Oil-Dri Corporation of America (ODC) 2003 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduce a question-and-answer session and instructions will follow at that time.

As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Dan Jaffee, President and CEO of Oil-Dri. Mr. Jaffee, you may begin.

Thanks, Crystal, and welcome, everybody, to today's teleconference. I'm sure everyone's - I hope everyone - anyway, let me not say I'm sure. I hope everyone's pleased with the results, but obviously there are going to be a lot of questions, and we are going to spend our time doing our best to answer those.

Before we introduce everyone who's here and get around to some general business matters, I just want to take the time to thank everyone for sort of respecting the Reg. FD restrictions that we put into communicating with me. I really - I want to let every shareholder know, I really don't talk to anybody during the quarter. And then I come here on this teleconference, and that's why I try and make myself so available so that I can answer all your questions for, you know, the past 90 days. And then, hopefully, in 90 days, you'll build up new questions; and in 90 days, we'll sit down and do it again.

So, I just wanted to thank you guys for respecting that policy, because it really allows me then, number one, to not even worry about disseminating information to various parties, because I don't talk to anybody; and secondly focus on running the business, which is, you know, the best use of my time. So, I just wanted to thank you for that.

In the room today, we have Charles Brissman, who is our Vice-President of Legal and General Counsel; we've got Jeff Libert, who's our Vice President and Chief Financial Officer; and Ronda Williams, who hopefully you all know or have talked to who heads up our Investor Relations department. And Ronda, you're going to kick it off.

Thank you, Dan. Good morning. I just wanted to remind you that, during this conference call, there may be some forward-looking statements made regarding the company's expected future performance, and actual results for such periods may materially differ. Thank you.

Great. Thanks, Ronda. And I think we're going to stick to our typical format. We're going to walk through a little bit of the highlights of the quarter, but really reserve the majority of the time to respond to your specific questions. Jeff Libert is going to take the pleasurable task of discussing the quarter from a financial standpoint, and then I might throw in a few qualitative tidbits as well. Jeff?

Thank you, Dan. Sales of the company for the quarter were up a percent-and-a-half, which is roughly very flat. But it was a very good quarter based on our profit increase during the quarter. A year ago in the quarter, we had only made $74,000, and in this quarter, we've made $1,219,000; a very, very significant increase. And the reasons for that are several fold.

First of all, in the quarter you should know that there is a $675,000 payment from a customer who failed to meet a contractual obligation. And what this related to was a product that was launched a few years ago, and we had spent some money on their behalf investing in our plants on the contingency of course that the product would be successful in the marketplace. So, we had a clause in the contract which provided for them reimbursing us for the unamortized amount of their capital expense on their behalf based on them not hitting a certain volume minimum, and that's what occurred during the quarter. And so, there is a $675,000 gain.

However, that's really not the driving force behind our improved profitability. Our gross margins improved from 18.2-percent a year ago in the quarter to 21.6-percent in this quarter.

The reasons for that are really twofold. For one, you know, we've - for those of you who have been participating in our investor teleconferences in the past, will know that we have rationalized our business geographically over the past year. We have decided to drop some business that was not profitable based on it being very far away from our plants geographically, and we've decided to focus in on things that we call in our blue zone areas where freight - because we're such a freight intensive business - is something that is manageable and something that we can sell the product profitably. And we have executed that strategy during really the fourth quarter of last year, and it continues to pay dividends for us.

Secondly our acquisition of the Johnny Cat brand in Taft, California, facility is going as expected, and if anything even a little bit better than expected. We have achieved the synergies we've expected on schedule, and primarily among those synergies is the adjustment of the freight of the distribution system will enter (ph) the product. In the past, the product had been distributed through warehouses, and we have found by either having the customers pick up the product from the plant or by going directly to the customer from our plant we have eliminated steps and therefore saved significant money. That has been up front two primary drivers of the strong performance in the quarter.

Looking at it by division - we'll go into a little bit of detail, for consumer sales were flat, down one-percent for the quarter and six-percent for the year. Again, the decrease is related to the geographical rationalization. However, in addition to the things I've talked about in the last few minutes, the sales of our core business continue to remain solid. We have strong ties with our largest customer, Wal*Mart, and we continue to see sales growth there. And we've been successful at continuing to control our trade spending. We've spent money, but we've spent it smartly. And versus several years ago, we've been able to reduce that amount significantly.

In our crop production horticultural group, sales were up a whopping 22-percent for the quarter, and I would attribute that to really two things. One is we've seen really strong orders for the quarter from ag formulators. These are people who use our product as a carrier for their pesticides or herbicides. And what we've seen out there in the agricultural marketplace is that genetically modified crops have not done as well as expected this formulation season. As a result, there is a greater need for products such as ours, and the order bookings have been very strong for the quarter and they continue to be strong going into the early spring.

Also in the crop production group, we continue to establish a presence in a growth market of forced turf. We have seen very strong orders in the quarter, and our products are being used in the reformulation - or not the reformulation, but in the rebuilding of golf courses. And that business is up significantly from a year ago.

On the industrial side, sales were up by two-percent for the quarter, and that is largely driven by our acquisition. While the acquisition is primarily consumer in nature, there is a significant part that is industrial in nature, and that affected industrial sales by roughly a few percent during the quarter.

For our specialty products group, sales were actually down by four-percent. We are seeing a lot of competitive pressures, the bleaching earth (ph) business which dominates that part of our - or that segment, is very competitive and we continue to see it. However, that business continues to remain a very strong contributor to the overall company because we've done a very good job of controlling our manufacturing costs.

That's a round up for our business units, but I also want to comment that from a cash perspective, which we've sort of reiterated those points over the last several teleconferences. We continue to remain very strong from a cash generation standpoint. Cash and investments were over $10 million at January 31st of this year, quarter end. And that's up from $5.6 million a year ago, and is down from 16.2 million at the end of our Fiscal '02. However, that can be explained really by two factors. One is our acquisition, which we spent $6 million on, but also this tends to be the busier part of our year. And so, we do end up having a little bit more money tied up in receivables and other working capital items. But it's a very, very strong story. We continue to under spend our depreciation, and we continue to maintain our plants in good working order. And we see this trend continuing for the future.

