Oil-Dri Corporation of America (ODC) 2005 Q2 法說會逐字稿

Good morning. My name is Amanda and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period. If you would like to as question during this time, simple press "star" and then the number "one" on your telephone keypad. If you would like to withdraw your question, press the "pound" key. Thank you. Mr. Jaffee, you may begin your conference.

Thank you, Amanda and welcome everybody to the second quarter teleconference. Let me introduce, who is here with us today, Andy Peterson, our CFO; Charlie Brissman, our Vice President and General Counsel; Ronda Williams, who is our Director of Investor Relations; and our special guest today is Tom Rutherford, the Vice President of our Ag Division. And before we get started, Ronda, will you take us through the Safe Harbor?

Certainly. Thank you, Dan. The company's comments today will contain certain forward-looking statements regarding the company's performance in future periods. Actual results in those periods may materially differ. In our press release and our SEC filings we highlight a number of trends and uncertainties that might affect our future performance. We urge you to review and consider those trends and uncertainties in evaluating the company's comments and in evaluating any investment in Oil-Dri common stock. Thank you.

Thanks Ronda. And before I turn it over to Andy for a detailed review of the quarter, I'd just like to give you some of my overview comments. We're very, very pleased with the quarter. The bar, obviously, is continuing to be raised for Oil-Dri, and where no one is raising it higher than we do internally. So sometimes when you get that close to it, you don't tend to see the achievements that you have been able to deliver. But when we step back from it, we're very happy with this quarter. We have record sales of $49.5 million. We just barely missed the $50 million hurdle for the first time in the company's history. Hopefully we'll break that a year from now.

And from an earnings standpoint, to be able to deliver 36 cents against 29 cents a year ago, when we incurred about 6 cents of Sarbanes-Oxley, what we consider to be non-recurring documentation expense, that is very, very positive. We spent over $500,000 in our efforts for 404 compliance. And a year from now, the groundwork we're laying today will be in place and we won't have to repeat that. So we feel very good about the quarter.

One metric that I have talked about in the past and I want to continue to highlight -- both for your investor perspective and also to continue to emphasize it was our internal team -- is our average revenue per ton. As I have mentioned in the past, we are in the business of mining, processing and shipping clay and we don't do it in the onesies-twosies, we do it in tons and we'll ship about 1 million tons again this year, just like we did in each of the past 4 fiscal years.

And we are in the business of then receiving money from our customers for those tons we ship. And going back to F01, we shipped 1 million tons. We took in -- and we are paid an average price of about $156 a ton. I am rounding to the nearest dollar. In F02, that was 158. In F03, it was 169. In F04, it was 180. And now through the midway point of this fiscal year, we have shipped 0.5 million tons. So we're well on our way again to that magic million ton number. And we are now clicking along at 187.

So in absolute dollar increase since F01, our prices are up -- average mix is up $31 a ton. That's both the function of price increases and selling more of the value-added products and less of unvaluable products. $31 a ton on 1 million tons is 31 million extra dollars, which is, obviously, why our margins have been repaired and expanded and the company is making money and generating a lot of cash. Just since '02, which is since where the big push began, from '01 to '02, there wasn't a big jump, 156 to 158.

The big jump started in '02. We are up $29 a ton or a compound rate of 5.8% per year for every ton we have shipped, that's very powerful and, obviously, we're not telling you we can do this forever on infinite item. But it is clearly the focus of the management team that we have a non-renewable resource and it is absolutely incumbent upon us to get as much value for every ton we ship and that's what we're focused on, on a daily basis. And I am happy to say that that focus has continued to pay off.

Final comment that I have before turning it over to Andy is, and this is just sort of me on my soapbox. I go on and I see some of these websites where you can click on the Oil-Dri stock and you could see who the inside activity is and all this kind of stuff. And you see that we've exercised options, which, frankly, I'm happy about because it shows that our stock is moving up. You never exercise your options when the stock is going down underwater. So that's a good news scenario.

