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Executives

Rhonda Williams – Investor Relations

Daniel Jaffee – President & CEO

Andrew Peterson – VP & CFO

Charles Brissman – VP & General Counsel

Analysts

Ethan Star – Private Investor

[Joseph Cregney] – Private Investor

Oil-Dri Corporation of America (ODC) Q3 2008 Earnings Call June 6, 2008 11:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the third quarter 2008 Oil-Dri Corporation of America earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Daniel Jaffee, President and CEO; please proceed sir.

Daniel Jaffee

Welcome everybody to our third quarter and nine months investor teleconference. First we can introduce all the participants; Andrew Peterson, our Chief Financial Officer is on the call as is Charles Brissman, our VP and General Counsel and Rhonda Williams, who heads up our Investor Relations and Rhonda will you please take us through the Safe Harbor provisions?

Rhonda Williams

Thanks Daniel, welcome everyone and thank you for joining us for our third quarter teleconference. On today’s calls 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 stocks.

Thanks again.

Daniel Jaffee

Thanks Rhonda and before I turn it over to Andrew for his general comments, what we usually call our play-by-play, and I add some color, let me just start with just sort of a real 50,000 foot comment which is we tend to be our own most critical graders but the reality of it was this is really was a very good quarter. As I’ve said many times before [Bud Selick] long time Board member, has always espoused that nothing is good or bad except by comparison. And if you compare the results of this quarter to a lot of other things that are going on in the world today in the financial markets and so forth, we had a pretty good quarter so yes, we’d like to have done better, but the reality of it is we did well. Andrew, why don’t you take us through the details and I’ll have some more general comments afterwards.

Andrew Peterson

Thanks Daniel, we had a strong third quarter revenue growth in both the retail/wholesale products group and the business-to-business products group. We had record sales of $59.5 million for the quarter, up 12% from last year’s $53 million. The increase was due to higher average selling prices and increased volume.

We were disappointed in the 18.6% gross profit margin in the quarter, down from last year’s 21.8%. Margins were negatively impacted by higher fuel packaging and transportation costs. Operating expenses were 13.8% of sales which was down from 16.1% as a percentage of sales in last year’s third quarter.

Net income was 3.4% of sales which was down from 3.8% in last year’s third quarter. EPS in the quarter was $0.28, the same as last year’s third quarter. Through the first nine months of fiscal 2008, $6.1 million of cash was provided by operating activities compared with $10.1 million in the comparable period last year. This was due to a higher cash bonus payout in fiscal 2008 that was earned in fiscal 2007 and higher accounts receivable and inventory balances relating to the 12% increase in sales.

Dividends of $2.5 million paid in the first nine months of fiscal 2008 we up 11% in comparison with the prior year. Cash and investments at April 30, 2008 was $27.1 million, up from last year’s $24.9 million. Cash and investments were $20,000 higher at April 30, 2008 then notes payable including current maturities. Therefore net of cash we were debt-free.

Certainly a great position to be in, in today’s environment. Thank you.

Daniel Jaffee

Thanks Andrew and I want to amplify a couple of the comments you made. First of all on the net debt front, you know leverage is a great thing when the hockey stick points up as we all know because we all have stock in our portfolio. When the hockey stick starts to flatten out or actually point down, that leverage can be just as dangerous as it was positive on the way up.

Looking back at our historical trends, when we closed the year 2000, 07/31/2000, our net debt stood at $38.6 million and so to get into a cash positive position seven and a half years later is pretty impressive and shows that the financial strength and the cash generating strength of this business because during that period of time we reinvested in our business through capital expenditures, we made acquisitions, we acquired the [Tap Plant] in 2000, we increased our manufacturing capacity in one of our single, most important lines by 50% a year and a half ago and we’ve increased the dividend at least $0.01 a share. We did more then that when we did the stock split, we actually increased it by 25% at that point in time.

So at least once a year we’ve increased the dividend throughout that whole period of time and yet we’ve been able to take our net debt down from $38.6 million to effectively zero; so very, very proud of that. Andrew referred to the margins, and yes there’s no getting away from the fact that the margins are not where we would want them to be however, I listened back to our teleconference from just three months ago, and pretty much a direct quote was we said “we won’t see much progress in margin improvement in the third quarter, and you may see some in the fourth quarter if the cost pressures have plateaued.” And clearly they haven’t.

