Oil-Dri Corporation of America (ODC) 2004 Q4 法說會逐字稿

Good morning. My name is Latoya (ph) and I will be your conference facilitator today. At this time, I would like to welcome everyone to the fourth quarter and fiscal 2004 earnings teleconference. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). Mr. Jaffee you may begin your conference.

Thank you and welcome everyone to the fourth quarter and fiscal 2004 year end teleconference. I'm Dan Jaffee, I'm the President of Oil-Dri, and with me today are Jeff Libert, our CFO; Charlie Brissman, who is our Vice President and General Counsel; and Kathy Arford who is our Manager of Corporate Communications, who is sitting in for Ronda Williams who had another baby, a baby boy this time. So she is on to greater things for a little while and Kathy will be fielding the phone calls and so forth in her absence. Charlie, do you want to do the Safe Harbor?

Yes. Thanks Dan. Good morning ladies and gentlemen. As you know the Company's comments today will contain forward-looking statements regarding the Company's performance in future periods. As I am sure you can appreciate actual results in those periods may materially different. In our press release and our SEC filings, we highlight a number of trends and uncertainties that may affect our future performance. We urge you to review and consider those trends and uncertainties in evaluating the Company's comments today, and in evaluating any investment in Oil-Dri common stock.

Great, thanks Charlie. I am going to start with some overview comments and then we're going to have Jeff Libert take us through the numbers. Very, very positive fiscal 2004. It marked our fourth consecutive year of balance sheet improvement and without diving into too many numbers, there are a couple of metrics that I think will illustrate that point. First and foremost is what I like to call net debt, where I take long-term debt and I subtract our cash. At the end of fiscal 2000, that number stood at 41 million, just under 41 million. It is now just over $4 million, slightly over 4. So you can see a $37 million improvement in those four consecutive fiscal years. Part of that driven by operational efficiency, our inventories are actually down. We have gone from 160 million in sales up to 185 million, yet our inventories have gone from 17 down to just over 12. So our turns have gone up dramatically. At the same time, our accounts receivable are relatively flat during that period of time. It was 24.4 million in 2000; it's 24.8 million now.

So, again our days outstanding have actually gone down a little bit as our sales have increased. So feel very good from a balance sheet perspective in the health of the business. This marked our third consecutive year of gross margin improvement, and again a major focus on getting more for our products and services that we deliver to our customers and becoming more efficient as an organization. And so at the end of fiscal '01 our gross margin as the whole Company, stood at 18 percent. It went up to 19.1 in '02, 20.6 in '03, and we finished this year at 23.3. So again we feel very good about the margin enhancement that we have been able to implement.

This marked our second consecutive year of earnings per share and net Income improvement. As you know, we announced our earnings per share. We made 84 cents in the year. That was coming off a loss in '02, a 53 cents margin '03, and we put out our projection in '05 of a range of about $1.20 to $1.30. So clearly we are looking to turn that into three consecutive years of earnings per share progression, as long as everything plays out the way we hope it will. From a net income percentage standpoint, as I said we had a loss in '02. So we made 1.8 percent in '03, 2.7 percent in '04, and look to improve that pretty nicely in fiscal '05.

So we feel very good about the quantitative aspect of our business and those very much reflect the qualitative changes that have taken place over the past four years. So in no way are we smug or satisfied with where we are, but we are clearly happy with the trendline and we do believe it is a trendline that we're going to continue to show incremental growth and delivery to the shareholders while also investing in the long-term health of the business. So with that, I would like to turn it over to Jeff Libert, our Vice President and Chief Financial Officer.

Thank you Dan. The quarter and the year to end numbers are mostly good news this time as we have been reporting over the last several quarters. Sales are flat for the quarter, but they are up 7 percent for the year-to-date. Diluted earnings per share increased to 84 cents from 54 cents a year ago, and that is a 63 percent increase, very strong positive numbers. However for the quarter, we saw a loss of 4 cents versus a profit of 8 cents a year ago, and that is due to an unusual item, which I will mention in a moment. Net income, pretax, increased to 5,033,000 for the year versus 3,083,000 a year-ago, again a 53 percent increase. For the quarter we saw a loss of $237,000 (indiscernible) a profit of $476,000 a year-ago.

