Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 Oil-Dri Corporation of America Earnings Conference Call. My name is Takisha, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Daniel S. Jaffee, President and CEO. Please proceed.

Thank you, Takisha, and welcome, everyone, to the Oil-Dri Second Quarter and 6-Month Teleconference. Joining me, as always, Dan Smith, our CFO; and Doug Graham, our Legal VP and General Counsel; and Reagan Culbertson, our Manager, Investor Relations and Manager -- Reagan, will you go through the Safe Harbor?

Yes. 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 stock. Thank you for joining us.

Thanks, Reagan, and everyone has had an extra 24 hours to prepare so we're expecting extra insightful questions today. But before we open up the Q&A line, Dan, will you walk us through the quarter and 6 months?

Sure. Thank you. Good morning to everyone. Oil-Dri's first 6 months were strong, but the second quarter's results reflected anticipated increases in advertising spending. Sales of $61.1 million for the quarter and $122.5 million for the year were both up approximately 2% from last year. Our EPS was $0.31 per diluted share for the quarter was down substantially from the $0.45 earned in the second quarter of fiscal '12. Year-to-date, our EPS was $0.94, which was up significantly from the $0.60 earned last year for the first 6 months. The lower earnings in the second quarter reflected a $2.3 million increase in our advertising and promotional spending in the Retail and Wholesale segment compared to the second quarter of fiscal '12. The increased spending was to encourage consumer trial and expand distribution for Cat's Pride Fresh & Light cat litters. Year-to-date, our advertising spending is down about $300,000 from fiscal '12. In the Retail and Wholesale section, team reported about 1% sales growth for the quarter and 2% for the first 6 months. However, the segment's income was down $1.1 million for the quarter due to the additional advertising and promotional spending that I mentioned before. Year-to-date, Retail and Wholesale team reported a profit increase of $4.6 million over the first 6 months of fiscal '12. We continue to expect that our overall advertising expense for the fiscal '13 will be more than historical norms but less than fiscal '12. In the B2B section, the group had another strong quarter. Sales increased 2%, but profit increased 10%. We saw a strong sales growth in our fluids purification, animal health and nutrition, copacked cat litter products during the quarter. Sales declined for our agricultural carriers in the quarter. Year-to-date, B2B team reported a 3% sales growth and a 5% income growth over the first 6 months of fiscal '12. Our gross profit remains strong at 26.6% for the quarter and 27.3% for the first 6 months, both were up substantially from the same period last year. Our balance sheet continues to be strong. Cash generation continue to be good. Our cash and investment balance at the end of the quarter was $35.8 million, which was only down about $500,000 from last year, despite accelerating about $2.4 million in dividends and investing about $1.5 million more in capital expenditures for the first 6 months of fiscal '12 -- versus the first 6 months of fiscal '12. Our cash and investment balances continue to substantially exceed our debt. Finally, during the quarter, we announced our intention to accelerate payments of our fiscal third and fourth quarter dividends. A dividend of $0.36 per share of common stock and $0.27 per share of Class B stock was paid on December 28, 2012. This payment was not a special dividend or an increase but rather an acceleration of the quarterly dividends that normally would be paid over the course of fiscal '13. Thanks. I'll return the meeting back to Dan Jaffee.

Thanks, Dan. And Takisha, at this time, we'll open up the Q&A. And as always, we encourage you to ask your most important question first and then go back in the queue just to allow everyone a chance to ask at least one question. And then if we have time for more, we'll cover your second and third questions.

[Operator Instructions] And your first question comes from the line of Ethan Starr [ph] private investor.

To what extent are you seeing the percentage of repeat buyers of Cat's Pride Fresh & Light increasing?

We are continuing to see that positive trend of repeat, which is very encouraging. And I'm prepared to cover IRI information. I'm assuming you're always interested to hear what's going on in the marketplace. Would you like me to cover that now?

Absolutely.

