Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Oil-Dri Corporation of America Earnings Conference Call. My name is Francine, and I am your operator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Mr. Dan Jaffee, President and Chief Executive Officer. Please proceed.

Thank you. Welcome everybody to the second quarter and six months teleconference. With me in the conference room is Doug Graham, our Vice President and General Counsel; Dan Smith, our Vice President and Chief Accounting Officer; Jeff Libert, our Vice President and Chief Financial Officer; and Rhonda Williams, who heads up all of our Investor Relations and will also walk us through the Safe Harbor.

Thank you, Dan. On today's call, comments may contain forward-looking statements regarding the companies 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 stock. Thank you.

Thank you, Rhonda. And as always, we will start with somewhat detailed brief recap of the second quarter and six months that Jeff will walk us through, and then we will open it up to Q&A. And we encourage you to prioritize, ask your most important question first and then get back into the end of the queue. So Jeff, will you walk us through the results?

Thanks, Dan. Sales for the quarter and year-to-date were up 5%. For the quarter we sold about $57 million worth of product and $113 million for the year. EPS didn't fare quite as well. For the quarter, we earned $0.25 a share, which was down 19% versus a year ago. For the year, we earned $0.50, which is down 2% versus a year ago. The story here for the top line is that we continue to experience success with a number of our product lines. However for the bottom line, things didn't go as well, and it's a story that we're hearing quite a bit in the business world these days. We've suffered due to increased costs, and it's really primarily oil-related. Oil is a major factor of our freight and it's a major factor in our packaging cost. And we've all seen a spike in our healthcare-related cost. That's something that is going on in the community in general. Also our foreign subsidiaries have struggled during the year. We've seen a very vigorous competition in our foreign subsidiaries. And our spending in market research and advertising has increased. Those of you familiar with Oil-Dri know that this is reflective of our long-term philosophy. In our business-to-business area, some of the areas that have done well. We've seen a lot of increase in our fluid purification products. However, sales of our Ag Chem and co-pack packaging litters have declined during the quarter. In our retail and wholesale area, sales were strong [indiscernible]. And sports turf products, however, they were not strong enough to cover some of the increased cost that we faced. Moving onto our balance sheet. We are in a very strong position. Our cash investments balance is now $40.7 million. During the quarter, we closed on $18.5 million of borrowings. And as in the past, we remain committed to dividend. Our yield -- our quarter dividend was 16% and that represents a yield of 3.4% based on the quarter end closing price. And we can also have continued our share repurchase program during the quarter. We bought almost 79,000 shares, which cost us $1.7 million during the quarter and for the year, we spent $2.2 million on share repurchase. So that pretty much summarizes it.

Thanks, Jeff. I'll add a couple of bullet points, things that we've talked about in the past, which is our average selling price. And then in the past, this has gone up greater than our average cost, so we, for the last few years, have been able to show some margin expansion. The good news is our average selling price in the first half was right around $256 a ton, up from just under $240 a year ago, so a nice increase. However, margins were still down. So that sort of amplifies what Jeff was saying, which is our ability to get the cost up. Again, our prices are greater than our cost, does not happen. And so we have seen margin erosion in the quarter. We are working diligently. A lot of our prices are set contractually and there's an annual mechanism. So those will go up when it's time for them to go up. And a lot of our prices are committed through the end of our fiscal year. So those -- we want those commitments as well. Where we can, we're raising prices and oftentimes, it's in the form of passing on incremental fuel through a fuel surcharge on freight. So I think everyone has seen this probably in all areas of the economy. Commodity prices are going up that we're being impacted as well. I would like to, Francine, at this point in time, open it up to Q&A to make sure we cover the issues that are most important for our investors.

[Operator Instructions] Our first question comes from the line of Ethan Starr.

I'm wondering, are the increased capital expenditures for new product initiatives, is that for new manufacturing equipment? And if so, when will the installation of such equipment be complete?

I'll take that one, Dan. We continue to invest in our manufacturing infrastructure, Ethan. You know very capital-intensive business, and it does require a number of reinvestments during the year. We also are investing in continued automation and making our progress more efficient. And we do have some projects underway right now, and we'd expect them to be done in the next six months or so.

That's relating to the new product initiatives, the new equipment?

Really, it's all kinds of things, Ethan.

Well the new product, when might you see revenue from this new product?

I don't think we're answering that question right now, Ethan.

[Operator Instructions] Our next question comes from the line of Robert Smith from the Center for Performance Investing.

So the Calibrin, the new product registration in the international market. We'd spoken in the past about China, so that seems possible. I mean are you willing to state that? Or this is out or what?

