Oil-Dri Corporation of America (ODC) 2005 Q1 法說會逐字稿

Good morning. My name is Shatina, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Oil-Dri Corp. first-quarter 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). Thank you. I would now like to turn the conference over to Daniel Jaffee, President and Chief Executive Officer. Please go ahead, sir.

Thank you, Shatina, and thank you everybody for joining us for our teleconference covering the first-quarter results of our new fiscal year. And as always, Charlie Brissman, our Vice President and General Counsel -- well actually not always, but at least this time -- he will be doing the Safe Harbor comments. So, Charlie?

Thanks, Dan, and happy Thanksgiving to everyone who has joined us today. As you know, ladies and gentlemen, 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 differ.

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.

Thanks, Charlie. And let's start by introducing everyone who's with us today from the Oil-Dri side. We have Andy Peterson, our new CFO, and hopefully you all saw the news release on that; Jeff Libert, our Vice President of Finance is with us; Dan Smith, Vice President and Controller, and Kathy Arford (ph) who is sitting in for Ronda Williams who is our Director of Investor Relations She is on maternity. So Kathy is sitting in and filling those shoes ably I might add.

I like to do a little introductory commentary, and then have Andy walk us through what I'll call the play-by-play of the quarter. And then as always, we are going to open it up and spend the majority of our time in a Q&A session answering any questions that are on your -- the investors' -- minds.

This was a, from our perspective, a good, but not a great quarter. We are still very upbeat about our fiscal year. I say it was good because while we were behind last year, we actually had planned to be behind last year in the first-quarter due to some known timing differences and we beat our plan. Now the real key for us going forward is going to be to meet or exceed our plan in the upcoming quarters, which obviously are going to call for us to exceed last year because, as you all know, we made 84 cents a share in '04 and we have reaffirmed our range and still feel confident about our range of $1.20 to $1.30. So this was going to be the one unfavorable comparison for the year. And while we don't give quarterly guidance, I did want to help you keep score at home as it were as the quarters start to unfold and you can start to assess for yourself how are tracking against our range.

We made 30 cents a year ago in the first quarter and made 22 cents this year, so we are down 8 cents. And obviously, it we are going to finish, let's just say for the fun of the math, we will pick the middle of the range -- $1.25 -- we need to beat last year's 84 cents by 41 cents. So if we are 8 cents behind and we need to beat it by 41, we need to make up 49 or call it 50 cents between now and the end of the year.

For those of you, as always, I'm out on the East Coast with my wife's family, so I'm in Maine and they are in Chicago. So maybe Chicago can mute their phone while I am doing my presentation.

Anyway, to get back to the math, we need to make up 50 cents between now and the end of the fiscal year. The easiest quarterly comparison is going to be the fourth quarter where we had lost 4 cents a year ago because we had that settlement on the patent case. So just pick any number again for ease of math, I'm going to say -- let's say we make 21 cents in the fourth quarter of this year. That would be -- that would mean we beat last year by 25 cents. So if we were able to do that, then we really need to make up 25 cents in the second and third quarters. And so we made 59 cents a year ago in the second and third quarters, so again, we need to make about 84 cents in the second and third quarters. If you want, you can divide it in half and just so you can kind of track and see are we going to make about 42 cents in each of the quarters. If we are relatively close to that, again, you can feel confident as we are that we are going to fall somewhere in the range as the year unfolds.

So you can see why we are so confident because we do believe we can make up within the ballpark of a quarter and the fourth quarter, and then we need to make up roughly 12.5 cents each of the other two quarters to finish the year exactly where we want to.

So we did speak about our plan. Our plan, if we were to hit our plan the rest of the year, we would be at the high end of the range that we have put out. So as long as we are tracking to plan, we are in pretty good shape. So we feel very good about that.

The other comment I want to make before turning it over to Andy is I have spent a lot of time on the road since our last teleconference. I was down in South America calling on a host of our bleaching earth for Ultra-Clear and rendering customers -- also our animal health where we are actually rolling out Poultry Guard and have always done very well with our toxin binder ConditionAde. And our business in the specialty area, as you can tell from the news release, is doing very well. It's also doing very, very well south of our U.S. borders. And so very, very positive to see all the good things that are going on in the specialty end of our business.

I was also in Boston at an investor teleconference or an investor presentation there, but then spent a couple of days in the market working with our broker and calling on accounts and that is going very well. During that visit there, we were able for the first time to get four items into Giant Food in Baltimore, Washington, so we are very excited about that. That is due to ship in January. So those orders are not in, but we feel very confident that the commitments we've received from the accountants are going to translate.

I hope you all don't hear all this feedback I am hearing. Anyway, it will translate into significant business for Oil-Dri. We also were calling on Stop & Shop, and we were their longtime private-label supplier and had lost the business due to a low-priced bid. We refused to meet that price. We stuck firm with our quality and service because we knew what it took to supply them on a consistent basis having done it for many, many years. And low and behold, the new supplier tripped all over themselves multiple times and we now have all that business back. And so we felt very reassured, let's say, that we stuck to our guns, knew what it took to supply them, and overtime, they realized the same thing.

