Good day, ladies and gentlemen. Welcome to the Oil-Dri Corporation of America Q3 2017 Earnings Conference Call. [Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to introduce your host for today’s conference call, Mr. Dan Jaffee, President and CEO. You may begin, sir.

Thank you, Kevin and welcome everybody to our third quarter and nine months Oil-Dri teleconference. With me in our conference room here in Chicago is Doug Graham, our General Counsel; Dan Smith, CFO; Mike McPherson, our Chief Development Officer here to cover animal health and animal intake questions and then of course, Reagan Culbertson, who heads up our Investor Relations, and Reagan will cover the Safe Harbor.

Thanks, Dan. 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’s stock. Thank you for joining us.

Great. And I’d like to turn over to Dan Smith, Chief Financial Officer, for a review.

Okay. Good morning, everyone. Oil-Dri reported EPS of $0.44 per diluted share for the third quarter of fiscal ‘17. We reported a loss of $0.13 for the same quarter in the fiscal ‘16. Year-to-date, we have recorded EPS of $1.29 per diluted share, which was about 12% better than the $1.15 reported in fiscal ‘16. A key driver of the income change was the decision to reduce advertising in mass media during the quarter. This decision led to an advertising reduction of about $6.4 million for the quarter as compared to the third quarter of fiscal ‘16. The company plans on shifting away from mass media towards more targeted straight promotions for the balance of the year. Third quarter sales were $64.7 million were up a bit from the third quarter of fiscal ‘16. Our sales for the first 9 months of fiscal ‘17 were $196.5 million were down slightly from the same period in fiscal ‘16. The small sales decline resulted from lower sales in the retail wholesale segment that was partially offset by improved sales in B2B segment. The sales decline in retail wholesale was largely driven by the decision to walk away from some low margin cat litter business during the second half of fiscal ‘16. Our gross margins contracted in the third quarter as compared to the third quarter of fiscal ‘16. Our margins were adversely impacted by greater than a 50% increase in the cost of natural gas used to dry our clay. We also experienced some other manufacturing cost pressures. Increased sales of our higher value added product lines could help offset some of the manufacturing cost increases. Our retail wholesale team reported a $1.5 million profit for the quarter, which was substantially better than the approximate $4 million loss generated in the third…

Thank you, Dan. And as always, we’d like to now open it up to the Q&A and cover whatever is most important to our listeners. And please ask your most important question first and then go to the end of the queue just so everyone have time to get at least one question in. So, Kevin, let’s open up the line.

[Operator Instructions] Our first question comes from Ethan Starr who is a Private Investor.

Good morning. Nice quarter.

Hi, Ethan. Thank you.

I am curious what has the potential for your clay to be useful in water purification? I understand you are doing some research in that area in conjunction with Marquette University?

That’s [indiscernible] stuff, but we know our clay works in a variety of applications. I would say that would be follow up into the future, but we certainly hope it materializes, but want to get more in focus we will certainly discuss it.

Okay, thank you. I will get back in the queue.

Thanks.

Our next question comes from Robert Smith with Center for Performance.

Hi, good morning. You released the animal health sales were up both domestically and internationally with strong growth in China. So, what is – how will you characterize strong growth in China? Can you give me some kind of an idea of the numbers, the ballpark numbers?

Year-to-date, the sales were up 36%.

Okay. And you certainly have a compelling product – what might be seen in the next – in the remainder of this year and into the remainder of the fiscal year – new fiscal year beginning...

Yes, Bob. I mean, we are not going to really give any kind of forward values, we just never do, but...

What should we be looking for, I mean, as far as the – can you give me some color as to what’s going to kind of cause this to trough?

I don’t know. I would say I would look for the growth to be more linear than exponential. I mean, so yes, totally potentially, Bob, yes, but I wouldn’t put it – I wouldn’t value that too high, I think the chances of popping are much less than just continued linear growth as we continue to rollout new products, put on new distribution, put on new customers. It’s really a creep, crawl, walk strategy versus a Hail Mary double the company strategy.

Okay. And the change in distributors in Latin America, does that have to do with Brazil and what was the change?