That was very perceptive on your part, and that is the large market. So our Calibrin-A, our aflatoxin binder has been approved in China. And we're in the final stages of trying to receive approval at Calibrin-Z.

What do you feel is the opportunity there, as far as size goes?

We're not disclosing that. I mean it's obviously a significant market, and we have a lot of hopes for it.

What is your CapEx estimate for the fiscal year?

We expect to be a significant year in terms of CapEx. I would expect it to be something in excess of $10 million.

And how much of that would be related to new products?

I'd say a fairly good chunk of that.

What do you mean by that?

Maybe half of that.

And I noticed the yield is up this morning. That's a little touch of humor.

And we have a follow-up question from the line of Ethan Starr.

How are Calibrin and Verge doing generally? And I'm wondering if -- also is the manufacturing of Verge continuing to progress as far as ability to produce different sizes and different things?

Let's start with Verge first. Our customer demand continues to be very strong. The sort of breakthrough technology is being leveraged by a couple of key customers who are seeing real benefit out in the marketplace. So they're able to market that, and they have exceeded their forecast with us in terms of demand. So that's a very good thing. We're hopeful that we'll get the volume up to the point where we can justify Phase 2 of the expansion. Phase 1 was a lot of infrastructure that can be leveraged in incremental capacity in Phases 2, 3 and 4 without putting in a lot more incremental capital. So the average cost of the product would actually drop. We did not want to go to Phase 2, and so we had stabilized the process. I can tell you the team down in our Ripley's facility is doing a great job. I was just there again within the last 30 days, and it's fairly stable. I mean, they're getting it. They're getting it to where the cost have come down. They're stabilized, and they still have some ideas on how to improve it even more. At the same time, we're putting together the justification to go to Phase 2. So far, things are good on the Verge front, sort of as you would expect. Anytime you're creating a new-to-the-world really technology, there are going to be some start-up challenges. And we have hit those, and we've overcome a lot of them. So still very optimistic on Verge. Calibrin, the core products are doing sort of what we thought they would do. These are the clay-only toxin binder, where Dr. Ron Cravens and his group would be the first to admit and discuss, where they would be disappointed would be on the new product side and getting into sort of a broad spectrum binder and then even into what they would call gut health, which would be a little further up the value chain from just pure toxin finding. So we're continuing to invest out at R&D and then in outside labs, in-vitro and in-vivo study to find the right blend between our clay and other additives that are known in the industry to come up with the best products because at the end of the day, the nutritionists are going to be driven by data and your products have to work. The good news is, from a toxic-binding standpoint, our products work the best of anything we've seen. And we put our products into test against a lot of the other guys. And our products work very, very well in Aflatoxin and Zearalanone, which are the A and Z in Calibrin. And so we're continuing to leverage that, but we know we have to move up the value chain to make this thing a success.

So I hope at some point you'd be able to out sell to the other guys?

Yes, that would great.

The broad spectrum binder you mentioned, is that varium?

That's sort of the code name for it. I don't know if it will end up being marketed under that name or not. That's to be determined. That is the idea.

We have a follow-up question from the line of Robert Smith.

I thought I heard you say that the per ton figures were $256 and $240, is that right?

$240 a year ago and $256 this year.

Then you spoke about price increases, and this question of contractual -- so what portion of sales is contractual through the end of the year? I mean what freedom do you have to raise prices across your product lines?

The majority of our business is not contractual.

So you have that wiggle room.

Yes.

And we have another follow-up question from the line of Ethan Starr.

Given the increasing price of plastic resin, at what point would it make sense to switch to cardboard boxes for cat litter packaging?

I think your percept of the category is blending the two. Consumers, there's still a set of consumers who love the jug, but a lot of them have accepted the boxes. So we do sort of a rudimentary box now, and we're definitely looking at upgrading and doing sort of a state-of-the-art box in the near future.

I just read an article this week. There's this company, Seventh Generation is doing -- they're going to do a cardboard container for their your liquid laundry detergents. If they think they can do that, I would certainly think you can get a better box for your cat litter hopefully?

Yes, absolutely.

I know you've had issues in the past with the boxes, but hopefully you can make it work. I don't know if I -- would the cardboard generally be cheaper than plastic or not?

I think I for an equivalent size, yes, I think it is.

That's something to consider, you decide what to do. But anything that cuts cost is always nice.

The beauty of the cartons is even on the -- if we're getting the per unit cost, it's because they're rectangular in shape. The stack along on a palette, but you can get more on a palette, given the same -- less wasted space. Whereas jugs you get all the curves and the handles and all that kind of stuff. So you're definitely paying to ship air to a greater extent than you are with cardboard boxes.