So all this time on the road has shown me that -- oh, and you know what -- I want to mention one more thing which is I was down in Bentonville last week, and as everyone knows, that is Mecca. That is where Wal-Mart is headquartered, and there have been a lot of TV shows -- positive, negative, and neutral on Wal-Mart. I can tell you from our vantage point, we are very proud of our relationship with Wal-Mart. They have always been fair in their dealings. It's always been about doing the best we can to supply not them as the customer, but their customer as our customer. And as long as we always focused on that, we have always been in good shape down in Bentonville.

So our relationship with Wal Mart is very strong. We met with their replenishment people. We met with the buyers. We met with the buyers' boss. And so it went very well, and we are confident that we can continue to grow with that account as they grow and even in light of or despite of the Kmart/Sears merger, I think that is just going to be a little ripple in the water as Wal-Mart continues to plow ahead and succeed not only in the United States but internationally.

So all this traveling in the field has shown me how relevant Oil-Dri is to a myriad of customers in a myriad of markets really throughout the world depending on the application and just further bolsters our confidence that all the investment we are making in better understanding the industrial minerals we have underreserved to then get those out to customers in a value-added way is only going to pay dividends for the Company and for our investors in the long haul. So still very, very positive about the future prospects about Oil-Dri.

So, Andy, I don't know how much of your thunder I stole, but I would like to turn it over to you at this point in time and have you walk us through the play-by-play of the quarter.

Thanks, Dan. First of all, I wanted to tell you all how excited I am to be here at Oil-Dri Patek. After about six weeks in the CFO role, I can take you that the Company is a very strong -- has very strong future prospects and a great management team. While I am very confident in my own abilities, I do recognize the big shoes that I am trying to fill. The success of Oil-Dri under the four years of Jeff Libert's stewardship is going to be tough to match. Jeff is on the call today, and I very much appreciate his continued support.

Getting to the numbers, on a consolidated basis, revenues were 44,121,000, down about 5 percent from the 46,292,000 in last year's first quarter. Operating income was 2,025,000, down 744,000 from 2,769,000 in the first quarter for year ended 2005.

The shortfall in revenue and operating income in comparison with last year is more than explained by the results in the crop production and horticulture products group. Revenues there were 2,594,000, which were down 53 percent from 5,486,000 in last year's first quarter, and we had an operating loss of 249,000 compared with operating income last year of 702,000. This is unfavorable swing of 2,892,000 in revenue and 951,000 in operating income for the group in the quarter. We had anticipated that our agricultural carrier business would be down in the first-quarter comparison and expect the business to return to historical demand levels over the balance of the year.

Sales for the consumer product group were down 9 percent for the quarter. An increase in promotional spending, primarily from the Jonny Cat Scoop rollout, negatively impacted sales versus prior year. We expect the new Cat's Pride packaging now being rolled out to positively impact our sales in the second half of fiscal 2005. I encourage all of our listeners to look for it on the retailer's shelves in your local markets.

Industrial and automotive group sales were up 5 percent in the quarter. This was due primarily to increases in per unit selling prices. Sales for the specialty products group were up 17 percent. Strong bleaching clay sales, along with an increase in ConditionAde and PelUnite Plus binder sales in the U.S., contributed positively to the growth.

On a consolidated basis, the lower revenues in the quarter caused the gross profit percentage to decline to 21.9 percent from 23.5 percent in last year's first quarter. This was a function of lower revenue coverage on fixed cost offsetting the continued significant improvement in average selling prices per tons sold.

The other notable item on the income statement is that the effective tax rate for the quarter of 25.5 percent compares with 29 percent in last year's first quarter. We expect this lower rate throughout the fiscal year.

Net income of 1,280,000 and EPS of 22 cents for the quarter were lower than last year but, as Dan said, ahead of our plan. That plan anticipates EPS for 2005 between $1.20 to $1.30.

In looking at our cash flow and balance sheet items for the quarter, the Company provided 1,028,000 from operations in the quarter versus comparison with a year ago where we used 1,728,000 in last year's first quarter. The fact that this positive variance of 2,756,000 was achieved despite 438,000 less net income attached to the Company's improved management of working capital components.

During the quarter, the Company make principal payments on debt of 2,580,000 versus treasury stock of 1,762,000 and paid dividends of 514,000. We finished the quarter with cash, cash equivalents and short-term investments of 18,941,000.

Back to you, Dan.

Great, Andy. Thank you. And as you can tell, Andy is a quick learner and is really hitting the ground running for us here at Oil-Dri. And I want to emphasize exactly what Andy was pointing out which was while the earnings may or may not have been what everyone expected, they certainly were better than we expected because we knew what our plan was, but maybe not better than the street would have expected in the first quarter.

The cash generation in the quarter was fantastic, and you pointed out the dollar amount. Let me talk about the share amount. We bought back 115,400 shares in the first quarter, which is an accelerated rate and something that we (technical difficulty) discussing at the December board meeting, but that both my father and I want to see us continue that pace or even increase it. So as long as the cash keeps coming in, we feel our best investment is in our own stock which we continue to feel is undervalued. Our book value per share in the quarter rose from 1280 a year ago to 1321, so we are trading at maybe 1.2 time-ish book value. And as we all know, book value puts very little value on the 500 million or so tons of reserves that we have. So we, again, continue to feel the best use of our free cash is to either raise dividends on a periodic basis, which we did during the quarter, and also to purchase our own stock as an excellent investment. So that is something that we are going to continue to do.

