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Operator:.

Good day, ladies and gentlemen, and welcome to the Oil-Dri Corporation of America and Q3 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded for replay purposes. It is now my pleasure to hand the conference over to Mr. Dan Jaffee, President and Chief Executive Officer. Sir, you may begin. .

Thank you and welcome everyone to our third quarter and nine months teleconference. With me in the conference room here in Chicago Mike McPherson, our Chief Development Officer Susan Kreh, CFO, Tony Parker, Assistant General Counsel and Leslie Garber who heads up our Investor Relations and you're going to walk us through the Safe Harbor. .

Leslie:.

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

In our press release and our SEC filings, we highlight a number of important risk factors, trends and uncertainties that may affect our future performance. We ask that you review and consider those factors in evaluating the company's comments and in evaluating any investment in Oil-Dri drive stock. Thank you for joining us. .

Great. Thanks, Leslie. As always, I'm going to turn it over to Susan to walk us through the details of the quarter, and then I'll add any color to her role play-by-play. .

Susan:.

Perfect. And I'm pleased to be able to share our third quarter results. We experienced some momentum during the quarter with sales strengthening at a time when some of the year-over-year cost increases we have been experiencing are finally beginning to subside.

We reported sales of $70.9 million for the third quarter of fiscal 2019, which was a 9% increase over the third quarter of fiscal 2018. Sales in our retail and wholesale product group were up 12% in the quarter, driven by a very strong 15% year-over-year growth in cat litter.

In the quarter, we experienced strong demand for our Cat’s Pride Scoopable branded litter and we continue to experience strong demand in our lightweight private label products. During the third quarter, our unit share of the overall cat litter segment continued to grow climbing to 15.3% from 13.3% in the same quarter of last year.

Our business-to-business products group grew 5% over the same quarter of last year, reversing the trend in the previous two quarters where sales had been below prior year levels.

We experienced 13% growth in fluid purification products, primarily in our North and Latin American markets where sales to edible oil producers were impacted favorably by the characteristics of recent crop. We also saw strength in sales of our engineered granules in our agricultural sector.

Conversely, sales in our animal health business continued to be below last year's levels, as our Amlan business in Asia continues to experience decreases driven by the widespread impact of the African swine flu.

As a reminder, last quarter we said that while we don't expect an immediate turnaround in the swine industry in Asia, we do project some recovery in our Amlan business as we continue to work with our customers on trials and adoption of products in other geographies as well as other channels, such as for poultry.

Year-to-date, we reported sales of $206.9 million for fiscal 2019 which was 3% above the same period in the prior year. Again, our retail and wholesale products group reported sales that were up 7% over the prior year driven by strong performance in cat litter.

The business-to-business products group reported year-to-date sales that were down 2% as the third quarter year-over-year growth in this segment was not enough to offset year-over-year decreases that we experienced in the first two quarters of the year.

Our third quarter net income attributable to Oil-Dri was $5.6 million compared to $3.6 million in the third quarter a year ago.

For purposes of comparability, I will point out that during the third quarter of fiscal 2018; we incurred a onetime tax benefit of $1.1 million that resulted from making a $12 million tax deductible contribution to fund our pension plan.

In fiscal 2019, we also had a favorable onetime item in the form of a confidential legal settlement that was booked in other income in our financial statements. Our third quarter diluted earnings per share were $0.74 per share compared to 48% per diluted share in the third quarter of fiscal 2018.

During our third quarter, gross profit margin was 23.7% up sequentially from 22% in the second quarter of this year as sales strengthened and as we started to see some easing in freight and natural gas cost. This compares to a 28.5% gross profit margin in the same quarter last year.

The gross margin percent was adversely impacted on year-over-year basis by increased freight manufacturing and packaging costs.

As we stated in our investor call last quarter, in an effort to partially offset some of these increased costs, we increased the prices of cat litter effective May 1 and we expect to begin seeing the benefit of that price increase during our fiscal fourth quarter. Now let's talk a bit about our operating segment; first, retail and wholesale.

As I mentioned earlier, sales for the retail and wholesale team were up 12% in the quarter and were up 7% for the first nine months of fiscal 2019 as compared to fiscal 2018. Profits for the segment in the third quarter was up $1.9 million over the same quarter in the prior year.

The third quarter fiscal 2019 was impacted by advertising being down $2 million in the quarter, compared to the third quarter of last year as we experienced the benefit of our litter for good program allowing us to lower advertising levels, but we continue to capture share. Now let's take a look at our B2B segment.

