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Executives

Daniel Jaffee – President and CEO

Ronda Williams – IR

Andy Peterson – VP and CFO

Charlie Brissman – VP, General Counsel and Secretary

Analysts

Ethan Starr [ph]

Robert Smith [ph] – Center for Performance [ph]

Jim Schwartz – Harvey Partners

Oil-Dri Corporation of America (ODC) F2Q10 (Qtr End 01/31/10) Earnings Call March 12, 2010 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2010 Oil-Dri Corporation of America earnings conference call. My name is Madge 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) 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 Jaffee, President and Chief Executive Officer. Please proceed, sir.

Daniel Jaffee

Thank you, Madge. And welcome, everybody, to the second quarter and six months teleconference for Oil-Dri. As always, joining me in Chicago in the conference room are Andy Peterson, our CFO, and Charlie Brissman, our VP and General Counsel; and Ronda Williams, who heads up all of our Investor Relations activity. And Ronda, could you please cover the Safe Harbor?

Ronda Williams

Thank you. I sure will. 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 urge you to review and consider those factors in evaluating the company’s comments and in evaluating any investment in Oil-Dri stock.

Thank you. And back to you, Dan.

Daniel Jaffee

Great. And we have heard a desire to lengthen our calls. We are not going to do that. We’re going to hold them at 30 minutes, but what we are going to do is spend less time of us talking and more time responding to your questions. So that should allow you to -- hopefully everyone to get on one question, maybe more, and so you’ve got whatever it is you want an answer. I would like to turn it over to Andy though just to give a 50,000-foot review, and then we will open it up to Q&A.

Andy Peterson

We had sales of $54.7 million in the quarter, down 7% compared with last year's $59.1 million. This decrease was due to lower tons sold. We had a gross profit in the quarter of 23.1%, up from last year's 20.1%. A favorable sales mix of our higher value products combined with lower costs for freight, packaging, and fuel used to dry our clay-based products offset the impact of the lower tons sold.

Operating expenses were 16.8% of sales, which was up compared with 14.1% in last year's second quarter. The higher percentage this year was primarily due to lower sales and a higher incentive bonus accrual.

Our effective tax rate in the quarter was 30% of pretax income, up from 25% last year. The change in the tax rate is due to the mix of products sold, which impacts our depletion deductions allowed for mining, and our forecast of earnings for the full fiscal year. Through the first six months of fiscal 2010, the tax rate is 29% compared with 28% for the full year of fiscal 2009. Net income was 4.1% of sales, up from 4.0% in last year's second quarter. EPS in the quarter was $0.31, down 6% compared with $0.33 last year.

In looking at the balance sheet and cash flow, through the first six months of fiscal 2010, $13.8 million of cash was provided from operations, up $11.8 million from last year. This was primarily due to the positive changes in working capital components, including lower accounts receivable and inventories because of the reduced sales.

Capital expenditures of $4.8 million were down $2.9 million compared with last year. Debt payments of $200,000 were down $3.9 million compared with last year. Purchases of treasury stock of $500,000 were down $100,000 compared with last year. Dividends paid in the quarter of $2.0 million were up $150,000 or 8% compared with last year.

Cash and investments at January 31, 2010 was $26.9 million, up $10.1 million compared to last year. We had $5.6 million more in cash and investments than we had in debt. Dan?

Daniel Jaffee

I’m over adjournment. Not at all. Madge, I would like to open it up to the listeners so that they can ask questions. Anything we didn’t cover, we’d be happy to cover for them.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) And your first question comes from the line of Ethan Starr [ph], private investor. Please proceed.

Ethan Starr

Good morning. Congratulations on a nice quarter.

Daniel Jaffee

Ethan, thank you.

Ethan Starr

I’m wondering how were Calibrin sales in the quarter. And could you please also share -- consider sharing Verge sales with us as well?

Daniel Jaffee

Well, let’s cover Calibrin first. It’s both encouraging and discouraging. We did not show the progression that we have been showing, but we still had a very healthy quarter for our new animal health products. And so I think Q1, we had $921,000 in sales of the new animal health products, which was up from $451,000 in the quarter before. We did just under $900,000 this quarter, around $875,000. So it would have been great to have shown more, sure it would have, but still very positive.