Great. Thanks, Jeff. And I do have some - couple of points to embellish on what Jeff said. He referred or referenced the gross margin improvement, and I want to shed a little light on how that was achieved. He talked about the freight, which is a huge piece of it, which is in the blue zone as we call it. And we really feel we have a competitive advantage in that blue zone, because generally the company that's closest to the customer in our business is going to have a big competitive advantage, because the other plants have to try and overcome their freight disadvantage with some sort of either efficiency gain or decreased margins. And so, you always are strongest closer to your base.

So, we have been really focused internally on what we call revenue. It's not what we call - the industry calls revenue management, where we're focused on how many tons we dig out of the ground and ship to customers and how many dollars we get back. And to put that in perspective, a year ago in - let's focus on the quarter for instance - a year ago, we did 282,000 tons in the quarter at an average price of $155 a ton. This year, our tonnage was down a little bit. We did 266,000, but as we mentioned, our sales dollars were up in the quarter. That's because our average selling price was up to $167 a ton. We got an extra $12 for every ton we distributed during the quarter - sold during the quarter and at average selling price up eight-percent.

I'm sure all of you are aware that nobody is getting eight-percent price increases, and we are not an exception. I would say there is nowhere where we have been able to raise anyone's price eight-percent. What we have done is focused on selling our higher margin, higher value items, and getting out of the low margin, lower value items, rather than sinking more and more money into increasing our capacity. Until we get to that effective utilization, you know, we are not going to do that. So, whenever we bubble up against capacity constraints at various facilities, we do the obvious thing of focusing on what the bottom, you know, quarter of our business looks like and is it a candidate for being either swapped or raised or right sized so to speak.

And we've been effectively doing that at a number of our facilities, and it's really starting to pay off in the results and in the cash, as Jeff mentioned. Because in the past, I think we would have as a reaction to running out of capacity, then said, "OK, where is the bottleneck? How much capital do we need to spend, and let's overcome that bottleneck and increase our capacity." Now we're first asking the question, "Wait a minute? Are we efficiently utilizing that capacity, and are there pieces of business that really ought to go to free up capacity for other pieces of business that are a heck of a lot more profitable?" And you know, that discipline has a twofold benefit as we referred to it, as we mentioned, of increasing our margin and decreasing our cash utilization, which is a good thing. And we feel that we can continue to play this revenue management game, you know, for a long time to come.

Before we open up to a regular question-and-answer session, one question that I will either anticipate or preempt in a sense - and I hope not to steal your thunder - is what are we worried about? OK, here we have this good quarter, and we've had a very strong six months, but what are worried about? Because, you know, it's all of our natures, we're always worried about something so that we don't, at the very least, get too self-confident. But - and the fact is we do have things to worry about. I'd say we have two things on our horizon that are concerning us, both of which I feel are manageable and overcomable (ph), but we need to focus on them now to make sure they don't come to bite us in F '04.

The first one is fuel -- the cost of both processing our clays where we use either natural gas or used oils or other - you know, coal, things like that - other fuel sources, to drive the moisture off of our clay and then make it, you know, the absorbent - or absorbent sponge that it is. As all of you are reading, I mean, crude oil hit a 13 year high yesterday at 37.70 a barrel. Natural gas is today at 739, well ahead for March. And to put that in perspective, in our forward buy program for F '03, we're hedged at about 367, well hedged. So, you're talking a doubling at the moment. Now, we're still protected through July 31st, but come August 1st, you know, those forward buy contracts expire and we will then be exposed if we are not able to secure new contracts at an economically advantageous rate.

That one I believe is overcomable (ph) because I can't imagine an easier - it's never easy to raise prices, but I can't imagine an easier scenario than tagging (ph) your price increase to increased cost in oil and natural gas to the buyers. We can communicate it very clearly. I have to believe that other industries, other players within our industry, are all experiencing the same thing, and they're all looking at the same pictures. So you know, I'm confident that if we manage this one correctly, we will be able to overcome it. I'm more hopeful that it will go away. I'm hopeful that the situation in Iraq will resolve itself, and I certainly don't want to turn this into a political call, so I won't. I just hope that it resolves itself, and I hope the situation in Venezuela resolves itself. And obviously, the cold winter is going to resolve itself in actually in a month of two.

So, those three pressures have really driven the fuel market crazy. And I didn't even mention that fact that obviously our freight, which we just talked about as being our single largest component of our cost of goods, sold is very fuel sensitive, You know, the cost of diesel is a big component of our partners who haul our product for us. And so, there's no doubt that that's also going to have upward pressure.

So, worry number one is fuel. I'm not all the worried through July 31st. I think we've done an excellent job of managing that risk, but come 8/1, you know, we're either going to have to raise prices or hope the situation resolves itself.

Second worry is Johnny Cat. You know, as good as I think we've done at integrating the acquisition, there's not doubt the trend line on Johnny Cat is negative. As we pointed out last teleconference, and you know, it's the same now. It's declining. The brand has been neglected. It hasn't been revitalized. In fact, there is not even a Johnny Cat scoopable, which represents over half the market. So it's - you know, it's segmented itself into a small older declining piece of the category.

Wade Bradley, our Vice President Consumer, and his team are working very hard on doing the market research necessary to effectively re-launch the product. And I believe that will not only mitigate the risk, but turn a negative into a positive. I believe that there is a very strong brand identity with Johnny Cat, certainly west of the Rockies, and that's where we need it the most because that represents the lion's share of the volume out of the Taft plant.

So, certainly worried about it, but again, feel it's overcomable (ph). But you will be hearing from me in the upcoming calls about how that is going and what impact that might have on F '04, because I feel like we acquired the plant at a very good price for us, very good deal for Clorox as well. But it allowed us now to then invest in the brand so that our net acquisition cost may be higher than that $6 million, but we will be able to, as I say, pump some adrenaline into the patient. So you will be hearing more about that in the upcoming calls.

That's it for what I see on the horizon. Obviously blue skies, you know, in the near term, and then those clouds of fuel and Johnny Cat out there on the horizon that we need to do a good job as managers of turning into positive.

Crystal, at this time, I'd like to open it up to a Q&A session. I do want to encourage everybody to ask questions, but after the end of your question, please go to the end of the queue, which will allow those people who want to ask a question to do so. And then, you know, obviously feel free when you've got your question answered, you're done, hang up and move on, because I'm going to stick around and answer questions as long as somebody wants to ask them.

Thank you. If you have a question at this time please press the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Once again, if you have a question, press the one key at this time.