Okay. It's interesting both on the positive but also on the challenging front. We'll start with the highest level, which is 52 weeks. So you got a full year's worth of market activity. This is through February, that's the most recent data I have. So the category is growing at about 4% in dollars. Oil-Dri's total business is growing at 17%. And remember, this is multi-outlet. It includes food, drug and mass. It does include Wal-Mart now. They now participate in this. It does not include pet specialties, so like a PetSmart or a PETCO, or even clubs stores do not disclose their data. But it covers -- so it's showing the category at $1.6 billion. We guesstimate that the category is about $2 billion. So what you're seeing here is about an 80% snapshot. There's maybe $400 million of retail that is not captured. But now that Wal-Mart participates, it is now up to a good 80% of the category. That's a guesstimate, but it's probably not a bad one. So again, category, $1.6 billion growing at 4%, Oil-Dri growing at 17%. Our scoopable products are growing a total 25%. And then obviously, with the huge jump, Fresh & Light, up 180% over a year ago. But what's interesting in the 52-week number is that we've launched Cat's Pride Scoopable 20 years ago, it's always been our leading seller. That achieved $22.5 million worth of sales in the 52-week period. Fresh & Light, in its first full year of launch, we already achieved $24.5 million in sales. So it already eclipsed Cat's Pride Scoopable. And Cat's Pride Scoopable was down a bit 4.8% during the 52 weeks, but not nearly as much cannibalization as we had worried about. Frankly, it was unknowable how much cannibalization there would be. But…

Okay, great. But are you making progress in -- on increasing customer trial rates for the Fresh & Light?

Yes, we are making a great progress. We have our display programs going on where we're trying to designate to get trials in this category is to drive incremental merchandising at shelf. And so we've got to have a pallet program going on that we're shipping to numerous customers, thousands of half pallets, and that's been incredibly successful. I can give you anecdotal data, but it's very positive. At one major account that we ran this with, we had roughly an 8 share before we ran it. We were moving on Fresh & Light. That's 8 total, all our products, we had an 8 share. We were moving 1.5 units per store per week of Fresh & Light. We ran this half pallet program, which has 48 units on it, and it sold through in 6 days. So that's 8 units per store per day of Fresh & Light. Then when we let it lap, we've let the promo lap and then look at the 4-week period after to see what did our share do, it actually eclipsed 10. It's at about 11.5 so -- at this account. So it shows that we got the trial out there, and then consumers came back and bought it at full price after the deal was over. So we're continuing to run this program. We've got other programs as well all around incentivizing trial.

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

I'd like to get my arms around advertising and promotions. So I heard that you spent $300,000 less for the year-to-date. So what was the actual figures?

We spent about $3.6 million for the first 6 months.

Okay. So that's versus $3.9 million?

Approximately.

Pardon?

Approximately. That's correct.

Yes, okay. And what is the total number for last year?

We -- I don't believe we've disclosed that.

Well, you disclosed the 6 months, I mean...

Yes,...

I think it will be really helpful.

It's in the neighborhood of $10 million.

Okay. And for the year, Dan, you said that will be somewhat less this year?

That's correct.

Okay. Can we go on to B2B and Calibrin and Verge?

Well, yes. Let's see if there are any other questions. If there aren't, then pop right back in and keep firing away.

[Operator Instructions] All right. And we have the follow-up question from Mr. Ethan Starr [ph].

Yes. Dan, please pick up on Bob's question on Calibrin and Verge.

What was his question?

How are Calibrin and Verge doing? Is there a new Calibrin product? I guess, Verge sales were a little bit lower the first half of the year or last -- this Q2?

Yes. I mean, so I guess I'll take the second question first. Way more of a skimming strategy than a volume strategy in Verge. And by that, what I mean is, we're using Verge -- it really is -- it's outstanding product. It is eye-popping when consumers see this engineered granule. So we need to find customers who can leverage the benefits of uniformity and 0 dust, and there are many of them out there. And when they do, price is not even an issue because they're getting -- they're being able to put less active ingredient on it. They're being able to have a tighter pattern when they spray it out onto the field, so there's less chemical going out. I mean, there's so many tangential benefits to what our product can do that when that all happens, the value proposition is such that price, not that it's irrelevant, but you're not competing with anybody else. So it's not, oh, your price is $5 a ton too high. If you lower it, you'll have the business. So we're really zeroing in on those accounts that it really resonates with. Then, if price is really the issue for them and there are many accounts where price is the issue, if they're in a large volume, very competitive industry and maybe the active ingredient isn't as expensive or they're not as focused on dust and the tightness of pattern, then Agsorb is a great product, which we've been making for years and we have a lot of capacity, and we can make it at a very low price. So we really have the whole suite of products targeted at the whole range of the market. But I'm glad we have not gone to Phase 2 or 3 of Verge because what…

Okay. But back to Verge for second. You said the consumers were amazed. So is that business consumers or retail consumers?

