Oil-Dri Corporation of America (ODC) 2003 Q4 法說會逐字稿

Good morning. My name is Mandy, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Oil-Dri Corp. of America fourth-quarter and year end earnings teleconference. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [OPERATOR INSTRUCTIONS]. Thank you. At this time, I would like to turn the call over to Mr. Daniel Jaffee, President and CEO of Oil-Dri Corporation. Sir, you may begin.

Thanks, Mandy, and welcome, everybody to our fourth-quarter and year end teleconference. We are obviously happy with the year and the quarter as it turned out, and are very excited as we look forward into fiscal '04. Today with me, we have our usual cast of characters. We have Jeff Libert, who is our CFO and Vice President of Accounting and Finance; Charlie Brissman, who is our VP and General Counsel; and Ronda Williams, who is our Investor Relations Manager. And Ronda, you're going to kick us off with a Safe Harbor.

Thank you, Dan. As you all know, this teleconference may contain certain forward-looking statements regarding the Company's expected performance for future periods, and actual results for such periods might materially differ. Such forward-looking statements are subject to a variety of factors that we have spelled out in our press releases and our SEC filings; and if you like, you can always read those on your own. Thank you.

Thanks, Ronda. And the good news is, our material differences that did occur during fiscal '03 were all on the upside. I think we had to raise our earnings range two times during the year -- maybe even three times -- and ended up towards the high-end of it, even after the Christmas Valley write off and close; so that was good news. Jeff, I'd like to turn it over to you for the fiscal highlights, and then I'll add any comments that may need embellishing as we move forward.

Thank you, Dan. Very positive news to report this quarter. As it said in the release, our sales have increased 14 percent from the fourth quarter and 7 percent for the year. Net income has increased 276,000 (ph) in the quarter versus a loss of 1,939,000 a year ago. As usual, there were some unusual items that we would like to tell you about so you understand a little of the flavor of what has happened. In the quarter, as Dan mentioned a minute ago, we closed our Christmas Valley, Oregon facility, which resulted in a write-off of $573,000 of related costs to the closure. A year ago, however, in the quarter, we wrote off $3,213,000, and we had an offsetting gain of $168,000 related to some sales of some land. Without these items, pretax income would have been $1,084,000 this year in the quarter versus $282,000 a year ago. So we're showing a very strong increase. For the year, net income increased to $3,083,000 from a loss of $1,094,000 a year ago. In addition to the unusual items mentioned above, in fiscal '03, we had additional gains from real estate and mineral rights of $449,000. We had a gain of $675,000 from a customer payment, who failed to meet their minimum purchase obligations, and a write off of $350,000 of goodwill related to our investment in Kamterter.

And Jeff, maybe it would be good if when I have some qualitative comments to make them, as you touch them, because I have a comment on one-timers. And that is that we were in our audit committee meeting this week and we were going through it, and it was interesting to note -- we had 1,000,003 in onetime negatives that we took during the year, of which only about $300,000 were cash. The other million were not cash. It was cleaning up balance sheet items like Kamterter investment and where the cash was long gone. We had $1 million in positives -- the payment you talked about and the land sales -- and those were all cash. The cash came in during the year, and we recognized the gain. And so opposed to, I think, sometimes when you see onetime positives because somebody changes their method of accounting for inventory or they do some of these goofy --- these presto changos (ph) -- our positives were all cash and our negatives were pretty much all non-cash. And I thought that was pretty interesting.

That's a good point, Dan. That's a good point. Continuing with that thought -- we had last year -- or this year -- we had an additional $385,000 (ph) worth of asset write-offs -- again, a non-cash item -- like mostly these other items that were write-offs whereas a gain has been -- have been real cash items. In fiscal '02, we had a gain of $937,000 related to the sale of land and mineral rights; and without these items that I mentioned above, for the year, pretax income would have been $4,526,000 versus last year's $717,000; and again, a very strong, positive gain which were very proud of here. Gross profit for the year -- gross profit percentage actually -- went up to 20.6 percent versus 19.1 percent a year ago; although for the quarter, we saw a decrease to 18.6 percent versus 20.4 percent a year ago. And I will touch on that in a minute. Basically, to talk about why we've seen the results we have seen, we really need to hit upon the same themes that those of you who have participated in past quarters will know about -- essentially a year ago -- actually in June of 2002 -- we rationalized our private-label business geographically with our biggest customer, Wal-Mart; and as a result, we have significant positives year-over-year as it pertains to the Wal-Mart private-label business. We essentially had walked away from business where we were not able to make an acceptable return. During the year -- second item -- during the year, in December, we made an acquisition of a plant in Taft, California from the Clorox Co., and also the Jonny Cat brand. And this acquisition continues to perform well for us. We added, geographically, we added a location on the West Coast, which is something that was new for us. While we had a facility in Christmas Valley, Oregon, was a small facility, and we didn't feel that it had the quality that we needed of product to expand out there. So we added a facility; we've expanded our geographic reach; and we added on a lot of higher margin business with the Jonny Cat brand.