And our first question is from David Fondrie of Heartland Advisors.

Good morning.

Hi, David.

Could you give us a little more information about the Taft operations, specifically I think you acquired it as of December 13th or so, what sales were for that operation for the period that was just reported? And have you started producing anything else or have you move any other product into Taft other than the products that they were initially producing?

Yes, David, and I'm going to try and answer your questions as best as I can. We do not disclose plant sales, however, I mean the Johnny Cat sales would be publicly available information through IRI (ph). In our news release announcing the acquisition, we referenced that sales are going to generate approximately $18 million per year. I can tell you because it's no surprise, the running rate in the last six, seven weeks since we've had it has been higher than that, but this is the busy time of the year. So, I'm still comfortable or with that $18 million annual number. Does that help?

Yes, that helps. I was trying to get a sense of where your increase - yes, if I look at your Q2 over Q1, you know, sales increased from 377 to 44.4 thereabouts. And I was trying to get an idea of how much of that increase came from Taft and how much of it was really organic. Looks like a good, or at least I would guess, a good part of it is organic as opposed to from Taft because what two-and-a-half, $3 million maybe a Taft based upon (ph) $18 million annual run rate, you'd be headed less than two months.

Absolutely, and the fact - absolutely. And I think Jeff referenced that the ag division had a very strong division, and that was good.

Yes, can Jeff break out - I mean, in your Qs, you break out the sales by divisions. Could - do you have the information now you could break out for us?

You're looking for break out of, I'm sorry, what specific information?

Well, you break out your consumer product sales specialty craft (ph) products and industrial in your Qs, and I don't think it was broken out in your press release.

Right.

But it will be in the Q.

But it will be in the Q.

So, I don't think it's a problem. I mean, should we ...

Yes, we do have - we do have the information. I have it.

But is it a problem, or should we just say, "Wait until the Q?"

Yes I ...

I just don't want to - the news release.

Exactly. So, our usual practice, David, as you know, is to give the specific quarter and year-to-date segment revenue information in the Q at the press release. It's a discipline that for us is all the more important in light of some of the recent rule making. So, we're probably going to stick with that practice. To the points Dan made, you know, the Cat facility was only in our results for the quarter for seven weeks of the quarter. So, you know, it's not a whole lot of impact.

Right, and to answer your second question, which was how much - have we brought in other either customers or products, very little at this point. I mean the biggest thing we've done from a synergy standpoint is just that we've rationalized the whole logistical distribution network, where instead of shipping to a regional DC and then to the customer, we're going direct. And that's had a big impact on the margins there.

So, I think once you see the Q, hopefully it will answer some of those questions.

OK, just as a comment, if you're not going to talk to anybody for the period of time, you know, after this conference call, it would be useful to have the detail of the sales by the different categories so we could ask relatively intelligent questions and better understand the company as from an investor standpoint. So, I would just ask that you consider that in future press releases.

Absolutely. That's a great point. And I will - again, I have all the numbers with me. I just know from a Reg. FD standpoint if I start talking about stuff that isn't in the news release now, we're going to have issue all sorts of releases, which isn't the end of the world. But let's put it - I hear you loud and clear, and I will get an answer one way or the other. And my guess is we will now start including this as part of our quarterly practice so that we can talk about it on the conference call.

OK, back in a few. Thank you.

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

Good morning.

Hi, Bob.

Just say some words about Ken Turner (ph) and also Poultry Guard. And second question is how much do you think you might spend in initial phases to shore up Johnny Cat?

OK, let me start with Ken Turner (ph), and I've talked with Tom Rutherford (ph), our VP of that division, this morning in anticipation of this question. He had a conference call yesterday actually on this, so I mean, we're still - we're in year four of the canola trials, and he said you can't really take a positive or a negative away from the fact that we're in year four of the trials. He thinks it's positive, but it's the cycle that this thing takes. He said because the technology has demonstrated a good benefit on reducing the seed count of how much seed they need to put in per square acre and so forth, which is a savings, is good, the biggest area for improvement or dollar savings is in yield. And the only way to really prove yield is through field trials.

And so he - you know, he said, "I wouldn't take away from this anything too positive or too negative. We're in year four. It's going well. It's good that it hasn't" - you know, didn't die in years one, two, or three, but he said it would probably be - it would not be prudent to expect a lot of value in the next 12 months coming out of the canola with Ken Turner (ph). So, we're still plowing along, but there's nothing on the immediate horizon with Ken Turner (ph).

OK.

OK. And now I forgot - I remember your third question - I don't remember your second question?

Poultry Guard.

Oh that's right, Poultry Guard. OK, let me talk about Poultry Guard. You know, the good news with Poultry Guard is what I've always understood with the application of the product is the culvert (ph) is the more they're going to use because they need to keep the windows closed in the chicken houses. And so, then the only way to manage ammonia at that point is with a litter amendment. So frankly, I would have expected this year to be dramatically better than last year.

That is not what we're seeing. I mean we're seeing sales relatively flat to the prior year in Poultry Guard, certainly for the quarter. And I - you know, I'll just honest with you, I'm disappointed in that. It's hanging in there, but it isn't doing what I had hoped it would do. So, that's a disappointment.

Do you have any thoughts as to the why?

You know the uptake on litter amendments is that that industry is so focused on obviously penny profit. They do so much volume that any added cost is going to get scrutinized very hard. So, the uptake of adding cost a litter amendment when past practice is really not a litter amendment. You're really trying to create a market, and there is another competitor out there. And so, we're sort of doing it together while fighting with each other.

But the biggest inhibitor is not them so much as it is the acceptance of litter amendments in general. It is - still the market penetration has been pretty weak. It's not like we are losing to the competition per se. We both have, you know, pretty good shares. They're bigger than we are. They started - but it isn't like their product's being accepted universally, and it's just that we can't get share. It's really that the size of the market is so darn small at the moment that it just hasn't done what everyone projected it would do. So I'm ...

And the competitor is who?

Is Jones-Hamilton. They make a product called PLT. And they really started it - from what I understand, they started the real industry. And then we jumped in, and we've taken a good share. And I don't have the exact share data, and there is no real - there's no IRI (ph) of Poultry Guard, but if I had to throw a number out there, I would say we have about a 30 share, 30 to 40 share. And they have a - you know, a 60 to 70, and there's another smaller player. But they have over half; we have under half. And it's just that the market is very small.

