Good day, ladies and gentlemen, and welcome to the Oil-Dri Corporation of America’s Q1 2018 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, today’s conference is being recorded.

I would now like to turn the call over to Mr. Dan Jaffee, President and CEO. Sir, you may begin..

Thank you, Chelsea and welcome everybody to our first quarter investor teleconference.

And with me in the conference room here in is Mike McPherson, our Chief Development Officer and Group VP of our B2B division; Dan Smith, Chief Financial Officer; Mark Lewry, Chief Operating Officer; Doug Graham, VP and General Counsel; and Reagan Culbertson, who handles many roles including all of our Investor Relations and Safe Harbor..

Thanks, Dan. 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’s stock. Thank you for joining us..

Thanks Reagan. And at this time I’ll turn it over to Dan Smith for a review of the quarter. Dan.

Good morning everyone. Oil-Dri reported sales of 66.6 million in the first quarter of both fiscal ’18 and fiscal ’17. Digging deeper we saw minor increase in our retail and wholesale team sales, which was offset by a small decline in our B2B team sales.

Earnings per share of $0.41 per diluted share for the quarter were 46% higher than the $0.28 we earned in the first quarter of fiscal ’17. The main driver of our improved earning was reduced spending primarily in advertising expense for our consumer products. Our gross margin percentage was about 28.5% for the first quarter of ’18.

This was down from the 31% reported in the same quarter in fiscal ’17. However, as we anticipated the gross margin percentage did increase from the 24% generated in the fourth quarter of fiscal ’17, was also slightly better than the 28% we reported for the full year of fiscal ’17.

Since the first quarter of fiscal ’17, we’ve experienced increased fuel, manufacturing, packaging cost all which would help to reduce our gross margin percentage. Our retail wholesale team had a small sales increase which helps generate a profit of about 2.4 million for the first quarter fiscal ’18.

In comparison the team had previously generated a loss of about 500,000 in the first quarter of ’17. Our total cat litter sales were flat with last year. We did see a nice increase in our private label lightweight sales. We also generated about 3% more industrial product sales in the first quarter of ’17.

Overall the profit increase was driven by the lower advertising spend that I mentioned earlier. The spending decrease was partially offset by higher fuel, manufacturing and packaging costs. We currently expect our total advertising spend for fiscal ’18 to be similar to full year fiscal ’17.

Sales of our B2B team were down slightly for the quarter as compared to the first quarter ’17. We experienced a sales decline in China for our animal health products. The decline was driven by the merger of two existing customers and possibly some weakness in the Chinese poultry market.

Profitability was down for the quarter as compared to the first quarter of ’17. The same cost factors discussed earlier impacted the business in this segment also. From a balance sheet perspective our total assets were over 200 million and our debt is down to 9.2 million.

Our cash and investment balances usually dip in the first quarter due to bonus and debt payments and this year was no exception. However, these balances when compared to the first quarter of fiscal ’17 were up over 20% and were substantially in excess of $9.2 million of debt.

Finally, in prep for tomorrow’s meeting, I want to highlight our tons sold for fiscal ’17 and fiscal ’16. We had about 767,000 tons sold in fiscal ’17 compared with 795,000 tons sold fiscal ’16. For those of you, who missed my slides, -- for those of you who’d be there tomorrow, you’ll get to see that on my slides.

I’m going to highlight for the call today. Thanks. I’ll turn the meeting back over Dan Jaffee..

Thank you Dan and Chelsea at this time we’ll open it up for Q&A, and as always please ask your most important question first and go to the end of the line. So that everybody has a chance to ask at least one question.

I will say, we did get good feedback and you’ll see we did a news release, because we’re going to sort of get out of it, but then a lot of you guys like them. So we kept it. And I hope you like the new format; it was easier for us to do. And hopefully it was informative..

[Operator Instructions] And our first question comes from the line of Ethane Star, a private investor..

Good morning. It was a pleasant surprise to see the earnings release. Glad to know you listen to your investors for a change.

Back in the second quarter teleconference, you mentioned a customer in to a six months trial in Oil-Dri animal health products versus antibiotics, and I’m wondering what the results of the trial were and has it led to improved or increased sales at all?.