The remainder of our business continues to perform strong. We will get into the details by segment in a minute. But in general, I would say that we continue to execute on the business plan, and we saw no major upsets during the year. I mentioned a minute ago about the margin, essentially, the year over year increases is due to the Wal-Mart reorganization and the acquisition. However, during the quarter, we saw a bit of a decline; that is related to the Christmas Valley closure, which the cost -- the proper accounting -- is to put them in the cost of goods sold; that accounted for about a percent of the margin decline. Additionally, we did see some incremental fuel costs because of the price of our natural resource that we burned in our plants. And they will not fully recoup in other areas during the quarter. Additionally, we intentionally made some operating decisions to invest in our facilities, which were cost of goods sold items. And we don't expect these investments to be reoccurring, going forward. I would expect, as we proceed in our fiscal '04, our margin will cover to levels that we've seen in the previous quarters in fiscal '03. Getting into the various segments, first Consumer. We talked a lot about that in the previous section, because it's the biggest part of our business. But essentially, sales were up 15 percent for the quarter and 4 percent for the year. This is primarily due to the acquisition that I mentioned previously. But in addition to that, we're also seeing significant increases in our Canadian sales through our Albright Canada subsidiary, and also our private-label dodtrie (ph) sales, as we continue to expand our distribution in both of these areas. In the Crop Production and Horticultural Products segment, it's been a fantastic year. Sales have been up 36 percent for the quarter and 27 percent for the year. The two big drivers of this -- first of all, our Ag/Chem Business, which is the biggest part of our crop production segment, was very strong, as we see continued strengthening of the ag economy, were up 20 percent for the year in sales. Secondly, we continue to grow our sports turf business. Sales were up 60 percent for the year; and this is due to both expansion of the markets, and also expanding market share -- our market share -- within those markets. So we're seeing extremely strong growth in our Crop Production and Horticultural Product Groups. Industrial -- we continue to be steady state there. However, with the acquisition, we are seeing higher sales. We're up 13.1 percent for the quarter, and 6.6 percent for the year. This is due primarily to the acquisition and also continued strong -- what we call light sorbent sales -- these are polypropylene based absorbent materials -- and they continue to become a bigger part of the market, and we participate in that.

In our Specialty Segment, sales were flat for the quarter, but up 2 percent for the year. What we're finding in this segment is that we continue to face pressure in Western Europe, because of competitive issues. However, we have been able to offset our losses in Western Europe with gains in other geographies, so we've been able to maintain some stability in that business. Additionally, we continue to see incremental sales in our Animal Health and Nutrition Business. We are continuing to expand our PelUnite Plus and our Poultry Guard product lines at a steady level. But, in addition to how we performed from the income standpoint, we have a lot of very positive things to say regarding our balance sheet. These are things that we've hit on before, but there's really been no change during the year. We really continue to see good, strong cash generation. Our cash in investments were up slightly during the year. We've maintained over $16 million of cash in investment, both at the beginning of the year and at the end of the year. However, we've been continuing to pay down debt. And for those of you who have participated in the call before, we refer to something called "net debt," which is short and long-term debt less cash. And essentially, that net debt has declined from 16 million at the beginning of the year to $14.7 million at the end of the year. And this is positive; but what the more positive part of it is that we have done this while paying $6 million, foreign acquisition, 1 million 8 in dividends and repurchasing 1 million 5 in stock. So this continues to remain a very significant part of our success story. And how we have done this is really through continued focus on efficient management of capital expenditures. This year, we've continued to under-spend our depreciation while maintaining our facilities in quality conditions. Excluding the acquisition, we have under-spent depreciation by $3.6 million for the year. So, very good news on the financial front. And it's been a very positive year for the company.

Great job, Jeff. And you pretty much knocked off everything on my list. So, I have a few comments, and then we will open it up for questions and answers. A couple of things that I would like to touch on -- let's start with a few of the quantitatives, and then really more of the qualitatives. But we did hit record-high sales of 173 million. We do feel that we have enough momentum now and enough things on our radar screen, where exceeding 180 is right within where we see F-'04 going. Obviously, we think it will be higher than 180. And we will be disclosing more accurate or precise estimates in the Q. This was our highest net income since 1999. Our book value per share rose to 12.38, of which $3 is cash and equivalents, which I think is pretty remarkable. And obviously, the stock market is recognizing this. Our stock -- at 7/31/02 was at 7.50; and at 7/31/03, was 11.95. So that's 59 percent growth, not counting the dividend yield. So obviously, over a 60 percent return during the year -- very good. We've had a lot of very negative years, so I understand -- but we've got to trumpet the good when it happens. So indulge me there. On a qualitative basis, you know, we successfully reorganized what has been renamed the Nick Jaffee Center for Innovation, out in Vernon Hills, Illinois, under the leadership of Steve Azzarello. And I'm pretty sure I've mentioned this in past calls; but he was one of our most successful technical sales people. He's been with the Company for 15 years. He took on a very big task, which was to come out of the field and lead a group of scientists out at the Innovation Center to come up with new product ideas for rapid and significant commercialization. And it's very exciting, what he's doing. Obviously, it takes time to plant seeds and see them sprout. And so F-'03 was really an investment year for him and his group. And in '04, he hopes to commercialize a couple of pretty exciting opportunities, none of which we want to quantify at the moment, nor really communicate too much. Because we feel until we get the patents issued and so forth, that we want to keep the knowledge as proprietary as possible. But rest assured, there is more going on at Oil-Dri than just the core business and the Jonny Cat acquisition. We've got a lot of exciting things going on out at the Innovation Center.

