Good day, ladies and gentlemen. And welcome to the Q3 Oil-Dri Corporation of America Earnings Conference Call. My name is Mark, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to your host for today Dan Jaffee, President and CEO. Please proceed.

Thank you, Mark. And welcome everyone to the third quarter and nine months investor teleconference. I'm surrounded by lawyers and accountants here. So I'm the envy of all. I have Laura Scheland, our Assistant General Counsel is also covering the Investor Relations duty and Dan Smith, CFO and Doug Graham, our General Counsel. And Laura will you walk us through the Safe Harbor.

Sure. Thank you, Dan. Welcome, everyone. On today's call, comments may contain forward-looking statements regarding the company's performance and future periods. Actual results in those periods may materially differ. In our press release and 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 evaluating any investment in Oil-Dri stock. Thank you for joining us.

Thanks, Laura, and Dan, if you would take us through the quarter and nine months.

I will thank you. Good morning. Oil-Dri sales for the third quarter fiscal 2015 were down 3% to approximately $65 million and year-to-date our sales were down about 2% to $196 million. Our third quarter gross profit percentage was better than the third quarter fiscal 2014 do in large part to lower natural gas costs. Our earnings per share of $0.19 per diluted share for the quarter was up from the $0.10 earned in the third quarter of fiscal 2014. Year-to-date, we have generated $0.88 of EPS versus a $1.11 in the first nine months of fiscal 2014. Our gross profit percentage for the quarter was approximately 22% which was better than the 21% for the third quarter fiscal 2014, a 37% reduction in cost of natural gas used in our manufacturing facilities helped our gross profit percentage. However, increased non-fuel manufacturing and packaging costs negatively impacted our gross profit in the quarter. Also the increased value of the U.S. dollar has adversely impacted our sales and margins in fiscal 2015. We have estimated a negative direct impact of the currency change to be about $900,000 of pre-tax profit for the first nine months of fiscal 2015. Our Retail and Wholesale team reported a 4% sales decline for the quarter compared to the third quarter of fiscal 2014. Year-to-date, the retail and wholesale sales were down about 1% compared to fiscal 2014. Earnings for Retail and Wholesale group were up for the quarter but down on a year-to-date basis versus the same period last year. Higher sales of our industrial products, lower consumer advertising expenses and lower natural gas costs helped to drive the profit for the quarter. Reduced branded cat litter sales, higher non-fuel manufacturing costs and higher packaging costs partially offset the positive factors. In the B2B area, B2B sales were down 3% for the quarter and 4% for the first nine months as compared to fiscal 2014. Sales of fluid purification products and co-pack cat litter were down for both the quarter and year-to-date. However, sales of our ag and animal health products experienced growth for both the quarter and year-to-date values. Operating income was up about 25% for the quarter and flat on a year-to-date basis as compared to fiscal – same period in fiscal 2014. From a balance sheet perspective, our cash investment balances at the end of the quarter were a little under $15 million which was up about $1 million from the end of the second quarter fiscal 2015, but down about $5 million from the same period end of the third quarter of fiscal 2014. Year-to-date our capital expenditures were up about $700,000 for the same period in fiscal 2014. Thanks. I will turn the meeting back over to Dan Jaffee.

Great. Thank you, Dan. And at this time, I would like to open up the lines to questions and answers. And as always ask your most important question first and then go back to the end of the queue, this allows everyone the opportunity to get at least one question in. So Mark, if you could open up the line.

[Operator Instructions] Your first question comes from the line of [Ethan Starr] [ph]. Please proceed.

Good morning.

Hi, Ethan.

Reading the 10-Q, it appears that retail sell-through for Cat's Pride Fresh & Light and other of your branded litter products has been suffering, how is the retail sell-through for Cat's Pride Fresh & Light and your other branded products including the Ultimate Care product?

Yes. I mean you are reading it correctly. It's very, very competitive at shelf right now. I know you do retail, I'm not sure if other people on the line bother to get out to the cat litter aisles. But, I guess the good news side of it is, as all the major competitors have launched lightweight cat litter products, so Arm & Hammer Fresh and Light, our Fresh Step up and Tidy Cat has a multiple traders now as lightweight is out there. So it is highly, highly, highly competitive. The good news is that lightweight segment is growing rapidly and we are continuing to see our business stable/hanging in there with these guys as it is getting very aggressive at shelf.