Three months ago, and I don’t have this number specifically but my memory tells me, three months ago oil was sitting at around $105 a barrel. This morning it broke $130 so in no way were we predicting the near 25% increase in the cost of oil which ripples through to our business in many different directions in just three months.

Again this is just sort of directional not specific but about four, four and a half years ago the total cost of drying our clay, the fuel dollars that we spent to dry our clay, was roughly ballpark $7 million. We’re expecting in the next 12 months that number is going to be closer to $27 million. So you can see how dynamic this situation has been and through it all we’ve been able to do what’s the most important thing which is maintain our volume, really increase our volume, with many of our most important customers. And so that was one of the more positive parts of the quarter.

Yes, it would have been great if we had raised our prices faster, if we had perfectly predicted oil six months ago and been in a great position to communicate those predictions to our customers. That’s really not reality. We’re always going to be in some sense in a hindsight view on when costs are going up this fast. Because you can’t go to your accounts three months in advance and say “we’re predicting a 30% increase in fuel so we’re raising your price precipitously.” They’re going to laugh you out of the account and find someone else to buy from.

So you’re almost always in a position of playing catch-up. But the good news is, is that the volume is coming in. The $59.5 million in sales was a record for a quarter. We actually broke $20 million for a month for the first time in the company’s history and so we are working with our trusted customers and getting price increases in place. You will start to see the decline level off and the improvement start to ramp back up on our core business. At the same time we are still moving full speed ahead with our new product launch which as I said a quarter ago, is going to coincide with our new fiscal year and so we’re looking forward to that.

And then finally as I said a quarter ago, we were all hoping that given our no-debt position, high cash position, and the state of the marketplace we would find some opportunistic acquisitions. We did make one in the last 30 days. It was not material from an SEC standpoint so we didn’t have to disclose it in and of itself, but it’s generally going to mean maybe $4 million in revenues in our core business. It was someone exiting the business and we were the likely acquirer and we were able to find a price that was fair to us, fair to them, and pretty seamlessly transitioned their business over to us. We won’t keep all of it obviously, if we in our models, if we can keep half their business and that would be great. We’ll see how that shakes out but it further validated that we are the acquirer of choice and that there are acquisitions out there to be made if we stay disciplined and stay opportunistic.

Well those are my general comments. As always I’d like to spend the majority of the time responding to your questions and answers and we’ll at this point turn it over for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Ethan Star – Private Investor

Ethan Star – Private Investor

Was the acquisition on the cat litter side or the industrial side?

Daniel Jaffee

It was on the industrial side.

Ethan Star – Private Investor

Why was the CapEx in the quarter so much lower then usual and will it continue going forward?

Andrew Peterson

That won’t be an example of what it will be like going forward. I think in fact it’ll certainly pick up from that level in the fourth quarter and I would expect it to be picking up quite a bit next year.

Ethan Star – Private Investor

So why was it lower this quarter?

Andrew Peterson

That’s all about timing.

Daniel Jaffee

My general comment on CapEx would be I think its going to start being higher then we’ve seen and not because necessarily we’re going to do more but the cost of steel has gone so crazy that doing the same project, just keeping the infrastructure of our plants where it needs to be is costing more today then it did 12 months and 24 months ago. So the days of under-spending depreciation and amortization for the next 12 to 24 months may be over.

Operator

Your next question comes from the line of [Joseph Cregney] – Private Investor

[Joseph Cregney] – Private Investor

I have a question simply regarding the bleaching earth side of the business. I notice that you do plan to increase prices but I notice that one of your competitors BASF specifically, increased 25% to 35%. Do you expect to match that or be similar?

Daniel Jaffee

That’s news to me that they put out a general increase because I haven’t seen that. I know there’s selective stuff but if you had anything, I’d love to get a fax of that. I haven’t seen them announce a general across the board 25% to 30% increase on bleaching earth.

[Joseph Cregney] – Private Investor

I saw it several weeks ago, but I think it was put out even a couple of months ago.