OK, and in terms ...

In terms of Johnny Cat re-launch, way too early to say, you know, really way too early. As soon as we do have numbers, we will get them communicated. But at this point, it's too early to say.

OK, thank you.

Thanks.

Once again, if you have a question, press the one key.

And we do have a follow up question from David Fondrie.

Can you help us understand the sequential increase in SG&A costs from 6.6 in Q1 to 7.9 in Q2?

Jeff, you want to ...

Well, you know, I think that part of the reason is that we've accrued our bonuses in line with the performance of the company. And I know that falls into SG&A. I believe that's a part of it.

Additionally, we've been ramping up our R&D efforts. You know, we've done a lot of things that we're now calling our innovation center. And we've increased our spending with our R&D group, and that would also be likely to be a reason why our SG&A has increased. But beyond that, we're really doing things consistent with the way we've done them before, and I don't see that as part of any sort of long-term trend.

Well, is that - would that - would - should we be looking at this almost $8 million as a run rate going forward? Or would you anticipate that it would back off into, I don't know, the seven or seven-and-a-half million range?

I would have thought there were some legal costs in there for your acquisition, but ...

No, that - those things would be capitalized as part of the acquisition ...

OK.

... FASB. You know, our run rate, there may have been - there are some things that were not capitalize-able that relate to employees traveling out there and doing similar (ph) like that. I see these expenses maybe a little bit high in the quarter, but your long-term run rate should be somewhere in between the two - I would say would be realistic.

Yes, because there's no doubt, during the quarter, we generated expense relative to the acquisition that is not going to recur. We had to bring in, you know, consultants on human resources, on engineering, on environmental. We had to do - and some of it was capitalize-able; some of it ...

Was not.

... was not. Internally, as you said, we were all traveling. I went to California three or four times in the quarter, which for me is abnormal. And we had a lot of people. Everyone in this room, I think, made it out there. Well, Charlie hasn't, but we'll get him out there.

So, I think you're right, David. It should back down. It's not all, you know, going to continue as a run rate. And then Jeff's point is absolutely right that in a bigger year we have an incentive based compensation program. As we do better, we're going to pay out more in bonus. And so, that would show up, too.

OK, I'll get back in queue again. Thanks.

OK, thanks.

Next question is from Ethan Starr.

Good morning.

Ethan, I was starting to think maybe you were ill or something. I was hoping you weren't going to go without asking a question.

Oh, I have several things.

OK good, good.

Now that Oil-Dri has achieved it's goal of having a west coast plant, what is now your top strategic goal for the company, not including anything related to new product development?

Well, OK, you just eliminated one of our top strategic goals, but that's OK I guess, because we covered that last call. But I mean, that is our top strategic focus for future growth in the company is the whole innovation center.

OK, but if we knock that one out, we still have a long way to go on playing out this whole blue zone concept of really focusing on those businesses where we have a sustainable competitive advantage. And as I said, one of the best ones is being close to significant markets. That one's hard to overcome because unless somebody can all of a sudden find a new way to ship things cheaper than the historic ways it's very hard to get product into the market better than we can.

And so, we can then - if we're doing our homework right and understanding the competitive landscape right, we ought to be able to share in that benefit with the customer. Obviously, they have to have an incentive to do business with us, but then we also have to have an incentive to supply them. So, the whole revenue management concept is very high on our radar screen.

You know, strategically - and it's really sorting through our brand assortment of both Cat's Pride and Johnny Cat - we feel both have a very strong reason to exist in the category. They're both positioned differently, you know, it's up to us to do the homework and the market research necessary to understand the individual differences between the Cat's Pride consumer and the Johnny Cat consumer, and then give them, you know, either the pricing they're looking for, the promotional strategies they're looking for, or the particular products, you know, that they're looking for.

And that's, we're putting a lot of our resources behind that because we feel like we have a great opportunity. We made this acquisition, and while it may seem in some people's perspectives in the rear view mirror, it's still very much in the front windscreen for us. We're very focused on trying to make sure we integrate it correctly and get the most out of it.

So, I don't know if I answered your question perfectly, but you eliminated my biggest one, so ...

OK, well, that's good. Also another question - one more - over the next five-and-a-half years, you'll be paying off over two thirds of your long-term debt. Assuming there aren't any acquisitions over this time frame, first do you anticipate any need for additional long-term borrowings? And second, do you expect the interest savings to drop straight to the bottom line?

You know, I don't have a crystal ball, but at the moment with the way our business is going, the margins coming back the way they are, the cash generation where it's at. I do not see any needs for debt; however, you know, if something were to come up opportunistically where we said, "Hey, we have a real opportunity to do something," and I've mentioned in past calls either industry consolidation, you know, some sort of something comes up on our radar screen, because we're still looking to be very opportunistic, though.

I mean, I think the chances of seeing Oil-Dri in some sort of high profile bidding situation is very remote, you know. What we are going to be is continue to be very opportunistic where we have a strategic advantage in as a strategic buyer in some of these consolidations. So, onto that front, I mean, here we were. We made this acquisition, and we were able to fund it out of cash and fund all the working capital and still grow our cash balance year-over-year. You know, as long as we keep doing that, no there wont be any, you know, needs to layer on more debt.

And do I feel that the reduced interest expense will fall to the bottom line? Yes, I think that's a very good assumption. I mean ...

And one other question - then, for long-term, what do you see is a reasonable amount of long-term financing for Oil-Dri to use? Again, assuming no acquisitions in the picture.

I don't know if I'm prepared to answer that question.

OK.

That's going to really depend, Ethan. That's going to depend on what our business develops and what are cash needs are. I think to try to give you an estimation of that right now, I think that would be premature and probably not very accurate based on the opportunities which, you know, we are not - have not fully been defined yet.

OK, thank you. I'll get back in the queue.

We have a follow up question from David Fondrie.

A few of us are dominating this call. I apologize for that. On the $675,000 that you received from a customer, I guess as an offset to costs that you incurred in the past, does that complete any obligation that they have? Or do they have continued obligations going forward to purchase product?

The answer to the question is they do have continued obligations. This really is related to their failure to hit a minimum, but their obligation to honor our contract and our obligation to them to honor our contract remains intact.