At this time, I'd like to open it up to a Q&A session. And as always, if you could, kind of restrain yourself. Ask a question or two and then go back to the end of the queue so that other people can get their questions in and people don't have to stick around for the entire hour, but they are certainly welcome to do so. So, can we -- Shatina, can we please open it up to the Q&A session?

(Operator Instructions). Jack Ripstein. Petaro Capital Research.

Hi. Good morning, gentlemen. Can hear me? My questions are in regards to the cash flow. In terms of CapEx for the year, could to give us kind of going forward what you might expect and what portion was maintenance versus maybe ramping up new products, etc.?

Yes, Andy or Jeff, I don't know if you guys want to field this, or you want to bounce it back to me, so.

I'll take it. As you can see from the release, we have been spending more on CapEx than we have in previous periods. We've talked in previous teleconferences about how our depreciation has been much higher than our CapEx. And you can see in our past periods -- putting the number in front of me -- we spent -- our depreciation was about 1 million 9, and we spent 1 million 7. So the number is a lot closer.

And in terms of percentage, I don't have an exact number to give you, but I would say it's about half maintenance and about half investment type things. And so we're seeing a little bit more maintenance than we have seen in years past and we expect that trend to continue throughout the rest of the year. But we are also seeing a lot more investment type opportunities, and these are significant dollars, generally manufacturing products, that we expect to contribute significantly savings in the future. And we factor that into our range. So that has been planned for.

I think before we are done for this year, you're going to see depreciation -- CapEx be a little bit closer to depreciation than it has been in years past, and I would interpret this as mainly good news because it means we are having investments to make our business to help reduce our costs in the future and deliver future earnings.

Great. And then also and just in terms of the cash flow, a lot has been squeezed out in terms of improving operating cash flow by working capital changes. How much do you think is left in there and how much do you think -- basically how much can you pull out on a kind of going forward basis?

I think that is a difficult question to ask. I think that -- I think that there are always opportunities to improve inventory turns and DSO, and that will be certainly a focus for my attention.

And then on last question and I will get back in the queue. You talked about your reserves a little bit. Is there a spot market or any way for us who are new to this to value those or to come up with an approximate value?

There was no spot market, and from time to time, mineral companies do get sold and they actually sell reserves in the ground. We have done so as well. We sold some reserves a couple years back and we sold those reserves -- my memory is between 50 cents and somewhere up to $1.00 a ton in the ground.

Now, they were specialized reserves. We know Kaelin (ph) companies -- we have seen some sales all the way up to $2.00 a ton in the ground. Again, I'm not saying that our 500 million tons is worth $2.00 a ton. But if you kind of look at our market cap, if all we did was have those mineral reserves, you would say that they are being valued at 15 or 16 cents a ton and then there is no value for any of the cash flow or anything else that we are doing with the reserves. So obviously, we believe that the market is undervaluing the reserves, but to answer your direct question, there is no spot market and it's really like anything. It is whatever someone is willing to pay for it if and when it ever comes up for sale.

Well, I appreciate it. That is a very --

Robert Smith. Center of Performance Investing.

Good morning. I saw you (indiscernible). Is that going to continue, or is that any sign of an incremental expense I mean that you foresee?

It's sort of a -- it is going to continue, but not in the sense of, if you remember in the past, where we were dropping -- I don't know if it was at that size -- those freestanding inserts 9 to 10 a year. I don't see that happening. And so it would be by brand, maybe two or three a year. Certainly if we are rolling something out like the new packaging, which is what this was about, or the Jonny Cat Scoops out West, we certainly think that's a good vehicle for getting the message out, but also putting coupons in the hands of the consumers to try and drive some pull at the retail level.

I got on the call a little late. Did you say anything about new products or what can you say at this stage?

I didn't say much, so I'm happy to tee that up here. We are continuing to progress with our new products, and they are a key piece of not only F'05, really more F'06 and beyond. We are in the final stages of announcing a new copacked cat litter product, which again will be under confidentiality and I can't really talk too much about it other than it reaffirms our ability to produce and provide high-quality, high-volume cat litter items for major marketers. So when somebody wants to get into the premium end of the cat litter category in a big way, they always seem to end up with us and that's great. That is exactly what we want to be. So I think everyone who is an investor knows we do Clorox under a long-term contract.

When is that runthrough?

Well, we are hoping to begin building inventory on that in December and start shipping it in January.

No, I met the Clorox agreement. I am sorry.

Oh God, that things got another 17 years on it.

Okay.

Ish, I mean, Jeff, do you remember exactly?

It's got another -- I think you are right on. (indiscernible) 17 years.

So we are in good shape there.

So that is all you can say or are able to say about new products?

We sold some of the new products in the quarter which was good, but they were really for tests, but full-scale tests which is good because everything we've been getting in the past had been sort of pilot tests where we had been giving them free pallets of material and they've been testing it, and these are these applications that I'm really not discussing because if I told to, I would have to kill you and I don't want to do that.

But they actually bought a full truckload, so they moved it from the pilot test to the full-scale test and results are looking pretty good. They have to send out to a lab for some final results before they are ready to make a final decision on whether or not to put this into their formulation on a permanent basis and if so and what percentage of their production.