Daniel Jaffee

I would love to get a hold of that, I’ll try and find it myself. I haven’t seen that. Usually these things come across our wire pretty quickly. But anyway we are out there working with our customers, raising prices. At the same time, a lot of our prices are—freight is a big piece of the equation and there you get fuel surcharges and things that are pegged to diesel and so you’re getting increases even above and beyond your product increases. You’re not making any money on that but at least you’re not losing it. Its basically the transportation companies that end up with it, I guess the oil companies end up with it. But so yes, we’re absolutely committed to maintaining our margins in the bleaching earth business.

Operator

Your next question is a follow-up from the line of Ethan Star – Private Investor

Ethan Star – Private Investor

I’m wondering how the Cat’s Pride Natural line is doing at wholesale and retail.

Daniel Jaffee

Too early to understand its velocity at the moment but from a retailer acceptance standpoint, very positive. Wal-Mart is taking it on in a significant number of stores in their new planogram as are many of our partners in the grocery trade and so we won’t—its just now starting to fill pipelines so we won’t know anything about movement for probably really three maybe even six months.

Ethan Star – Private Investor

Hopefully at least seven figures in revenue a year?

Daniel Jaffee

Yes, I mean certainly with cat litter, it’s such a big market that if you’re not doing that, you’re delisted. If your velocity isn’t enough nationwide to generate that, you won’t have an item. So yes, that’s a very reasonable expectation.

Ethan Star – Private Investor

How else does your contracts from the cat litter side of the business permit you to increase prices to keep pace with gas prices?

Daniel Jaffee

Most of our business is at will, meaning there’s no written contract. You’re quoting on the business and then there’s usually an annual commitment but there’s nothing written in stone there so if things went crazy, I think a mid-year—we’re certainly going to take a look at this on a mid-year basis because this is about as dynamic as its been and I think the accounts will work with us if the facts support a mid-year increase. We’ve heard anecdotally food companies have been not only taking two but three increases in the last 12 months because food prices have gone so crazy due to corn and all the other inputs, so these are dynamic times.

Ethan Star – Private Investor

Why was [inaudible] looking at private label and co-pack relationships?

Daniel Jaffee

Private label same deal, co-pack even allows for it if the facts support it?

Ethan Star – Private Investor

Back to the acquisition, how much money did you spend for that?

Charles Brissman

It was about $1.3 million.

Ethan Star – Private Investor

Will there be a public announcement around the August 1st of these new products that you’ve mentioned?

Daniel Jaffee

No. Not until its material. As I said a quarter ago, until we materially have to disclose what we’re doing, I’d rather not. Its better for you, it’s better for us. So there won’t be any announcement August 1st.

Operator

There are no additional questions at this time; I would now like to turn the presentation over to Mr. Daniel Jaffee for closing remarks.

Daniel Jaffee

I hope this is an indication that everybody has bigger fish to fry then Oil-Dri at the moment because I think the quarter came in pretty much as we predicted three months ago. Fuel was going to go, but basically predicting it was going to be higher and that’s exactly what happened. I would say looking forward we’re just in the process as we always are of completing our forward-buy strategy on up to half of our fuel requirements and obviously its ugly. It’s much higher then a year ago. We factored into our pricing expectations and our cost models, but having said that there’s every indication that it’s going to keep going up. Fiscal 2009 is going to be a dynamic year. The team is responding very well, totally receptive to taking the facts on to our customers, working with them to find prices that keep us healthy, keep them healthy and ultimately keep the consumer healthy.

And so this is something we’re watching literally on a day-by-day basis. We’re not reacting to it because you don’t want to overreact. But we’re certainly reacting to it on a month-by-month basis and like I said I have every expectation that we’re going to have a second round of price increases in fiscal 2009 really for the first time that I can recall. We’ve done it in selected basis where we had to when specific inputs went up, but I think pretty much across the board we’re going to need a second round of increases above and beyond our [eight one] increases and those would probably go into effect end of January sort of February 1; at our mid-year point.

But we’ll keep you posted. The good news is the volume is coming in, the opportunities both from a new product launch standpoint and from an acquisition standpoint seem to be presenting themselves and so we will continue to keep you posted going forward. So thank you for your support. It was a good quarter and we’re looking forward to finishing the year strong and heading into a new fiscal year with a lot of momentum.

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Source: Oil-Dri Corporation of America, F3Q08 (Qtr End 04/30/08) Earnings Call Transcript
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