And without getting into too much math -- and you guys can do this for yourselves when you do get the Q and the K, actually, is what Jeff alluded to -- and really our focus on the balance sheet and really generating cash -- these are numbers my father brought to my attention, and they really are startling. If you look at our reported net income, from '98 to 2000, we reported a little over $14 million in net income. So jot that number down. The next three years, 2001 to 2003, we reported roughly $3 million of net income. Okay. So net income in the first three-year period was 14 million; it was only 3 million in the second three-year period. However, operating cash flows, less capital expenditures in that first three-year period, '98 to 2000, it was only $1 million. We actually used cash one year, broke even another, and generated about 1 million. So the three-year period in total, even though we showed all that earnings at $14 million in earnings, only generated $1 million in cash. That next three years, again, we only made $3 million in income -- 11 million less than the prior-year period -- we generated over $37 million in operating cash flows less capital expenditures. It's really startling. And it's both to the last three years, and an indictment of the prior three years. I mean, there is no way to look at one without looking at the other. The first three-year period was a period of chasing share for share's sake, trying to grow the business, investing heavily, but letting inventory go cafluey (ph); receivables weren't nearly as under-focused, certainly in terms of outstanding deductions and miscellaneous receivables from customers, as we were doing more and more business with accounts that, frankly, we shouldn't have been doing business with. Now you can't totally -- we can't indict ourselves totally, because everybody was doing business with these accounts. But we finally woke up and said so what, we don't want to be like everybody; we're going to start stop selling to certain consumer accounts. And I think you guys know who they are; they both went bankrupt in the last 12 to 24 months. And not only did we not -- I mean, we did not lose a penny when they went bankrupt -- and I would almost bet there's not another consumer product Company in the United States that didn't take a big hit when those two guys went under. And we didn't lose a penny because we called in the dogs long before they were filing for Chapter 11 protection. So as embarrassed as I am of the period from ;98 to 2000, I am equally or more proud of what is going on in 2001 to 2003. And fortunately, it's what have you done for us lately. And fortunately, like I said, the momentum is so positive that we have issued in the release an estimate for the upcoming year of 70 to 85 cents a share, coming off a 54 cent year. So even at the bottom to the top of that range, you've got a big percentage increase still not back to our record levels. But clearly, it would be a nice step on what we call a victory on the road to our championship. So again, not a championship, but another nice victory, another nice validation that we are proceeding in a manner that we expect to do. And I can tell you that in that 70 to 85 cents is, again, a lot more investment in the future, both out at the Innovation Center and in the understanding and repositioning of the Jonny Cat and Cat's Pride brand, and then a re-launch in the third to fourth quarter of some or all of those SKUs. And that is in our spending plan for the year. So we feel very good that not only -- from what we see -- that we can deliver against this range, but that this range isn't such a stretch that it's inhibiting our future growth; it's more the opposite. This range is well within what we can achieve and invest for the future, which I think is very important, because we see so many opportunities in front of us.

So, Mandy, at this point in time, what I'd like to do is open up for Q&A. Before we do that, I do want to remind everybody, after you ask a question, go to the back of the queue. But we've got a lot of feedback. And rather than limit the number of questions you guys have -- 'cause some people ask a bunch and some people don't ask any -- go to the end of the queue. If you pop back up, you can ask another one, another one, another one, as long as you keep going to the end of the queue. But that we're just going to limit the time. So at 11;00, we've got to end the conference call. So at about 10;55, we will end the Q&A session. I'll have a few wrap-up comments. And then we will be done with today's teleconference. So we have a good half-hour of Q&A. So Mandy, can we open up the floor?

[OPERATOR INSTRUCTIONS]. Your first question comes from Ethan Starr.

Good morning, Dan.

Hi, Ethan.

In last year's fourth-quarter teleconference, you told us that in the next six to 12 months, we would be seeing some dramatic statements and big changes from Wade Bradley and the Consumer Group, and I guess that's what you were referring to when you mentioned the re-launch in the third and fourth quarter of this coming year. And I'm wondering if you can finally let the cat out of the bag and tell us about the Cat's Pride brand revitalization? Or has the cat still got your tongue on that?