The unusual item I mentioned a moment ago was a settlement of a legal latter for a cost of $1.25 million, and additional defense costs of 700,000. So obviously that has made a significant impact on our quarter and in our year. We typically go through these unusual items because we like to tell you about some of the things that affected our year that were outside our normal operating business and leave it to you to make your assessment as to what to do with the numbers. But we want to keep you informed, and give you the details here. Additionally for the year, we have taken additional charges for write-offs of $464,000 of equipment and reserve for $200,000 for some obsolete branded packaging inventory. Of course last year we had some unusual items as well in the quarter. A year ago we have $573,000 associated with the closing of our Christmas Valley, Oregon plant, and throughout the rest of the year, we had additional asset write-offs of $385,000, the write-off of some goodwill for $350,000, gains on real estate and mineral rights totaling $449,000, and $675,000 of gain due to a payment from a customer who failed to meet contractual obligations.

If we took all these items out, we would be looking at pretax income for this quarter of 1,797,000 versus $1,084,000 a year ago. For the year last year, including all these items, we would be looking at 9,545,000 versus $4,526,000 a year ago. As Dan mentioned a moment ago, gross profit is up so that is driving our strong numbers. A year ago we saw year-to-date numbers of 20.6 percent. This year we have increased our gross profit by 2.7 percent to 23.3 percent. And we have lowered our tax rate. A year ago we saw a year-to-date tax rate of 29 percent versus 27.4 for fiscal '04. And the reason behind the reduction is a revision to our depletion calculation estimate.

The reasons why we continue to see strong performance, I have said it before and I'll say it again. It's really starting to get boring but it is the kind of boredom we can all live with. We continue to see strong performance from our Taft plant and Jonny Cat acquisition. We have added higher marketing branded business and we have begun to try to grow volume out of that facility. We have focused on selling profitable items such as branded scoopable cat litters. We have obtained selective price increases in various businesses and altogether we have been able to increase our average price per, as we like to say internally, per ton. We have increased by 7 percent and that is a combination of price increases and by selling more profitable product. Our overall businesses are performing strong. We have seen improvements in our manufacturing processes. We have focused on measuring our sales and lowering our cost of goods sold, and we've been able to increase our (technical difficulty) productivity.

We are producing as much volume with significantly fewer people than we did a year ago. We have had some setbacks, so we have done all of this in spite of some things. We just talk about the settlement agreement a minute ago, but we have also been planning for the future as Dan has mentioned. We have been investment spending in what we call our innovation centers in Vernon Hills, Illinois, and we're trying to spend money to develop that next group of products that is going to take us to the next level of profitability. Additionally, we have investment spent behind the Jonny Cat Scoop litter launch. We have seen 14 percent increases in our energy costs and that is a very difficult thing for us to absorb because we are a very energy dependent business. We remove a lot of moisture from our clays and we have also, a smaller item, we have seen $120,000 of closure costs that have spilled over into FY '05 related to our Christmas Valley, Oregon.

Looking around the Company to our various business units such as the consumer group, we have seen sales flat for the quarter and up 9 percent for the year. Again this is due to the Jonny Cat acquisition. At the time of the purchase, that particular brand was in steep decline and we have invested in the product and we have stabilized the brand. This fall we are rolling out our Jonny Cat Scoop, so we're expecting growth in the future for that particular brand line. We have seen continued strong performance of Cat's Pride brand in Wal-Mart, and we are seeing significant increases in our Canadian business, and also due to favorable exchange rates, we're seeing increased profitability.

In our Crop Production and Horticultural Products, this business was a bit of -- one that was struggling in this second half of the year. Sales were down 31 percent for the good quarter and 4 percent for the year. We had a very strong first half, we had a very weak second half. A lot of our agchem customers, which are the bread and butter of this business, had formulated earlier this year and they shifted business out of the second half. Additionally we are beginning to see some impact of genetically modified feed and that has softened our business somewhat.

Additionally, in this particular unit, sports turf sales had a slow quarter and year. We have seen good strong business within the baseball market, however, the golf business is heavily dependent on golf course construction and rehabilitation. That business tends to be a little bit uneven and we saw some decreases in that business in fiscal '04. Our industrial business has been a strong performer for the year. We've seen increases of 4 percent for the quarter and 8 percent for the year. This has been primarily driven by, again the Taft acquisition. A lot of that business was industrial business. We've also obtained price increases in this business, and seeing increased business from distributors.