Is there - do they see any improvement in - I mean, whatever product they're selling obviously did not sell as they expected. Are they taking any actions in order to try to enhance their sales of that product? Or is it one that they're just kind of throwing in the towel and saying that, yes, it's not working? We'll accept our obligations and meet them with Oil-Dri?

I can't really comment on what this other company's intentions are. That's really for them to comment. I can only tell you that they've failed to hit their minimums and that's the extent of it.

Do you sell other products to the company?

Not at this time, no.

OK. And then, I think you indicated that you resolved the overburden issue?

Yes.

So, that's a thing of the past?

We hope.

You want to answer?

Well, we have completed the amortization of our estimate (ph) change that began in the second quarter of a year ago. And we believe that it was a result of an unusual blip (ph) in our resources where we ran into a lot of play that was under a lot of over burden. And we believe that long-term while the amount of overburden is significant, it wasn't quite as high as it was in this period of time of our mining programming.

So, we believe that we're through the higher overburden of clay (ph) and amortizing that amount, and yes, we should be lower in the future than we have during the past 12 months.

So, would that - would that - do you think that might positively impact your gross margins?

I would expect that it would.

Yes, I think if you equate it to gross margin, I think it's maybe three quarters of a point. Am I - would you agree?

Yes.

... dollars?

Yes, I think that's ...

Yes, I think it's three quarter of a point going forward in improvement.

Well, that's terrific news. Great, I will again get back in queue. Thank you.

Thanks, David.

Next question is from Ethan Starr.

Yes. As you noted in your letter to shareholders last fall, as Oil-Dri's depreciation expense starts to fall reflecting years of lower capital spending, Oil-Dri's expectation is that operating income will rise. When might we actually see this begin to happen?

Well, the depreciation did start to drop, but now we made this acquisition. So, we actually out spent our depreciation and amortization in the quarter and in the half now because of that. So, certainly this year is not going to be one of those years where you're going to see a big decline. It also always matters, you know, what's the life of the assets and when are some of the big expenditures of the past going to be fully depreciated? I would just say is if we continue to stay on this discipline of not just pouring new capital in to support potentially unprofitable business, you're going to continue to see improvements like we've already been showing. But in terms of an absolute reduction in depreciation amortization, my guess is you wont see a big decline this year because of the Taft acquisition.

No, I understand that. But are we talking like five years, 10 years down the road?

I think our average life on assets is, what, maybe 10 years?

That would probably be in the 10 to 15 year range on average. And just to give you a flavor - and I can't promise you that this will happen in the future of course - but if were to spend if we were to depreciate around $8 million a year and spend $4 million maintaining our business as we close to did last year, you would expect to see that depreciation go down on average of a few hundred thousand dollars a year. That's what you'd see happen. But it was a very slow process.

OK.

But it will - it will happen. I mean - but yes I think it will be two to three maybe $400,000 a year.

OK. How are the dog treats doing?

Dog treats are doing well. As you know, we're in the nation's largest retailers. And for those of you who didn't see the "Fortune Magazine" article on Wal*Mart, I thought it was excellent. As a supplier to them, I thought they really captured the essence of who they are and where they're going. So, I encourage you to read it. And we're also in there, too. Mario Cabelli (ph) was quoted as liking - I think it was everything to AOL (ph) to cat litter. And he mentioned how Oil-Dri is one of the companies that he has taken a position in and is considered to be bullish on.

The dog treats are doing well. They gave us an initial target of so many per store per week that we needed to move. We have already doubled that. And so, we are in discussions with them on how to continue to further the line, possibly taking on a new SKU, and obviously trying to then spread the good news to other retailers so we can expand the distribution base.

I was recently doing some Wal*Mart store checks down in southern Illinois, and both supercenters I went into had J-hooks where they had a whole wall basically of Smart Snacks with a big 97-cent display. And so, I called our retail link person and said, "What are moving at these stores?" And we were moving - it was our single largest mover in terms - units per store per week of any of the items we sold them including all our cat litter items, the dog treats were. So, it shows when you merchandise these things right, and it was triple the movement we're seeing on average just to tell you. So, if we were able to get this in all of their stores, we would triple our movement.

You know, in the quarter, we did over a quarter of a million dollars. So you know, we're going to do over $1 million of Smart Snacks, and then we have a private label business on top of that. I think we'll approach $2 million in total dog treats - million, five to two million depending how the year shakes out at the end. But things are going well with the dog treats.

OK, good.

You know another thing to focus on just as we go forward is along with the Johnny Cat cat litter business came this liner business. So, we're starting to develop a fairly, you know, sizable piece of the business that don't have clay as their base. I think the, you know, between the liners and the dog treats and our light absorbents which we sell as polypropylene oil and water absorbents in our industrial division. And maybe, you know, some of our other non-clay, we're probably building up about a $10 million a year non-clay business.

Well, is there any possibility of marketing the Johnny Cat liners as Cat's Pride liners in the areas of the country where Johnny Cat is not a well known brand?

It's a definite possibility, although it has pretty wide spread distribution and it is the premium liner. It's the thickest liner out there. It has the drawstrings, and so it demands a higher price point than anybody else. And it was pretty well marketed coast to coast. But there maybe some select areas where that makes a lot of sense.

OK. Now I didn't realize it was marketed coast to coast unlike the litter.

Right, right.

OK. In last September's fourth quarter conference call, you mentioned the university research study to see if Poultry Guard would work as a pathogen control. What are the results of the study?

You know, I don't know. So, I'm not even going to - I don't - I don't know.

So, at least now you'll know when I do answer a question, I believe I know the answer. I don't know the answer to that. I'll dig into it and we'll make sure that if it's anything material we'll get it out to everybody. But if it isn't, then we'll just cover it in next quarter.

OK, well I thought this thing was like a 90-day thing, and we'd know like in 90 days or so.

Absolutely. No, I think you have every right to know, and I should know. I just don't know the answer. So, rather than make it up, I figure I'll get you the right answer.

OK. I appreciate that. I'll get back in the queue.

OK, thanks. To my defense, I have been busy this past quarter, so you don't have to worry that it's just that I've been asleep at the switch. I just - I have to admit the acquisition really consumed a lot of all of our time and energy.

Any other questions?

Yes, I'll keep going if no one else has questions.

OK, did you get back in the queue?

No, I guess not.

I'm trying ...

... I do.

Crystal, let's see if anybody else has questions ...

We do have a question from David Fondrie.