No, it hasn’t resulted in an increased sales from that customer, although the trial was successful. They subsequently made changes in their production operation that were unrelated to our product that ultimately affected the performance of not only our product but every other product that was tested.

So that company now is back in the research mode, looking for new alternatives that work in light of their new product environment..

So Oil-Dri product was deemed successful but it didn’t result in more sales. Interesting. Thank you..

[Operator Instructions] And our next question comes from the line of Robert Smith with Center (inaudible). Your line is open..

Before I ask my question, I just wanted a housekeeping question here.

So when you say that the total advertising spend is going to be similar to the prior year, does that mean that you’re going to essentially make up the $3 million in the nine months?.

I would say that’s a fair assumption Robert..

So my question then, maybe Mike can speak to that as well. I’m kind of disappointed in the China experience, because I thought the runway was so large that you’d have a really serial increase in sales and income from that geography. So maybe if you can just give a little color on that..

I think long term the prognosis still looks fine. It was really just a timing of this one account. Our China business focuses on acquiring large direct accounts or large producers of poultry. And it was simply a timing issue; we lost this account due to a merger between two customers, before we were able to obtain our next large account.

So I think overall the sales development, market development prognosis looks good. This is just a short term timing impact from losing this one account..

So everything away from these, the loss of this account continues to show gains..

Yes, everything else is positive in general in terms of our ability to acquire new customers. It was just this company that used to make its own feed and it used our products. Now it’s getting feed made for them by the company that acquired them will definitely use our product. Very large account that’s why there was this short term hit..

So are you trying to [pitch] in?.

Of course, that was the first thing we did..

[Operator Instructions] and we do have a follow-up question from the line of Ethane Star, a private investor. Your line is open..

I wonder if there are more opportunities to trim cost and save money by including a consumer manufacturing and processing lines in the factories. I think it was mentioned in the Q4 release that there are plans to do that in fiscal ’18.

Could you speak a little bit about that?.

Good morning Ethane, its Mark Lewry. Yes, we continue to (inaudible) and last we year we had only emetric, which was on our packaging lines. We are expanding that actually to a broader measure to go upstream and downstream this year and we continue to see progress and improvement in our packaging efficiencies..

Okay, but you had this through data measurement or you’re actually putting in CapEx spending money to improve the lines with new equipment?.

We’re doing both. I mean we’re capturing the data so we can understand where our downtime is, and then investing to improve..

So hopefully downtimes are being reduced?.

It is..

And we have follow-up question from the line of Robert Smith with Center Four. Your line is open..

Can we hear some metrics on Fresh & Light in the first quarter?.

Really where I wanted to go and so I’m going to take this chance to use your question and talk about what I want to talk about; which I think is very exciting. We kind of touched on a little bit in the news release, but we’re ready to unveil it bigger.

For those of you at the annual meeting tomorrow, you’ll see it in full color, technicolor, which is our marketing program for 2018 and beyond. We’re calling it Litter for Good.

We have been donating cat litter to shelters on an ad-hoc basis for 25, basically if we’d have a relationship with them or they were in a town where we had a plant or if they actually just called up and said do you have any litter, we would take off-spec or old packaging or whatever it is, litter sitting somewhere in the warehouse. We will take it.

And when we started thinking about, how can we make this in to a real program, where the consumers can participate and show us that they are as passionate about animal advocacy as we are.

And we created what’s called Litter for Good and we filmed the new commercials and really a micro video which can go on a website, it’s a three minute video that sort of explains it. Basically the nuts and bolts of the program are this. Consumer can sign up for free on the catspride.com website, and then join our club.

And then nominate their local shelter to receive free litter.

If they don’t see the local shelter, there’s a point where they can – if they don’t see it in the dropdown, they can just write in and then we’ll get them nominated, and then we’re going to accumulate all those votes and for every jug of Fresh & Light, every green jug, we’re going to donate a pound of free litter to a shelter across America on a pro-rata basis with those votes.

The beauty of the program is that I’ve been on the Board of the anti-cruelty society which is the largest shelter here in the mid-west for the last 20 years. And I know what a big expense cat litter is to a shelter, thereby getting free litter that frees up dollars for them to do all the things they need to do to try and save cats lives.

