Good day, ladies and gentlemen, and welcome to the Q2 2019 Oil-Dri Corporation of America Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Dan Jaffee, President and CEO. Sir, please begin.

Hi Mark, thank you and welcome everyone to the second quarter and six-month fiscal 2019 investor teleconference. With me in the conference room here in Chicago is Mike McPherson, our Chief Development Officer; Susan Kreh, our Chief Financial Officer; Laura Scheland, our General Counsel; [Leslie Garber] who will be taking over the reins to be our Director of Investor Relations and last but not least and a big round of applause this is Reagan's last meeting as our Director of Investor Relations. She got paroled for good behavior. She has been promoted to focus exclusively on marketing. So Reagan, thank you for everything and please take us through 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 stock.

Thank you. And at this time, I'd like to call on Susan to walk us through the quarter and the six months.

Sure, love to. Today, Oil-Dri reported sales of $69.9 million for the second quarter of fiscal 2019 which was a 1% increase over the second quarter of fiscal 2018. Sales in our retail and wholesale products group were up 5% in the quarter driven by growth in cat litter where we are experiencing strong demand in our lightweight private label products. Our business-to-business products group continue to see weakness in the quarter with sales down 3% compared to second quarter of fiscal 2018 as performance of our Fluids' Purification products were down internationally due to price competition by local suppliers. We also experienced the continuation of the first quarter reductions in our Amlan business in Asia driven by the widespread impact of the African swine flu. While we do not expect an immediate turnaround in the swine industry in Asia, we do expect to see some recovery in the back half of the year as we continue to work with our customers on the trials and adoption of products such as Varium for poultry, and NeoPrime for piglets to improve feed efficiency around the world. We also reported sales of $136 million for the first six months of the fiscal year which was flat to the same period last year. Our retail and wholesale products group reported sales that were up 4% over the prior year and again driven by the strong performance in cat litter. Our business-to-business products group reported sales that were down 5% for the first six months primarily for the same reasons that I talked about in the quarter. Our second quarter net income attributable to Oil-Dri was $2.3 million compared to a loss of $1.1 million in the second quarter a year ago. For purposes of comparability I’ll point out that during the second quarter…

Great, thank you Susan, I appreciate it. Mark before we open it up I just want to remind everyone to please ask your most important question first and then go to the end of the queue. Just so we make sure everyone has a chance to ask at least one question and then if time permits will then bring you back for question number two. So Mark let's open up the lines.

[Operator Instructions] Our first question comes from the line of Ethan Starr, a Private Investor. Your line is now open sir.

Before I ask my first question, I just want to thank Reg and for all her help with Investor Relations over the years even though she never succeeded in getting you to lengthen the conference calls.

She tried though.

Okay good, by the way I really don’t want to be a private prison industry mention the word parole okay. Anyway my first question, Indonesia you mentioned that I believe last quarter in the presentation is - I guess understanding subsidiary set up there or are you starting to sell into Indonesia? And I think Vietnam is also going eliminating antibiotics in feed as well at some point.

So, is there a question?

Yes. Well, I asked you. Are you starting to sell in Indonesia?

At this time? No. We're currently discussing the right timing to do that whether or not it's this fiscal year or next fiscal year.

Okay. But you have a subsidiary set up?

Correct, yes.

And our next question comes from the line of Robert Smith of the Center Performance Investors. Your line is now open.

Yes, I just wanted to ask about some color on Amlan and the trialing process and since you've altered your approach, how - what's been happening with the conversion rate of the trials?

You're talking about the new product like Varium antibiotic alternatives or…?

Yes, sure.

The conversion rate has been very high. We're seeing continued success in the product for the companies that spend the resources to trial the product. It's more times than not showing a favorable benefit. And not just in performance but also the ability of producers to eliminate other alternatives to antibiotics that they're using. Typically, Varium will replace two or three different feed additives. It'll be in use like essential oils or probiotics. So, overall it's been very successful.

How long is the trailing process usually?

Probably nine months - very slow. So they do a very methodical process from typically a small trial at a research farm often times will repeat it again at a research farm, then they'll take it into a one or two chicken houses and their production operation, and then slowly scale up from there.

And our next question comes from the line of John Bair of Ascend Wealth Advisors. Your line is now open.

Having participated in these calls for quite awhile, I'd like to and I can't resist not saying I appreciate the higher granularity of the information in your earnings release. So, my question is regards the costs involved with the ERP system and it looks like that's trending down. Do you anticipate that trend to be ongoing and kind of when do you feel that it's going to be essentially fully operational and the operational costs will kind of wind down on that?

