Good morning, ladies and gentlemen. And welcome to the Second Quarter 2016 Oil-Dri Corporation of America Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will facilitate a question-and-answer session [Operator Instructions] I would now like to turn the conference over to your President and CEO, Dan Jaffee..

Thank you. And welcome everybody to our second quarter and six month teleconference. I'm going to turn it over to Dan Smith. We've got Doug Graham here, and Reagan's going to do Safe Harbor as always..

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 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..

Dan let's cover the six months and quarter and then I'm sure everyone online is going to want to hear about what's coming down the road. So let's take a look back first..

We’ll do Dan, thank you. Good morning to everyone. Oil-Dri reported another strong quarter. Our earnings per share of $0.53 per diluted share of the second quarter were approximately 36% more than the second quarter of fiscal 2015. The quarterly results were driven by improved product mix, lower cost and higher selling prices.

The positive results were partially offset by increased SG&A expenses. The increased earnings were primarily a result of improvements in the retail and wholesale segment. Earnings for the first six months of fiscal 2016 were up over 80% from fiscal 2015.

Our sales for the quarter and for the first six months were up 1% and 2% respectively over the same periods in fiscal 2015. Our gross profit margins were about 29% for the quarter and 30% for the first six months of fiscal 2016. Improved selling prices and product mix only with lower natural gas packaging and freight cost all helped our gross margins.

Our retail and wholesale team generate increased sales for both the quarter and on a year-to-date basis. Our branded and private label lightweight litters have contributed to the growth. The segment has achieved income values for the second quarter and for the first six months as compared to the same periods in fiscal 2015.

The income growth was driven by favorable product mix, lower trade spending and costs.

However, as we look to the second half of the fiscal year, we believe that our integrated marketing campaign for our new and improved Fresh & Light Ultimate Care lightweight cat litter will significantly increase advertising expenses and reduce earnings in the third and fourth quarters of fiscal 2016.

B2B had a 2% sales decline but nevertheless achieved a 2% profit increase in the second quarter. The segment sales and profits were up for this first six months. Our Agsorb and Verge product lines helped drive the profit growth for both periods. The segment also benefited from lower cost.

From a balance sheet perspective our cash investment balances have grown about $6.6 million from the fiscal 2015 yearend totals. The increase was achieved despite spending over $11 million on capital, dividends and debt payments during the first six months of fiscal 2016.

We paid out about $2.8 million in dividends for the first six months of fiscal 2016. Our dividend yield would be above 2.2% based on the 1-29-16 closing price of $37.50 per share and our latest quarterly dividend of $0.21 per share. Thanks, I'll turn the meeting back over to Dan Jaffee..

Thank you Dan, and Lauren let's open up the lines for question and as always I encourage everyone to ask your most important question first and then go back to the end of the queue, so we let everybody have a chance to ask at least one question..

[Operator Instructions] Our first question comes from John Bair from Ascend Wealth Advisors..

Good morning. On the road here so hopefully this comes through LA. Question on the new marketing campaign, can you tell us how long this engagement is, [Indiscernible] is it like a one year and then as kind of a parallel question with this is the contribution of part of the sales to the foundation.

Can you share how long that commitment is?.

I'm sorry, I heard the first part of your question, but not the second.

What was the second part of your question?.

The second part was in conjunction with the partial that supported the foundation, how long of a commitment that might be, if you can share that or not yes..

That sort of well is going with the first part, but after an answer if I don't get it, just add to follow-up question. We're getting some beeping here, and I don't know why. But anyway hopefully you guys can hear the beeping.

It's a multiyear deal, the goal is to have it be a real long-term partnership, I can just tell you that the Heigls have been fantastic. I mean obviously this was something that's very near and dear to them, Jason Heigl is Katie’s brother, Nancy's son, who when he was 15-years old perished.

He fell out of a back of a pickup truck and he was a lover of camping animals and they started this foundation as their star grew. And they are as excited about partnering with Cat's Pride as we are with partnering with them.

So to us, it couldn't be going any better, the goal to have it in my opinion go on forever, but to start with it’s a multiyear deal and our goal is to more than exceed their expectations, so that they are going to continue partnering with us as we move forward.

Does that answer your question?.

That's great. That's commendable. And I have other questions but I'll get back in the queue..

Please don't..

Okay..

Next question comes from [Ethan Starr] (Ph) a Private Investor..

Good morning.

What are the opportunities to save money and or improve efficiency by improving the consumer products manufacturing facilities, is there a big opportunity there?.

Yes, a large opportunity. As you know, we've executed a divide and conquer strategy, where Tom Cofsky is a long-term Vice President of Manufacturing is overseeing certain suite of our plans and then Aaron Christiansen has come in to oversee the reminder of the plans and then they have also divided other duties.

For instance, the raw materials which is something that’s on this intimate knowledge is underneath him, Aaron has engineering and process improvement under him and so that's really what he is focused on.

We've already made a lot of improvements by those two, as I say divide and conquering, it's allowing them both to get deeper into the subjects that are under their control.