And then in one of the other new products -- and the Jonny Cat Scoops are going very well. Those I can talk about because all that data is public, it is out there, and we've gotten pretty much 100 percent acceptance west of the Rockies in both grocery and mass merchandisers. We are now trying to get into the big box stores, and they are interested in maybe a bigger size -- a pail or something like that, and that would be exciting for us and also the pet specialty players like the PETCOs and the PETsMARTs.

So preliminary acceptance is fantastic. Now we have got to get the velocity up, and it is building every period. So as long as we are on the upswing, we feel good. If and when it plateaus at some level south of what we are expecting, that will be good, but we haven't seen that yet. Our first test market, which was in Salt Lake, we are continuing to do very very well and it keeps growing. So we are confident/hopeful that out West we are going to see the same thing in L.A., San Francisco, San Diego, and Phoenix.

So the Jonny Cat Scoop rollout is going very well, and those expenses pretty much hit the fourth quarter of '04 and the first quarter of '05, so incrementally they're going to add a lot of GP and contribution in the second, third, and fourth quarters of this fiscal year, which is, again, why we feel we can meet or exceed the hurdles that we have in front of us.

And then, the other new product item which, again, is more of a business to business thing, we are in the final stages of working with an outside ad agency to put together the whole go-to-market strategy and feel we will have that thing out for the season that it needs to be which is the spring. So we are continuing to plow ahead.

But you'll have more to say along these lines on the next call?

Well, the next call is still prior to the launch of that last item we talked about. Hopefully by the next call, we will have a definitive answer on the first opportunity I was speaking about who went to the full scale trial and they will have their results. So yes, that one for sure. And Jonny Cat Scoop (technical difficulty) we will have a lot more details.

I'll get back in the queue. Thanks.

Chris Kyper (ph). Rich Sound Corporation (ph).

Good morning. A quick question for you. In terms of your consumer business, looking long-term, because I'm very published in the long-term, how big do you think that business can be on an annual basis and how do you get there?

Well, you know, our consumer focus the last three years has been much more about profitability and sustainability than it has been about share growth. If you look at Oil-Dri from about '97 to 2000, we were very focused on share growth and did a great job of growing our share, but at the same time, pretty much cratered the earnings of the Company trying to support it and compete head-to-head with mass marketers like Clorox, like Nestle Purina.

We finally woke up. It didn't take us long. It only took us three years of getting our heads kicked in. So we are quick learners here at Oil-Dri. We finally woke up to the fact that you know what, if the retailers want a national mass merchandise or a mass marketing company, they're not going to buy from Oil-Dri anyway. They can get Clorox. They can get (inaudible), ARM & HAMMER, and they can get Nestle Purina. We've got to be something else to them, or else we are redundant and really a bad redundant.

So we -- I can't say we pulled a 180, but we pulled about a 120 and started focusing on key accounts like Wal-Mart, like Kroger, like Publix, Safeway -- I can name all the big retailers, grocery chains and mass merchants that we were doing well with and then saying, we need to maximize our sales with them where we are given points of distribution. So again, I think you are new to Oil-Dri, but in about two half years ago, we walked away from $10 million of business with Wal-Mart because it was unprofitable and we couldn't supply them like they needed to be supplied.

So we have continued to do that and do that and do that. So our consumer business has stayed. It is growing, but it isn't growing as rapidly as it would have been had we not walked away from a lot of business. So it is sort of a long-winded answer for you. We are at about 100 million.

Yes, I would hope that we would grow with the category, which would be 4 or 5 percent a year in dollars -- maybe flat in units, but we are not looking really to take over the world in share because the minute we do that, not only do we lose some of our point of differentiation to the trade, but Nestle and Clorox are going to let it happen and I don't blame them. They're bigger. There's no question.

So we are not going to tell you that we are going to become the number one or two marketer of cat litter in America. We are, we believe, the number one manufacturer, and we believe we will always, due to our reserve base and the strategic locations of our plants, always be the most relevant supplier for the largest players, but it won't be under our brand. Our brand is opportunistic. It is doing very well where it is, but we're not going to take Jonny Cat national, nor are we going to take Cat's Pride west of the Rockies. They're both sort of regional, very good brands that have a lot of market share in the markets they compete. So I don't know if that helps you or not.

That is very helpful. Thank you.

The next question has to do with the crop in horticultural business. You guys indicated you had a bad quarter. If you sort of look at the quarterly numbers, you've had a bad couple of quarters. If you add up the last two quarters, I think revenues were somewhere around 5.7 million compared with those same two quarters from a year ago of 10 million. When you think about that segment overall, it seems to be generating about $21 million a year in sales. Has anything fundamentally happened to that, or is it all timing?

No, it -- I can't really throw a percentage on it. A big piece of it is timing. There's no doubt that if we had had our VP of Ag in this call, he'd be saying what I am going to try and say for him, which is our big ag customers geared up heavy last year. We loaded them up. They ordered. We would load them up, and they finished the year with a lot in inventory so that they have started this year by not needing to order as much as early. So their orders are now starting to kick in and they are starting to kick in fairly heavy which is good. So that is the timing piece.