I love the way you've put it. The number one thing all of us want is to have Oil-Dri and its shareholders reap the maximum benefit out of the investment we make. And so before we let too much out, we want to make sure we've gotten it out in the marketplace rather than giving our competitors a chance to preempt what we are doing. So let me talk qualitatively. I'll let you know the disciplines we're going through, but I'm not going to tell you the results. Although, we're very happy with the results we've gotten; and we're using them now -- let me back up -- let me go with what I said. We've spent a lot of money and time in understanding Jonny Cat consumer and the Cat's Pride consumer, and not in a vacuum, but in relation to the other brands that are out there. Why are people buying it? Why aren't they buying it? Why did they buy in the past but they don't buy it anymore? What would it take to get them to buy it in the future? What would it take to get them to keep buying it? What do they want to see? What features, benefits, attributes, what are the negatives, all of the things. And so, we spent a lot of money and a lot of time. And it came through very loud and clear. We've got some real nice, what we will call hooks that we want --some that we want to maintain, because that's the reason our existing base is buying each of the brands -- and they're different for each of the brands. And then some new looks that we can layer into the products that will attract, we hope, a significant chunk of the overwhelming majority of the market, who we don't sell to. And so, we are now in the next phase, which is, we understand that we are not -- this is not going to teach our competitors too much -- we are not in the -- you're not going to see Oil-Dri or Cat's Pride commercials on the Super Bowl, where we're spending $1 million for a 30 second spot; that just isn't going to happen. So given our financial appetite for advertising and media, you know, we are putting together a program to re-communicate to our consumers and to our non-consumers the features and benefits of each product. And so, we are in a test market in one place with something right now-- and I don't even want to say where it is or what we're testing, but we're getting good feedback there. And we are working with some, again, pre-eminent people in the field in which we're focusing to really come out with a big statement. So we're -- and all this can be done within our financial budget and constraints. So it's not like we're asking you, the shareholders, to accept a year of reduced earnings as we revitalize these brands. We believe we can give you enough of a show to show you that we're clearly on our road of renewal, but at the same time, put enough behind these brands to make that acquisition everything it can and should be. So, I don't know if I answered your question, but I think you can sense a lotSU of excitement on our part, and that we are really doing this thing the right way, and that we're getting a lot of good results.

Okay, thanks. I'll get back in the queue.

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

Hi. Congratulations on a positive year, and as you suggested last time, I don't know where we are in the seven-year stretch, but I am hoping that we are going to have a seven year stretch.

Absolutely.

Okay. Well, let's start off with the first question being Kamterter, and get that out of the way. What can you tell us about that?

I'll give you another question, because there's really nothing new at the moment on Kamterter. It's the same old, same old. We're, you know.

Is the planting essentially proceeding at a greater acreage season to season? Is that where we are?

I have not heard any new news, and that's the thing. So in the last three months, I'm not sure anything has changed at Kamterter.

Bob, they continue to have their existing priming and coating business. Business seems to be positive year-over-year. But the breakthrough that we've been looking for and hoping for has not yet occurred, and we have no news on that front.

Let me circle back to the Innovation Center. Can you tell me something about the staffing and the dollars that are going to be involved in this?

Yeah, we can, because I think we publicly -- you can break out how much we're spending on R&D, give or take. You know, we spend roughly $2.5 million a year on R&D. Before Steve went into the Innovation Center, a good 70 percent of that was what we will call tech service, which was just maintaining our existing core products out in the field, doing sample analysis, responding to customer requests, things like that. Only 30 percent was on pure new product development. We have flip-flopped that completely. Now two-thirds of all that money is being spent on new product development, and only one-third is on tech service. We have not noticed any drop-off in tech service; it's a matter of when it was free, basically, to the divisions, all the sales guys were calling in and saying sure, run my samples, take -- get -- this out to the lab. Now what we do is charge tech service to the division. They can use it as much as they want, but they're going to pay for it. Low and behold, they're using it a lot less. And they're using it more prudently. At the same time, we've then freed up those dollars and we've really segregated the people. In the past, everybody did everything; they did both new product development and tech service. Now, that two-thirds of the organization and dollars that is being invested in new product development -- those people do zero tech service. They get no calls from the field; they're not going in the field; they don't respond to any of that. We have then taken the tech service people, and they respond entirely to what's coming in from the field. So it's protected, both the dollars and their share of mind. We're getting 100 percent of two-thirds of the people focusing on new product development. And what you are seeing -- low a and behold -- especially because you've got a guy running the place who is a salesperson, who understands that research is only useful to the extent we can commercialize it -- you're seeing a real bias for action out there. And we're seeing a lot of good opportunities go through what we call our stage-gay (ph) process. And the beauty of it is, we're killing a bunch of them too. In the past, they would have just lingered on, and we would drip dollars at them. We're killing the ones that should be killed, but we're putting serious resources behind the ones that should move forward, and it's pretty exciting.

How many are on staff?

Good question.