Okay. But, you have the best products, you have – what I have seen from my retail observations, you have the lowest price product before discounting. And yet, obviously, you can't compete with your competitors on just how much money you can pump into the marketing. But, certainly you can do more to free media.

Yes. I mean we can always do more. I mean I would agree with that.

Okay. So your response to this retail sell-through decline is what?

What I just said. I mean it's very aggressive at shelf. So you are talking about competing in a – everyone focused right now on lightweight. It is growing over a 100% of period of doubling more each year-over-year it's up to now 18% of the category from 2%, 2.5 years ago. So you are talking about just a massive land grab and it's what everybody is focused on. And we have a 15 share of that. Our historic share of the scoopable segment was about 4% to 5% maybe 6%. So if the whole category goes lightweight, it's a big win for us. We see our share more than double really go up 2.5x and then our historic share of private label lightweight scoop was tiny. It was under 2%. And as I mentioned in the last call, we have now about – we have 19% last period, we have now added on enough to approximate close to 25% of the category. So from our vantage point, in the long run, it's a win-win-win. In the short run, it's – you are in the heart of the battle right now. And this is not for the queasy. So you got – if the team is engaged, the team is fighting, but trust me, every ounce of real estate has been fall over at the moment.

Okay. Let me understand these two numbers here. You have 15% of the lightweight retail market branded?

Yes.

Correct?

Correct.

Okay. And you now have commitments from 25% of the private label scoopable category?

Correct.

Okay. Thank you. I will get back in the queue.

Okay. Thanks. And the 25, I told approximating, it's not an exact number.

Your next question comes from John Bair from Ascend Wealth Advisors. Please proceed.

Good morning. The question on the – since it's a lot of shelf space battle, are your volumes – overall volumes increasing and so that the sales and revenues being off a little bit as more due to pricing as opposed to volume shipments?

Good question. If you combine all of our lightweight offerings, so a year ago, all we had was Fresh & Light. And this year, now we have Fresh & Light and Ultimate Care and we have seen some switching of customers from Fresh & Light to Ultimate Care. So there has been some cannibalization. I would say the volume – the unit movement and unfortunately, I have the dollars in front of me, I don't have the IRI data and units. So I guess I better not answer that question. I don't have the unit movement in front of me. So I really – I can't answer that question.

Okay. And then with regards to your CapEx spending, is the fourth quarter anticipate about the same level and then what are you expectations for 2016 all these numbers drop off. It's been pretty active in the last couple of years.

I think – this is Dan Smith. I think the fourth quarter is going to be in the ballpark of the third quarter plus or minus. And in terms of fiscal 2016, we are working currently on the budget, so I'm not prepared to have an answer on that question as of at this time.

Okay.

Yes. And my bellybutton is that, I would expect it to be lower than this year. So that's a reasonable expectation.

Okay. And a quick follow-up and then I will get back in the queue. So would some of the lesser capital expenditure dollars possibly go into additional marketing?

Yes. It's a good question. I mean it's not a one-to-one, but yes, we are going have to keep fighting the fight and getting people to try. We know when we get incentivized trial that we get great usage and great repeat. So we have a great product as Ethan mentioned. So there is no doubt, this is going to continue to be a battle. Having said that, you sort of saw the margins pop back a little bit this quarter and that trend should continue again as we are trying to be more mindful of where we spend our marketing dollars in the middle of the storm. I mean we could – you can't get the incremental shelf space right now. Everybody is fighting for it. So we are going to give the product away and then we would obviously. But, it just isn't – it's being very battled over at the moment. So I'm not so sure how much our marketing will go up next year not because we wouldn't want to do it, but because there wouldn't a good return on it. And so what we do spend, we will get a good return on and we are just not going to give the product away and especially as the lightweight private label continues to ramp up, we should start we will benefit from that where our branded national players don't participate in that end of the market.

Okay. Thanks. I will get back in the queue.

Thanks.

Your next question comes from Robert Smith, Center for Performance Investing. Please proceed.