But, there is also no doubt that the acceptance of GMO -- genetically modified organisms -- are where they put the technology in the seed so that you no longer have to spread the herbicide or the pesticide as much is being accepted on a broader base. So that happens, then the need for a clay carrier declines. And we have all known this. However, they were all predicting that we would be out of the clay carrier business by about the year 2001, and here we are heading into 2005 and we still have a pretty significant business.

So clearly that's a cash cow business. Nobody is putting in new clay carriers or new capacity behind it because everyone believes that the past is better than the future. But how quickly that will continue to decline, we don't know. We are not just rolling over, though. We're investing a lot of time and money and energy into new products in this area -- not necessarily as carriers because that wouldn't -- we don't see those markets growing in the future, but in some turf and ornamental applications and our sport's turf applications and in other applications that I'm not yet talking about. So the overall division we believe can be a grower, but short-term, yes, what you're seeing is both a timing and a market shift.

Okay. One last question and I will drop back in the queue. You guys are repurchasing just a ton of shares. You look at the stock and how it trades, how is that really in the best interest of shareholders? It doesn't seem like it's really pushing the price up much and you guys have been active repurchasers for a long time.

At some point, you're just shrinking the float to a level that I think it's actually at a disadvantage to shareholders. Because when a guy shows up in the market and wants to sell his stock, if it is any substantial amount of stock at all, there is not that many buyers there to take interest in it.

Two parts to this. What do you think about that comment, and then secondarily, are all of your purchases that you're making, are those on the open market or are you guys conducting private transactions as well?

I'm going to take the first question, and Charlie, I will let you take the second question. The first one was is the buyback in the best interest of shareholders? Chris, the frustrating part from my vantage point is I get input every which way. I talked to our largest institutional shareholders during the last quarter; and they all said we don't even want you to raise the dividend. We want you to just go back go out and buy back shares. That's the best thing you can do. But then we had other investors telling us you ought to raise the dividend. Forget about the buyback. We tried to take a happy medium. We said, let's raise the dividend a penny a share and let's continue to buy back shares -- sort of trying to take care of everybody. Here is what we feel on the float.

At some point, you would think it would have to translate into an increased stock price because if you're taking out a percentage of the shares, then the shares are left should be relatively more valuable. As that happens, what would be nice we continue to perform. We continue to buy back shares. Maybe we can split the stock in some way, shape, or form and get more shares out that way.

But we just continue to feel that this is a good use of our cash and we get a lot of feedback from our big institutional shareholders, telling us that's exactly what they want us to do.

Charlie, I am going to turn it over to you for what split has been open market versus private transactions and so forth.

Certainly, Chris, in the last three fiscal years, the first purchases have all been open market purchases. The Company has had repurchase efforts ongoing from time to time literally, I think, for the last 10 fiscal years. It's conceivable in years past there might have been privately negotiated transactions, but none are coming to mind.

And, certainly, the last couple of fiscal years, all have been open market and disclosed in our quarterly filings.

Excellent. Thank you, guys.

Ethan Starr, a private investor.

Good morning. And I would urge you to continue the buybacks at whatever pace you can do, comparable to last quarter which is very nice.

My question -- you recently added this quote "same usage is 20 pounds" to the packaging of 14 lb. Cat's Pride scoopable litter; and I'm wondering to what extent that has helped improved retail sales especially in the grocery area.

That is actually not a recent addition. It's just we re-did the packaging. I think we've made it more apparent to you, which is what we wanted. It was always out there, but I think it was confusing and not well communicated and now it is. For those of you who are new to Oil-Dri, and Ethan, you're all over this, but let me just give a little background for investors as they're going to do their retail checks. I hope every time you guys are hitting retail, and Ethan, I know you do this, you go to the cat litter aisle.

Our stuff is lighter density. So it's like feathers and lead. The consumer buys it by weight, but they use it by volume. They're not putting a tray on a scale and weighing in.

So the fact that our jug is the exact same -- our 14 lb. jug is the exact same size as the competitors' 20. Means they can carry home a lighter jug but get the same uses.

But unfortunately, consumers were being fooled into thinking they were getting a better value by paying -- let's $7 for the competitors' 20 lb. versus $6 for our 14 pounder when in reality, there were getting the same fills for $1 less. Well this whole marketing packaging redesign is all about having the consumer completely understand they're getting 20 lbs. worth of cat litter; and then they can look at the price and say, hey I am saving a buck. This is a good deal.

So I'm glad you thought was new. It really wasn't. It just was sort of unobvious, and you're a very aware retailer checker. So you can imagine the average consumer had no clue what was going on in the past, and now this will hopefully be front and center for them.

Okay. How has this helped improve retail sales in groceries?

Too early to tell because we're still clearing out the old stock. I mean, when I do my retail checks, I see as much of the old packaging as I do the new, but we obviously believe that -- first of all, research shows that most consumers in cat litter are making up their mind at the shelf. They're not going in there with an absolute conviction on any brand other than Fresh Step is the only one that has ever been able to drive any brand loyalty.

So everybody else is just --it's a fight for shelf position.

And then, package design, which is why we spent so much money on it at the end of last year, is your ability to communicate to the consumer quickly, instantly. They look. They grab.

And so we do believe strongly that the new brand blocking that we are putting together with our packaging, where we are going to have a coherence amongst all of our brands -- core scoopable, different sizes, different flavors, multi-cat load track, and regular Cat's Pride Scoop -- . That whole brand block will bring the customer in, let them choose one of our amongst our many brands and then increase our overall sales.