(ph)

Twenty -- a total of 20. I mean, we probably have -- yeah.

Advanced degrees? How many would you say?

I think we have like six or seven Ph.D.'s, and probably four or five with master's. And then you've got the support staff underneath them.

And of the two products -- can you mention what the market size might be that you would be tapping, without giving out any other information?

Purely conjectural and within the Safe Harbor statements that Ronda said, sure, when you do the math and you take -- there are existing markets where there is another material being used; we believe our material works better, adds more value, and will make it such that for every dollar they spend buying our material, these customers will save $1.70; that's the way it's looking at the moment. So most rational people would switch, if the value proves out, because who wouldn't spend a buck to save a buck 70? That's a nice investment. And this is a very cost-conscious industry that we're talking about. If you had 100 percent take-up, the market would almost double the size of the company. Literally, we've done the math; it's about 900,000 tons; we shipped a million tons last year. We don't believe 100 percent is even remotely realistic. We do believe that 20 percent or 180,000 or 200,000 tons is well within reason. And that we do believe that if successful, and we're hoping that F-'04 will be the year we prove it, and we've done in R&D trials -- we've even gone to customers and done in their pilot plant trials, and they've seen benefits -- they are now saying we need to take it into a full-scale production trial for a period of time to prove out what you guys are telling us. Because I'll tell you, we're pricing this on a value basis. We are saying hey, we're saving you X, we're going to take a percentage of that. It isn't here's our stuff and we're going to market up 10 percent and you get it. So that's where the patent protection really is important. So this one -- the one I'm talking about right here -- this one's a big one, and this one's got enough legs on it where if it works here -- and we believe it will -- we know there are other applications on top of that total I gave you, where we think it will work equal or even better. But this is the one we started with, and we are far along with enough customers where we believe -- you know, we've got to play this one out, and then we'll take it to the next level.

So the 20 percent translates to what, - 35 million or --?

well, you'd have to then plug a price on it and all that, and I don't want to do that. But I mean, you could easily -- because you've got a calculator -- you could take our sales, you could take the tons I just told you, figure out what our average price per ton is, and if you wanted to multiply that by the tons, at least as a peg, yeah, you'd be right there.

That's only one of the two?

That's the biggest and the best. I mean the --

Where is the second?

The second one is in an engineering phase where we were at a plus or minus 30 percent accuracy on our engineering; so we spent more money to get it to plus or minus 10 percent. We now have new cost information based on that engineering. And so we are now refining our financial models. You know, that one may not be as big, but it's probably easier, meaning it's smaller, but we would be selling to existing customers with an existing application. And so, we're not trying to educate people so much. It's more just proving out the DCF for us -- the discounted cash flow -- to make sure the investment we put into this technology, we can get a good return on. So we are trying to balance our portfolio, just very much like you would a financial portfolio, where we have enough of the singles, some more doubles, and then just very few that we're going for the home runs, which are far out there. You need a few of them, but you don't want to always be trying to go for the home runs because you'll end up with nothing.

Would it be at least half the size of the first?

No, no. It would be you know, maybe, it might be a tenth the size of the first, or you know -- $4-5 million. Plus, you know, it's significant margins. It's a big deal.

Okay. I'll get back in the queue. Thanks so much.

Your next question comes from David Mondry (ph) of Heartland.

Good morning.

Hi, David.

Congratulations on a nice year.

Thank you.

Could you provide a little more color on the gross margin? Is it correct to say -- and I think this is what you said -- the 570,000 write-off in Oregon all flowed through the cost of goods sold?

Not all of it. I'd say 80 percent of it did. This is Jeff Libert speaking, by the way.

Eighty percent went through, okay. And then you gave two other elements that went into the impact on gross margin.

Right. We talked a little bit about fuel prices. We continue to see -- we burn natural gas; we also burn other locally available sources. And while natural gas has not spiked like we saw this past winter, there is a lot of rippling through the markets, and we have futures that we have used to control our costs, and some of them expired during various points, and other alternative fuels sort of adjusted the market over time. And so we've gradually seen -- certainly, year-over-year, we've definitely seen dramatic increases in fuel costs. So that has had an effect.

Jeff, just on that point, sequentially, from third quarter to fourth quarter, was there much differentiation (ph) -- differentiation -- in the natural gas prices, or your inputs there?

There was some marginal creep of costs between the third and fourth quarter. I don't have it per se of quantification for you. But certainly, qualitatively, I can tell you that as alternative sources of fuel continue to see increased demand by people who can't afford natural gas or would seek alternatives, that that further makes a tighter market, which forces prices up.

Jeff, wouldn't it be accurate to say -- I mean, we knew we were having a very good year, so the plants, rightly so, they need to take their shutdowns to do the preventative maintenance; so they've got them in prior to 7/31, whereas, maybe in other years, they wouldn't be so motivated to do so.