The strong performer around the Company for the year, is our specialty group. Sales were up a whopping 21 percent for the quarter and 11 percent for the year. Our bleach (indiscernible) business, which is the heart and soul of this particular segment, was very strong. Oil processes were active in the U.S. and we've seen gains versus our competitors in this business. Additionally, animal health and nutrition did very well. We have seen increases in both our ConditionAde product and Poultry Guard. We attracted new customers as we've demonstrated the benefits of these products. We have seen particularly good results overseas. Moving onto the balance sheet as Dan mentioned a year ago, we are very proud of our performance. We continue to be very strong.

Cash and investments were up $6.4 million from a year ago, total debt is down by $4.1 million, so that relates to the net debt number that Dan communicated a moment ago. At the same time, we have purchased 1.8 million of our stock and that includes $480,000. So we are seeing increases despite making these reinvestments in the Company by repurchasing the stock and also paying dividends. Days outstanding of receivables is up slightly from a year ago, but far below historical norms and inventory -- days of sales and inventory, we made about the same as a year-ago. We continue to focus on efficient management of capital expenditures. That is a theme that we've communicated in the past. (indiscernible) depreciation by $2 million for the year and we have done this despite making some significant investments for growth opportunities and cost reductions. So I'm very pleased to report to the teleconference that the state of Oil-Dri is very strong financially and I have just told you the reasons why, but we certainly are very pleased with our results for the quarter -- not that we're done, but we certainly see significant progress in this fiscal year.

Thanks Jeff. It's always fun to deliver positive news. As always, we're going to spend most of our time in a Q&A session. Again, we're here until 11:00 Central Time, so we will field as many questions as we can. I would appreciate it if after you have asked a question you go back to the end of the queue until all of the questioners have been exhausted, and then at the end we sort of get into a rapid-fire mode, but at least at the beginning let's go back to the end of the queue. So Latoya, if you could please open it up to a Q&A session?

(OPERATOR INSTRUCTIONS). Ethan Starr (ph), private investor.

Good morning and congratulations on a nice year. In reading the third quarter 10-Q, I see that Oil-Dri has changed its method of federal tax filing and I'm wondering, approximately, how much cash this will save each year and for how long will this new filing method continue to save Oil-Dri money?

The answer to that question is that we expect to see savings for the future, certainly in FY '05, and certainly things change with talk tax laws, so it's not prudent to make too many predictions beyond FY '05. But we would expect to see this method generate savings, apples-to-apples, non big enough (indiscernible) consideration indefinitely. Now in terms of tax savings, that is a detail that we don't disclose. I'm not going to tell you much about that here. But when you consolidate, what you do find is you use your tax attributes better and there was significant cash savings. I wouldn't expect to see significant cash savings going forwar, but certainly as you implement this we do make more efficient use of cash tax attributes, so it's going to have a positive (ph) cash benefit.

Okay. Thanks.

The good news is, as we're starting to make more money it's nice to see our tax rate actually come down, so the timing of all of this is good.

Absolutely.

Robert J. Smith (ph), (indiscernible) Performance.

I guess the title of my outfit is just too long to get that investing as a tail (ph). Anyway, good morning guys. Thank you very much for an excellent year. New products, what can you tell us?

I knew it was coming.

Well look, that's the future.

Once again, we can't tell you anything. No, I'm just kidding. This time we're actually going to -- I tried to bundle some stuff up but I think this should hopefully help you. What I did was, I took all of the new product work that is in the various divisions' plans that they are committing to delivering, and again they tend to undercommit and overdeliver, which is good, but let's just use this as a benchmark. A couple of them we have talked about, the scoopable -- Jonny Cat scoopable items are out in the West Coast now. We have gained almost full out ATV (ph). We are waiting for Albertson's to finally get it on the shelf, but they have approved it. So we're going to have pretty much 100 percent ATV West of the Rockies on those. So those are two you know about.

Then we've got the other three that I've referred to on other conference calls that I'm going to keep under the code of silence. But when I put all of those together, we're expecting to do about $5 million in sales in '05 on those new products, and obviously the hope and the goal is it's 5 million heading towards more, but I'm not really at liberty to talk about FY '06 and beyond. Let's just say let's hit that 5 million or more. You can certainly quiz me on it every quarter, how we're doing vis-a-vis how we thought we were going to do, and we'll all get a feel for the traction that is happening with these new products. But we're very excited, they all -- our hope is that they all will deliver margins greater than the Company average, so they will take us in a value-added direction, which again is consistent with my comments from other teleconferences. They are all in pretty significant markets that we think Oil-Dri can gain a good enough share (indiscernible) a company our size, they're going to have a material impact on the business.