So the retail -- our trade partners are very enthusiastic about it. Now we've got to give some time, let's say another quarter, before we see how the consumer reacts.

Okay. So what kind of feedback are you getting from retailers on the new Cat's Pride packaging, and I'm wondering also if the new packaging might help to get Cat's Pride back onto the shelf at Target stores?

First of all, it has been very positive from the retailers. We would love to get back into Target. As we were talking about trying to do more business with those accounts that value us -- that are honest, treat you fairly -- Target is certainly one of those accounts.

The good news is Fresh Step is in Target and we make all that, all the Fresh Step course product. So technically we are in Target. We are just not in there with our Cat's Pride. The same can be said for PETsMART as well. So we don't -- we call on them as religiously as we call on everybody else, and at the moment, they are happy with their segment and they don't see the need for a Cat's Pride product. We are going to keep knocking on their doors.

Great. And also, what is happening with the lawsuit in Reno?

Charlie, I am going to punt that one to you.

Quite literally nothing is happening with the lawsuit in Reno.

I could have said that.

Yes, going back a couple of phone calls, a couple of earnings calls I believe, there was oral argument on the liability issues in the case at the end of January. The case is being heard without a jury, so we are simply waiting for a ruling from the judge, and we continue to wait with no indication on when a ruling might be forthcoming.

Okay. Thanks. I will get back in the queue.

Jack Ripstein. Petaro Capital Research.

Hi, guys. Thanks for taking another question. Question about the share buyback. I think it is a good idea. So there's my vote for what it's worth.

But also, in terms of the guidance you've given, is that factoring in an aggressive buyback, or is that more on a stand-alone basis as the shares stand today?

It's pretty much factoring it in. I mean we are thinking -- we've got the buyback going. We also have various executives exercising, so you get the dilution effect going on. So it's a wide enough range where I would not -- if we announce that we are reupping our buyback program after the next board meeting and everything, I wouldn't adjust the range based on that. I kind of just say -- that is why we give such a big range. It kind of allows for all that.

Okay, so it's not one of those Sisco-oriented things where you make the earnings by reducing the share count?

No, and again, we give guidance and obviously we have shown a track record the last couple of years. We hit our earnings. We feel very confident we are going to hit our earnings again.

We do not manage this business to hit our earnings. We manage the business for the long haul to do the best we can and really -- and you are new to our teleconferences -- but I heard a great quote that I try and keep repeating because it's really how we run our business. "Earnings are an opinion; cash is a fact." So we focus very hard on our cash generation. I think that is shown in the results. And yes, we feel very confident of our $1.20 to $1.30, but I am not going to make any decisions from an operating standpoint in the short run to try and hit some artificial range. I would rather just come out to you guys and change the range. But not that I am saying it is going to make me do that. I am just trying to tell you how we run the business.

Sure. That's great. That is how I would like to see it done. Thank you.

And then last question is in regards to lots of cash flow on the books. Obviously, you have the option toward dividends. You are doing the stock buyback which is fantastic. Are there any sort of other things that are living out there because obviously you are very well capitalized that you might be putting that cash towards acquisitions, etc.?

And then lastly, what do you see as the target cap structure because obviously you have debt that you're paying down every quarter. But do you guys see levering back up once that debt gets paid down, or what do you see as the optimal balance sheet?

Well, you are too tied together because you mentioned acquisitions. And we are continuing to be very focused and I am going to call it opportunistic. As any of the businesses that have direct relevance to us come up for sale, we are going to be an aggressive potential acquirer. We don't want to overpay, especially recognizing that in many of these processes we seem to be the only company bidding. So you don't want to be bidding against yourself.

So we have actually gone through exercises a couple of times in the past two to three years where we get into a process we put together a very healthy bid, and the owner decides to just keep the business because there are no other bidders and they think they can do better. And that's fine. We are going to stay -- stick to our guns. They have to stick to their guns.

On the other hand, you're not going to hear from us -- at least in the short run -- then we are going to go out and get into some far-flung business that we know nothing about just to try and artificially grow the business. So if two or three of these close in competitors came up for sale in one year or one short period, we would go after all of them to the extent we felt we could integrate them profitably into our business, and that could then drive a need for further debt financing, but I don't see it.

We are not going to put debt on just to put debt on, and we are not going to go out acquiring companies just to acquire them. We are going to stay pretty disciplined with how we run the business.

Okay. Great. Thank you.

Robert Smith. Center for Performance Investing.

I believe you said you were looking for another strong growth year in Poultry Guard on the last call. I don't have that comment or the number in front of me. Can you just go back and refresh my memory on that?

Yes, and I don't have all my numbers with me out here in beautiful Portland, Maine, but my memory is probably pretty close and I will just qualify it and hide under Charlie's Safe Harbor for the rest of it.

But we, as I recall, I affirmed that we were hoping -- we did about 40 -- a little over 4000 tons in F'04 in Poultry Guard. And then our plan called for 6000 tons, so we are looking for roughly a 50 percent increase in the new fiscal year in Poultry Guard. We did not see that kind of an increase in the first quarter, although we did continue to grow. Our sales were up, but they were only up about 15 percent. But a lot of it -- and I talked to the guys and I get reports from the guys -- again, they are very confident. They feel its timing and that they are still sticking to their plans. And so nobody is waving a white flag on Poultry Guard.

