Dan Jaffee - President and CEO Dan Smith - CFO Laura Scheland - VP and General Counsel Reagan Culbertson - Investor Relations Manager Mike McPherson - Chief Development Officer.

Ethan Starr - Private Investor John Bair - Ascend Wealth Advisors, LLC Robert Smith - Center for Performance Investing.

Good day, ladies and gentlemen and welcome to the Oil-Dri Corporation of America Third Quarter 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 follow at that time [Operator Instructions] I'd now like to introduce your host for today’s conference, Mr. Dan Jaffee, President and CEO. You may begin..

All right. Thank you and welcome everybody to our third quarter and nine months Oil-Dri teleconference.

With me in Chicago conference room is Dan Smith, our CFO; Laura Scheland, our General Counsel; Reagan Culbertson, our Investor Relations Manager; and Mike McPherson, our Chief Development Officer; and as always we’re going to turn it over to Dan for a review of the results and then we will open it up to Q&A.

Oh, I forgot about the Safe Harbor, [indiscernible] pointing at Reagan, I didn’t know which you had on her face. I would say nothing.

Reagan, let's do the Safe Harbor?.

On today’s call, comments may contain forward-looking statements regarding the Company’s performance in future periods. Actual results in those periods may materially differ. In our press release and 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 in evaluating any investment in Oil-Dri’s stock. Thank you..

Thank you. I apologize for missing the Safe Harbor. I figure most of our callers are loyal members and they know that nothing we say will [indiscernible] correlate to anything which will happen in the future. Just kidding, but that’s basically what the Safe Harbor says in a nutshell. Let's turn it over to Dan Smith..

Let's do that. Good morning, everyone. Oil-Dri reported sales of $64.8 million in the third quarter of fiscal '18, which was about the same as the third quarter of fiscal '17. Year-to-date we generated little over $200 million of sales for the first nine months of fiscal '18, which was a 2% -- which was 2% better than same period in fiscal '17.

Net sales were up for a B2B segment, but down for the retail wholesale segment. Earnings and diluted earnings per share both improved from the third quarter of fiscal '17.

During the second quarter teleconference, we discussed the approximate $5 million negative tax, deferred tax asset adjustments which resulted from the federal tax rate change in the 2017 Tax Cut and Jobs Act enacted in December of 2017.

In the third quarter, the company made a business decision to contribute an incremental $11.5 million of company's pension plan before we filed our 7/31/17 income tax returns. This contribution is deductible at the old 35% federal tax rate and allow us to recapture over $1 million of negative rate impact recorded in the second quarter.

On a year-to-date basis, the tax expense adjustment has effectively reduced diluted net income per share by about $0.54, which was better than the $0.69 we discussed in the second quarter teleconference.

The incremental contribution also reduced company's pension expense and federal PBGC pension insurance premium for the quarter and we believe for years to come in the future. Our gross margin percentage for the quarter was 27.4%, which was almost identical in the third quarter of fiscal '17.

Year-to-date our gross margin is 28.1%, which was down from the 29.3% for the first nine months of fiscal '17. We’ve experienced higher freight, manufacturing and packaging costs in fiscal '18 than in fiscal '17. Sales for the retail wholesale team was down approximately 1% for the quarter.

Sales for the first nine months are down less than a 0.5% compared to fiscal '17. Increased sales of private-label lightweight cat litters partially offset reduced sales of our branded cat litter. Increased branded cat litter sales in e-commerce area have partially offset the loss of the brick-and-mortar customer.

Profit for the segment was up about 47% for the quarter and 17% year-to-date as compared to the same period in fiscal '17. Reduced advertising spending in the quarter in the first nine months drove the improved profit for the segment. The lower spending was partially offset by increased cost in freight and packaging.

We expect advertising spending to be down for the full-year in fiscal '18 versus the full-year of fiscal '17. Sales in the B2B area continue to be better than comparable periods in fiscal '17. Our operating profit was down for the quarter due to the increased cost for freight and packaging.

On a year-to-date basis, 6% increase offset the increased cost and allow the unit to report about $1.2 million more in operating profit as compared to fiscal '17. There were several significant changes to our balance sheet during the quarter.

Like other companies, Oil-Dri took advantage of the old federal tax rate and made an incremental tax-deductible pension contribution in the quarter. This payment reduced the expenses I previously discussed and it reduced our cash and investment balances, along with our long-term pension vulnerability.

We used about $6 million of our line of credit to facilitate the payment and anticipate paying off those short-term borrowings in the fourth quarter. Next I will turn the meeting back over to Dan Jaffee..