OK.

We'll go back and forth here, I guess.

Yes, fair enough.

Can you talk about - part of the acquisition was in order - was to try to get I guess back into Wal*Mart on the west coast, business that you gave up before you had the acquisition. Can you talk about any progress on that front, or whether there's - you see opportunity? Or do you have to wait for a period of time before you might be able to go after that business?

Sort of yes and yes. We do see an opportunity, but yes we do need to wait for a couple reasons. Number one, we really want to get our arms - well, we have our arms around the total cost of the plant. We know the dollars intake, the dollars out, and we're comfortable with the profitability and so forth. We are in no way comfortable or confident that we understand the cost by item as this point. You know, this was a real small piece of Clorox's business, so that didn't have a P&L on this things and rightly so. So, we're reconstructing all the standard costs and all the detailed costing. So, we don't want to get into a position where we fight to get this business back, find out it is not profitable, and then are back in the - you know, the unenviable position of going back down there and saying, "Whoops, we screwed up."

So, we're taking a very methodical approach. We're going to get, you know, six months under our belt of running the plant, understanding the costs, before we get aggressive on a price item like that. So, I do think it's an opportunity. I'd be shocked if we can't compete because Ralston's (Company: Ralston Purina Company; Ticker: RAL; URL: http://www.ralston.com/) plant, who's doing it, is right down the road and they're - you know, they're, should be in the same position we're in. So you know, we should be able to get some of that business back if we want it. But at this point, we're in a wait and see.

And can you - commented - you mentioned - or there was a press release that you said you might be repurchasing stock. Did you in fact repurchase any stock during the quarter?

We have repurchased stock during the quarter, and I think we mentioned it. Let's see what did we get. We got 16,000 shares during the quarter, and then we stopped when we - you know, we pulled ourselves out of the market just conservatively and I guess how many more days do we have to wait and then we get back into the market?

Probably two full trading days. I mean, we're - with our own purchases, we're following the protocol we imposed on all of the executive officers here at the company, as well as employees who have material non-public information. So, we were out of the market while it was clear our results were going to be what they were for the quarter. We expect to resume purchases at an appropriate time, which is probably at least two trading days from yesterday's announcement.

So, yes, then we'll be back in.

And can you give us depreciation amortization both for the quarter and the half year, please?

Yes, I think I don't (ph) have that.

I don't think we have it here.

I remember seeing it exactly, and that's why now I'm scrabbling. We have all sorts of papers spread out in front of us, and rather than spout of what I have in my head, I remember seeing it.

Oh yes, here it is.

OK, so depreciation amortization in the second quarter was two million one against actually spending of property, plant and equipment of five million, of which, you know, a big chunk of that was the Taft acquisition.

Over four million of that.

Yes. And then, year-to-date, we're at 4.2 million of depreciation amortization and spending of about 6.4.

Great. I'll get back in queue.

OK.

Again, if you have a question, press the one key.

We have a question from Ethan Starr.

Now, that you've owned the Taft plant for a couple of months, how long do you think it will take for Oil-Dri to really get the plant to where you want it to be?

You know, it's a great plant. I - it's in many instances already where we want it to be, and in some instances beyond where we want it to be. But from an understanding I'd say the biggest area we have to improve upon is just understanding the cost as we were describing. So, from that standpoint, it's going to take the rest of the fiscal year as we then prepare for the budgeting and the standard costing cycle for F '04. So I'd say until August 1st.

OK, have you already picked up any regional private label since the acquisition or not?

No, you know, we - because we don't understand our costs as well we're very hesitant to do it. So, we've had some inquiries. We've discussed in general terms pricing, and at the moment, we have not felt confident enough to get as razor sharp as you need to be on private label and then run the risk of not making money. So, at the moment, we have not.

OK.

The biggest opportunity out there is to stabilize the Johnny Cat brand. I mean, that's where the dollars are coming from.

OK. Have either of the Mississippi plants recently seen a slow down in the amount of work they've had in the past?

I see regional Yahoo! (Company: Yahoo! Inc. ; Ticker: YHOO ; URL: http://www.yahoo.com/) chat boards - is that where this is coming from?

Yes, exactly. You read them, too.

You know, I started reading them because, as you guys know, I'm getting my MBA at Northwestern, and there's a fellow in our class who wired me into that. So, I have started to read them. I saw where they saw we got rid of a shift. Really that shift was not due to a slow down because the business, actually, there is very strong. The Ripley plant is our ag plant, and the ag business is going nuts. What it was, was a rationalization.

They were running so much overtime that they figured out they could do - and I don't know all the details, but you know, in like four on three off or whatever it was and get the two shifts versus having three eight hour shifts. But then, running everybody overtime to make for whatever shortages there was in the processing. So, the answer is there has not been a slow down. That business is doing well relative to last year and really a lot of historic benchmarks. It was just a change in the shifts - the shift schedule.

OK. Are there any potential uses for oil derived (ph) clay in the organic farming industry? I would think that if you did not add any chemicals to your clay, it could be considered organic and thus could be used in helping to grow food without compromising it's ability to be labeled organic.

I feel like this is a plant from our VP of the ag division because Tom Rutherford (ph) is always pushing for soil amendment and top soil products that he feels have a wide, will have a widespread consumer application. I can tell you we're looking at it. And if, you know, the rest of the company ever feels as bullish about it as he does then, you know, we'll be launching those products soon. But the fact is we're still sort of in a wait and see mode. But we're trying to do the market research necessary to understand how big of a market could it be, and do we have a reason, you know, can we profitably get into it? So, I think you're right. I think there's an application.

OK, good. I'll get back in the queue. Thank you.

Thank you.

We have a question from David Fondrie.

If I could come back to revenue for a minute again, you showed a great sequential increase in revenue of Q1 over - or Q2 over Q1. And the comparison, I think, over last year is probably a little bit unfair, because I think you had some of the Wal*Mart business that you discontinued in there. So, if I could focus just on the sequential increase as a way to get a sense of what we might see going forward, if I assume that two-and-a-half to three million of that sequential increase came from the acquisition of Taft. And that's just guessing based upon the prior run rates and maybe a little stronger in the six weeks that you were running it. Can you talk about, you know, what accounted for maybe almost the $4 million increase quarter-over-quarter or $3.5 million increase quarter-over-quarter?