I sat down with Ron Cravens, who heads up -- Dr. Ron Cravens who heads up that business. And there is still lot of encouraging positive news coming from the field. The single largest market that we are not registered in is China. And we feel like we cleared a significant hurdle during the quarter. It’s still not the final hurdle. So there is no registration yet in China, but that will open up a huge market to us that we were registered in with our old products, but you have to re-register with the new. So, still very positive on animal.

And on Verge, the real question is not what was our sales, but are we able to make it. We were still in the startup mode last quarter. We’re still in a startup mode this quarter. It’s a new process. It’s really new to the industry, not just new to Oil-Dri. And again the good news is we made significant progress. We’re still not over the hurdle where we are able to both meet the quality and the rate of production that we anticipated when we put the plan in. But the good news is we are able to make the quality now, and we are making significant improvement on the rate of production. So we will get there, but we are not there yet.

Ethan Starr

Okay. I’ll get back in the queue. Thanks.

Daniel Jaffee

Thanks, Ethan.

Operator

And your next question comes from the line of Robert Smith [ph], Center for Performance [ph]. Please proceed.

Robert Smith – Center for Performance

Hi, good morning. So I got on the call I think five minutes late and I missed the presentation.

Daniel Jaffee

Hey. If you’re not on time, you’re late, right?

Robert Smith – Center for Performance

Okay.

Daniel Jaffee

You’re going to always catch Andy’s comments on the webcast. But what questions do you have?

Robert Smith – Center for Performance

Okay. So my first question was centering around Calibrin, so I’m going to circle back to that. So you guys brought some company in Georgia. So can you kind of give me some color as to -- was this totally new acreage or was it part of a leased acreage or what was that?

Charlie Brissman

Bob, it’s Charlie Brissman. I can answer that for you. The acreage that we’ve purchased in the second quarter is new acreage owned in fee by us. And almost without exception had not been previously subject to lease or any other rights that we owned. So those are new acres going into the reserve pool.

Robert Smith – Center for Performance

So, say, you pay about $3,000 an acre?

Charlie Brissman

You know, in all -- I think that’s about right, Bob. There were several transactions, but it probably does average out to right about that number.

Robert Smith – Center for Performance

So what type of clay is this? Is that the high quality clay or the lower quality clay or --?

Charlie Brissman

Well, there -- it's a range, but I think we feel -- and part of the reason we are able to purchase now is and part of the reason we are excited about it is we have not been able to explore every corner of every acre we acquired. Our belief based on having been down there for decades and the due diligence we did perform for each transaction is that we are adding across the board on our high-quality reserves, both for cat litter and for bleaching earth. There are certainly reserves that are in our own minds won’t be appropriate for all of those applications all the time. But on the whole, part of the reason we are excited about the purchases is, the vast majority of the tons we expect there are very much the light density white that we like and the bleaching clay reserves that we like very much.

Robert Smith – Center for Performance

I was trying to some way put the price tag back on to the reserve position. So that’s what prompted my question. It’s a follow-up, where I’m going.

Daniel Jaffee

I mean, I think -- this is Dan coming back. I mean, we’ve sort of circled around this many times and we have to come to the wrong conclusion of whether they value clay in the ground or they just enroll until it’s mined and processed. That’s the value.

Charlie Brissman

Yes. I am following you, Bob, and I guess nothing goes on our books except the acquisition cost for purchased reserves. And at the end of the day, that’s sort of all we can say about it. The reserves that are reflected on the balance sheet do not have market fluctuations or anything like that. And there are lots of reserves that are available to us that won’t have any balance sheet impact at all because they are either held under lease or don’t otherwise require purchase cost or acquisition cost to be recorded. So for all of those reasons, as Dan was alluding to, we as a company have never tried to do anything other than, say, if we paid cash for it, that’s what’s on the balance sheet. And otherwise, the valuation in quotes of our reserves is very much in the eye of the holder.

Robert Smith – Center for Performance

But again, so this was more a mix of both the higher valued and lower valued?

Charlie Brissman

Yes.

Robert Smith – Center for Performance

Or was it skewed to one or the other?

Charlie Brissman

I think mixed is all we can do with that quantity of acreage. So yes, it’s a mix.