Well, you know, we're talking about two items -- that is the second item. Yes, we did take preventative maintenance shutdowns. Typically, the fourth quarter, in terms of sales -- not this year because of the acquisition -- but typically, we do slow down a bit. And when we slow down a bit, there's less fixed cost absorption and margins do suffer a little bit. Additionally, we really focused on preventative maintenance and trying to get the plants in good shape for upcoming fiscal year. That does hurt our margin a bit.

David, maybe to help you going forward with your models, because Jeff and I were talking about this yesterday -- in '01, we made 18 percent gross profit; '02, 19.1, '03, 20.6. We believe using 21, you know, is probably a good number for an '04 -- 21 to 21.4, maybe.

Right, okay.

Would be a good number for an '04 model.

And then, just, following on with gross margin, I'm assuming that the new products that you're talking about, particularly the first one -- where you suggested that the -- you know, that you're going to look at what value added there was for the customer -- that those would probably sell at higher gross margins than your historical gross margins?

Yeah, very good assumption.

Again, congratulations on an excellent quarter.

Thank you.

You have another question from Ethan Starr, private investor.

Yes. Do you continue to expect more consolidation in the absorbent clay industry over the next few years? And if the right opportunity comes along, might Oil-Dri consider another acquisition?

Yes, and yes. Again, I haven't seen anything that should change my feeling that it is getting very hard for the regional players to maintain their positions with the accounts. I mean, as the accounts consolidate and become national, so too do they expect their suppliers. And the number of accounts that a regional player can sell to is shrinking every year. And so I do believe there will be continued consolidation. You add that on top of the fact that I know the profile of -- no pun intended -- I know the profile of the ownership of many of our competitors, and they are you know, either not looking to move on, meaning they're putting their states (ph) in order, they're doing things to rationalize their own portfolio of assets; or they're just not as committed to the category as maybe they were 10 or 15 years ago. I do believe that opportunities like the Taft opportunity will bubble up, you know; but it would take a crystal ball to try to predict that one would happen in F-'04. But I can guarantee you when they do, we will be in the process. And as long as it remains rational, there should be no more strategic buyer than Oil-Dri. And so we should be the one who is willing and able to pay the most and, ultimately, reap the benefits. So if it gets irrational, we're not going to try and gain -- become Snapple or something like that. We're going to stick to our guns on what we think a good return would be and what a good fair price would be. But as long as it's rational, I think we will be in good shape to bring some of these regional players into the Oil-Dri network.

Thank you.

Your next question comes from David Mondry of Heartland.

That was quick. Jeff, can you indicate -- or help me understand -- why interest expense declined so dramatically between third quarter and fourth quarter?

Well, we continue to pay down debt.

Yeah, but that would be --

We had a payment of -- we had a significant payment -- I think April 15th. So I don't think there's anything unusual about that. I don't have the third quarter release in front of me.

It was 600 -- roughly -- $600,000 in the third quarter and $400,000 in the fourth quarter.

And I believe it was also some adjustments on deferred comp program, that runs through interest expense. And so those are really the things that make up that number. And we went through a year-end adjustment based on truing up what we thought our deferred comp plan was.

I don't recall where it all fell out. And maybe you can help refresh my memory. When the Las Vegas project was canceled or didn't get the permitting, wasn't there some indication you were going to try to recoup some of the funds expended out there? And did anything happen on that front?

Charlie, do you want to?

Yes, David. This is Charlie Brissman. We do have a lawsuit pending in state court in Reno, Nevada against Washoe (ph) County, which generally alleges an arbitrary and unfair denial of special use permit, and is seeking damages. The nature of the case is that it's essentially bifurcated. The liability phase is being tried first, and if necessary, there will be a damages phase. The current posture of the case is that briefing on the liability issue is complete; oral argument will be scheduled shortly; and by shortly, I expect within 30 to 45 days. And thereafter, we can expect a ruling from the judge. The case is being heard by a judge and not by a jury. So we are pursuing the matter; procedurally, that's where it stands. And as is the case with most litigation, it's -- beyond where it stands procedurally -- it's difficult to say anything about what's going to happen.

From an earnings standpoint, I mean, can we at all predict when we will get a ruling on liability?

It's difficult to say, Dan. After oral argument, the ruling will come as quickly as the judge's docket permits. And in state court, you know, we could expect something, I suppose, anywhere from 60 to 80 days out. But again, without a jury, this is very much a matter of what the judge's docket looks like day-to-day and week-to-week. And it's difficult to say beyond that.

Great. Okay. Lastly, any opportunity for you to re-enter the Western part of United States with Wal-Mart now that Taft plant is under your control?

We are in discussions with them as we speak, basically. We absolutely would like to do that. They are open to it, provided we can be as or more competitive than the supplier they change to. And so, we're in active dialogue. And hopefully, we will have something to announce. But at the moment, no, we don't. But we certainly would like to.

And what kind of capacity do you have -- or at what kind of capacity are you running this task?