Again, you said there were, what, 2 or 3 others?

There are 3 others on top of the 2 Jonny Cat Scoop items, so all 5 are in various stages of rollout right now, some more on the testing side than the rollout side. But they all have significant volume expectations to be clicking in by the back half of the year, with the Jonny Cat Scoop one selling right now. We just dropped our FSI last Sunday, and the initial movement is very positive on those 2 items, so we're very encouraged by that.

So you will be able to speak of the others as soon as they reach what is called commercial stage?

Yes, and we are actually filing for patents on one or some of -- all of them, and if those ever get issued, then we're certainly going to be in better position to talk to you about them.

Well, that's going to take a while.

Well, but we're -- Charlie, I mean, you can't speak specifically, but in general one of them I think is pretty far along.

Bob, to the extent a product's got a patent initiative associated with it, it may become a matter of public record through our application well before --.

Oh, I see what you mean.

-- commercialization. Either through our commercialization efforts or because it's already a matter of public record, we're looking forward to being able to talk to you about those matters when it is right.

Can I put a tagline in for (indiscernible)?

You can. There is really nothing new this quarter on (indiscernible).

Okay. What actually is going on? In the past I have had the flavor that they've been increasing acreage tests. Is this still going on?

The agricultural business moves at a glacial pace. I think (indiscernible). There is really no news.

The good news is it's not in our plan for anything. The estimate we put out there, we don't need Campturner (ph). I hope it hits, we're still a good equity player there, as I have said before. It's on (indiscernible) nothing, so whatever it would hit would be complete gravy. But these new product things are much closer and they are more tangible and they are showing the money we have spent out at Vernon Hills is starting to look like it's going to pay off.

You took a partial write-down on Campturner in the past. Is it fair to say that there have been no particular negatives about this?

We've taken a complete write-down.

There is no value on our books.

Campturner is at zero, and again consistent with the past. The operating business is doing well and making money, but then the R&D side of the equation is spending it all, so net, net each treading water.

But there is nothing negative that has come through these tests, (indiscernible) tests, that you know of?

Not to our knowledge.

Thanks, I will get back into queue.

James Stevens (ph), private investor.

I'm relatively new to your story, so forgive me if you have already answered this in this call or prior call, but first of all do you breakout sales by products segment? Second of all, what is to prevent someone like Mccall (ph) for example, to come in and drive pricing down in some of your leading segments? Are there (indiscernible) directories selling to the public or perhaps doing a private-label program, something like Wal-Mart?

Jim for James?

James -- either one is fine.

James, welcome to the teleconference. We do break out sales by division, not necessarily by product segment. I don't know if you have specific questions on that, but let me answer your second question first and then maybe Jeff will answer your first question second. Regarding what would stop someone from coming in, both the beauty and the curse of this business is that freight is the single largest component of the cost of goods sold. I say beauty and the curse because it's a beauty when you understand that and you can compete in markets close to you. It's the curse when you're trying to get into some other market and you realize there is a competitor sitting over the plant, a heck of a lot closer to it than you are.

Additionally the beauty and the curse of the industrial minerals world is that not all minerals were created equal, some do some things, some do other things. So we're really maybe just giving an example, but it's apples and oranges. Colloid and us really don't compete head-to-head on almost anything other than a little bit on scoopable cat litter, because their mineral is a sodium bentonite. Our is a calcium bentonite. So the properties that make our product attractive to our customers pretty much preclude them from competing, and conversely the properties that make their mineral attractive to their customers pretty much keep us from competing with them because they just don't act the same way in most of the application. So they are really not -- that is not a realistic scenario where they would just start coming into our markets and cutting prices. The products don't work.

Is there some one in the calcium area other then Amco (ph) that would be a competitor, perhaps, for something like scoopable litter?

Scoopable Litter Amco is definitely a competitor, so if you're zeroing all of your comments onto scoopable litter, they already do Wal-Mart's private-label. We do the nonscoopable. Our stuff doesn't swell, their stuff swells. This is a good primer for anyone on the call who hasn't -- it's a refresher for everybody. But when you pour water on our stuff it is highly absorbent but it retains its structure which is very important in all of the applications we use. You don't want it to form a blob - i.e., when we sell it to Monsanto and they put on an inseciticide or a herbicide, the last thing they would want is for this thing to agglomerate when they are trying to keep it in granular form to give it to the farmers who can then disperse it onto the field in a nice pattern.