Profit for the quarter was down compared to the same quarter last year despite the stronger sales due to the higher cost impacts of manufacturing, freight, natural gas and packaging.

Income for the first nine months was down for the B2B segment as compared to the same period in fiscal 2018, based both on lower sales and the increased costs that I just mentioned. And to round out our discussion, I'll make a few brief comments on the progress we're making on reducing our trade working capital.

During the first nine months of fiscal 2019, our trade working capital was impacted by our ERP implementation, as we went live on our new system at the start of our fiscal year on August 1st.

Cash was used during fiscal 2019 to fund the building inventory and receivables, but we learned to leverage the new capabilities as well as work out the kinks in our ERP system. Inventory increased $4.2 million from the beginning of the fiscal year primarily in finished goods and packaging.

Some of this inventory increases is the impact of the increased costs discussed earlier, and some has been driven by the build of incremental safety stock, resulting from launching our new ERP platform. During the third quarter, we made progress on reducing our inventory levels, as inventory dropped 1.4 million from the second quarter of fiscal 2019.

This occurred primarily in finished goods as safety stock moved towards more normal levels. We've also seen an increase in fiscal 2019 and receivables of 2.3 million from the beginning of the year. This is primarily driven by stronger sales in the month of April, compared to July of 2018.

During the third quarter, our receivables improved by $2.4 million over the second quarter of fiscal 2019, as we worked through the backlog of aged receivables and other invoicing related issues resulting from our ERP implementation that we discussed with you previously in our second quarter investor call.

So with us a few highlights, and that brief summary, Dan, I'll turn it back over to you. .

All right. Thank you. And really you've covered everything very well. The only thing I want to highlight is the 70.9 million was the first time we had ever broken 70 million in the quarter. For the record not only for the third quarter, but for any quarter, in the history of Oil-Dri. So that was fun.

Let's open up the line and as always ask your most important question first and then go to the end of the queue that allow everybody the opportunity to ask at least one question. .

:.

Thank you sir. [Operator Instructions] Our first question will come from the line of John Bair with Ascend Wealth Advisors. Your line is now open. .

Thank you. And good morning.

How are doing Dan?.

Doing good.

How are you?.

Dan Jaffee:.

I'm good. I'm doing great. I got a question for you with regards to operations with this swine flu issue. What are you -- what are you all doing to kind of lay the groundwork for a recovery over there when that situation kind of gets under control, and the swine market starts to try to re-establish the breeding or whatever it is.

What are you all doing to try to get ready for that?.

I'm going to let Mike McPherson handle it, but I have some comments as well. .

Dan Jaffee:.

Coincidental to the spread of the African Swine Flu, the business I already was focusing more heavily on the promotion of Varium and Calibrin-Z for the swine market -- I'm sorry for the poultry market.

That was an area that historically due to the overabundance of swine in China, the China team initially focused on penetrating the market when we entered there and maybe was overly reliant on swine to fuel the growth, and thus to the extent on poultry, but Flemming Mahs, who's taken over the President of Amlan, since August has directed a lot of the effort more towards poultry.

The layers, breeders, and broilers so we have a lot of active trials that are going on now and that's the most turn into sales that will help offset the continued spread of the swine flu. .

Yes we're [Indiscernible]. That's exactly the right move. I mean people just because swine production is down 40% or 50% doesn't mean people have cut down their caloric [ph] intake in China by 40% or 50%, they're still eating. They're just switching to other meats and we need to participate in all meats and then win either way. So that's our strategy. .

Dan Jaffee:.

Thank you. Our next question will come from the line of Robert Smith with Center Performance. Your line is now open. .

Hi, good morning.

Could you give us an idea as to your ability to implement price increases sufficient to offset the increased costs?.

Yes. The good news is that we did take increases 81. Then the cost went up. We jumped in. Got some extra rounds of increases. And then, actually, freight rates were starting to come down a bit. So I think you know Susan mentioned the sequential increase in margins.

I look at it per ton more than percentages, but both of them were moving in the right direction from the second quarter to the third quarter. I think, you'll continue to see that in the fourth quarter and then you'll continue to see it in the fiscal 2020. So yes, I think we're in good shape from that standpoint. .

Dan Jaffee:.

Thank you. [Operator Instructions] Our next question will come from Ethan Starr, Private Investor. Your line is now open. .