The problem with looking at sequential in our business is it is very seasonal. I mean, there's no doubt that the winter months, this is always our biggest quarter.

OK.

And so, you've almost got to look at year-over-year and then take your pluses and minuses and go from there. I mean - so, you're right, the minus is that we walked away from a big chunk of Wal*Mart business, and as we disclosed that was about $10 million a year in sales. With this quarter being a little bit bigger than the others, you wouldn't be far off to assume maybe three million of that hit this quarter, and then that's on the minus side. If the plus side - as you rightly did, you got about six weeks of the Johnny Cat. So you know, we were up a couple of million dollars in sales.

I wouldn't look, you know, for that huge sequential jump. However, once we'd lapped (ph) the Wal*Mart - now that was June 1st. - so once we lapped (ph) that and we no longer had that negative, and then we get into the positive of Johnny Cat, you will see year-over-year increases that are fueled, that are driven by the momentum in the businesses and the Johnny Cat acquisition. So you know, if you just take the numbers from, I don't know, I guess in my mind the way I - the way I'm sort of thinking of, if you take 160 - what was it? - 164 million. Let me do this for you. It was like, OK, 162 in '02, 162 million. You know, we're going to lose about eight million off of that from the Wal*Mart deal, so you're down to 154. You add 18 onto that, which is the Johnny Cat, you're at 172 and you put in a number of a little bit of growth, maybe you could convince yourself 175, you know, could be a good number for F '04. How is that? Does that work for you?

That helps. That helps. Thanks.

Yes, OK, good. Good. Crystal, anymore questions?

We have a question from Ethan Starr.

OK.

Yes, can you tell us anymore at this juncture about your plans to revitalize the Cat's Pride brand.

No, just that we're trying to get the most bang for our buck, so as we're going out to survey the consumer there's no reason to exclude Cat's Pride, so we are working them into the market research and the revitalization. I would say it will not be as dramatic because we do have the wide array of Cat's Pride products. We're in scoopable, we're in cat kit (ph). We're in the course (ph) end of the business. It'll be a lot more tweaking than it will be ripping and pulling. But we do expect to have that happen, to revitalize the Cat's Pride brand.

OK, and the major goal is to drive market share?

No, I mean we're not - you know, I hate to sound contrary (ph) or anti-establishment, but, you know, we're not your typical consumer product company. Our major goal is to drive profitability. So you know, we have walked away from accounts that have hurt our market share, but have dramatically helped our profitability. And it's been a good thing for this company.

So, you know, I would not focus so much on market share as I would how are we doing with our key partners. And we've identified, you know, who they are internally. I don't know that we've ever communicated them externally, but they're obviously either the key mass merch or grocery players in the United States, and that's who we're working with daily to put together programs for directly at their stores targeting our marketing dollars directly with their stores to move our products off their shelves.

And that's really what we're all about. So, if our share grows, it'll be because our share of those accounts is growing or because those accounts share of the total category is growing. I mean, Wal*Mart is growing year-over-year 15-percent. And this category has only grown from two to four-percent depending (ph). So, they're taking share consistently from other players. And as we ride that horse, our share is going to grow, too. So, I don't think our share will grow, but that isn't our primary goal.

OK, well I know you have - like selling the Smart Snacks in stores like Dollar General (Company: Dollar General Corporation; Ticker: DG; URL: http://www.dollargeneral.com/) and those kind of stores, any chance of getting the litters into those stores?

Well, interestingly enough, we are in good discussions with Dollar Generals on our litters, but now they've discontinued the treats. But that happened a little while ago. They haven't bought treats from us in a while. They did not merchandise it the same way, and they were seeing per store unit movement literally one-tenth of what we were showing at Wal*Mart. So - and there's no reason, because their shoppers demographically are not, you know, one-tenth - don't have one-tenth the buying power. It was really more a function of merchandising, positioning on the shelves, getting the price point, you know, vis-a-vis the other items in the category and all that. So, we're disappointed, but the Smart Snacks are no longer in Dollar General.

OK. How is the Church & Dwight product doing?

You know, I'm beating on our consumer division because we didn't get our updated IRI (ph). They've been having some problems with the database. So, I can tell you directionally how it's doing, but I can't quote you 12-week, you know, numbers. You know, it's not doing well - year to - you know, year-to-date. So, let's say some 26-week numbers, it's down, you know, considerably. It's down 40, 50-percent. They've lost a lot of distribution. I think they're not as focused on trying to save it anymore as they are just looking for a - I don't know. I don't want to assume what they're doing. It's definitely down significantly versus prior year.

OK, can you tell us the average price you paid when you bought back stock last quarter, or is this something we'll have to look at the Q for?

I think you could find all that. Jeff, don't we - do we have to disclose all that? Can I just say what it is?

If you know, I don't think that's a problem. I actually don't know, so ...

It was between nine and 950.

OK.

It was right in that range.

Sounds good.

I haven't looked at the spreadsheet yet, but ...

... see no ...

... which is good, because, you know, I was looking back at our historical buy back program, and we average about 15, 16. So, I'm happy to layer in some nines and you know, 10s, 11s, 12s. We're going to keep - you know, as long as we keep generating cash and we have the authorization, we're going to stay out there and keep buying back shares.

Wonderful. I'll get back in the queue.

OK, thanks.

I'm showing no more questions. Actually we do have a question from Ethan Starr.

OK. Well, I guess no one else wants to ask questions, so I'll keep going.

Great.

I understand you took clay to England to make cat litter there, which you then sell in England and on the continent. Could you please give us an overview of Oil-Dri's European cat litter sales and your competitive position in that market? I'm especially interested in knowing if you're able to leverage your relationship with Wal*Mart in the US with Wal*Mart in Europe. And also, how you stack up against such European cat litter makers as Tulsa (ph) and Sued Kami (ph)?

Well you know, as we said earlier, where we - in our blue zone, we're strong. And that means we're close to the market. In our - what we call our pink zone, we're weak. And I can tell you Europe is pink. I mean, you know, Tulsa's (ph) in Spain and Kami (ph) has plants all over the area, although I don't know how much cat litter they make. But there are a lot of local cat litter guys there. So, we actually do not sell hardly any cat litter in Europe and on the continent of the UK.

We did at one time I guess in our heyday back in the late 70s early 80s, Cat's Pride was the top selling brand in the area. But what happened was is we'd built the market. The local guys just cut the price and undercut us and took it all from us. So we don't sell a lot of cat litter over there, and I don't see it as a real opportunity. It's complete out of our blue zone.