Thank you, Dan. At this time, [indiscernible] I’d like to open it up to Q&A. We would like to encourage everyone to ask their most important question first and then go to the back of the line just to make sure everybody has time to get in at least one question..

[Operator Instructions] And our first question comes from Ethan Starr, who is a Private Investor. Your line is now open..

Good morning..

Hi, Ethan..

How was the Litter for Good marketing program going? Are you pleased with the return on investment thus far?.

Very, very pleased with the return on investment and very pleased with the traction. I have some sort of high level metrics that I'd be happy to share. Before Litter for Goods, this is really before January 1, we were putting on about two Cat’s Pride Club members a day.

And just to remind people who aren’t as close to the company as you’re, what Litter for Good is is consumers can join the Cat's Pride Club for free, nominate any of their preferred shelter, it could to be a local shelter, it could be any shelter that they want to nominate to receive free litter.

And then every time we sell a green jug of Cat's Pride Fresh & Light, we donate a pound to a nominated shelter based on the pro rata nominations that they got. And so that’s how the program works. So clearly a leading indicator is are we gaining Cat's Pride Club members.

So for years, two, three years data that I’m looking at, we would put on one to two a day and that's it. I mean, it's just really -- there wasn't a lot of activity of Cat's Pride Club members. We’ve been averaging since January 1st 65 new club members a day. So sturdy twofold increase in the activity on that.

Additionally, those members have made over 9,000 nominations for shelters to receive litter. We now have 2,200 shelters in our database and of those the shelter then needs to register to receive free litter and basically -- about a third of them have registered. So we've got almost 700 shelters that have registered.

And so what that’s driven so far is 1.5 million pound in litter donations and our top shelter actually, this donation period had over 800 nominations. So we sent truckloads to the numerous shelters throughout the country, hitting both coast and pretty much everything in between. So the program is going very, very well, but it's a ground war.

It's going to be a slug, slug, slug. We believe there are almost 13,000 shelters, independent shelters in the U.S. So the fact that we’ve 2,000 is great, but we really just scratched the surface of where this thing can go.

Does that answer your question?.

Partly.

The example you gave us the example of top shelter at 800 nominations, are you seeing increased sales in the area around that shelter at retail?.

Well, yes and no. I think what you asked for was, are we happy with the return on investment, so if you look at like, let's say, the retail and wholesale segment, you can see the operating income for the quarter was up 47%, yet sales were relatively flat.

So that kind of tells you that the way that happened was we’re spending less on advertising, yet we’re getting the sales. So the efficiency or the return has exploded. I mean, our cost per unit sold, in terms of marketing in the past was in technical term ginormous.

When we were running lots of national TV and having to discount our products to get them to move and to get displayed and so forth. This program is allowing us to get equal to or greater movement at a much reduced price - cost to Oil-Dri. So obviously a higher return on investment..

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

Okay. Thank you..

[Operator Instructions] Our next question comes from John Bair with Ascend Wealth. Your line is now open..

Thank you and good morning..

Hi, John..

In your news release, you indicated that sales for fluid purification for jet fuel -- refining jet fuel was up nicely. And I’m wondering if, you have application or potential for increased sales due to a pending bunker fuel reduced sulfur content in bunker fuel used for the maritime industry that’s going to come into play in 2020.

And my understanding is it's pretty tight market on the diesel side.

Any application there that could be beneficial to Oil-Dri?.

None that we know off. We are -- clay minerals are used in the refining industry are two applications.

One is something called BTX that our clays don’t work and the other one is to refine kerosene, that refining process to turn kerosene into jet fuel is where some refineries have some clay treatment that’s used and we are seeing our increased sales in that application..

Have you investigated or I mean is the clay material just not applicable to the low sulfur diesel refining processes? Is that kind of a totally different area then?.

Yes, totally different, correct..

Okay..

The type of processes these oil refineries have in place doesn't utilize clay or any other type of filtration media to achieve their finished product..

Yes..

We have looked at it though conceptually, but no..

Yes. Okay. I’ve got other questions. I will get back in the queue. Thank you..

All right. Thank you, John..

And we’ve a follow-up question from Ethan Starr. Your line is now open..

Yes.

I’m wondering to what extent are the higher trucking costs eating into profits?.

Well, I mean, in short run, clearly they are going to be a major reason behind our 8-1 price increases that we will be taking and it will all be around freight inbound materials that we’re buying and outbound on materials that we’re shipping, but it's a nationwide pandemic.

So we're not the only one experiencing it, all of our competitors are as well..

Okay.

But it is eating, sounds like it’s what several hundred thousand dollars for the last quarter or two or hard to know?.

Ethan, in the 10-Q we identified frieght costs were up about 15% per ton..

Yes, I noticed that..

Yes..