Good morning. Oil-Dri's last 2 press releases both included the phrase growth strategies. And could you please discuss Oil-Dri’s growth strategies and if such strategies include acquisitions.

What are your key criteria in considering an acquisition?.

Sure. So our growth strategy was first of all to get the foundation strong using a house analogy. You don't want to build a new house on a weak foundation. And that came with the multi multi-million dollar investment in our ERP system.

Second part of the growth strategy was making sure we had the right people in place, in order to leverage the infrastructure that we've invested in. And you've seen a lot of new names and faces at the highest level, the companies Susan and Molly who's our new Chief Operating Officer.

We promoted Jessica Moskowitz to take over our consumer products division, and promoted Laura Scheland to be our General Counsel. So we've had some good changes at the top of the company and then Mike you got promoted, you were I don't remember what your old title is, but Chief Development Officer.

And then what happens, when you do that and those people then raise the bar with the people reporting to them. And so that's all happened. And so you've got the old and experienced are sort of them skipping their step, myself included. And then you've got the new folks who are bringing world class skills into the company.

And then finally you got to have two other things in order to grow, one is, you've got to have the financial firepower to get it done. We're down to almost no long term debt. I think we're just down to $3 million of current maturities of long term debt. So we're down to almost nothing on the debt side.

So we have a highly under leveraged balance sheet, and as we announce, we have a untapped revolver of $45 million. So that's the first part of the equation. Do you have gunpowder? And then the second part of it is do you have something to shoot? And the answer is yes.

I mean, I'm not going to get into too much specifics, because I think that we're just – again, yelling to the other side what play you’re going to run, doesn't tend to lead to more yardage in football. And we're not going to do it here either.

So just suffice it to say, the infrastructure is there, the team is in place, we've got firepower, and we're going to start hitting the accelerator. .

Dan Jaffee:.

Operator:.

Good. Thank you. Quick follow up on that. On my previous question that is and that you do these trial studies, and so forth.

When might you see some positive results on that, where it might actually turn from the trial studies to actual revenue sales, that kind of thing?.

We should start to see growth from that in the fourth quarter. .

Dan Jaffee:.

Okay very good. And a follow up here on that, one if possible, cat litter sales increase is that due to new merchants being added to the mix or just overall increase in demand from existing -- our existing customers. Thank you. .

Both. All the above. I mean the velocities of existing towns is increasing dramatically as you guys know because we announced it. We lost our third or fourth largest account a year ago. We lapped them in this quarter which was colder.

But we're still year-to-date at 7% losing the third or fourth largest account which kind of tells you how much we would have been up had we not lost. And again, we didn't lose it for real. I mean we didn't lose them through the lack of performance. Our products were moving in the top third of their product line.

It was for whatever strategic reasons that we didn't understand. But having said that, so our existing account business is doing very well. And then, we have put on new business certainly with a private label lightweight, and also been putting on some course, traditional business. So it's all of the above on that.

So we are -- we are proud of the results of what's going on in the grocery division. And as Susan mentioned, we're now up to almost a 16 unit share in the category. Certainly if you add in the product that we make for Clorox, we're well over that. And so we're probably in one out of every shopping -- one out of every five shopping carts in America.

There's an Oil-Dri product in there. And so we clearly have critical mass in this category. .

Dan Jaffee:.

Thank you. And we have follow up questions coming from the line of Robert Smith with Center Performance. Your line is now open. .

Dan, could you give us some color on the R&D effort where it's focused at the moment?.

A - :.

I mean, again, I don't like to get too specific as this is just going to tip the competition where we're going. I would just say we're continuing to spend it equal to or greater rates of what we've done historically and we continue to be very bullish about where that spending is going. So, I don't think I'm going to get into any specifics. .

Okay.

And how about advertising expense in the fourth quarter?.

In the fourth quarter, I don't get forward guidance like that. I mean historically, Susan made a great point. I just want to give you a little trend because I think it's very important. Our sales are up 7% year to-date, 12% in the quarter despite losing Kroger and for half of this year. We lost them for half of last year and half of this year.

And yet our total advertising is down significantly. And that is the power of Litter for Good.

That’s the whole grass roots program where we have engaged over a thousand shelters coast to coast to actively solicit their donor base to not only join the Cat's Pride but then to go out and buy and tell all the friends to buy the green jug because every time they do we donate a pound of litter to shelters.