So, I'm not going to put a number on it for you but historically, I would say we've been inefficient and it makes sense, we are in our 75th anniversary and I would say for the first 70 some odd years, we were mining and processing company. Packaging really was just something we did to try and get the mining and processing we did with our customers.

So a lot of time packaging came in the form of a railcar or a bulk bag or a £50 sack. And for the last few years now, it's been putting tough that high speeds in the jugs, which is a totally different discipline.

It’s nothing that we really did in the past and our team has done a phenomenal job of embracing the change and moving forward, but there are lot of best practices out there as you well know of companies that have been putting stuff in jugs at high speeds for years.

And rather than reinvent the wheel, we want to adapt and adopt those practices and so that's where Aaron comes in, he comes from P&G and Unilever, he has been in that world and he is bringing those skills to our team.

So it's been a great marriage on all parts between Tom, Aaron and Mark Lewry who is the Chief Operating Officer, the whole supply chain really is functioning very well..

Okay, I understand you don’t want to quantify things where you can already see things improving or you notice it?.

Yes..

Okay. Glad to know that. I'll get back in the queue..

Thanks..

Next question comes Robert Smith from Center FPI..

Good morning.

Could you give us some color on how China is developing?.

That’s nothing substantial, its proceeding I mean, Dan I don’t know if you want to make any comment?.

The sales are drawing, but we're still trying to gain market share, we still have more SG&A than sales relative for the sales, because we're in a growth mode. So we're still exploring, we're still trying to grow the market..

Main products are being registered, but that's still….

And right now as you probably well know the China economy is slowing down a little bit too, so that's obviously impacting our business and everybody else's business..

So for the quarter end declined but China was growing..

Yes, I think that's very accurate, the currency fluctuations in South America really did a number on the AML and animal health business there. So that's a good thing that China was growing because it did help or offset some of the declines we saw in South America..

I see, okay, thanks a lot. I'll get back in the queue..

Alright..

Next question comes from John Bair with Ascend Wealth Advisors..

Shed some light on, what you see happening in the agricultural market so far, I mean your press release showed that there was an increase in sales both to for quarter in the six month. Do you see that trend increasing or improving..

Yes, the Ag market is really difficult to predict. It kind of depends on what the formulators decide to do in terms of what they produce and they are going to look at the corn prices and things like that to really making a judgment call. So it's very difficult for them to predict their business and it's very difficult for us to predict our business.

So far as you've indicated we've been strong and we hope that trend continues..

And is that primarily domestic oriented or do these products source out to South America or other areas..

I would say it's mostly domestic..

Okay. So you had a relatively mild winter conditions in the Midwest and Ag prices of course are down, but maybe cyclically things are going to pick up and maybe there is going to be higher plannings and so forth. So that was where I was trying to go with that. If there is some sort of preemptive activity if you will coming into the growing season..

Nothing I can immediately point at this time..

Okay, all right, fair enough. All right, I'll get back in the queue..

Next question comes from Robert Smith from Center FPI..

Yes it’s the Center for Performance Investing.

So could you give us some further information on private label, lightweight penetration?.

Yes, so it's interesting because it's now been on the shelf long enough where you are starting to see some sales velocity and some repeatability and some actual IRI trend data. So from a dollar share and remember historically our share of the scoopable private label market was about two.

From a dollar standpoint, we have a 68% share of the private label lightweight and of the 32 we don't have, our private label lightweight partners are showing a sales velocity and unit per store per week and dollars per store per week that's more than double the competition.

Now the competition again, we were not naturally inclined to compete in heavy, because we don’t have heavy minerals. Our minerals our lighter, so in the heavy market where it's all price per pound, we were at a natural disadvantage.

Now that you go to the lightweight, they are at a natural disadvantage, so what they have to do to come up with the lightweight item is take their active ingredient, which is sodium bentonite. Cut it by 40%, 50% or 60% and then fill back in a filler to make it lighter, but they are literally delivering 40% to 50% of the active ingredient.

Our private label lightweight is a 100% active ingredient. It's all calcium bentonite but no fillers added, so it's no wonder that the sales velocity has more than doubled, when consumers says anything, I mean if you were heavy or twice as much in a laundry detergent, it wouldn't have been a great innovation on the liquid concentration.

Instead, it was you were able to use less and do the same number of loads. So our partners are very happy with us. It's going very well, we're already seeing a couple of the major accounts that we didn't get right out of the gate, because they were being supplied for years by the heavy guys so they naturally went to them.

They are already switching, so we're already fully switched at one account and we're sort of partially switched at another.

And so again, I would love to say we're the world's greatest salespeople and maybe we are, but in reality it gets down to the raw material, and our raw material because it's a 100% calcium bentonite, which is very absorbing, controls odors and because we have plants from the West Coast to the Midwest to the East, our freight footprint for any national account is fantastic.

So nobody can deliver a better product at a better price than we can. So to answer your question, we currently have a 68% share, I see that share growing and I see the distance between the competition expanding too. So right now I would sell them two to one, I think that's just going to continue as consumers needs our product..