However if you're making a scoopable cat litter, you absolutely want it to agglomerate. So at Wal-Mart in the course or traditional segment of the category which is about 50 percent of the pound at Wal-Mart, that is what we participate in. It doesn't clump, it doesn't agglomerate and that is the traditional Special Kitty. On the scoopable side where the consumer actually wants it to agglomerate, where they're going to go in once or twice a day with a scoop and pull it out, it does agglomerate. That is Colloid (ph) and they are supplying them. So we supply the course along Ralston and they supply scoopable, I think fairly, exclusively, at Wal-Mart but they don't supply Sam's.

Thank you that is helpful.

James, one more point. You asked did we just talk about sales by productline and Dan mentioned that we do not. We do have it by business units within the company. If you look at our 10-Q, the third quarter and our upcoming 10-K, you will see sales and profit by business unit, within Oil-Dri.

Understood. Thank you very much.

Thanks and welcome to the call.

Larry Layton, Second Line Capital Management.

A couple blanks to fill in. In terms of the outlook for '05, what is the assumption about tax rate? What is a rough assumption about revenues and what sort of hedge do we have in energy prices versus real prices today?

Okay. I'm only fielding this because Jeff already told me the answer to the tax rate. Basically you can assume that the tax rate for '05 will be equal to or less than the tax rate for '04. That is about as far out as we can see. Regarding sales, we will give guidance on that, but that will be in our K which will be coming out soon, in two or three weeks. So we're not going to get into that now because then we've got to put out a news release on Reg. FD and all that kind of stuff. Let's just leave that for the K. Then your third question was fuel hedging and that one I can talk about because we have disclosed this before and we are sticking to our guns on this one.

We forward by in what is called the shoulder months, so in the March/April timeframe we forward by for the upcoming fiscal year which starts August 1st and runs through July 31st, roughly give or take, 50 percent of our natural gas requirements for the upcoming fiscal year. We try and forward by half of our requirements so that we take half the volatility out. It's basically our way of saying, we don't make money on fuel. We make money mining, processing and marketing absorbent mineral, so if we hedge hedge nothing we're taking a lot of risk that we think the price is going to stay the same or good down.

If we hedge everything, we're taking a lot risk that we think the price is going to stay the same or go up. Instead we're basically saying we don't know what it's going to do. It seems like even the experts don't know what it's going to do but we're certainly not an expert, and we just hdge half. We do it every year and we put it in our plan so that is in our $1.20 to $1.30 earnings per-share estimate and at least we have taken half of the volatility out. This year, we did the same thing in FY '04 and it helped us finish where we wanted to finish and we did it in '03 and we're doing it again in '05.

Thank you.

Even Star private investor.

Also in the third quarter 10-Q, I see that Oil-Dri is now investing in debt securities. I assume they have a higher basis points return than the treasury securities do? I am wondering how much additional cash will a differential generate on an annualized basis? And also, how much higher are the returns?

Ethan, when you start getting their debt securities, you're exactly right. We did do that to diversify our portfolio a bit and also to (indiscernible) higher returns, but we're not talking about big money. We're talking about maybe 10 our 20 basis points.

Okay.

Very stable investments, high-quality stuff. We don't take any real large risks with our money.

Okay good, but who decides which debt securities to invest in?

We have a very strict investment policy. We restrict, we have a third party do that investing for us and we restrict their investing to only certain types of securities of a certain grade and only certain percentages. So that's how we manage it.

Great. Considering Oil-Dri's strong cash position and recent cash generation, I would like to urge the Board of Directors to consider increasing the dividend again this year and/or distributing a onetime bonus dividend. Any comments on that?

No comment other then I took notes and we're happy to get the feedback. We have talked to a number of our large institutional investors to get their input, and without naming names or anything, they actually would be more in favor of seeing an increase in stock buyback programs. So, were going to take all of the input to the board meeting, and let them, along with me, make the best decision we can.

I would favor an increased stock buyback program too. If they were to decide that, that's wonderful also. It's the same either way to me.

Good, thanks for your feedback.

The press release noted that you invested in the Cat's Pride and Jonny Cat brands in fiscal 2004, and I'm looking at Cat's Pride Litter recently, I have seen some changes in the package labeling. What are some of the changes you're planning as far as Cat's Pride to revitalize the brand and how have the moves you have already made affected retail sales?