Would it make any sense to, I don't know the details of the Verge manufacturing process or would it make any sense or the Verge leverage technology to apply that to any of your other products?

Absolutely, and we are looking at that. We think that has potential.

For when?

Well, nothing in the near future. Anything of that value added space -- they have to go through tests and get the data and all that kind of stuff. But we're looking at it.

Does that aim more to consumer or industrial side?

Probably more on the vis-à-vis side. Only because on the consumer side, one of the benefits of Verge is it's spherical and with very great uniformity. And imagine a litter box full of BB, not a good thing. Because if they get out, they can roll and that's not a benefit in the cat box. You don't want spherical. You want non-uniform granules so that they don't crack and they don't roll.

Sure. Are the prices you're charging today, literally today where they need to be to restore profitability to where you want it?

No.

Is that no?

No, that's a no.

Then I'd like to urge you to continue to repurchase stock. The stock's down today. Hope we can get some shares at a bargain price. And also, when it makes sense to do so, as well as to increase the dividend again this year.

You stole Bob's thunder and now -- going to knock him out of queue.

Any additional votes for that I'm sure will be appreciated by other shareholders.

Yes, that's true.

And we have a follow-up question from the line of Robert Smith.

I noticed that in your press releases you do highlight this fact about the dividend being increased for seven years. And I think it reads very well, and I'm hopeful that you will continue this policy. So are there any numbers that you can offer us about the comment about Wal-Mart?

I'm glad you brought up Wal-Mart. I would just say that we're -- I think our relationship is better than it's ever been. And I was just down at their vendor supply summit, which is something we have not been invited to the last couple of years. So number one, nice that we got invited. And got to spend time with both our buyer, our DMM, our GMM interact really with all levels of the company and then from the senior execs presented. And everything they're talking about is right in line with what we can deliver. So we feel like strategically, we're moving in the same direction as our largest account, which is obviously a very nice thing to be able to say.

So are you continuing to increase the store count?

No, like I said in the past, they are huge. I mean they have 2 million associates. And so we will hope and continue to increase stores as they work on what they call the modulars and make changes. But I can just tell you that they talked about a couple of key things. Number one, they want brands. They want assortment. And they want brands to the extent they can be to be the OPP, the opening price points in categories, not just private label. And for instance, Cat's Pride Scoopable is exactly that. It gave them assortment, it was unique, it's flushable. And it was the opening price point for branded scoopable litter in the category. And so when you start hearing that, it makes us encouraged about the future for Cat's Pride Scoopable in Wal-Mart.

But has the storefront numbers increased in the last three months?

Last three months, no. They look at them every six months, and so the next time they're likely to look at them would be some time in the fourth quarter of our fiscal year.

And can you share any performance numbers from Calibrin in the quarter? Just was it up?

No, same, it was relatively flat.

Which is disappointing, so we are -- no way are we waving the light flag. We're still very encouraged and confident about our long-term prospects in the animal health area. We've just hit some road bumps here in the short run.

Anything that you might comment about the R&D function going forward? I mean about the money being spent as productivity and anything on the final highlight? If you can't speak of it now or the timeline to when you might be able to say something?

I would just say as an investor, you should want to know, as we're hitting a softening in margins, are we cutting the things that could potentially benefit us in the long run? R&D, advertising, sales effort and the answer is no. So we are doing what we can to control the expenses that are not in those areas. But I would say, we're actually spending more in those three areas. And we're going to continue to do so. We are still very encouraged about the long term prospects of our business and feel that short term, yes, we've been hit with cost increases greater than our ability to forecast them and get out in front of them. But I think we're not overreacting either. We're going to get our prices up. We're in rational markets, which is good. I've been reading a lot about Warren Buffett, where he likes to invest. And one of the things that played his hot button is pricing power. And I don't know if we have pricing power, but I think we're in rational markets, where when external costs go up, the market in general tends to have to react because these are not things we can control and nor are we expected to control. So oil going up as much as it has. It's something that's completely outside our control. So we will be out there raising prices and trying to cover the cost increases.

And any comment that you could offer about the year as a whole?

You know we don't really give too much forward guidance, but you can read into my comments to say that I think 2011 will go down as being a very important strategic year, but maybe not -- when you look back in your investments to say it was the greatest financial year. I mean we're behind right now on earnings from a year ago by a couple of pennies or wherever we are, $0.01, depends on how you are rounding. We'll finish the year on whatever trajectory we're on, but I really think we're planting seeds that for '12, '13 and '14 are going to be very valuable to you and the rest of the investors.