But what I was sort of frustrated about was you couldn't see that I actually -- my latest exercise, I am accumulating more shares, but you don't see that. It looks like, all I have done is, exercised and sold versus actually holding the shares, is because we have 2 classes of stock. I don't totally understand why these websites don't pick it up. But basically, they are not. And if you going into the SEC filings, which you can see through our website and through a lot of websites, you can actually see that, yes, options were exercised but then more shares accumulated.

So in my recent exercise, I kept 7500 more shares and that raised my personal stake to over 170,000 shares and that actually raised our family stake up over 1.457 million. So, the purpose of all this is, I see some of these comments from investors and rightly so, who don't like when they see insiders, especially, at the highest levels of the company, do what they consider to be bailing out on the stock. And all I can tell you is from a jappy perspective it's the exact opposite. We are continuing to increase our holdings.

We continue to believe in the absolute long-term value of this company and what we're doing. And so in, no way, we're trying to reduce our exposure to Oil-Dri. We're trying to increase it both on what we are buying and then obviously as you see through the management of the company and you will hear it through Andy and the company buying back shares on the outside. So, I think nothing speaks louder than that. I will get off my soapbox. Andy, I would like to turn it over to you for review of the quarter in the 6 months.

Thanks Dan. On a consolidated basis, revenues for the quarter were a record 49,481,000, up 4% from 47,800,000 in the second quarter of last year. Net income for the quarter of 2,146,000, an EPS of 36 cents was 24% higher than in last year's second quarter of 1,728,000 and 29 cents. As Dan said, despite the fact that we incurred 505,000 of SOX expense in the quarter. We expect this positive trend to continue over the next 2 quarters and remain confident that we will deliver $1.20 to $1.30 per share for the year-ended 7/31/05. And looking at the division results for the quarter, sales for the consumer products group increased in the quarter by 889,000 or 3% while operating income increased 525,000 or 13%. This reflected slightly higher average selling prices and a decline in expenses compared with last year's second quarter.

Sales for the specialty products group increased in the quarter by 737,000 or by 11% while operating income increased 139,000 or 9%. The bleaching product lines see increase in North America and Latin America compared to last year's second quarter. Sales for the industrial and automotive products group increased in the quarter by 532,000 or 10% and operating income increased 328,000 from a loss in last year's second quarter. Higher average selling prices and continued growth of synthetic absorbent products account for the improvements.

Sales for the crop production in horticulture group decreased in the quarter by 477,000 or 8%. And operating income decreased 359,000 or 33%. Agsorb carrier sales while much stronger than the first quarter of 2005 were still below last year's second quarter. In looking at the business from a balance sheet and cash flow perspective, during the quarter the company brought back 116,300 shares of common stock at a cost of 20,185,000, paid dividend of 565,000 and we finished the quarter with cash, cash equivalents and short-term investments of 20,071,000. Indicative of management's continued effort to improve working capital components, sales in the second quarter were up 4%, while accounts receivable were down 9%, or an almost $2.5-million improvement, compared with last year's second quarter.

Continuing the focus on cash, EBITDA for the second quarter and 6 months to-date was 5.150 million and 9.151 million, respectively. When CapEx are deducted, this results in free cash flow of 2.934 million and 5.187 million for the second quarter and 6 months to-date.

I'll turn it back to Dan.

Great, Andy. Thank you. We're obviously very positive. And the number that still keeps jumping out at me is how well the balance sheet is doing and the fact that you did get our days outstanding down and so, despite all the uses of cash and all the things we did -- buying back shares, dividends, CapEx, everything. You know, a year ago, at January 31st, we had 17.9 million. And this year, almost 20.1 million in cash, which is your cash and cash equivalents and investments, which is fantastic.

Before we open up to a Q&A session, we're going to invite our special guest to talk. This is in direct response to a commitment, I made last quarter, which was to Bob Smith regarding Kamterter. So Tom Rutherford, who is our Vice President of our Ag Division, has just enough time to comment on it. And then he's going to have to run off to a bunch of calls this afternoon. But, Tom, can you walk us through what's going on with Kamterter? And again recognizing that this is just responding, Bob Smith, to your question, but then we as Oil-Dri -- don't worry, I view Kamterter as a material part of our business. It's certainly something we have an investment in or are certainly rooting for. Then, as you'll hear from Tom, there is some reasons to be optimistic.