I am wondering if you've seen the new package design yet. I would doubt it because it is just working our way through the plants and everything. Was there a cat on there or a silhouette? That's the real question.

The silhouette was there but it also said same usages, whatever pounds the other product it, the competing products area.

You haven't seen the new package yet. Keep your eyes open. I know you do great store checks and I appreciate your feedbacks. Keep your eyes open. I will be obviously sorely disappointed if you don't see a major improvement in our presence on the shelf.

Okay. What is CapEx budgeted at for 2005?

We expect to spend about 6 million this year and depending on the timing of a lot of our projects, that number can fluctuate, but we do have a number of big items, and whether we do one item it might make a difference of 1.5 million in a year. But I would expect to see CapEx approximating about the same next year.

Okay. Thanks. I will give back into the queue.

A follow-up from Robert J. Smith.

I just wanted -- this is an aside on the suggestion about the dividend. You know that you can go on and see dividend screens on line, and the business services also provide them with companies that have increased their dividends over how many years, so to speak. So the suggestion of increasing the dividend, maybe kicking it up 1 cent in the quarter or something like 4 cents a year, I would favor because I would like to see in ten years that Oil-Dri has increased their dividends, ten years running. Anyway, that is my thought. I think you can afford it with what you have done with the balance sheet so well. My question is, the R&D expense line, what do you spend in '04 and what do you estimate in '05?

We have spent pretty much what we set out to spend, which was $2.5 million. It depends in what you are going to call pure R&D, (indiscernible) service and so forth. But that is a pretty hefty increase over -- before we regenerate -- re-energized Vernon Hills, so we're running around $1.9 million to $2 million range. We expect to spend right in that range, maybe a little more, in FY '05 and that again is in the ESP estimate that is out there. That is what is so exciting from my vantage point, is that we are delivering incrementally better numbers, but we're investing heavily in the future. This isn't, we're hitting the finish line with nothing left in the gas tank. We have momentum. That feels good. So you should take comfort in the fact that I, at least on what I can see, FY '05 is eminently achievable, and yet at the same time we can still invest in the future.

Have you plugged in a certain price increase index for '05 to arrive at 120, 130, or is the range predicated on sort of uncertainty in that area?

Price increases are already implemented. We do that again in the March/April timeframe to be implemented by August 1st. So those are all now taking effect and they have already basically been accepted by the marketplace, as well as they should because we don't control natural gas, and it is ugly out there.

Thank you. I will give back into queue.

Just one general comment, and maybe some of the other people on the call would want to voice their opinion. On the dividend and the purchase and all that kind of stuff, it's interesting that the funds we tend to attrac are small cap value funds and they generally -- they don't dislike dividends, but that isn't what is driving them towards the stock. So the input from the small cap value fund who generally holds a lot of our stock, has been way more skewed towards toward, do a buyback versus increase the dividend. So I am just giving you their perspective. And if anyone is on the phone (indiscernible) small cap value funds and I have gotten that wrong, feel free to clarify it because our board meeting is, I think, on the 7th, and I will be taking the message.

(OPERATOR INSTRUCTIONS) Ethan Starr.

Yes, recently the price of natural gas has dropped somewhat. To what degree is savings boost (indiscernible) Oil-Dri earnings?

Not much. It would really -- again because we are 50 percent hedged, we've taken a lot of the volatility, both on the up and the down. It would really have to come down and stay down for a while, and then affect the whole marketplace before we would really see it. But certainly we would rather have it going down than up, don't get me wrong. But fuel is not a major concern once we buy our contract. It is pretty much sort out the picture.

Okay. Has there been any further consolidation in the aborbent clay industry recently, in the last year or so?

No, there hasn't been anything. Who is to say what will happen, but I still believe that when plants do come up for sale we will be the most likely acquirer in our neck of the woods, in the calcium bentonite nonswelling end of the world, and we are very interested, especially with the war chest of cash we have built-up that we're going to continue to be opportunistic on that. We're happy to deliver the Taft acquisition and the Mound (ph) one before that. I'm hoping there will be another one, but there is nothing on my horizon that I can tell you that you should raise your expectation, it isn't there.

Okay. What is happening with Poultry Guard?

Poultry Guard. Poultry Guard is going well. I don't know how much specificity. Charlie, do you want to talk about Poultry Guard?