So then we're talking about 68% of 20%, is that....

Well ultimately 20%, yes, now you are still talking it's a nascent market, so it does not currently represent 20% of the private label scoop market yet, so it will be nice when it does.

At the moment I'm looking at a share that basically represents about 1%, so could it grow 20 times, you would hope it would, but it should as consumers continue to adopt lightweight and lightweight continues to be the norm.

I mean I can tell you all the consumers I talk to, who have experienced lightweight in a positive way they will never switch back.

I mean why would they ever say okay, I hear you are putting some item in there, we have our competitors are actually launching the items which is interesting, with new additives and their interesting bells and whistles and features, but you know in a 40 pound box who's bringing that home.

So I joked, when a make a lot of sales calls and I joked rather than put these additives in there they ought to put Ben Gay in there. So that when that brings it home they can actually repair their sore back. I mean who is going to buy it. So it's all playing out very well for the industry, very well for the consumer and very well for Oil-Dri..

Okay. Thanks..

Thanks..

Next question comes from Ethan Starr, Private Investor..

Thank you. How was your retail sell through with the Cat's Pride light weight scoopable litter is going.

So the media is going to hit starting next week. So I think in sell through you are seeing now is just advanced buzz, loading up the shelves, pipeline fill and really the big read is going to come in the next 90-days. So when we're with you in 90-days to be able to look at that IRI data.

It will be 30-days in arrear, so we will only have a couple of months of the data, but that's okay. That will be the real proof the efficacy of the campaign, but we are very, very excited and very optimistic of course..

You can’t comment on the recent past?.

I mean we can but it's not relevant. You have got so many dynamic changes that it's like talking about the dead ball era versus the new ball era, the new ball is going into play next week. So I can do it for if you want, but as an investor, I know you are a big investor in Oil-Dri the biggest thing will be in 90-days..

Okay that's fine. Take somebody else’s question..

Yes..

Next question comes from Robert Smith..

Hi, Dan.

Can you give me an idea is to the level of spending in the quarter, is there any fourth quarter, I mean not at the level, but is there going to be more spending in the third quarter or would it appear than the fourth quarter?.

Yes, definitely yes, because these are the key viewership times then the market tends to go a little quieter during the warmer months and then the goal is to read the data, define and refine the feedback we get from our media mix both social and TV and cable and then come back in the fall with another campaign.

So the goal is to keep the snow ball rolling and keep it growing. We are the inventors of lightweight litter as I described, we have the natural advantages and now we need the consumer to know what a great product we have.

And that's why we are literally over the moon with our relationship with Katherine Heigl, I mean with her star power and her queue scores with our demographic women to 2054 are off the charts. I feel so fortunate that we are partnered with her, it could not have gone better..

Dan, who is doing a creative work for you.

So we have an ad agency here in Chicago called Magnani and it was their campaign, you will be seeing the TV commercials and for those of you who are can reach out there at May, I will be doing some investor road shows.

I will be in New York in April, we will be doing in Boston again, we will be doing in Chicago and I'm going to bring the commercials obviously with me. So they will already be on the year, but I'll be showing you the commercials.

Next week is the Global Pet Show down in Orlando we will be unveiling in our boots on big screen TVs, all the commercials with Katie actually introducing each of them and talking about the partnership between Foundation and Cat's Pride. So we're expecting a big buzz down in Orlando next week..

Thank you..

Okay..

There are no other questions at this time..

Great. Well look as I said, I mean really the company is doing very well, the margins are expanding, the strategy of creating value from solvent minerals is working.

You have obviously noticed the top-line is not exploding in any way, shape or form, but the margins are expanding that's because we keep trading higher value profitable items and as we do that, we push out some of the lower value unprofitable items rather than to keep maintaining. There is no point.

Otherwise, we are churning up our reserves for no benefit. However, with this campaign you guys know that the magnitude of this category its $2.2 billion of retail, you can do the math, but any share point is the big deal and the question is how high is up? And in 90-days, I think we will have a much better feel for that than we have today.

but I can tell you, we couldn't be happier from where we're seating today as we're going to hit the launch button starting what we call the Air Campaign next week.

You are going to love the TV spots, and Katie is literally, fully committed and invested to making this work and so she is going to use her - she is already using her social media power, she has got a 1.2 million Twitter followers, she has been tweeting about us.

She has got 4 million Facebook likes, she has got Instagram, she has been out there on the social talking about the partnership, encouraging her royal fan base to go out and try Cat's Pride, Fresh & Light Ultimate Care, because with each sale a donation is made to the Jason Debus Heigl Foundation.

And so that's the beauty of the partnership and like I said, my absolute goal is to far exceed her and Nancy's expectations, so that they are going to absolutely want to keep the partnership going. So we'll be back here at you 90-days. Obviously, I'm always excited and enthusiastic, I'm more excited and more enthusiastic than I usually am.

So thank you everybody and we will talk to you in 90-days..

Again ladies and gentlemen, thank you so much for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day..