So, Tom, you want to take it over?

Actually, just a couple -- I want to mention 3 things, one about the core strength of the company and also a couple of new opportunities -- one which we referenced last time, Bob, that I think you're aware of. The core strength of the company is excellent. It's a tiny company, it's a technology company. They doubled their sales last year, though, with a very healthy $600,000 profit. And their core business is priming seeds, but they -- in an effort to expand into a platform that would allow them to prime seeds more profitably, they introduced a California facility that pellets seeds.

And that California expansion has been responsible for the serious doubling of their sales in the last year. The particular seed coating equipment that's been built allows for very precise applications of pesticides, and the market is coming to them because of that. It's very important, as the seeds grow in value, that pesticides can be used at the very low doses and be effective, but you have to have the equipment to apply it. So that element -- the core strength of their business, the priming and now the coating, is making them a very healthy, if small, operation.

The last time we talked, canola was an opportunity up in Canada. Priming canola seed, we thought, might be their first venture into the major crops. They've worked with the Canola Council up there, and a couple of things have been the focus trying to reduce the cost of seed by being able to achieve same planning stand with a lower number of seeds to start off with, because they don't germinate as quickly or as uniformly. And that's been a success, but that's not the real Holy Grail.

The Holy Grail for canola is to increase yield. And there have been some issues with the Canola Council, which had some problems and operating profits of -- problems of its own, and the focus of that research kind of disintegrated a couple years into it. And that coupled with canola prices and the overall malaise in the Ag market, the focus has kind of come off of that, and it has degenerated -- if that's the right word -- into. We are now trying to license that to an interested party up in that part of the world, who would take the technology up into Canada and do the priming up there. But as to-date, it hasn't happened yet.

The third focus -- and it's one that is really just an example of this guy, John Easton's cornucopia of ideas in his mind; he's an amazing person -- is a mixed phase sprayer technology. This is an equipment opportunity that really is a very unique piece of technology. It allows you to spray solids, liquids and anything in between, like suspensions, all at once, very precisely, and at low volumes, which is the way that agriculture -- the direction that agriculture is heading.

This technology really represents a paradigm shift for equipment manufacturers. And it's the kind of technology that they are, at the same time, enormously excited about and terrified of, because it's like throwing all their pieces of business up in the air and not knowing how everything is going to land. The ramifications for this technology actually transcend agriculture. There could be applications for food processing, paint, nanotechnology, if you're dreaming in color, and those types of things.

John is working and has been working very closely with a major equipment manufacturer. The technology is real. They are very interested, and they are working through an agreement. And that's probably as much as -- I am not sure I know, accurately, a whole lot more than that. But I can tell you that from my perspective, as you look at the history of this business -- and you saw the big checks that we were lucky enough to receive from the Monsanto deal from that Sakata, the sale of the technologies solid matrix priming to Sakata to Monsanto and to Rikard Sea (ph) -- this has the potential of being significant. But it is also a complicated thing to put together, and for the equipment manufacturers, there is risk. Anytime there is a big reward, there is risk. So we continue to be fascinated by this little company. And as I think it was mentioned earlier, it's not core to our business, but it offers us wonderful opportunities. And we work very closely with them.

That's about it, Dan.

Great. Well, Tom, thank you. And I know you've got to go out and make us some money. So go get them.

Okay. Thanks.

Okay. Thanks. Before we open up to a Q&A, just the usual rules apply. If you could ask one question and then go to the back of the queue. And also we are here until 11:00. So we'll really answer your questions, 11 o'clock, Chicago Time. So we'll be happy to answer your questions until then. So try and prioritize, so you make sure you get your most important questions asked first.

So, Amanda, if you could please open it up, we'd appreciate it?

At this time, I would like to remind everyone, if you would like to ask a question, please "star" then the number "one" on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Ethan Starr.

Good morning. Nice quarter.

Hi, Ethan. Thank you.

I was just wondering, how are sales of Cat's Pride doing, and has the new labeling made a difference in sales?