Both. I mean, it starts in the B2B area, but we've got a couple of key customers who have used our product, our name and our -- and high-speed video imaging to show their customers the benefit of having no dust and a very tight control on uniformity and, therefore, a very tight distribution pattern. So it -- the benefits are to both.

Okay. Any new country approvals for Calibrin recently?

I don't think so. Still expanding what we've got going in China. I mean, that was last year's big approval. And we're spending a lot of time and energy and investment in expanding our relationships, having feet on the street through distributors and agents and so forth. But no, nothing. That was the big hole that we needed to fill.

All right. Your follow-up question comes from the line of Robert Smith.

I just wanted to be tackling the Calibrin again. So what is the market opportunity again if the clay plus works?

Yes. I mean, it's astronomical, so I'm just going to qualify. I mean, there's a general belief that these gut health issues are costing the food production globally billions of dollars a year. So they're willing to pay to help and improve the efficiency of their animal production. So you can't input a number on it. I mean, it's astronomical.

When are you going to complete these in vivo trials?

Well, we completed one. We've got a couple more going on right now. Next 3 months are going to be critical for those. It's -- it is all about the data, so it takes time. And the good news is, the core products are doing very well. But it's time for some new products.

Yes, but then, so -- you said 3 months. I mean, but really, when can you really come with data that can you really blow this away?

Yes, I can't answer that -- I don't know, so I can't answer that question.

Can you give me any kind of ballpark, timing?

I mean, it wouldn't be realistic. Look, you've seen how long it takes us to launch new products and to get...

[indiscernible]

Right, so a long time, about 2 years. Yes.

Okay. I wanted to just bring up Larry Washow for a minute. We were surprised that he came on board as a Director. I met Larry once. I admired his work at AMCOL. Can you just give me some color as to how this happened and...

Yes. I mean, I think it was, frankly, a coup. I mean, I've always had a very good competitive relationship with Larry. And when he left AMCOL, he was not encumbered, restricted from joining our board. He's got a wealth of experience, obviously, in industrial minerals, international acquisitions, M&A. All of those things are very valuable to us. And so I was very happy to have him join our board. I mean, to me, it was a perfect fit.

And what do you think his main contribution will be?

Around the areas I just said, industrial, minerals, international, M&A-type experience. He started on HR. It's interesting. And so he's got a great background on just on the people aspect and the business as well.

Okay. And is the stock buyback active now? Are you starting to nibble? The stock essentially was flat for the year, the market is up. Just trying to get a feel for if you're in the market or at this price level. Have you bought any stock recently?

No, we haven't bought any recently, and I would say it's on the back burner.

Okay. And remember, the $64-question, I mean, the $2-question?

That's your $2 question.

Okay. I think the back half of the year is important bottom line and I know you're managing the business on the long-term basis, and I congratulate you on that. But there are some feelings about where we are for the year. I mean, as far as the estimates go.

Yes, duly noted.

You have a question from the line of Alex Marsh Michen [ph] from Tivo Price [ph].

Dan, I was just curious as to -- if you could talk a little bit about the gross margin expansion from last year and what's driving that?

Higher prices and lower costs. No, I'm just kidding, Alex. I mean, that is what's doing it, but it isn't just that. It is continued focus on creating value from sorbent minerals. And it sounds easy, but it really isn't. It's been 13 years in the making. And it's really focusing in on the R&D, understanding our minerals, they're very unique. I would say 20 years ago, we had some specific applications. But for the most part, 90% probably of our sales were just commodity-based. We were competing on price, and we didn't even understand what our products did. And so why would our customers would want to pay us for that value? So we've really tried to get closer to the customer, closer to the end user, closer to our mineral and say, are there unmet needs out there that our clays could potentially meet? And little by little, step-by-step, we've been doing it. So I printed out the last 6 years just to do it. But you could go back even farther, but you are 100% right. I mean, the gross margin, I'll just read you across the line in '08, 19.8%; 20.9% in '09; 22.7% in '10; 22.1% in '11; 24.3% in '12; and now 27.3% in '13. So if you go back farther, you'll see the lower trend. I mean, it's just been little by little, selling our more value-added applications, which then allows us to make a little more margin, which then we can reinvest in the business and keep the snowball rolling. So...

That's helpful. Is Fresh & Light higher gross margin than the Cat's Pride Scoopable? So should we see a margin lift as that becomes a larger part of the mix?