Robert Smith – Center for Performance

Okay. And then just following the Wal-Mart story, is there any way to look at the stories that came back? Is there any geographical question -- or what can you tell us about the units that they decided to come back to the company?

Charlie Brissman

You know, I think as we disclosed -- and just to put it in reference, let’s say, when we were at the peak of our branded business of Wal-Mart, call that 100, when we got the new store counts and everything that went into effect in early August, we dropped to 12. We dropped basically 88% of our points of distribution. But that 12 was geographically distributed across 38 of their 42 distribution centers. So it was -- there really was no geographic line of reason to it.

We still were in almost 100% of the US, just not in almost 90% of the stores. And this add-back was the same. So, meaning that we got added back across all geographies. But we were in 100, we dropped to 12. Now you can say we are at about 25, 30, relative. So it kind of gives you an idea of -- we're not back to where we were or even close to it, but still a pretty strong statement that quickly into their new strategy that Cat’s Pride has a lot of loyalty amongst its customers. And when they couldn’t find it at Wal-Mart, they were going elsewhere to find it. And so --

Daniel Jaffee

Bob, I think -- we’re continuing to do so. I mean, I have market data. And Wal-Mart doesn’t report. So it’s like the perfect science experiment. You get the whole (inaudible) and look at the rest of the market. So I’ll give you an idea. The rest of the market for the 24 weeks ending February 7, which is pretty consistent with meaning post their new plan around post August. So since they’ve put in their new project impact for cat litter, the rest of the market in dollars are down 2% in cat litter. Cat’s Pride is up 18.6%; Fresh Step, down 3%; Scoopable, down 29%. Arm & Hammer is in second place on that growth level of 9%. (inaudible) down 2%.

So you can see that since they have put it in, in the rest of the market, we have outperformed the market by a huge percentage than any of our competitors by a huge percentage. Then when you even segment it more and (inaudible) what they discontinued for us is mostly scoopable items. So if you take a look at the scoopable part of the category, so in that 24-week period, scoopable was down 1.6%, and Cat’s Pride scoopable was up 34% on the 24-week. And even the eight weeks, up 26%, and the four is up 24%. So we’re continuing, and the market is down 2%. So we are continuing to dramatically outperform the market, which again speaks to the loyalty and strength of the Cat’s Pride brand, and it will also speak to why they started to pull maybe not 180 obviously, but they pulled maybe a 40 or 50 degree churn and our goal is to get them in full (inaudible).

Robert Smith – Center for Performance

And when do they review this again?

Daniel Jaffee

Whenever they want. This was -- that was so startling about this move. This was an orchestrated -- this was not a review period. This was intra period. I mean, it’s early if they review these things once a year. Usually it’s once every other year because it causes them a lot of pain and suffering to go through the categories. So to do it that quickly is a real testimony to our brand strength.

Robert Smith – Center for Performance

So in essence, it’s really the consumer contacting their local Wal-Marts and saying, we missed the product, I want to get it back. Is that --?

Daniel Jaffee

You and I can both just guess as to what all that was, but they don’t share that with. But the proof is in the clinic. So -- Bob, if you’d go back in the queue because --

Robert Smith – Center for Performance

Sure, I will.

Daniel Jaffee

They will ask questions as well. Thank you.

Operator

And your next question comes from the line of Jim Schwartz from Harvey Partners. Please proceed.

Jim Schwartz – Harvey Partners

Hey, Dan, how are you?

Daniel Jaffee

Hey, Jim, good, how are you doing?

Jim Schwartz – Harvey Partners

Good, thanks. A question, just from the summer period of ’09 to now, could you talk about the new -- maybe the new store penetration for cat litter that you’ve embarked upon and then maybe touch on the all-in initiative for this year?

Daniel Jaffee

Yes. You’re saying outside of Wal-Mart, did we increase our distribution dramatically?

Jim Schwartz – Harvey Partners

Yes.

Daniel Jaffee

Yes. The way they measure that, they call it ACV distribution, which is all commodity volume. And you can kind of see in the number of stores in the US what -- how many of the scanners are you coming across. So for the 24-week period ending February 7th, we were -- Cat's Pride was -- it had an ACV of 53.9% to put that in comparison. The other big guys are all at 98%, 90% -- 88%, 98%, 94%. So they are all way up there. We are at 53.9%. And that’s up only 1.3%. So the dramatic increase has been that we have – within the greater velocity in existing points of distribution. It’s easy to show increase. If we have taken it from 53% to 63%, you’d see almost a 20% bump in movement just because you are in more stores.