So it's continuing to grow. Certainly, if we can knock off some of these international opportunities, then we should be in great position to either meet or exceed that plan. So the first quarter was up, but wasn't up commensurate with our plan, but we are still hoping we will hit the plan.

We will have more to discuss in the next call?

Yes, I think a six-month number is better than a three-month number for us. Especially the winter months are really the great months of Poultry Guard because it's really two uses for Poultry Guard, and I'll just reeducate newcomers to the call. This is used in chicken raising houses, and the initial application was for ammonia control, and that tends to be done during the winter months when the cost of heating is so great that they don't want to open up the windows to ventilate, which is how they usually treat ammonia. Ammonia comes from urine. And so during the summer months, they can just open up all the windows. You are not paying -- I guess chickens grow the best in like 88 degrees or something like that. So they have to keep these chicken houses pretty hot. And it's easy to do in the summer, but in the winter, they are paying all this energy cost to heat these houses. The last thing they want to do is open the windows.

So they keep the windows shut, but then the ammonia goes crazy, so that use our product to battle the ammonia. So there is certainly a seasonal aspect. But we have found is that our product is almost uniquely qualified to control pathogens, which is -- there is darkling beetles. There is all sorts of things going on the soil of these chicken houses as you can imagine. But everything that gets in that soil is potentially a deterrent to the bird growing to its full capability. So the fact that we can help control these pathogens has led many of our customers to adopt Poultry Guard year-round because that isn't -- you don't open the windows and the pathogens all jump out. It is nothing like that at all. You need to put something in the soil to combat the promotion of these bad actors, let's call them. So that is a year-round application. So we got both things going for us and it's all positive. And certainly, as I said that, though, the winter months are going to be our strongest because of -- you get both benefits going.

You know I've spent quite a number of years asking about (indiscernible). I guess it's written down on the books, so maybe you could just give me an idea as to the scope of this operation at the present time.

You know, I'm not well-qualified. I have not been focusing on it only because it hasn't been a real opportunity as I'm sure you are frustrated as am I for the last couple of years --

Well, I am patient.

You are patient, I'm frustrated. But yes, as you have pointed out, we've written it down to zero on our books. And yet when I do talk to Tom Rutherford, who is our VP of the Ag Division, about it, he's always pretty consistent that he believes in Jonny's as do I. He's a very talented -- he is a genius, there's no question -- and believes that there are enough opportunities still brewing that he feels we will see another payday out of (inaudible). But it's really not on my radar screen, but I can certainly commit by next call to making sure Rutherford gets me up to speed.

Yes, I would be grateful for that. There has been no call for additional money?

No.

Business is essentially stabilized?

Yes, it's more than stabilized. They have got two pieces to it, and Jeff has talked about this in the past. Jeff, do you want to cover this?

Yes, when you look at (inaudible), what they really are is an operating company and they have got a small (indiscernible) coating business and that is what pays the bills, but this is a solid, stable business. And then they've got their research piece. And really the revenue and earnings from the (inaudible) coating really fund the research piece. So there are really two pieces of it, and more or less they have broken even and held their own, but really not grown significantly. And when one of these research pieces really develops into a real opportunity, that is when there is going to be a payout, but that hasn't happened yet.

Thanks very much. I will get back in the queue.

(Operator Instructions). Ethan Starr (ph), a private investor.

Yes, I am wondering how will the change in leadership of the specialty products division affect things if at all?

Good question and how did you find that? Did we announce that, or did you come across it?

It's in the I think either the 10-K or the -- I think it is in the 10-K.

Good for you. You are awesome. Okay, yes. Gene Kiesel, a longtime Oil-Dri employee, has left. He had what he perceived to be, and we hope it works out for him, a better opportunity in terms of autonomy. He's going to be the CEO of a private equity owned company. It looks stable and I'm sure he will do very with it. It created an opportunity for us to both reorganize and promote from within, and so we feel it's going to create a lot of opportunity for us, and certainly we are hitting the ground running as Gene left that business in very good shape and it's doing very well.

So there is a piece of his division that is exactly like the Canadian business in that it's got a synthetic operation and it's mostly focused on floor absorbents and private-label cat litters. And so that piece is going to actually report into our Canadian subsidiary, and interestingly enough, the General Manager, Michelle Basttion (ph), who is in Montreal -- it's a short flight. It only five hours for him from there to the UK. So he was just there this past week, and that transition is going well.

There was animal health component to Gene's business, the specialty business, and that is going to move back into the ag division under Tom Rutherford. So that is going to be good because the expertise and skill-sets are very synergistic there.

And then the biggest piece, which is the fluid purification piece, the edible and nonedible oil purification piece, we have promoted a 19-year veteran, Bruce Patsi (ph), who was running all the sales, the domestic sales. That has always been our largest -- our fastest-growing pieces of business where we have the best share. We have about a 40 share in the U.S.. He's going to be taking over the entire operation from a fluids perspective, including having the foreign salespeople report into him, and they sell the whole suite of products, but they'll report into Bruce.