Very, very low as a percentage of the total out there. I mean, that was one of the changes we made. Craig Paisley, who was running that plant for us, was able to basically close half the plant. So, move everybody into one half of the plant; they were running both halves, and that was regenerating a lot of cost. So it's saving us a lot of money at the moment. But we do have a lot of capacity out there, and would love the incremental business.

Great, thank you.

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

We'll get it right one day. Center for Performance Investing. In the stock buyback program, can you just give us an idea as to what your attitude is toward this? I know you have 309,000 shares that are left. As far as it said, you paid an average price of, I think, 10, 10 and change. How do feel about this now?

I'm really happy with the shares we've got. I mean, I'm really glad we were able to buy back the shares at the price we have. And we are going to continue during the periods in which we are able to go out and buy. I mean, we come out of the market whenever we feel there is material information we have that you guys don't have. We get out of the market. So we have been out of the market during this period. And once we're able to get back into the market, we will. And so I think we're going to continue. As long as we keep generating cash, and as long as we keep believing that the -- our -- next best dollar is spent on buying back our own stock, we're going to keep buying it back. So, and/or assessing raising the dividend. So I know that's a hot button for you; you've always been focused on that, and I've always taken your feedback to the Board. And so clearly, a topic on the October meeting's agenda, and if not then, then the next meeting's agenda, will be, you know, what do we do with the dividend? Because we are doing well. We are generating a lot of cash. And we feel confident about our business. You guys have been loyal supporters. And we feel you guys are worth it. So it will be an agenda item, that's for sure.

As opposed to Kodak -- did anyone see what happened to Kodak today? They slashed their dividend by 70 percent. It was the first time in 100 years. They slashed it by 70 percent; it's brutal. Okay.

Your next question comes from Ethan Starr.

Yes. I'm just wondering what's new and what's happening with Poultry Guard and Smart Snacks?

I was hoping you were going to ask about Poultry Guard and Smart Snacks. Let's do Poultry Guard first. The exciting thing about Poultry Guard is that we have found features and benefits above and beyond what we originally believed, so much so that we are finding a lot of sales outside of the winter ammonia control season, which is what it was originally intended to do. We still do that, but they found benefits on what's known as the horizontal transmission of pathogens, that's where one species or animal transmits something to another. And my understanding of this is, is that the darkling beetles transmit these pathogens to the chickens and the turkeys, and they don't get as healthy and don't put on as much meat. And so because our product has the benefits that it does, it prevents this horizontal transmission. And so, people have been using it outside of the winter season. And so, these numbers, I don't believe are material to trigger any kind of abdee (ph), so I'm going to give them anyway. In '02 in the fourth quarter, we only sold 210 tons of Poultry Guard. And this is just a way to show you. In the fourth quarter this year, we sold 620, three times. So you can see people are using it outside the winter season. Our fourth quarter is May, June and July. And so for the year, we were up about 30 percent in Poultry Guard. And we see a lot of momentum heading into the new year. So it's still not having any material impact on the company. The good news is, it's not having any negative material impact on the company. We have been investing in that brand in '02 and '01. It basically broke even in '03. And we're hopeful that it will start to show a profit in '04. And, you know, for us, every $80,000 of pre-tax income is basically a penny a share. So something starts kicking in, 240,000 or 480 or whatever, I'm not saying they will -- but I'm just saying, you can do the math. It doesn't have to be that $35 million opportunity to have a real material impact on our reported results. So we're positive on Poultry Guard; we're happy that we found applications beyond the winter months, and that we can sell this year-round. It certainly helps our production and the planning of the sales. So Poultry Guard news is still good.

Dog treats, in general, (indiscernible) news is good. Specific to Smart Snacks, not so good. We were told, you know, hey, you guys, we're going to put you in -- this is at Wal-Mart -- if you can do five units per store per week, you're going to be in good shape. At like ten, we'll think of expanding and taking another one. Well, we were doing -- we were doing well over nine, and in the majority of our stores, we were doing over 11, per store, per week. And they discontinued it. They replaced us with a knock-off, basically, of what we believe is a vastly inferior product, but at a much lower cost. And you know, they know their shopper a lot better than we do, so I don't question their decision. The only thing I know is we didn't fail. We just -- it is almost like we were a victim of our own success; because it was doing so well, they recognize the validity of what we call a functional treat -- a treat that does something other than just reward your dog for doing something good -- this was an oral hygiene biscuit, which really worked on the dog's teeth and breath. So that's the bad news.