So if you look back at all, our total advertising back in half 2016 was $17 million, year-to-date it's at five. So we've been able to dramatically cut national TV advertising and yet deliver increased sales. That means profit per working dollar spent is going up in the consumer division.

So, we don't believe we can outspend the big boys and we don't believe we should. And so we have to be a little more nimble and a little smarter. And so far it's working. .

Thank you. And our next question will come from the line of Ethan Starr, Private Investor. Your line is now open. .

Yes.

Did the settlement received in the patent litigation exceed Oil-Dri's total expenses in litigation?.

Yes, it did. .

Okay. That's good to know. And also you mentioned in the queue there was mention of several new private label customers added.

Do you still have more room to grow in private label with new customers?.

Certainly with new customer and we have a large share and so the biggest growth is going to come as we continue to execute getting price parity. And even in some cases now because freight costs coming out of the Northwest and rail has hit the sodium bentonite industry pretty hard.

So we're actually seeing some accounts with a lightweight is now priced under the heavy and the more that can continue to happen the more product we're going to sell. So I'd say increase velocity with existing accounts is a bigger opportunity than new accounts, but both will play a role. .

Okay. One more quick question.

How do Metal X and Proveta [ph] differ from your current products and when do you expect them to generate revenue?.

Since I've never heard of either one of them. I can't answer that question. Do you have any Ids like trademarks [indiscernible]? I wouldn't answer. Are these like trademarks [Indiscernible] but yes, both are new experimental products that are going to be field tested in the fourth quarter. .

Okay. Thank you. I’ll go back in to the queue. .

Thank you. We have a follow up question coming out of Robert Smith with Center for Performance. Your line is now open. .

Hi.

Mike, could you give us an idea of the opportunity of poultry versus swine in the Amlan market?.

A - Mike McPherson:.

A huge article in The New York Times this weekend regarding the continued global shift away from antibiotics in the food chain to get it out of the human food chain so that we don't end up having resistance to them when we need them. And so the trend lines are in the right direction.

The question is what's the best way to get to market? And we're continuing to look at them. .

So while this is all going on.

You have these tests going on is that correct?.

A - Mike McPherson:.

The test mark with potential customers. .

A - Mike McPherson:.

Thanks. .

Thank you. And we have follow up questions coming from Ethan Star, Private Investor. Your line is now open. .

Yes. Susan touched on this in her comments, but receivables and inventory are still higher than I'd like and I'm hoping we'll continue to see those numbers decrease and cash increase soon.

And I guess this goes in tandem with the ERP system being installed for a longer period of time as well?.

Yes. And as I said, we did -- when we talked last quarter I told you that we anticipated seeing some improvement over the third quarter and we did. We aren't at what I would call the new normal yet. I think there's still more opportunity particularly on the inventory side.

I think we've still got some safety stock built into the system that as people get more comfortable you'll be able to see us drive it down. .

Okay.

How about DSO? Will that drop as well?.

DSO is back to July 2018 pre-implementation levels today. So the opportunity there is you know can we get better terms, but really as we move to business outside the U.S. and other types of customers we end up with longer terms, we end up with a customer mix.

So -- but I would tell you, as DSOs are back to normal, and now we just have to look for ways to improve it. .

Okay, great. Thank you.

And so some of the ERP system is going much better these days?.

It is going much better these days. .

Okay. Thank you. .

Thank you. We have a follow up question coming from Robert Smith with Center for Performance. Your line is now open. .

Yes. I just wanted to circle back to this question of the price increases.

Is there an opportunity to get ahead of the cost curve, I mean, when you try and implement the price increase? I mean is that a question of what is it a question of? Projections of your own costs going forward or how do you look at that?.

Yes. Now that's exactly right. And we definitely were under predicting last August 1st, with August 1st increases. So the increase we took in August 1st did not adequately anticipate the shipping crunch that occurred in what was our fiscal first quarter August, September and October, and so that we're playing catch-up after that.

But it was pretty dynamic and no one's predicting that again. They didn't predict the last year either. But we are expecting to be ahead of the curve this year. .

Thanks. .

Thank you. And I'm showing no further questions. So now it is my pleasure to hand the conference back over to Mr. Dan Jaffee, President and Chief Executive Officer of closing comments or remarks. .

.

Dan Jaffee:.

Ladies and gentlemen, thank you for your participation on today’s conference. This does conclude the program and we may all disconnect. Everybody have a wonderful day..