Good question. I'm going to answer your second question, first. I would say that, at the moment, we're not seeing the lift we had hoped for, but we're seeing a lot of competitive activity in the marketplace. So it's hard to say what would have happened, had we not made the changes, because it's like any science experiment. If you can't hold everything else constant, you can't really decide what's going on. So, you know, our sales are fine. They're strong.

You know, as you know, I've done a real good job in the past -- I don't know, probably 3 years, since we started turning this thing around of emphasizing we're not a consumer product company. We're an industrial mineral company that has a great outlet of our mineral in the cat litter market. And so we do a lot of gorilla marketing and we do a lot of stuff like that, but we don't do any real consumer media programs and things like that. So we're happy with it. It's doing well with our core accounts. So we try and stay in the top two-thirds so that we don't get turned at the bottom of an account, but it's -- we're not trying to take over the world with Cat's Pride. That's for sure.

Okay. Last quarter, you mentioned that one of the new products was a co-packed litter that would begin shipping in January. Can you tell us more about those products and who it's being made for?

I can't really tell you any details of it than it did begin shipping, and we're hopeful that it will be -- we will do the best we can do, which is to make the cat litter and get it on the boarding dock, and they will take it from there. So -- but, you know, it should be good for the Company.

Okay. Great. I'll get back in the queue.

Okay. Fine.

Thank you.

Your next question comes from Jack Ripstein with Petaro Capital.

Hi. Good morning, I guess, afternoon, almost there. I was curious, the pricing by ton is really interesting, but what is kind of the corresponding cost element and speak to any sort of fuel incremental prices as oil has gone back above 51 bucks for at least brief time?

Sure. Well, the one thing you can look at then during that same timeline that I gave you, which was F01 to F05, let me just give you some gross margin information and then you can figure out obviously where the cost have gone vis-à-vis the topline. In F01, our gross margins were 18%, they rose to 19.1 in '02, 20.6 in '03, 23.3 in '04, and I know what we are at now like 22 - probably 0.6 or 7 year-to-date, I actually...

22.7.

22.7. There you go.

Okay.

Pull that out of the year. So you can see that at least for the first 3 to 4 years of it, our price increases and mix changes were outstripping the overall increase in costs. But absolutely, we have been very communicative both to our investors and to our customers about the absolutely hit we are taking on fuel, both on the processing side and on the shipping side. The cost of shipping our product is a big percentage of our delivered cost of goods, and those costs are going up and are going to continue to go up.

So, we are -- I don't know, if you are new to that, I feel like you are new to our teleconferences. I am not sure how new you are to Oil-Dri and following us, but what we do every year is probably worth reiterating. Let's try and take about a half of the volatility out of our fuel purchasing prior to the year starting. It was - it's sort of our admission that we don't know anything about where fuel is going, then for everyone who tells you it's going up, there is obviously someone else who tells you it's going down, that's the nature of the market.

And so, what we do is, we try and lock in about half of our fuel needs before August 1st, so we can plug that into our planning cycle, and when we give you guys sort of an annual estimate, at least, we have taken half of the volatility out. This year is no exception. So the fact that it's running up right now, doesn't really have a huge impact on our ability to meet this year's goals. It could certainly have a lot of impact on what we tell you we can do in F06.

Right. Okay. So, that's kind of -- I knew that was the strategy. At least it had been in the past, if it wasn't going forward, and I saw you incrementally added some shipping costs to - it was in the release, I mean, everyone has got the same fuel problem, so it is not like you can be outdone by someone else on that front. How much can you pass on to the customer going forward?

Well, our commitment is to try and pass it all on, I mean, that's sort of our -- we are not in the fuel business and so we don't feel it should be our responsibility to try and control the world price of oil, obviously. So, whatever that is, we're going to pass it on. And as long as everybody else is equally rational, the market will have to absorb it. So that - and that is our goal. Whether you can always get it done on annual basis isn't so easy of contracts - you've things like that, but that's certainly our focus.

Okay. Great. Appreciate it. Thank you.

Okay. Thanks, Jack.

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

Thank you. And I want to express my gratitude for having Tom come in and speak with us. Am I on?