Hi, good morning.

Hey, Bob.

Could you give us some color on the animal health and Chinese development market?

Yes. I will give you a little bit, but I will also commit, I think you raised this flag last teleconference and Dr. Ron Cravens will be here live for the next teleconference. So he will answer in detail your questions and he will be able to talk about the year then. But, we had a good quarter at Amlan, we are continuing to see the business ramp up albeit always at a slower rate than many of us would like. We would all like to be seeing all growth rates greater. But, we are continuing to see all the trends and all the product performance attributes that let us to get into China in the first place. Our product works very well in swine production and bindings [revanin] [ph] and other toxins. And it's continuing to perform in the marketplace. So I guess the best thing is just to say things are continuing along the same line and Dr. Cravens will be here in three months.

Right. Dan, what is the differential between what your expectation was and what you saw?

I mean, I don't really – we don't talk about our expectations in terms of dollars and it's just the general terms I gave you, you're going to have to suffice. We don't give –

When you said – you said you were kind of disappointed.

No. I think we all are. I was just talking in general. Any time we start up anything, everyone who tells me, it always takes longer and costs more. Guess what, we fell right into that. So but the good news is –

But, are there any particular obstacles?

No. Just – all the obstacles are starting an organization, thousands of miles from your base in a foreign language, in a foreign currency, with customers who are used to doing business with other folks. So all the nothing you couldn't – wouldn't have anticipated.

Okay. Thank you, Dan.

Thanks.

Your next question comes from [Ethan Starr] [ph]. Please go proceed.

Yes. Did the China subsidiary at least breakeven in the quarter?

I believe last time we talked about that we are not anticipating the China subsidiary as just the location to breakeven until fiscal 2016 is the guidance I provided. If you look at the total China sales, they are positive in terms of contribution. But then you get into transfer pricing and those types of things that I'm not going to talk about on this phone call. So --

Okay. How much money you are going to save in the cat litter division since mid-April?

I mean that's – we are not getting into that flush.

Okay. But, you have been saving money.

Well, you are starting to see the margins come up and you should see that continued trend, which is what I saw.

Okay. Just out of sheer curiosity, I have no sense of this, you say that resin pricings are coming down, but how much does one container for jug of cat litter cost, it seems like $0.01, $0.10, a $0.25, I have no clue?

I think it's less than a dollar. But, I don't know right off top of my head either.

Definitely less than a dollar. It's – but I don't know off the top of my head either.

Okay. Thank you.

Thanks.

Your next question comes from Jim Schwartz from Harvey Partners. Please proceed.

Hey, Dan, how are you?

Good Jim. How are you?

Good. Thanks. Just some of the math that that you guys gave last quarter just on the private label market over time, I mean you are still that sort of $60 million potential revs with 14% drop down to net income 22% pretax, I mean that – those are all legit numbers that over time you hope to achieve, correct? Those are big numbers.

Yes. They are big numbers. And the math was correct and it always going to be – I would think – the thing we have to understand, it's a private label is going to be a lagging indicator, it's not going to be a leading indicator meaning innovation starts with the brands and then as consumers get comfortable with it, you can look at liquid detergent. Yes, I mean, the liquid laundry detergent same deal. When they went concentrated, it started in the brands consumers got comfortable with it and then got to the point where the private labels followed in and the ramp up rate as occurred. And I can tell you what happened in scoopable 20 some odd years ago, was eventually private label approximated 20% of the category and 80% was brand. So if that happens here that math is absolutely accurate. There is no reason to believe that it won't happen. But it's going to take time. Consumers tend – the consumers who are into innovation it comes through the brand to start that's the TV commercials are saying, it's everything they are saying. And then eventually they all start to say, hey, you know what I want to save a little money, I'm going to try to sell the product. The good news is, we can shovel through laboratory demos and we do it out on our Web site and so forth. But, the private label scoopable offerings were giving our retail partners outperform the national brand.

That's what I wanted to ask you about. Because it sounds – you guys only once who actually have lightweight clay, correct? The lightweight, you actually manufacturing lightweight cat litter, you have got other big brands throwing in newspaper print and dolomite, whatever they are doing, so it's not absorbing the same. I guess what happens when the private label outperforms those brands. And then I guess out then – I guess private label gets far more share to your point.