That hasn’t been the case. What we’ve done, we’ve always never tried really to be in 100% ACV because we want to partner with those retailers that get it, that like having our high quality, our low class, and our region-specific marketing programs that weren’t basically odd by the pyrotechnics of a national program and understand that their shoppers are local and want to do it. So the Publix’s, the HEB, the (inaudible), I mean, you can go around the country routes. I mean, everywhere. That’s geographically they are all over the US, but these are accounts that have always been loyal partners to Oil-Dri, and we’ve been loyal to them. And so we have a pretty good share in those markets, in those accounts, but there is a good 40% of the stores we are not even in.

Jim Schwartz – Harvey Partners

And then how are you working on penetrating those -- that 40%, is that something that -- because with your distribution network, you certainly get there.

Daniel Jaffee

You can get there. The problem is unless our proposition resonates with them, you just get churned. So you give a lot of money to get on the shelf, and then six months later, they throw you out and they put somebody else in. They play this lotting [ph] game. I’m not saying they are all like that, the whole 40%. But we’ve been in the category long enough where a good percentage of the 40% is looking just to churn you. They are looking to take your check, put you on for a little bit and then throw you out. And so what’s the benefit if it’s Charlie Brown and the football and they are losing? And we’ve had enough of it. And that’s what we told Wal-Mart. That’s why when we went down to Battenville, they think you’re not in 100% of the US. We said, no, by design, we don’t call it 100% of the US. We have specific accounts we don’t even call at.

Jim Schwartz – Harvey Partners

Okay.

Daniel Jaffee

And no, let me tell a story, and they are like, really? Why? And we told them that same story. So we’ve always targeted with you Wal-Mart, but you won’t find us in K-Mart. I mean, there are a lot of stores you just won’t find our products and there is much to do with us as it does with that.

Jim Schwartz – Harvey Partners

Right. Okay. Great. And then just on the all-in initiative, where do you stand this year?

Daniel Jaffee

Which one -- now we are like four years into all-in. So I have three different ones on the bank.

Jim Schwartz – Harvey Partners

Calibrin is here. That’s happened.

Daniel Jaffee

The Verge? You want --

Jim Schwartz – Harvey Partners

Give me Verge, yes.

Daniel Jaffee

Right. I referenced Verge at the beginning. I mean, we are really still trying to just -- we can now product at the quality that we need in order to really excite the marketplace. And that’s been a major accomplishment in the last three months by the team. They have done a great job, because at the beginning, we couldn’t even get the quality. It was just chaos. We’re starting up a new facility, no wonder. So now we can get the quality, but we have to slow the process down in order to do it although we have now been able to speed it up from the bottom of that rate. And so now at least we are shipping. We are filling sample orders. We are getting product into the field for testing so that we’re not missing a season as it were. And we are confident that we keep learning and finding new bottlenecks that we are going to get to the rate of production we need to justify the capital expense. So still very enthusiastic about it, and major progress was made during the quarter.

Jim Schwartz – Harvey Partners

And could you refresh me on the market opportunity that you see there and why you are going after this?

Daniel Jaffee

Yes. I mean, the initial market is all around carriers. So the active ingredients -- and I don’t want to tip our hand too much, so I’m not going to give you the exact active ingredients and the exact things. But they are all around pesticides that use carriers -- pesticides and insecticides that use carriers to deliver an active ingredient to go after a specific test. And our product because it can be made to disintegrate slowly, disintegrate quickly, not disintegrate at all, because its uniformity is so great because it has no dust, they can actually put less active ingredient on our product, get a tighter pattern, and get a greater and faster kill rate. And we’ve proven it. We’ve proven it in our field trials. We’ve proven it in our labs.

And now the question is, on a grand scale, can we replicate what’s going on in the small scale? But that had huge implication to everyone. It’s not just a cost factor that they can put less of this active ingredient on it. It’s also -- these are chemicals. So the narrower the pattern, the less chance you have for any kind of spillover of having it end up where you didn’t want it to be. And so the formulators are very excited about getting their hands on our carrier.