You may not know this, but every year 3.2 million cats go in to shelters in the United States, and only 1.6 million get adopted. So that’s a grim reality for the other 1.6 million. And so the goal from Oil-Dri’s standpoint is to save more cats and to do more on Spay/Neuter, Trap, Neuter and Release.

There’s all sorts of programs that take a lot of money. The Ferrell cat population is a big problem and so that’s the Trap, Neuter and Release program, but these all take a lot of money and these shelters are on limited budgets. So in my interactions with anti-cruelty and travelling around.

I’ve talked to numerous shelters and they’ve all said, Yes, you send us an email and the email is actually going to come from Katherine Heigl to these shelters who have a database of over 2,000 to 2,000 largest shelters in the United States and their donor base, so you’re talking millions now of donors.

They are going to receive this email blast and communication package and we have a full-time shelter manager now on board. And they are going to take that and them pump it out to their donor base and say, look, nominate us and start buying the green jug, we want free litter.

And we believe that this is going to be a very powerful program, but it’s going to be up to the US consumer base to agree or disagree with us. But the beauty of this program is they are going to be giving the best cat litter not just light weight litter, but the best litter.

We just completed an in-home new task where we performed at parity with what is perceived as the market leader in one metric. But I beat them a whole number of other things, at a better price. So the consumer really gets a win-win, but then every time they buy a green jug, we donate a pound. If they buy a green box which is bigger, we donate 2 pounds.

We’re actually going to partnering with retailers and so during specific periods if you buy a green jug at a specific retailer, we’ll double the donation.

We’re going to be integrating again with ABC and we’re not going divulge that yet, but when we do, during that three week integration we’ll be doing double donations and they will be announcing it and all that kind of stuff. So, we believe this has the chance to really do three things, number one, go viral. Number two; increase our bank for a buck.

Rather than just spending a lot of money on TV which is very expensive and not all that efficient when only a third of the consumers own a cat. So two-thirds of the people that see that commercial have no interest in what you’re saying.

And then the third thing is to really go out and see a cat, that’s the most important part of the program, is to save these shelter cats and actually to prevent them being born in the first place on the (inaudible) Trap, Neuter and Release program is to stop the mass proliferation of the Ferrell cats.

And so we believe this has the power to be very powerful.

The ability to be very powerful, because consumers who have a passion around cats are most likely to be those consumers that already donate in to a shelter in their neighborhood, and when they receive this email from their shelter and Katherine Heigl encouraging them to get involved and to do this, and they realize it’s not going to cost them any more money to do it.

All they have to do is switch cat litters. We believe it has a chance to be very big..

Have you lost market share in the first quarter and presently?.

Again Bob, I’m not going there. I’m not driving in to rear view mirror. I could get you the IRI data, it’s public and I’m sure somebody could get it for you..

You’ve always commented on the past, so that’s why I’m asking..

I’m telling and I’m not telling. So thank you I’m not prepared for that and I’m not answering that question. I’m looking forward; I’m very excited about 2018..

So you don’t think there’s a storm?.

I have no comment..

Well, your comment was that you’re optimistic about the year. So I guess you aren’t..

You can drop whatever conclusion you have Bob..

Thank you. And our next question comes from the line of [John Bear] with Ascend Wealth Advisors. Your line is open..

My question was going to be, if you could give us some updates on the relationship with Heigl Foundation. You kind of touched on that, I guess, on the last outlook for ’18. But can you elaborate a little bit more as far as, it sounds like this relationship is going to continue for some time going forward..

Sure it is. Certainly continuing through all of 2018, and the relationship was fantastic. To go down beyond that, great, and if it doesn’t it’s not an indication that it isn’t played. It’s just a matter of where we’re going to allocate our money and where they are going to allocate their time.

But we are both passionate and advocates and frankly we both have a great personal relationship. We really – Nancy and Katy Heigl are fantastic to work with, and I think they really enjoyed their relationship with us.