There was a major distributor that’s sold in the northern part of South America, Central America and Mexico with most of the sales being in Mexico. And we terminated our relationship with them, bought back the inventory which reversed the sales and had a sizable inventory level and we are now selling those at a – obviously a much slower rate to the new distributor.

But you say it’s an anticipation of a ramp up to serve that area, right?

Yes. Hey, Bob, let’s go to the end of the queue and just so all the people have time to ask some questions, but hopefully you will have time to get in.

Sure. Thanks.

Thank you.

Our next question comes from John Bair with Ascend Wealth Advisors.

Good morning. Thanks for taking the call here. Well, wondering if you could give us any insights on trends regarding online sales. In other words, are you seeing any shift by the consumer to order your product for home delivery as they have been doing with regards to items like apparel or electronics or other household goods? Are you seeing any impact in that regards?

Yes. We are in the whole category. And I guess it makes sense as long as the e-tailer is willing to eat the freight. Our view just as the consumer tried to buy a $7 or a $10 jug of cat litter to weight anywhere from 10 to 20 pounds depending on whether you bought a light or a heavy format of it and then ask any kind of normal retailer to just put it in a box and ship it to you, the shipping cost to be more than the product. So, it would never make sense to buy such a product online. But what’s happening as you well know is we have got Amazon prime where you can pay a fee for the year and then get free 2-day shipping. You have got chewy.com which is similar, but it’s a pet – it’s focused on our industry, and I think any order over $49 they give you free shipping. So once the e-tailer, as we call them, is willing to absorb the freight, it makes sense. So, the business is booming. We are happy with it because we sell either way and so we are making our margin. Whether or not those e-tailers are going to forever want to continue to lose money on that particular item because they believe they are making it on the whole basket or whatever, that’s up to them. But from our standpoint, it’s definitely a rapidly growing segment. We are participating in it very heavily as are all of our competitors and we will see how it plays out, so great question. It is – and just one more thing that isn’t captured in scanner data like IRI or Nielsen, so again whenever we report any kind of Nielsen information or IRI, it’s getting to be a smaller and smaller percentage of what is actually captured because that segment is growing outside of their purview.

So you are able to – am I hearing this that you are able to see or distinguish those kind of e-tailer sales and I guess from their standpoint, they could just – they are going to give you free shipping at $49 order, they could always accommodate or bump that level up to make it $79 or whatever and which would drive their sales overall, but would also help shelter your product or other, let’s call them, bulky products like that, but I guess the question is, you are definitely seeing a shift by the consumer towards that kind of thing with the e-tailers?

Yes, more exponential growth on that side than linear.

Very good.

Thank you.

Our next question is a follow-up question from Ethan Starr, who is a Private Investor.

I am curious what market share did the regular non-Ultimate Care Fresh & Light litters have in the latest 12-week period in the lightweight category, do you have that?

Dan, what’s the market share of the non-Ultimate Care….?

Fresh & Light litters?

Let’s see if I have that data with me. I don’t think I do. I think I just brought the summarized data.

Fine, we can do it later.

Yes. I will tell you we are strategically deemphasizing the Fresh & Light and emphasizing Ultimate Care. We are still very much behind both of them because we market, although marketing is behind the looks for the green jug. But we believe as the market migrates more to lightweight and away from heavy, that the consumer will want the 50% lightweight. So anytime you get new distribution and things like that, we are opting to slot the 50% lighter Ultimate Care versus the 25% lighter Fresh & Light because they are both fabulous products. And because we launched the Fresh & Light first, it’s still bigger than the Ultimate Care. But what you see is basically a migration from the 25% to the 50%.

Great, okay. And I mean you gave figures for the Ultimate Care and the private label lightweight and are those based on the same 100 – same piece or same pie?

Of the pie, you mean, is there a combined share number, I don’t…

Same 100%.

If you tell me where you are looking, I can try and answer that.

Towards the end of the press release, you mentioned like 5.1% and 2.4% for the Ultimate Care?

Yes, you can add those together. We come up with yes, yes, yes.