OK, I just asked you this, I was looking at your Oil-Dri UK Web site and they still have the cat litter featured on there.

Yes, I mean, I don't think the want to discourage people from buying from them, but that is not what's paying the light bills over in the UK.

OK, now do they even have any mineral resources in the UK, or do you ship all the clay over from the US?

It's half and half. They take some stuff from the US, and then they also have a locally available mineral that they process and packaged either on it's own or in a blended format. So, it's about half and half.

OK, same thing with Japan. I understand you export cat litter to Japan. I'm wondering what kind of position you have in that market?

I don't even know. What are you referencing? I mean, how do - where are you getting your information? You ...

Well, I asked Ronda. I understand, I saw it in an article back in - I guess this is the "Fortune" article in 1988 in that you sold cat litter in Japan and Israel and Ronda - I asked Ronda about this and she said, "Yes, you still do sell some litter in Japan."

Ethan, I'd characterize that business as a small one and very opportunistic.

Yes, very small.

I figured as much, but OK. Well, is there any possibility of finding a company there to manufacture like Oil-Dri's paper litters there? If those could conceivably take off there?

Possibly. I mean, I guess it'll be a nice day when that's our next best opportunity. I mean, we have so many things close in that are much more - that will make you a lot more money that we're focusing on.

OK, just curious.

No, no, absolutely.

The only other question I really have is you mentioned at the very beginning in your remarks before the Q&A the number of tons you shipped this past quarter at the $167 per ton.

Right.

What was that figure?

Oh, you want the tonnage again?

Yes, from this year and last year?

I think it was tons sold in quarter 282,000 last year and 266,000 this year.

Wow, so many fewer tons for a bigger price. Now, given the book value per ton of the clay reserves you have, is it logical at all to once the profitability goes up, the book value should not - well, I guess you have a lot more than just clay in that book value, but the book value of the clay is so low it seems that this is an excellent price to be selling the clay per ton at.

Well, I think the interesting thing to note is that in our book value is just the acquisition cost of the clay itself. It has none of the actual value of the clay. So, if you attribute any value to the clay - I mean we've done this exercise before - but we had like 400 million tons of reserves and we've sold a bunch and we've sold them anywhere from a buck a ton to $2 a ton.

But let's just say you attribute - let's say you attribute 10 cents a ton just for the fun of it, OK? So $40 million of incremental value is not in the book value. I mean, that would be almost $8 a share of extra book value on top of the book value you've seen. I mean, that's 10 cents a ton. I can guarantee you we wouldn't sell it at 10 cents a ton. So, that's always been sort of the off balance sheet, you know, you always come to these off balance sheet liabilities, we have massive off balance sheet assets. And it's our job to convert those into value in dollars, that then - that then do get it there (ph).

Well yes, that's kind of the question I was asking. So then, realistically I guess once profits come back, the share price can be appreciable higher than book value and still kind of reflect book value in some sense? Or lower multiple book value.

... price. Wouldn't it be a higher multiple of book value? Or am I ...

No, lower. You know, if the share price was around 20, the book value is around - what - 12 something right now.

Right.

And if the share price went to 20, you'd have the $8 extra. It would still be like, you know, if you include the off balance sheet assets, it's still a book value of about - priced book of about one.

Oh, I see what you're - yes. But right now, we're at under. Right now, we're at 75 cents. We have a price to book of 75 cents.

Point seven, yes I know. I understand that.

So, it would increase the price of the book.

Oh, from the current standpoint, yes. If you're looking at - I was not looking at the current price - stock (ph) price.

Oh, OK. OK, I've got you.

So, OK. Well, thank you very much. I look forward to the next quarter's results.

And keep that chat line going. I watch it.

OK.

OK, and listen, you're on target. Of all the guys that are on there, you're impressive. I give you a lot of credit.

OK, thank you.

Thank you, Ethan.

We have a question from David Fondrie.

Oh wow, David, I'm sorry. I didn't think anyone was still hanging in there.

Yes. Well, I started thinking about your answer to the prior question and trying to reconcile it. We went through this reconciliation of what sales might be for 2003, I think came to 175 million.

For 2004.

2004?

That's '04.

OK, well that will help. Sorry, yes.

We're in F '03 right now.

OK, OK.

And what I was saying is in F '04, we'll have a full year of Johnny Cat. But it won't all - I mean, you'll - and then a full year of no Wal*Mart. So, I backed one out ...

OK.

... other.

That's better. That makes more sense now. I mean, that's - that would make more sense. OK, then let me back up then and - seasonality, fourth quarter is typically your weakest quarter? Can you go through the quarters, if all things being equal, what type of a seasonality you have?

Sure, let's just - and if you don't mind, we're going to sort of do it on the fly. I always keep all of our news releases. Let's look at F '02 real quick. F '02 in the first quarter, we did 41 million six. OK? Then in the second quarter, we jumped, see there, to 45 million four.

Yes.

Then in the third quarter, we went back down to 39 million two.

And that, is that a true seasonal drop?

Yes. Yes. And then we did 39 million two in the fourth quarter, and that was the first quarter that had two months of getting out of the Wal*Marts.

Wal*Mart.

You know, maybe you could have said, "Well, had we not gotten out of Wal*Mart, it would have been 41." So, that kind of gives you, but the third quarter is the weakest.

OK.

You know, I think there was some - it was by T.S. Elliot or somebody who said, "April is the cruelest month of all," and my dad has always said that because that third quarter is always the cruelest quarter of all. And then, you know, it bounces up a little bit in the fourth quarter, but it is still less than, clearly, the boom quarter of the second quarter.

OK. Great. Thank you.

Sure. Any other questions?

I'm showing no more questions.

OK. Well, anyway for those of you who hung in there, thank you. I think this is a good format of just focusing all the questions: we stay; we answer them all. David, if Charlie survives here - OK, he's OK, I've got your point loud and clear that it would certainly be more helpful if we're going to do this once a quarter to try and get into a little more detail. And I'm going to take that up with our - you know, legal advisors and try and put a little more meat on the bone in the future, which will make these calls that much more meaningful.

So, I appreciate it. I appreciate your guys' support, and look forward to talking to you all in 90 days.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may disconnect at this time, and have a great day.