Do you think you can match last year?

You know we don't really give forward guidance, so I'm not going to answer that question. And look, you should take a lot of pride. That comment at the end of the news release or wherever we mentioned the dividends, that's straight out of you.

I accept that, and I think the world is a policy itself. And I think it really adds weight in the investment community. And we'll have increasing weight.

And we have a follow-up question from Ethan Starr.

The press release mentioned of course, the Cat Litter category and it's declined. To what extent, long term, if it declines significantly, is that a potential threat as far as leveraging your fixed costs?

You know it's a good question. I would say the good news is, yes. It's declining as a percentage of the overall category because the growth of the category has gone to Scoopable. However, I will tell you when Scoopable was launched 19, 20 years ago, right around 1991, we had pretty much completely gone through the life cycle of any cat that have been born and raised and perished during that period of time. And yes coarse cat litter is still a huge part of the category. So I think people were sort of predicting, "Oh yes, people stay with coarse because that's what they were traditionally in, but the buyers will all go to scoop." That is not true. I mean, so the new buyers are making the decision to go to coarse everyday. Obviously, more new buyers are making the decision to go to scoop. But we would be out of coarse altogether if the predictions from the 20 years ago had come true. So that's sort of the good use to sort of directly answer your question. I mean it would not be good for us if coarse cat litter went away. There's no trajectory that's sort of predicting that's going to happen anytime in the near future. And so you end up owning a greater share of a smaller segment of the market, which again, getting back to any kind of pricing power, all the investment and any kind of new capacity that's coming into the cat litter category is coming in on the Scoopable side. So you can read into that what you want, but the competitive aspect of the category is on Scoopable, not coarse.

Can you expand a little more about your comment before about Phase 2, 3 and 4 on Verge?

Basically the plant's been designed in a modular fashion with enough space for all four phases. And as demand can justify it, we can then make the next investment into Phases 2, 3 and 4. We've only invented in the first phase so far, but there is plenty of space for future growth. And so as our profitability improves, as we improve the process and as customers adopt our granule, we're going to be moving in into those other phases.

And I was doing that on the back of the envelope, Ethan and so don't hold me to that, but just an order of magnitude. The fixed cost per ton on Phase 1 because we did have to build up the infrastructure to allow for incremental capacity in Phases 2, 3 and 4 as a fixed cost is roughly, I won't even get into the numbers, but my back of the envelope is about 5x what the fixed cost would be on just the discrete expenditure in Phase 2. So that means we can pretty much double the capacity with 1/5 of the capital. So as you start to do that then you drive down your overall average cost, and the whole thing gets a lot more profitable.

So is Phase 2 just additional capacity and not something that makes a different size or different quality? Not different quality, but different size or...

So you've still got the same three variations. You got the non-disintegrating, you got the disintegrating and then you got the slowly disintegrating. And then under that, you got three different sizes, our 100, our 140 and our 200. And then Phase 2 makes those same exact nine SKUs, but it just doubles our capacity.

So getting close to -- once you find the process enough that you can produce them consistently well, you'll add Phase 2?

I think we're getting pretty close to where I'm expecting, Jeff and Tom Rutherford, who's the VP of the division to come to me with a request to think about Phase 2.

So Phase 3 and 4 are just additional capacity?

Right. We can make all the products that we want to make right now. We've got those capabilities. The question is customer adoption is, so far, we are very much on track with where we wanted to be on that and cost and that's a little bit harder for us. But we are making progress.

I would encourage you to Google or Yahoo, and I bet it's out there somewhere. Verge and -- I haven't tried to do this, but I know that they're out there. FMC is out there with an advertising campaign really touting the Verge granule. If you don't find it, then it will be out there soon enough. It just means they haven't put it out there.

I have done that and there's a press release out there and they're talking about the strength of their product. And the reason why it's so strong is because it's revolutionary Verge technology. If you do that, if you look on their website, Ethan, you'll be impressed.

So I encourage you guys to do that because it's really a nice testimonial to -- if you build it, they will come. And we built it, and they've come.

And that concludes the Q&A portion of the presentation. Mr. Jaffee, any closing remarks?

Thanks, Francine. And yes, thank you guys. Look quantitatively, not a great quarter, but again, qualitatively under the covers, a lot of investments are being made that are not going to -- that did not and would not help the quarter, not even likely to help the next quarter or the quarter after that. But there's certainly things that we are hopeful and confident are going to help future quarters. And a lot of good strategic investments are being made to grow the business. So thank you, and we will talk to you again in three months.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.