Okay. I will be back in the queue.

Okay. Thanks.

Our next question is a follow-up question from Robert Smith with Center for Performance.

So the two numbers that you gave for lightweight at 2.4% and private label at 30.6%, what kind of progression do you think to close that gap, would you be seeing in the next say, year?

Again, not going to get too – I would tell you that the lightweight private label is continuing to grow rapidly because it’s both growing in terms of unit movement for point of distribution as we execute a pretty aggressive pricing strategy and because we are gaining more and more distribution. So I did always promise to tell you when we got new distribution, once it was out into the marketplace, so the major shift between last quarter and this quarter was we shipped to Dollar General. We are now in all of their – I don’t remember how many stores they have, close to 10,000 stores. And it’s the private label lightweight item, that is our item. I have been doing store checks. It’s out there. It’s working good and we are expecting big things out of that. They don’t have to move a lot to be a big player. So that was the major thing that we had been working on and so that is now out there [indiscernible] safe way is out there we are making that. So we pretty much got, as we said, about an 80 share of the private label lightweight segment.

Thank you.

Your next question comes from Ethan Starr, who is a private investor.

Yes. Did the Fresh & Light Ultimate Care with pictures of Katherine Heigl on the packaging improved sell-through velocity at retail and has that continued since the picture was removed from the packaging?

Well, so the purpose of that was and Heigl was very willing to work with us, which was great. We saw when we are running our TV that some people get excited about lightweight and then not necessarily buy the green jug with Katherine that Katherine was promoting in the commercial, so by having her picture there it made the connection strong. I can’t – there are so many variables going on. I mean the category is very intensely competitive right now. I mean Arm & Hammer just launched the new products, Nestlé is always very competitive and Clorox [ph] has launched a new product. So I can’t say for sure because of all the moving variables, we believe it was the right thing to do and it worked. But I can’t really give you data that says it accounted for 20% more or less or anything like that. I really can’t. I don’t have that data to support that.

Okay. How successful the recent cat price trade promotion has been?

It depends on how you look at it. From my vantage point, what we were looking at and you guys heard me say it before and I think most of the people on the call are like this, you know what money ball is. When you are trying to get into the analytics and figure out what works best for your particular company. So for us, we are spending money trying to incentivize a trial and encourage repeat. And so you can do it through the airwaves and that also has a tangential benefit of building your brand image. I think there is always a benefit from TV that doesn’t necessarily translate directly into unit sales that period. But at the end of the day, you expect – you spend X amount of dollars and you drive Y amount of movement. And so when we did a detailed marketing mix and based on that mix we saw that for immediate half, your best bet is to use trade dollars to get incremental distribution in the retail outlet because the holding power of cat litter is so wounded litter. If you think about it in one place and you can maybe fit three jobs. So going from, pick a number. If every day, Ultimate Care is at $11.99 and you run a hot deal at $9.99, but you don’t put incremental products into the stores, then all you do is a lot of stock on Tuesday instead of Friday because they are not going to restock the stores until after Sunday’s big shop and then on Sunday they start to restock the shelf. So that’s not a very efficient use of any kind of our trade dollars. So instead what we try and do is maybe sweeten it a little bit and get the trade to go ahead and give us an end aisle display or a half pallet or a quarter pallet display without dropping right inside of the store [indiscernible] or somewhere near the actual pet aisle. And when we do that, our lift goes way up 3x, 4x, 5x because now there are so much more products in the shelf in the store. So that’s what we are doing. It is working. We are also using targeted social and digital to a greater extent and are going to keep doing that. So we are just going to keep getting smarter as we get more data against our spend.

Great. Thank you.

Thanks.

Your next question comes from Robert Smith with Center for Performance.

Dan, can you tell us anything about the R&D initiative near-term as far as those new products, where is the emphasis currently?