We may have more comments specifically on Poultry Guard in the 10-K, but I think if you look at the performance of the Specialty Products Group that is summarized in the press release, you can see that across all of their major product lines, including Poultry Guard, you saw a significant pickup over the course of the entire fiscal year. We are pleased to see it and think we have some momentum.

Yes, and I think in general, if I haven't said this before, (indiscernible) too specific, it's just that we were losing money on Poultry Guard as we were investing to try to get it up and running. We got pretty close to breaking even last year. We actually made a little money this year, so incrementally it was much better than it was from a profit standpoint. The sales line continues to look very good and we do have a significant amount of Poultry Guard in the plan for FY '05. So we're continuing to be bullish on Poultry Guard.

Wonderful. I look forward to better news in 2005.

Great.

Robert J. Smith.

On this Poultry Guard, you have been willing in the past to speak of it by isolating and breaking it out. So could you do that?

I don't know what you have in fron of you.

I'm going to say (indiscernible) Poultry Guard stuff. We did just under one million last year. We did about 900,000 and we did a 1.5 million in FY '04. I can tell you we're budgeting to do significantly more, so north of 2 million in FY '05.

Just circling back to the dividend, the dividends, per se, on much of the investment community's agenda, so to speak. I hear what you say about your holders, but I again maintain that I feel it is important that the dividend be looked at and the shareholders receive an income flow from your continuing prosperity, so to speak. My suggestion was a cent a quarter which is 4 cents a year or around $200,000, and I think you guys can well afford it and I for one would like to see it.

Duly noted. Believe me, you can bet my Dad and my sisters are going to be on your side of the fence.

You know I have expressed this a lot earlier on, so to speak.

Absolutely. We did raise it last October and it is definitely going to be a topic for discussion at the Board level this coming October.

I am a long-term investor and I would love to see you guys appear in the screen of companies that have increased their dividends for X number of years.

Good. Duly noted.

James Stevens.

Yes, just want to talk a little bit about your free cash flow. Two-part question, I guess. Do you expect that D&A will continue to exceed CapEx by -- I think it was a couple million dollars this year, it has been more in the past -- for the sustainable future or do you think that there is some sort of big CapEx -- giant CapEx -- project that might be looming out there down the road? Second part is, it seems that a lot of your free cash flow over the last few years has been due to changes in working capital, and I am just wondering how sustainable that is?

I will address both questions. First of all, related to capital expenditures, I think we talked about a little bit before, and your question about how much are we going to spend next year. I do see us spending about the same next year as we have this year. I do see CapEx continuing to be less appreciation for the near-term future. Of course, the more times you spend less in your depreciation, depreciation becomes to come down, so over time they become more an equilibrium.

But the good news is, if we do end up exceeding our expectations on capital expenditures, it will be because there is significant opportunity, some sort of acquisition or some sort of investment that we can make to help reduce our cost or to expand our business, that we haven't -- we're not foreseeing right now. We're continuing to try to develop these things with a large group of people working in teams trying to develop the next opportunity. But the answer to your question is I think we will underspend our depreciation for that, the next at least year, possibly 2, 3. That's what I can foresee right now. In doing that, it really doesn't makes sense to make projections.

Regarding -- your second question was -- I'm sorry -- change in working capital. You know, we do have very strong inventory turns. We turn our inventory more than 10 times a year. Our days of receivables has come down over the last several years, although there has been a slight uptick this year. I see us being strong there, but I don't see that being a major source of generating additional working capital in the future.

I wasn't looking for it to be a major source for additional. I just was wondering whether the level of free cash flow where it's so far ahead of earnings plus depreciation less CapEx; I am wondering if that is something that is sustainable, not necessarily --.

No, I don't see anything that is going to create a need to invest heavily in inventory and receivables. I think we're very focused on being lean. That is how we operate at Oil-Dri, and I just think what we have done is sustainable.

Very good, thank you.

Robert J. Smith.

What is the labor situation within the company? I don't think I have ever really touched on that.

You mean union, non-union?

Yes, or availability, things like that.

We have one collective bargaining unit, a local of the Steelworkers at our Ripley, Mississippi facility. It has about 40 employees in it. We just successfully renewed that collective bargaining agreement in April for 3 years. We consider the relations down there to be good. The remainder of our workforce in the United States is not organized, and I think we believe we haven't had any regional labor issues or labor supply issues at any of our plants in the United States.