I'm not sure how much we disclose individual SKUs, and I have said and I'll continue to say, it's clearly higher value than the average of what you're seeing in the company. So it is accretive to our overall margin profile and our average selling price profile. So the more Fresh & Light we sell, the better it is for all of us.

All right. Your follow-up question comes from the line of Ethan Starr [ph].

Yes. Anything new in R&D or M&A?

Nothing we can really talk about. I mean, obviously, we're not allowed to talk about stuff until it's -- whatever is publicly disclosed. And so as always, we're always opportunistic on the M&A front, and we're always investing in our research and development. So we've actually -- I would say, the only thing new in R&D is we've actually brought in some scientists who aren't really assigned to any particular division. We've never done that before. They've always been part of a business unit. Now we've got some guys who are really motivated, really interested to just explore what our clays could do in different areas, and they're finding some interesting things. And so could lead ultimately to a new business or whatever. So doing well has enabled us to expand the amount we invest in R&D. And so that sort of have been the big change out of research is that we actually have some people now who are not even assigned to a division anymore.

Okay, that's good to hear. Any new products in the works that are in the pipeline soon? Or just nothing you can talk about?

Well, I mean, I don't know if you saw it. Hopefully -- maybe you haven't. But the Fresh & Light paper litter...

Oh, yes. I was going to ask about that, thank you for reminding me. Yes, I saw it online. Is that a different formula from scoop and flush?

Much different. Totally different formula, manufacturer. Really, it's an eye-popping product, I encourage you. It's at Wal-Mart right now. We've launched it everywhere, different accounts are in different stages of taking it. They're the first ones to jump in. It's made from 100% recycled paper. It's even lighter, it's 40% lighter. So it's an even lighter product, it works very well. It's going to -- targeted to compete on a price point basis with the other big alternative litters, meaning nonclay cat litters. So yes, if you could drop by a Wal-Mart, take a look. Make sure you can find it. I encourage you buy a bag and play around with it a little bit. It's a great product.

Okay. It works better than the scoop and flush does -- did?

No. I mean, it's not even -- oh, the scoop and flush, way back when -- you've got a great memory. I've been thinking of Fresh & Light. Yes, it's definitely better than scoop and flush. It is, in our opinion, the best alternative litter now in the market. It is not better than Fresh & Light. So far, no one's been able to knock clay out. Clay is the absolute best cat litter from an odor control and a clumpability standpoint. But if you're into the alternatives and it is a legitimate segment of the market, it's now about 7% of the category. These are nonclay based products, wheat, corn, pine and paper. If you're into the alternatives, and obviously, 7% of the market is, this is your best bet.

Okay. So you're hoping you're not knocking your own Fresh & Light out of the shelf with it?

Yes. I mean, what we're trying to do is just expand Fresh & Light's presence. So now you'll have the fragrance free. You got the multi-cat fragrance, and now you got the paper litter. And trust me, we've got the pipeline is coming to have more truly innovative Fresh & Light offerings.

Okay. A lot of retailers taking the litter?

All I can say at the moment is we've had 0 rejections. We're still in the process of presenting it. So very few have gotten the presentation, but they all love it. We unveiled it at the American Pet Products Association show down in Orlando a couple of weeks ago. And I was in the booth and very positive. I mean, it's where -- they're being challenged to put innovative products out there and to meet environmental sustainability goals and all that. And so they loved the fact that it's made from 100% recycled paper.

So I assume with the fact that you're not -- no mining involved and you're not making it in this recycled papers higher margin?

Certainly, on a per ton mined basis, absolutely. Because we're not even using up our reserves on this one. But again, vis-à-vis Alex's point, it will be accretive to our overall profile. I mean, our goal is not to launch products that are less valuable at lower margins than we currently have. That would not be fitting with our mission. So you can bet that if the whole company sold this product, you'd be happy.

Wonderful. Glad to hear that. Hope it takes off and does really well.

Thank you, guys, very much for your interest. And we're looking forward to talking to you again in 3 months. You should hear more of the same continued investment in Fresh & Light, continued progress in some of our B2B areas. I guess in my closing statement, just to put it out there on the landscape, we've been spending capital, we're going to spend more capital, maybe not in the next 3 months relative to the past. But the point being we're bubbling up against capacity in some key product areas that are high value to this company. And so we will be looking to put in incremental capacity for those areas. That's a good thing. And very high ROI and just continued investment in those business units. So we'll talk to you more about that as it starts to hit the balance sheet. Thank you very much and we'll talk to you in 3 months.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.