Yes. Bob, if you could go on mute, you got a lot of background. Thank you. As always, I am not going to get into too many specifics, the last thing we want do is keep off our competition in what place we are going to run. But just in general, as you guys know who are long-term investors or maybe the new to the company investors, I repeat. Our mission is to create value from sorbent minerals and that add value creation starts almost exclusively out of the research center, where we have numerous scientists who come in everyday trying to better understand our mineral will bring maybe customer problems from the fields where they will say, hey, if our mineral could solve this problem, they would certainly find value in that and that value ultimately translates into a better value for us and for that value creation for the whole chain. So, that’s what we are working on in every business. We are really not working per se to push volume. It’s really more about getting more value being more niche-oriented and having each unit drive a greater share of profitability. So you have been seeing in the trend lines for the last 15 years, we see that continuing. We don’t feel we have got all played out the opportunities for our mineral.

So, are we seeing new product introductions this time of the year from here on?

Yes. I mean, we always have new product introductions. This past year, we have launched and it’s still going to happen, because we are still getting registration but neoprime and varium in the animal health area. We have got targeted new products in our ag business, where we are partnering with various people to use either our engineered granule or some other aspects of our core mineral to give them. That is maybe we put a brand name on, but it’s a B2B type application. And then in the consumer area, absolutely, we are working on stuff now. We are about to launch a new home stuff to prove the efficacy of some of our ideas. And we have already in the process of launching new products that you will see on the shelves probably in 3 to 6 months that we are already proven 3 to 6 months ago.

Our next comes from Ethan Starr who is a Private Investor.

Yes. In the press release, you note that you have about 30% of the private label of cat litter market. I am wondering how has that increased over the years and do you see that the share continuing to increase?

No, I don’t have a trend line on me. So I will give you bellybutton data. Obviously, a large chunk of that is of course cat litter, where we have a huge share of the market. That’s the non-clumping, what people might call, traditional. That’s been in steady decline for years, but we have been able to hang on, because really what’s happened is more and more players have dropped off where we have made acquisitions. So we have not dropped at the same level that the overall core segment has. Having said that, we really see the growth and the excitement getting around the private label lightweight, I continue to believe that ultimately when the consumer can get the products they want, at the price they want that all things – those things all being equal, they are not going to want to take home twice as much weight. And especially if they start to understand the impact on the carbon footprint as the retailers start understanding that their people have to carry around a 60-pound cage through 20 pounds versus a 30-pound cage through 10 pounds. All those kind of things are going to weigh in favor of light versus heavy. It just defies the logic that long-term the heavies are going to be able to hold on to a large share of the market. Obviously, our major competitors don’t want to see that happen. They are heavily invested, no pun intended in the heavy side of the market. Their supply chains are built around it. Their economic structures are built around it. They are not going to fight it hard at that level. That’s what they should do. You are fighting logic on that standpoint. Really, the product should continue to get lighter and they should – we should all be focusing on performance and getting more efficient, so that we can keep the price where it needs to be and the performance where it needs to be. So as that grows, our private label lightweight business is going to really, really grow. And so that’s where you are going to see the growth and value their value for the retailers, value for the shopper and value for us.

Great. Thank you.

Thanks.

Our next question comes from Robert Smith of Center for Performance.

Yes, I got cut the call. I am sorry I am back on line. When we are on the [Technical Difficulty] next call?

You broke up, Ron, I mean, Ron – Bob, you broke up. We can’t hear the question. Alright. Kevin, do we have another question? I think Bob is in a bad cell.

There are no other questions in queue at this time.

Okay, great. Well, listen thank you everybody. We are continuing to be very positive about the long-term prospects of our business. And as we obviously as you are seeing as we continue to get smarter and we align our marketing mix, you are going to see some bottom line benefit too, because TV is an inefficient short-term vehicle. We used it to get the product launch. It was excellent. We got the whole market to jump in. Thank God they did and we got the snowball rolling. Now we are going to get efficient. We are going to keep spending a lot of money, but a lot of it could get focused on trade and digital and social. And so that’s where we see the best ROI and that’s what we are going to place our bets. We are still going to do TV, but it’s just the marketing mix. It was skewed heavily towards TV during the first 2 years. It’s now going to get more balanced towards the other. So thank you. And we will talk to you in 3 months.

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day.