So ….

It's a good bit of money..

Okay. Well, I guess, I look forward to the 8-1 price increase, and I will get back in the queue. Thank you..

Okay. Thanks..

[Operator Instructions] We have a follow-up question from John Bair. Your line is now open..

Thank you.

Just wondering with all the trade chatter and so forth that’s been going on here this year, are you seeing any kind of impact with your activities in China with relation to potential customers, are they holding back or are you seeing any impact of that with your China operations?.

No, we are not. The good advantage that we have being American and selling our products in China. The Chinese companies that make animal feed and make produce chicken and swine meat, love U.S products. They have a high degree of confidence in the integrity by which we make our products, label our products, don't adulterate our products.

So we continue to see very strong demand and preference for U.S. goods coming out of China for the livestock sector..

Okay. That -- well, that’s encouraging, and hopefully none of the products get snarled up in this mess, but I’ve got another follow-up question, so I will get back in the queue..

John, you can ask your follow up..

Okay. Real simply, I’ve noticed or read that there's a couple of new pet themed ETFs and mutual funds.

And I’m wondering if that's you’ve garnered some interest, noticed that the trading volumes picked up a little bit here in the last few weeks, unless maybe last month wondering if you’re getting more inquiries or more exposure within the financial community as a result of these announced new investment products?.

Yes, I mean, on that one, your [judgement] [ph] is good as ours, probably better. We have seen the increased activity, but at the moment we don’t \know where it's coming from..

Okay. Very good. I will get out back in the queue..

Thank you..

Thanks..

Our next question comes from Robert Smith with Center for Performance. Your line is now open..

Hi. Good morning. I got on the call late, because I’ve a new iPhone and had some trouble with it. Anyway, so correct me if [indiscernible].

So can you give us some color on the penetration of the China market and what might be accomplished to move things on a little faster, so what are the obstacles there?.

First, right now we don't have any type of traditional economic or trade or any other type of barriers. And obviously our whole team there is Chinese and speaks Chinese and we don't have any language or cultural issues. If you might imagine the size of the companies in China are vastly larger than most any other country.

So it's a more complicated sale. You're dealing usually with a nutritionist, a veterinarian, the Head of Production, oftentimes the Head of the feed mill as well as ownership. Usually one or two family members and you have to get in there and manage a very complicated decision-making process to approve.

Really to test and evaluate very rigorously and then approve the new feed additive to go into their operations is not an easy task. So it's a longer more complicated sale, but when it occurs, one sale lands you a pretty significant amount of volume.

So we are just -- our team is committed to continuing the process to get our products approved with the various entities in China and so far there's been no barriers..

Except time..

Are you able to take the results from a satisfied customer to and publicize that or use it as a segue to gaining a new customer?.

Typically not. Most producers in the industry will not share the results of their performance because they don't want to be used in the marketing efforts of the various companies that they used to buy different feed additives from, because that would be -- it would run ramp, but if they allow that to happen.

So all you will get on a perfect day will be then I’m telling you we run your product over a series of 2,3,4. Sometimes 5 different increasing levels of usage and product looks good. We are buying it. And that’s what's you’re hearing.

Well, could you tell us did it help feed conversion, did it help growth, did it cut mortality? It had benefits that we thought were good for our operation we like to move forward and you’re left really not a 100% sure. What it did, you just know it would be something to justify the cost..

And ….

Well, everywhere, not just in China..

Could you give me an idea as to what are the other promising markets, international markets?.

The broader Asia, in general we are doing well in. We are having a record year in sales in the Middle East and we’re doing great in Latin America, in particular, in Brazil and Mexico. We see nothing, but opportunity in the markets that we’re competing in..

Thank you..

Okay. Thank you..

And we’ve a follow-up question from Ethan Starr. Your line is now open..

Yes. I’m wondering if you picked up anymore private-label lightweight customers recently and also with the private-label lightweight situation is in Canada. Because you’ve said in the past that Canada is much more private-label penetration, like 40% versus 20% here.

Just wondering how that’s going?.

Yes. Yes, we continue to grow our private-label lightweight business. We’ve a major retailer that’s going to be coming online this month, starting shipping. I mean, it takes as you know six months to get the packaging and everything right, so it's finally going to hit the shelves, so you should be able to find that at some point in your retail search.

But let me give you some data. And there's two ways to look at share and historically we've always sort of just defaulted into what the account sort of default into which is dollars. But when you're selling private-label or you’re selling popularly priced otherwise known as cheaper brand, then units can be an interesting perspective as well.

I’m not going to say a better perspective, but as we all know that the retailers understand the concept of market basket, where they know a shopper doesn’t just come in and buy one thing and then cross the street and go buy a bunch of other things someplace out, but they tend to bring the purchase with them.