Yes. I mean in Canada, it's almost 40% of the market is private label. And so they always had President choice and it's more of a private label driven market. But, that was all – Europe has always been more private label. Yes, I mean, for whatever reason the competition has chosen to go lightweight by putting non-performing lightweight things in the jug. And you touched on – you got one sort of accurate, it's Perlite, the dolomite might actually made it heavier that was another competitor.

All right. Perlite, right, exactly.

But, you got the concept, the concept is, those things all I need to do is make this jug lighter and I can climb lightweight and you can claim anything you want. But, the problem is, the use up rate is so much higher because 50% of what's in that jar isn't performing. So the consumer as to buy twice as much to get the same job done. It would be – the equivalent in the liquid detergent analogy would be of the way they got concentrated somehow was just taking out half of whatever was in it, so instead of doing 40 wells, now you can only to do 20 and the competitors sitting know it's 40. Right now, there is no real communication, we need to get to that either clumps or users or something, which will highlight in very tangible terms for the consumer. You buy the other guys and you are going to be using up twice as much material as ours. And by the way that will cost more. So not only you buy paying more you are using more. I mean I have done the math and if a consumer were to use our lightweight brand, they would spend roughly given the amount they would use and how many times they would buy in a year, roughly $90 a year. And if they buy Tidy Cat lightweight, they are going to spend 270, 3x the amount because the use up rate is so much faster and it's more expensive. So it's a double-whammy. But, we also have flip, you could have retailers saying well, great, what I will care, if I can turn a consumer from a $90 user to a $270 user, I may actually going to grow my category. I think that's a short sighted win because eventually the consumers are going to say what happen to my budget. I mean I was spending $90 a year or $100 on cat litter, now I'm spending almost $300. So we will see. I mean it's a crazy shootout right now. But I can tell you, we are sitting back four years ago knocking over the first domino with the launch of Fresh & Light. This is playing out as well or better than anything I ever could have imagined. I mean they are all jumping in and they are jumping in most of them with inferior performing products at higher prices.

Yes. I'm sorry, go ahead Dan.

I think its shame on us if we can't continue to win in an arena where we have better products at better prices.

Obviously, a last question, where else can you source lightweight clay outside of you guys?

I mean there is plenty. Look, there are plenty of minerals out there that are lightweight. But, that are lightweight and absorbing. There aren't many. And so the best one that I know about I'm not a clay mineralogist, I'm an accountant. But, I have been in the business for 20 some odd years. The best ones I know about are the calcium bentonites and ours is diatomite mix out on the west. Those are the best lightweight absorbing naturally controlling odor clays. That's why they have been the basic of cat litter for 70 years. Perlite never sold a pound in the cat litter because it doesn't work ever for 70 years and now because the lightweight, it is light, it's 9 pounds a cubic foot, it will blow right out of your box. But that's all it does, it's not a cat litter. So and newspaper – shredded newspaper not a cat litter. I can go on and on. Feeder, just putting feeder chips, feeder not a cat litter. So it's interesting, I think in my humble opinion, they have made a mistake and we will see what happens. We will see how it plays out.

Okay. Thanks Dan.

Okay. Thanks.

Your next question comes from John Bair from Ascend Wealth Management. Please proceed.

Thank you. After that explanation you just gave, you need to get that story out some how in a very visible manner. So I think that is pretty compelling. My question is with regards to your natural gas what is your, how rapidly are your prices adjusted, is that on a monthly basis, and is it like where the consumers where there is a lag time either going up for cost recovery or how does that work?

We do not hedge our natural gas.

I know that. That was not a very good deal. You seem to go – I remember that quite well. Okay.

Our prices adjust with the market based on the well-heads. So we have – the well-head plus, the delivery plus taxes types things or whatever the market is doing, we adjust with it.

For the month.

For the month.

It's okay. Because I know at the residential level there is a lag time typically, I mean obviously, the prices if you are on a variable just month to month, but I think that there is a lag on cat jump, if there is a big spike or whatever. So I was just wondering how quickly your prices are adjusted?