And so I think what you're going to see is much more focus on sales. Gene was more of a General Manager, putting the team in the place and letting them go to war. I think Bruce is going to be much more hands-on. He is going to have to find that balance between being two hands on, but being very customer-focused. So I think he's going to have a lot to add, and it was sort of a good opportunity for him that it opened up and he has jumped in and taken the job.

Okay, so the futures of the fluid purification will be the reporting division?

Will be the specialty division certainly. Yes, that is our global fluid purification business will be the specialty division, and then the ag division will just pick up the domestic animal heath and nutrition. So we will help you follow the numbers, but yes.

Okay. Great. Without the increase in promotional spending for the Jonny Cat Scoop rollout, would sales for the consumer products group have increased year-over-year?

Jeff or Andy, do you want to field that, or I can?

I believe the net sales would have increased slightly year-over-year without the promotional spending.

Okay. Thanks. And on the new products front, you mention the last quarter that you hoped to obtain $5 million in sales this fiscal year with new products. Are you roughly to about a quarter of the way through in the first quarter?

That is a good question. Let me flip through or some of my numbers here and just see. I would doubt it only because a lot of it backloaded. Like I said, we are going to launch one of them in the spring and we are still in tests on another one. On the other hand, I think we are doing better on one of them than we had anticipated.

Although, when you put all the trade spending behind the Jonny Cat Scoop launch, that wipes out a lot of your revenue. So the answer is no. We didn't do a quarter, but we weren't expecting to do a quarter. So we are going to obviously do more than the shares in the second, third, and fourth quarter.

I think the second quarter we still may not do it, but by the third quarter, we ought to be there for sure, and then the fourth quarter ought to exceed it because then you are expecting that your running rates for the next year will be even more. So I would say yes, we ought to be able to do -- we ought to anticipate 1.25 million in the third quarter and then more than that in the fourth quarter so that your running rate is better.

Okay, great. And this new copacked cat litter product, will that compete to a large degree with Cat's Pride or Jonny Cat or --?

Not so much. I mean, I'm not exactly sure how they are going to position it, but I think from a price standpoint and a performance standpoint, it would have the greatest likelihood of competing with Fresh Step. But I really think what's going to happen is the same thing that is going to happen when ARM & HAMMER launched theirs. One of two things is going to happen. Either it's going to expand the category where they'll be able to bring in dissatisfied course users who have jumped to scoop for better odor control will come back to the course segment because they feel they can get the odor control they want. That would be the best because it expands the category.

The worst-case scenario is that it does sort of what ARM & HAMMER did which was it wasn't -- it couldn't win the war. And so Fresh Step continued to grow, and now you don't see the ARM & HAMMER course anymore.

So it's almost like heads we win, tails we win bigger. I am obviously hoping that it expands the category, but as long as we are making them all, we are betting on every horse in the race, you tend to do pretty well. If you don't care about your odds, you just want a winning ticket, you to do pretty well when that happens.

Okay, great. Thanks and in closing, I would like to urge the board to increase the provision for stock buybacks at the next meeting and then wish everyone a nice Thanksgiving.

Great. Well, Ethan, thank you. And as you guys know, I take your comments to heart. I feed them back to the board directly, and they always take it into consideration. And I think at the end we try and find a happy medium. So I'm going to be in the same boat you are. I think we should start -- keep the pedal to the metal on the stock buyback. So have a nice Thanksgiving.

Do we have more questions?

Robert Smith.

By the way, I also strongly favor the stock buyback, as well as increasing the dividend on an annual basis. You know that.

I was wondering in your travels, so to speak, on an internal basis, have you guys run numbers on clay reserves of the big players in the business as far as cat litter use -- what the reserve positions are and ownership, etc.? If someone was to say other than North American clay reserves what do you own, is there a way to get a handle on this?

Yes, there is, and Fred Havelin (ph), who is our Vice President of Raw Materials, could probably regale you all day long on these stories.

So can I get to him?

I'd be happy to have -- if you understand what he tells you, please tell me. Fred, when you hear this, I am just joking. But seriously, again, from a macro standpoint, I could probably talk to Fred about it and then I'll talk to Charlie and see if maybe there is some sort of macro picture we can give you because you know people talk marketshares and everything else. We could probably give you a total picture of reserves and then what percentage are under control by whom, and that would probably be something not only valuable for you but for me, too. So I am going to put that on my follow-up list.

Great, okay. Great. Happy holidays and good luck.

Thank you, Bob. Happy holidays to you, too.

Thank you. At this time, there are no further questions. Will there be any closing remarks?

There will be very brief closing remarks. Thanks, Shatina. I just want to thank everybody, and I want to thank our newcomers to the call. I think Jack and Chris, you were the two newcomers, and maybe you've been on before but have not asked questions. But I really appreciate you guys, your support, your interest in our business, and as you can tell, we try and listen and take what you say to heart.

So please never pull any punches. Give us the feedback. We would rather hear it from you directly than have you bail out on us because you thought we weren't listening.

So thanks very much and I sincerely wish you and your families a happy and healthy Thanksgiving. We will look forward to delivering our results over the next three months and then reporting on them to you next quarter. So thanks again.

Thank you. This now concludes today's Oil-Dri Corporation first-quarter earnings teleconference. You may now disconnect.