So if they buy our jug of our products, that’s going to be part of maybe a $100 to $150 purchase. So having a higher unit share its relevant to the retail. They get it. They want to see that lot of their shoppers like your brand even if it's at a lower range and so your dollar share may actually be less than your units share.

So long-winded way of saying I’m now looking at both whenever I look at the stuff and as you know, when we’ve historically talked about our share, our branded share it's been about 3%, 3.1% is what I'm showing for the 12 weeks.

I’m showing 3.3% for the 52 weeks or its about the same, our private-label share is about the same and 3.7, 3.6 or total share of the cat litter sold not counting what we do for the co-pack side, I mean, so private-label and brand is 6.7% in dollars-ish. And then if you look at the units, though, all of a sudden it jumps pretty significantly.

So our unit share is 13% of which our branded is about 4.4 and our private-label is now up to 8.7. So we’re supplying 13% of the units in the category. That’s significant and its interesting. So that's all I will get it now.

So just to show you our branded -- sorry, our private-label lightweight for the 12-week period ended a year-ago we had 66 share of the private-label lightweight scoopables were sold in the U.S in this snapshot, which is grocery and mass merge which tends to be about two thirds of the category.

So again, you can't get your arms around the whole thing, but this is the best snapshot. We got 56% a year-ago. It's up to 70% now for the 12-week period this year and the 52 weeks about the same 64 and 70. So, you can see it's growing and it will continue to grow as we continue to rollout new retail.

So our private-label lightweight scoopable offerings are doing very well in the marketplace..

Okay.

This new customer you mentioned, would that customer be material in size?.

You know when you say material, I think there's an SEC definition of materiality where we have to disclose our top five customers or something. No, they won't be one of the top five customers of Oil-Dri.

Will they be material in the stands that they’re a major player that will have a beneficial financial impact on our retail and wholesale segment results, the answer is yes..

Okay..

We are [technical difficulty] in the SEC standpoint..

Okay, great.

And how about for Canada? Any -- are you that was private-label lightweight doing there?.

Slow, but we still are -- we believe in it, but again we’re in discussions where it's nothing eminent in Canada. But no, just know bigger, but just no yeses and we are working on packaging and we can give you certain months when it's all going to start happening. We are still in the discussion phase with Canada.

So the way we look at our sales target list, green is they’ve approved it and we have a date. Red is they’ve rejected it, and they want no part of it and yellow is we're discussions but it's neither green nor red.

Canada is really yellow at the moment with really all major players in the U.S being green and/or the reds we’ve discussed in the past with two outliers that are sticking with their current format. It's not moving for them. It's sold at a much higher price point because they’re buying from someone who is not basic in lightweight minerals.

So it will basically 3 miles at the trough and we just have to wait..

Okay, great. Thank you..

Thank you..

And we’ve a follow-up from Robert Smith. Your line is now open..

Hi.

So with respect to advertising and promotion, can you give us some -- down about the dynamics of the category as far as dollars go and the movements in one direction or another?.

I’m assuming you missed my comments on the Litter for Good?.

Yes. Well, I heard the tail end of that..

Yes, so I would say let's go back listen to the trans -- read the transcript or listen to it, because we covered it pretty well, but our return on investment is going.

It is absolutely pointing in the right direction to the point where we’re able to achieve equal to ish [ph] slightly up sales at a dramatically reduced advertising cost and so you can see that the segment income.

We don't report just consumer, but the retail and wholesale segment income was up very strongly and it’s a 47% -- yes, that’s 47% in the third quarter..

So you’re going to be moving more towards social media and away from TV and things like that?.

Social and our Litter for Good which is socially driven, but it's more of a ground-level guerrilla war..

And that leads to reduce the overall spending?.

It reduced overall or if we end up spending the same, dramatically increase in sales. So per unit a reduced cost, yes..

Got it. Thanks..

Might have time for one more question..

[Operator Instructions] At this time, I’m showing no further questions..

Great. Well, thank you everybody. We continue to be very optimistic for the long-term health of our key business segments. As you well know our mission is to create value from sorbent minerals and we’re doing it.

Our GP, our operating income, everything on a per ton basis is all at record levels for us, because we’re getting more value for the tons we’re shipping and so we’re going to keep focused on that.

The key to that is innovation, R&D, staying very close to our customers, understanding what their wants and needs are and then trying to supply them with products that more than satisfy the requirements and build real partnerships and we’re able to do it. So, we are going to keep doing it, we will talk to you. Our next one will be our year-end.

So we will close fiscal 2018 and we look forward to talking to you then. Thank you..

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