So it’s a great partnership and again just recently Katie said, yeah you can send me email out under my name, because they knew, you know shown up at a shelter coming from Dan Jaffee what’s that going to mean so as far as since I’m the business owner, but coming from Katherine Heigl, that’s a different story.

So she was more than happy to allow that to occur. So it’s a great relationship..

So do you think that this effort for ’18 is something that would continue? I mean, is it a one-year program at this point with evaluation and deciding whether you go forward with that again in another year or is that kind of how we should look at this?.

It’s not how I’m looking at it, but certainly that’s the reality of it. The reality of it is, sure any program needs to be evaluated and monitored for its success. But we’ve been donating litter to shelter for 25 years. So this is just sort of system (inaudible) it, and getting the consumer involved.

But we’ll be donating litter to our last day in business, so it’s my guess. And we’ve always done it, we feel like it’s a good thing to do. We do love animals and so it’s a nice way of giving back. But I would look at it from your perspective, because this is how I’m looking at it. We’ve a 2.5 share on Cats Pride and Fresh and light branded nationally.

So you do this program, is it likely to hurt your share or is it going to go down. Well there’s not a lot of down side. I mean obviously, I mean I can’t imagine someone seeing all this and saying boy these guys, I’ve been buying these litters for years and I’m not going to buy it anymore. Really what we have is a mass awareness problem.

When we do our research, 50% to 60% of the consumers have maybe not heard of us. They just don’t see it, they just see brand blocks that they are used to seeing Freshed Up, Arm & Hammer and Tidy Cats, and they don’t even see it. So it’s not like they’ve tried, they don’t seem to like us.

So they’ve evaluated our proposition and it doesn’t resonate with them, even if they’ve seen us. So this is going to get us awareness and trial we believe and we believe there’s way more upside meaning we can grow greater than 2 to 2.5.

It’s a greater chance than dropping and we believe that the expense behind is going have a way higher RLI than if you think, look you can take it. You can take our media cost and divide it by the number of green jugs we were selling in the last couple of years and you’ll see a big number for jug. I mean a big number for jug.

So believe this is going to be a much smaller number per jug, and give the opportunity to dramatically increase the jug. So to me win-win very excited about 2018..

And our next question is a follow-up question from Ethane Star, a private investor. Your line is open..

I’m wondering if clay has any possible uses to inhibit food spoilage..

Not that I know of..

No, me?.

Yeah, I mean you must have an idea about it..

Well I just don’t want to read in the patent office filing..

Feel free to shoot me anything you want to send me and I’ll take a look..

And we have a follow-up question from the line of Robert Smith with Center [Four]. Your line is open..

So could you give us some color on how the newer products are doing in the market place, in animal health and also do you have any plans for the introduction of new products in this fiscal year..

New products they are in the new (inaudible) going as we expect and continues to be (inaudible)..

Yeah, any prime versions, things like that and (inaudible)..

All of those products are growing and we continue to get new customers and our customers continue to be interested in those technologies. So from that standpoint it’s positive. In terms of this year, we are registering one to possibly three different view on the whole products.

We’re going to see when the final research shakes out, how many new products we have. Those will start registration probably in the next few months, and that’s possible when it comes here too we might registration before the end of this fiscal year.

But the reality is, a number of countries would be obtained in F’19 and that’s when we would start our initial sales and in (inaudible)..

And then just circling back to one of Ethane’s prior questions about this question of the antibiotic. I want to be really clear on what you said, so the perspective customer change manufacturing processes is that what happened.

And so what if that has to do with the efficacy of – so you’re trying to work but not sufficiently in comparison or what?.

Well it gets a little bit in to the weeds and they use some different drugs. But in this particular instance, Varium was being evaluated in what they call antibiotic free production line. And all along with many other materials they are being tested.

In the middle of the trial, the customer stopped using something called an iodophor, which in some circles is not strictly considered an antibiotic, because it’s not used in the human health market. But the reality is it is a class of antibiotic.

When they remove the iodophor to treat another disease this is where unfortunately Robert it gets a little big. It is used to treat cocci which is a parasite. When they remove the use of that iodophor, they had an outbreak of parasites, which then causes a secondary disease called necrotic enteritis.