Yes, we still got some opportunities there to enhance the technology. But it will continue to trend down year-over-year. So in the second-half of last year as opposed to the first-half, almost everything we spent on it turned to expend as opposed to capital. So now year-over-year comparisons will look flatter as we move forward in the year. But from a run rate perspective, we'll probably stay at a run rate near where we are right now at least for the rest of this fiscal year and then look at what other opportunities maybe ahead of us, whether we want to enhance the technology or ramp that rate down a little bit.

And we'll move on to the follow-up questions. Our first follow-up comes from Mr. Ethan Starr. Your line is now open.

Yes, last quarter you mentioned a couple of new products in the works that you're going to be launching in fiscal 2020. And I'm wondering, are those tackling issues or diseases for which there are already competing products out there or will they have the market to themselves initially for totally new things that nothing else exists to work on?

They are new products and new approaches to multi-billion dollar diseases that exist in the industry.

So there are already products out there dealing with diseases or just different - they have different approaches? They don't have your view or the approach of yourself?

Different approaches to battle the same problem.

And our next question comes from Robert Smith of the Center Performance Investors. Your line is now open.

Yes, so circling back to my first question. You must have a long-term planning function, I'm not sure whether it's three years or five years, but looking at Amlan, do you foresee something like a hockey stick where these products essentially take off and is there any kind of the way you're planning - your planning function, do you see this in the foreseeable future if you have a three or five year plan?

That's what we're hoping for. We'll have a much better indication, let's say, in the next 6 to 12 months. But if the ramp rate of the new products continue, yes, we're seeing a much higher growth rate in our new products than we are in our traditional mycotoxin binders. So, that's the expectation right now.

And do you have a three year or five year plan?

Yes.

Which one, three or five?

Five.

We have a follow-up question from John Bair of Ascend Wealth Advisors. Your line is now open.

Kind of a tag on question with regards to ERP, can you elaborate a little bit or clarify a little bit more on this compliance fines aspect of that? It does look like that was lower in the second quarter than the first. And again, is that a trend that you would anticipate to continue or is that something that will go away eventually?

You know, I'm not sure it'll ever go away because they're sort of - the bar is set, so that you're never going to clear it all the time. But we accrue and have a certain baseline level of it in our pricing as do all consumer product companies. We went way north of that in the first quarter and then we're able to cut it dramatically into the second quarter, I would say the trend will continue to improve but it's not going to go to zero, because that's just not realistic. But, yes, those were above and beyond sort of one-time start up pickups.

Well, forgive me for being ignorant about those, can you kind of define what that involves or what they involve?

Sure. Yes, I mean different accounts have different rules. But in general it's all around when the product is going to arrive from the time you say the promise date. If it gets too early, they fine you; and if it gets there too late, they fine you. Because they're trying to manage their distribution centers and sort of adjusting time way and if everybody just all the suppliers just randomly were at the truck show up outside of a agreed upon window, it would be complete chaos. So we all get it and ordinarily you're able to stay within that window a huge percentage of the time, 95%-96% of the time. We were nowhere near that during the first quarter, we still weren't there in the second quarter but we were dramatically better. So it's like, yes, I know once we get more stable we will see the fines go down. But you're never there 100% of the time, it's just not feasible. Your driver's either get a flat tire or the miss their appointment, they don't show up, they get there too early. And they fine you that. And it's kind of hard to stop that one. So, that's where they come from the compliance fine that help them manage their business and they know that there's a cost to them when suppliers don't meet those windows and then they pass that cost right back to the supplier.

Is that a pretty tight window, I mean, are we talking hours, days typically or does that vary from customer-to-customer?

It does vary, but I would say in general you're talking about a 24-hour window, sometimes 48.

That would make sense with tightness of the driver situation and so forth.

Yes, you can think of all -- trucks they receive.

I'm sorry.

You can think about all the thousands of trucks they're receiving if everybody missed it by three or four or five days, they wouldn't be able to plan their business. So it's a tight enough window where it makes sense logically to both parties.

Alright. Okay. Very good. I’ll get back in the queue. Thanks a lot, that clarifies a lot from my standpoint. Thank you.

And our next question comes from the line of Ethan Starr. Your line is now open.

Private label litter and private label lightweight litter, are more new customers launching soon or are you continuing to get new customers? I still see retailers out there without private label lightweight litter, and how was sell-through in the U.S. and Canada?