The good news is, we're using this functional treat concept to really strike a chord with those retailers and/or catalog houses that sell high-end to people who really care about their pets, who are willing to pay more to get that treat to do something rather than just be made of pure byproduct and be crap for the animal, which is what we basically got replaced with at Wal-Mart. But at these other outlets, it's really taken hold. So we have a number of them. We've got this oral hygiene; we've got a glucosamine treat, which helps the joints. And I can tell you, I give it to my dog, who's ten, and she's more of a puppy today than she was six years ago; it's really amazing what that treat has done for her. And a third treat we do is, it neutralizes the dog's pH of their urine, so they don't burn the long. And it's amazing. I've given it to a number of people who were having a lawn burn-off problem, to have them test it, and they all said back to me, loud and clear, how great this product is. They're now saving thousands of dollars on their lawn by buying our treat. And those are all going very well. So as Jeff referred to, our private-label business is (technical difficulty). And that's where we are going to focus then. We know we don't spend enough dollars to communicate all these features and benefits to our own brand, so we're going to focus on supplying high-end functional treats to those retailers and catalog houses that will then spend their own money communicating to their own customer base on what the benefits are. So that's our focus now on dog treats. So the good news is, we're making money; it's growing; but you're not really going to see an Oil-Dri brand treat out there anytime soon.

One more quick question, if you may. On Jonny Cat, I see you've produced a multi-cat version and a scoopable as well as the Kat Kit. Will you be introducing the multi-cat and the Kat Kit on both coasts, or just the West Coast?

To the extent successful, we will be introducing it only on the West Coast. I'm , we have Cat's Pride Scoopable on the East, and so this is to fill our voids in the West.

Okay. Thank you.

You have a follow-up question from Robert Smith.

Could you give us some color on the first quarter? And what will be the major parameters impacting the quarter?

Yeah, I mean my biggest -- the biggest thing on my radar screen was about four months ago -- maybe five months ago -- you know, I sat down with a senior team and said look, gas prices are going gafluey (ph) -- we are well-protected through 7/31, because we always forward by -- come 8/1, we've got new contracts at these new higher prices. We went through with a real rifle, not a shotgun, and said by product line, here's how much you must get, in terms of a price increase, to offset the cost increases that we are going to face, come 8/1. So the beauty of that early buy program -- or advanced purchase of gas contract program -- it did give us time to get out into the marketplace and know for certain that come 8/1, our costs were going to go up. Given the team a lot of credit they were able to do it. And they are assuring me, and I'm confident in their assurance, that they were able to cover our cost increases. But you know, that's going to be my concern, as the first quarter unfolds, is did we raise prices enough to cover those costs? I believe we did. I've see nothing that would lead me to believe otherwise. When you asked me the question, that's really my biggest short-run concern, is just to make sure we don't see our margins erode due to the rising price of fuel.

How far ahead are you blocked (ph)?

Now, we're blocked, for now, '04. We are purchased now through 7/31 of '04. We know at our price now, pretty much is going to be for fuel. So we were able to go to our customers and justify our price increases. And I will tell you to almost to the one, you know -- a lot of kicking and screaming, no question -- but it was very well-supported. And this wasn't Oil-Dri just trying to line its pockets. This was, you know, we produce a necessary item for them, where we take a very modest margin, 20 percent, and we need to maintain those margins. And that was the discussion.

And so what you're saying is, if you're accurate, that should be a wash.

If we're accurate, that should be a wash.

And so what else?

That was the good news. I mean, I was thinking this morning, because I'm always trying to tell you what is the biggest thing I'm worried about -- I guess the biggest thing I'm worried about is that something I don't know is going to derail us. Because everything I can see looks good.

Well, I mean, you're almost two periods -- two-thirds -- through with the quarter, right?

But we don't release interim you know, (multiple speakers) --

No, I understand that.

I'm just -- I think I answered your question as well as I could, which is, everything I can see, that's my biggest concern. I remember in years past, I was concerned about the Clorox contract, well, we renewed that, and signed up for another 20 years. I think I was then concerned about Wal-Mart and what our margin picture was. We've reorganized that, and that turned out to be a big win for both of us -- both us and Wal-Mart. And so the good news is, we're looking mostly out the front window. We're not looking a lot in the rearview mirror at the moment.

Okay. So, if nothing comes out of the woodwork, you should be on plan for the first quarter?

That's exactly right.

Okay. Thanks so much.

Yes. Thank you.

At this time, there are no further questions. Sir, are there any closing remarks?

No, perfect. And we're right on time. So, Mandy, thank you. And I really thank all of you for your questions and your support. And we are really trying to balance that focus on absolutely delivering on our commitments to you, both in terms of the quantitative -- our earnings guidance -- and the qualitative, of telling you what we're going to do, and then knowing that you're going to ask us again in 90 days, did you do what you said you were going to do? And at the same time, investing for the future, so that '05, '06, and '07 are stair steps above and beyond '04. And like I said, we're very confident. Everything we see, we've got a lot of opportunities; it's out there for us to apply our efforts so that we succeed. We don't see anything -- despite the weak economy, despite a lot of things -- we don't see anything that's going to derail Oil-Dri. So, let's just all knock on wood and hope we can say the same thing 90 days from now. So I look forward to speaking with you then and be safe. And I'll talk to you in another quarter. Thanks, very much.

Thank you for participating in today's Oil-Dri Corporation of America fourth-quarter and year-end earnings teleconference. You may now disconnect.