but everything seems to be moving in the right direction.

So are we going to get all that? No. Maybe you say what you are going to get the 19% you already got. Let’s say you get three quarters of the ones where you feel really good, so it’s another 15 points and now you are at 34. And let’s say you only get a third of the ones that are little farther out, so you are going to get seven more or something.

You get a 40 share. We will now do the math. So now if you have a $150 million market sort of, and we end up with 40% of it, now you are at $60 million..

Yes..

That’s a big number. At the same time, our brand is growing and we've always known as a strong synergy between our brand and private label partners. When we're doing the private label, we tend to do better with our brand of those accounts because the efficiencies are better for them.

They can order pallets instead of full truckloads of our brand and we are a partner. So they are more likely to listen and want to participate. So it’s a huge win opportunity. It’s all moving in the right direction. I would say if anything it’s had a negative impact on earnings so far, that’s just me talking in general.

But if we’ve had to spend all these ramp-up costs, all the things we are doing and we’ve had very little shipment thus far. So the best is yet to come..

Yes. I mean it looks to me like just the progression of, I mean, our gross margins should -- just from reading the kind of the words in the press release, it sounds like gross margin should benefit a bit at the back half of the year but also at some point -- yeah, you are talking about potentially 25% sales boost just from this private label.

I mean all these initiatives you have been taking that have been all cost and no revenue. At some point, we’ll cross over to be revenue with not as much as cost. Fair to say..

Very fair to say. Clearly, when you have to keep investing some capital to keep up with this….

Right..

…this $50 million, $60 million as it starts to commence. I would say as you are doing your models, you could -- if you wanted to say look I’ll just guess that this stuff will be average margin to Oil-Dri. So they’re making 22%. Let’s say they are making 22% on your $60 million.

I’m not saying where we are, I’m just saying you’re doing your models whatever. But if you look on net income, I mean, we’ve been making anywhere from 4% to 5% to 3% net income. And so if you instead say, okay, that’s the gross, but this stuff is private labor. There is no marketing beneath it..

Right..

There is maybe, right, you throw us a small percent commission, where we have a broker put 1% or 2% commission again on that. So if you are making 22% and you are paying 2% in commission, you’re dropping 20% to pretax.

All of sudden with a 28% or 30% tax rate, you could be showing 14% net income on this stuff, when the company has been historically making 4%. So you will start to see what they could do to the bottom line..

Yes. That’s -- all right. From your lips to god’s ear, sounds good. Dan, thanks very much. I’ll say the hard work is starting to payoff..

And look, you guys have been -- everyone on this call have been loyal long-term supporters. And we don’t give forward guidance but I felt, it was important to kind of give you a glimpse behind the curtain here. So you can see why we're so excited about it. It could all be nothing. I got to say that and we’ve given the safe harbor.

But you got a -- you’d have to convince yourself that lightweight is not going to take hold and nobody believes that at the moment.

And then you’d have to say okay, somehow lightweight takes hold but Oil-Dri is got the largest body of reserves and well distributed quality and quantity throughout United States, somehow doesn’t participate in the market they've already been participating in for the last 60 years. I mean, it’s really -- you know me, I get excited about anything.

But I'm very excited about this opportunity. It fits with who we are..

Okay. Thanks again Dan..

Okay. Thanks..

I’d like to thank everyone for participating in the question-and-answer session and now turn it back over to Mr. Dan Jaffee for closing and any or additional remarks. Thank you..

Great. Well, thank you, guys. And look I think I summed it up well there at the end of my response to Jim. We were very excited about the future and we will be up to catch you at next quarter. If Ron Cravens is in the country, he’ll participate, if not, I’ll make sure he is in the country for the next one.

So in the mean time, be safe and thank you very much..

Ladies and gentlemen, thank you so much for your participation in today's conference call. You may now disconnect. And everyone have a great day..