My understanding is, the last three trading days of the month. I think it's the average of that become our price for the next month.

Okay. Okay. Very good. And I guess one last real quick question, you got quite a number of mines that you both lease and own, I was wondering on those given that the nature of the clay types, do you carry those on your books at cost, or do you have to mark this to the market – some kind of fair market value?

The actual minerals in general are not carried on our books in general. When we had a business acquisition then we had to value some of the minerals in the ground. But, the vast majority of them are not carried on our books some are, but the vast majority are not. And the ones that are carried on our books are carried at cost.

Okay. So if you acquire a mine, well – okay. So if you acquire a mine, you do at that point have to make some kind of market value for the minerals, or is it just basically the property value itself?

If you acquire a business because we are off leasing and buying land and types of thing, so typically, if we just purchase a land, we put it down as a land –but if you buy an actual business then you have to allocate a portion of the cost of the acquisition of the business, the minerals.

Okay.

And various other things.

Okay. That's quite interesting. Okay. Thanks very much.

Thank you.

Your next question comes from Robert Smith from Center for Performance Investing. Please proceed.

Dan, it's about 18 months ago you indicated quite a few – had certain trials going on, I think [indiscernible] additional important uses and I don't know, some kind of trials and you said that by 18 months you should probably have some kind of reading in that. So could you just give us a little more information about where we are with the – those important indicators?

I am going to leave that to Ron, I really, I'm – he will cover all of that on the next teleconference.

You can't say anything about it.

I mean what's the point. He is so much closer to it than I'm that he will give you real detail. I mean you are way better off asking him than me. I mean, on me you are getting it filtered, I'm reading his report. I'm talking to him. But, I mean he is the guy you want to talk to. So let's make best use of his time. He is going to be on the call in three months.

Okay. Well, I hope you might consider expanding the call time maybe for the next visit. Thanks.

Okay. Thank you.

Your next question comes from [Ethan Starr] [ph]. Please proceed.

Yes. Are you selling either the branded or private label lightweight scoopable into Canada at all?

Yes.

Branded or private label or both?

I'm not going to get into the details of it just from a competitive standpoint. But, yes, Canada is a market, it's trailing the U.S. I would say lightweight is less than 2% of the Canadian market at this point. But there is no reason to believe the Canadian choppers or Canadian cats are that much different from U.S. choppers and cats. So it got launched here. It will trial us, but we believe it will show the same long-term opportunity.

Is there any lightweight competition up there? No pun intended.

Tidy Cat lightweight just launched up there and I think it's on the shelf. So I know that they have launched and I know they are going to retails. And I'm pretty sure, it's on the shelf. I haven't been to Canada in a while physically. But, my understanding is, yes, [they are up there] [ph].

Okay. Thank you very much.

Thanks.

I would now like to hand it off to Dan Jaffee for closing remarks.

Great. Well, thank you. And I appreciate your questions. You guys are asking all the relevant questions that we internally are asking. And the good news is again, the lightweight is continuing to grow and continuing to be a greater and greater share of the category. It surpassed the course, the traditional in the most recent period which we sort of predicted given the trajectory that we predicted the last time. And it happened – it's the coarse grain segment is now under 15% and lightweight is over 18%. And so it's blowing away the alternative and all the stuff that is made from the organic materials that wheat and corn and all that kind of stuff. And that represents less than 5% of the category. So it is growing. The traditional scoop is in decline. It [Technical Difficulty] another 4%, 4.5% and it haven't declined in 20 some odd years. So, clearly that the tipping point is coming and it's there as I said it is more than doubling year-over-year each period. So we will report on that again in three months and its all good for Oil-Dri in the sense that we really on the heavy side, we are the odd man out. Our minerals are naturally more pores, which makes them more absorbent, which makes them lighter and bulk density, which makes them a better cat litter. And so as the consumer is looking at running lighter weight and more performance, its right and we are realizing. And I think it was John, who made the point, he is right on. We have to do a better job of getting that word out. We are going to continue to work on that and we are extremely confident about the future of our participation in this segment, which is great. So thank you. In three months, Dr. Ron Cravens will be with us and we will have some more market detail for you as well. Thanks very much everybody.

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