Yes, I mean we are still rolling on new business and rolling on new skews with existing business. And as we continue to execute our all things being equal strategy, which I've talked about in the past, which is both pricing and performance, we're seeing a dramatic increase in the ramp up of the velocity. So, I give this anecdotally. So, major retailer who we launched with was selling the lightweight at a significant cost premium through the heavy, and our quality probably wasn't where it - it wasn't what it is today because we keep improving and they were all selling. The heavy was out selling the light 7 to 1, now they're a total parity. The pricing is in parity, the performance is pretty much at parity and the velocities are at parity. We're actually going to be testing with that major retailer, having them take the lightweight below the heavy and see what it does to the movement. We think it's going to tilt the scale continuing more in favor of the lightweight. So we're absolutely seeing it, you know, can I quote Nielsen numbers or am I not allowed to quote Nielsen numbers. All right, [indiscernible]. I mean we mentioned it's a little bit in the release but I got some new news and some new way to look at it. I looked at our unit share, so this is everything we supply to retailers that are covered by Nielsen on a unit basis. So not on dollar basis but again when you're competing on a more of a popular priced brand like Cat’s Pride premium is the opening price point at Walmart, so it's a very popular price or cheap, two ways to call, whichever you want. And then private label, you're not going to get the same ring as other guys but you're going to see a lot of unit movement. And a year ago from the 12-week period that just ended, we’re at about 13.9% of the category and now we're 15.8%, so we gained almost two fold unit share points in the last 52 weeks on a running rate basis. It's a 12-week running rate basis. So, to me that just continues to validate why Oil-Dri is doing well and is thriving despite a low dollar branded share. We're in about one out of every six shopping carts that leave retailers nationwide. So you know we're a very formidable supplier and that number is growing rapidly. So we like the working units, obviously, it’s self-serving, but the retailer's know all about market basket, they know that shoppers don't just come and buy unit, they actually spend on average depending on the retailer $109 to $120 during each shop. So grabbing that unit brings $120 to the store and they get it. So we're happy about that.

Okay. So, one unit is one jug?

It could be one jug, it could be one bag, whatever is the unit - yes, whatever it is that they happen to format the buying unit.

And so 13.9, that's all stores or 15.8 is all stores?

No, that was last year and this year it's 15.7 like or 15.8, somewhere…

And you're selling more - you're selling lightweight private label in Canada and they sell more of it there, I guess more people use private label there?

Well, that's the whole - it's been lagging. So, private label light weight is launching in Canada, and ultimately private label represents about 20% of the dollars in the U.S. It represents almost 40% of the dollars in Canada. So, clearly there’s a bigger pool there.

One other quick question. How will the ERP system save you money long-term?

Well, it's not just about saving money. I mean if we're talking about why would our run rate costs go down? It's because we've got incremental costs in there today to do things like moving a lot of material around because I mentioned earlier that we build inventories to support the launch, we've had to lease warehouses and add extra labor and all of that to support this peak time periods. But then as we get to more normal levels, we would see some of those costs going back down again, was that the question you were asking.

No just in itself - forget getting rid of the extra cost to start it, how will the system itself the software itself save you money long-term?

The software itself is going to give us more capability long-term. So I said do more to improve profitability than just save costs. It should help us some insights into pricing. It should help us do better transportation, management, if there's a lot of capability that we didn’t have prior to implementing this. It should help us with our material requirement planning. So I'd say there's a bundle of things that are not just cost that are really profitability but it should help us into.

And we'll always focus more on we’ll see how it all plays up but it really provides the infrastructure and the foundation upon which we could grow. We are pretty much maxed out on the old system and it was all Excel spreadsheets work around because it was not a companywide real-time database for everybody had visibility into the same numbers and there is one point of truth you may heard of all these euphemisms for why you I believe to put in. So I would more look at as infrastructure and once it is in and working for us and we've figured out all the opportunities to enhance the technology, then it really will form the foundation upon which the future growth is possible.

And our last question will come from the line of Robert Smith of the Center Performance Investments. Your line is now open.

So about your anticipated price increase in May, is this going to bring you forward ahead of the curve or you're going to be lagging again so give me some color on that. In other words, you're making up the cost profile that you didn't anticipate - is it going to give you some wiggle room ahead?

I mean hope so but it obviously is a moving target, you hope that if costs have stabilized, natural gas, freight all that kind of stuff but yes that will be in good shape. If not, then you got to hope to be in the 3-stage rational which it's been very rational. All our major competitors have taken price advances as well and I think everybody was sort of caught behind this one. So that’s the hope, the hope is that we've got now in front of it but you are chasing a moving target.

Thank you.

Well thank you everybody, appreciate your interest as always, appreciate your support. We will be back at you in three months and we will talk to you then. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.