Our employees in Canada and in the United Kingdom in general do belong to their respective nations versions of collective bargaining units, but there again, we consider the relations to be quite good.

And in terms of labor supply, we tend to be the employer of choice or certainly in the top 2 or 3 in almost every town in which we participate in, mostly because these are very rural counties. I mean, that's the whole point. There's open land where we can be mining clay, so we have not had any problem attracting and retaining good labor. Having said that, we have had a major thrust with the support of our employees on automating the worst jobs, heavy lifting of pails and making pallets and things like that. We have been able to do more with less, so it's interesting that prior to the Taft acquisition, we had, give or take, 870 employees on the payroll. We then acquired Taft which had 100 people working there. So fast forward 2 years, we're now down to about 760 or something like that even with Taft. So it shows how efficient we've been able to come. I give Tom Cofsky, our VP of Manufacturing, and his team a lot of credit.

It also is a credit to the capital expenditure discipline that Jeff was alluding to, because when we do spend money we have a higher return. When we spend that money on automation and we know, hey, we're running 2 or 3 shifts, if we can eliminate 4 jobs per shift, that is 12 jobs, and it's the worst jobs; and we never terminate any full-time employee due to automation. We always find them other jobs, even if it means keeping them and waiting for just due to natural attrition jobs to open up, because we don't ever want to them to be afraid of automation. We want them to embrace it and they have, and so our morale is good. The worst jobs are out, which also tend to cause the most workers' comp issues, back and things like that, so it's all been positive.

Looking at the facilities utilization, is there a number that you can come up with, an approximation as to operating capacity?

Yes, I mean we use a lot of sports terms around here, and we look at our sweet spot of where we want to be from a utilization standpoint. Most of our facilities are at our sweet spot, meaning that you want them at around 90 percent utilization. If it gets more than that, you tend to have a lot of inefficiency, package inefficiencies go down; overtime goes up and inventories go up. If you've got way too much less than that, let's say less than 75 percent, you really are not getting an efficient utilization of your fixed capital. So most of our facilities are in their sweet spot. We do have 2 facilities that are south, meaning they need more business. And a lot of the new product initiatives are right in line with getting those facilities more volume. And we are incentivizing our sales guys to go out and try and fill up that volume. So we are trying to get to a good blend.

What's sort of amazing is that if you look at our 4-year trendline on sales, okay, we did 160 million in '01 on 1.032 million -- really 1.031 million in tons. Fast forward, in '04 we did 185 million in sales on 1.031 million in tons, which is sort of amazing that we are staying right in our sweet spot. As I've said on many calls and you've seen in our news releases, whenever we put on a new profitable piece of business, we first look and see before adding capacity and adding capital, is there business at the bottom that really should go. And if it is, we raise the prices; if it sticks, well, now it's valid business and we'll put the capital behind it. If it doesn't, we let it go and we stick with the higher stuff. So our average selling prices Jeff referred to on a year-to-year basis, I'm looking at a 3-year horizon, is up $25 a ton, which is pretty impressive.

The fact that these facilities that are in that sweet spot when you spoke to the question of sizable CapEx in the foreseeable future, you didn't see those. So any incremental expense would be essentially not large for machinery and equipment and stuff like that?

Right, with very nice, hard paybacks.

Thank you very much. Good luck.

At this time, there are no further questions.

Great, thanks. I just want to wrap up. I want to thank everyone for your continued support and interest in our company, and I can tell from the general enthusiasm and tenor of the questions, you guys are feeling as positively as we are and I appreciate that. I think we set out a year ago to make F'04 a year that was both good for the short and long-term, and I think we've struck that balance very well. We invested heavily in the future of the business by also delivering a number that was a significant increase over the prior year and overcoming the fact that it even absorbed a big hit of a onetime licensing suit patent thing. So I'm happy to have that behind us.

So, again, on the horizon, you never know what is going to happen, and that is why we do all the Safe Harbor stuff. But I can tell you sitting here, a month and a half into the fiscal year, I see F'05 being another good year; maybe not huge on the top line, borrowing and acquisition or something like that, but an increase on the top line. But again, incremental improvement of the margins, delivering $1.20 to $1.30 earnings per share while also investing in F'06 and beyond. So we'll look forward to talking to you at the end of the first quarter, and until then, stay safe. So we will talk to you then. Thanks.

This now concludes today's fourth-quarter and fiscal 2004 earnings teleconference. You may now disconnect.