So the Varium worked for the purpose it was intended. But once they change the administration of drugs, they created a new production environment for which Varium wasn’t developed, nor were any of the other types of products that were being tested in this production line.

So as a result, it’s kind of a new production environment for the boiler producer, which is why I said it worked. Initially for what Varium was developed for, but now you have this new situation where you’re creating multiple diseases and Varium is not a drug..

And we have time from one more question. Our last question comes from the line of Ethane Star, a private investor. You line is open..

I’m wondering for the lightweight cat litter you mentioned in the past that it’s more profitable than heavyweight cat litter. And I’m wondering is it just because it cost less to transport or does it also cost less to manufacture and/or process through your factories..

It’s a good question. First of the all, the transport is large, not just from the factory to the customer, but the fact that sodium bentonite only occurs in South Dakota and Wyoming, and our calcium bentonite occurs in California, the Mid-west and the east.

So your net miles to the customer are much lower and then you can put twice as many units on the truck, so even if the miles were the same, your freight cost would be enhanced. So you’re basically getting a half and a half.

Our total fleet is probably 25% of or 75% less than what a heavyweight cat litter would be getting to the same customer, depending on where the customer is obviously, because if it was in Wyoming, they would have an advantage. But there aren’t many cats as pets in Wyoming.

So if you want to pick California or the Northeast which are the major hot beds of cat litters, major advantage on both sides. So the mines are closer to the market and then because of the lighter nature of it, you can put twice as many units on the truck.

Does that make sense?.

Yeah, but it makes it sound like you’re shipping some of our calcium bentonite to Wyoming and you’re making it there..

I’m shipping calcium bentonite, that’s who I am. I guess if there’s a – like a Wal-Mart in Wyoming, I suppose I am. So they have a benefit. So sodium bentonite would have a cost advantage to a Wal-Mart in Wyoming..

Okay.

But isn't it being shipped to your factories first and then going back there?.

No, I’m saying that competitors will be shipping from there. We don’t have any mines in Wyoming..

I know that, I’m quite aware of that, but I was referring to your products not the competitors’ products..

Is there any efficiencies or cost savings in manufacturing lighter weight litter or not?.

Not really. I mean it’s all volumetric. You’ve got an 80 foot dryer that’s eight foot in diameter and its pounding out clay and it doesn’t care if the clay is 70 pounds a cubic foot or 35 pounds a cubic foot. It’s coming out a certain amount of volume.

Now obviously on a per ton basis there’s going to be a lower cost per ton because they are going to get more tons out that dryer because of what’s coming out weighs more. But it’s volumetric and then it goes over a screen and that’s volumetric and then it get put in jugs and those are volumetric. So the cost per unit would be very similar.

Now I’m going to be a little more, be a little more, less efficient or whatever. But I’m just saying there’s no inherent advantage. I will tell you the one inherent advantage is the way our minds work; we turn down what’s better known overburdened to clay ratio. I mean we have to take off top soil to get to a lot of clay.

The way sodium bentonite works, is it’s not a lot of top soil, but it’s very thin seams. I’ve heard they are very, very thin seams. They disrupt basically, I've heard three to five times the amount of acreage we do for every ton a litter. So it’s very disruptive actually to the environment from that standpoint..

Okay. Thank you very much..

Alright. Good. Well thank you everybody. I hope some of you will have time to come to our annual meeting where we’ll actually will be showing our new marketing program both the videos and the commercials and all of that. Mark will be presenting, Mike will be presenting, Dan will be presenting, and I will be playing MC and celebrity roaster I guess.

But we’re very positive again. We think that the focus on the future is more important than just trying to explain the past. I get that there’s – you certainly need to understand the past and know where you’re going. But in each of our businesses we have a lot of things to look forward to, and yeah they take longer.

We’d all love them all to materialize tomorrow, but then we would have nothing to do the day after that. So we believe we have a lot of opportunities, we believe the company is still moving very much forward, and really the best is yet to come.

So we’ll go at it for another quarter and we’ll either see you tomorrow or we’ll talk to you again in another 90 daysish. So thanks very much. Happy Holidays everybody. I hope you get to take some time off. Bye, bye..

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day..