Jim Schwartz – Harvey Partners

Right, okay. Thanks. Thanks, Dan.

Daniel Jaffee

Thanks.

Operator

And you have a follow-up question from Ethan Starr, a private investor. Please proceed.

Ethan Starr

Yes. Oil-Dri is playing as many agricultural uses. But I’m wondering if it has any uses in aquaculture. Maybe it’s kind of a bizarre question, but I’m just wondering.

Daniel Jaffee

No, it’s not a bizarre question. We’ve pointed it around that you call WDG, the water-dispersible granules. You can use them in shrimp production and things like that. And at the moment, not our biggest opportunity on our radar screen, but again with Verge, definitely an aquaculture potential there.

Ethan Starr

Okay. So it’s shrimp. Any fish or just shrimp?.

Daniel Jaffee

All that I’ve heard is shrimp in shrimp farming.

Ethan Starr

Okay. A different question. I noticed in the store recently, I noticed something called Cat’s Pride Ultra. Is that a new variant of Cat’s Pride?

Daniel Jaffee

Yes, it’s for a specific retailer to give them a specific size and efficacy that they were looking for. And so, yes, that’s -- it's just a product line extension.

Ethan Starr

Okay. So they have an efficacy that no one else has?

Daniel Jaffee

Well, a different way [ph] to unique formula that is specific to their chain.

Ethan Starr

Okay. Is it in all that chain stores?

Daniel Jaffee

As far as we know, it is, yes. I think it is. Don’t call me on that one. The intention was to get there. I’m not sure if it’s there yet.

Ethan Starr

Okay. Well, I look forward to future quarters.

Daniel Jaffee

Good. Thank you.

Ethan Starr

Thank you.

Operator

And we have another follow-up question from Robert Smith, Center for Performance. Please proceed.

Robert Smith – Center for Performance

Yes, just circling back to Calibrin. I was kind of disappointed. Perhaps you were too. What happened and how can we go forward with this?

Daniel Jaffee

I mean, I was disappointed because I -- just because it would have been great to continue showing 40%, 50% increases. Our business doesn’t really run in quarters, and we got to take a longer look. We got to see we’re still very positive, talk to the people in the field, talk to Ron Cravens who heads it up. I’ve been out there myself. There is still a lot of enthusiasm and excitement around that we have product line extensions and variations already in R&D that are going to help us expand the markets into which our binders can compete. So it’s still very positive, very healthy, but yes, with this quarter -- (inaudible) but I guess numerically, yet it was.

Robert Smith – Center for Performance

Was it reorders or new orders or what?

Daniel Jaffee

Ron told that it’s mostly just timing instead of -- a lot of orders came in in the first quarter that’s (inaudible) in the second. and he is hoping that the repeat -- the repurchases will occur in the third that didn’t come in the second. So I think we got to take a longer perspective than 90 days and see how it plays out.

Robert Smith – Center for Performance

Okay, thank you. By the way, the statement about the dividend increases running seven years. it looks darn good in this environment, and I hope we go to eight.

Daniel Jaffee

Good. Most of my family members agree with you. In fact, they may.

Robert Smith – Center for Performance

I’m the champion.

Daniel Jaffee

All right. Thank you.

Operator

And you have no more questions in the queue, and I’d now like to turn the call back over to Daniel Jaffee for closing remarks.

Daniel Jaffee

Great. Madge, thank you for orchestrating the call. Guys, thank you for your attention and interest and support in our company. We continue to be very optimistic about the future, and frankly we are pretty darn proud of the first six months. I mean, given the (inaudible) of the needs we took coming out of the fiscal year when our brand was challenged of not being a brand or not having loyalty, I think the market is the ultimate arbiter of that and the market is speaking very loudly that Cat’s Pride is the real brand, is the great brand, and they want it and they are going to find it. And so we are very, very excited, not just in the B2B areas, but also in the consumer area that this has been a great validation in the Cat’s Pride trend. So I look forward to talking to you in three months, and (inaudible).

Operator

Thank you for your participation in today’s conference. This concludes the presentation, and you may now disconnect. Good day.

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