Yes, Bob. Was that too detailed, not detailed enough, I mean, I don't know.

...some other questions then I am sorry, he slipped away.

That was no coincidence, Bob.

There was one thing that caused my -- raised my eyebrow, when you said that they doubled their sales in the 600,000 profit run rate, but you have written down this as a revenue?

Yes, so, it is currently on our books at zero.

So what is -- is it 20% -- 29% of 600,000?

We don't - do you want to take it Andy?

Yes. It's -- we own about 11% of the business.

I thought you own more than that - in the low 20s, I mean, do they have another financing or something?

Yes. They had an additional round of financing that we did not participate in.

We had the choice too, and we choose not to.

Okay. When was that?

I don't even remember.

Okay. I was not aware of that.

It was couple of 2, 3 years ago.

Okay. So, let's put that on the back burner then. I got on the call about 4 or 5 minutes late. Did you say anything about Poultry Guard?

We did not.

Can you do that now?

Okay. Obviously (indiscernible) no, I'm just kidding. Yes, I mean, let me flip - I brought my little details. And I don't think of getting into trouble, because it is not material or anything, so it's fine. For the 6 months, our Poultry Guard business is about flat with last year, which I would say is somewhat disappointing, but I know that - I talked to the guys who are behind the detail, and there is a lot of timing, they believe, going on with it.

The quarter equally was about flat. The margins were good though, so I mean, at the 6-month point we did just under $1 million, our sales were a little bit ahead of last year, but not much. We did just under $1 million in sales at good margins of Poultry Guard, so if you do $2 million a year, as a company our size, we're getting to the point where it is getting to be meaningful. But they obviously need to hit their plan, and if they hit their plan, they're going to finish the year up significantly, up 20%, 25% over last year. So, they've got a big second half in front of them.

Is there any connection even remotely of concerns about avian flu and what this product might do?

You know, I would have to have our Asian guys. I have talked to them about it - where they have been hit the hardest is in Asia and they - I am just teasing because I totally believe what they are saying, but when I hear avian flu and my business is down, it's sort of like the sun got in my eyes and I dropped the fly ball, I mean, well, how you respond to that? I don't know. I don't know anything about avian flu.

You know, I don't know much about it either.

What I can tell you is, yes, they have linked the two, the avian flu has hurt our Poultry Guard potential in Asia where they were expecting to sell some product this year.

Yes, but I was just wondering if the actual use of the product would in some way intercede or something or make the possibility of the spread less, I mean, I am shooting in the dark pyramid.

Yes. And I am right there with you. I mean, I did see a bunch of e-mail's flying around between some sales guys and our R&D guys on that very concept, and it didn't have any attraction. And why? I don't know. But there, people were thinking, could it actually help the situation? And I don't think that's a possibility.

Okay. And just one further point then I'll step back in the queue. As the earnings increased, I assume, you guys will consider another increase in the dividend?

Certainly that -- your statement is correct, I would say. Generally, we don't take a look at it every quarter.

I know that. Yes, annually, I mean.

Yes, annually. So, I think it's reasonable to assume, it will certainly be on the agenda for next October's board meeting like we always do. And continuing -- things continuing the way they are, it's probably not unrealistic to think we would make another move.

Yes. I would love to see it on a modest moderate basis, as you've been doing.

Yes.

Wonderful. Great. Good luck and I'll step back in the queue.

Okay. Thanks.

Your next question comes from Blain Molder (ph) with Lowe Partners (ph).

Hi, guys.

Hi, Blain.

The Crop business had a nice rebound in the quarter. Can you give us a sense of the inventory levels there? And is this -- can we expect maybe growth in the rest of this year in that business?

Yes, I mean, it was a timing thing mostly that the first quarter was so bad, and so the second quarter did relative to the first quarter, looked okay. I was actually looking at it, this year's second quarter against last year's second quarter, and we are still down. So, I guess, it's all your perspective, I mean, the accounts that -- if Tom Rutherford was still on the call, he would tell you, they're still looking up inventory that they completely missed the forecast for the year, while there are packets of, okay, we did maybe lose this business, but we put on that business. Net-net, his overall feeling is that it is mostly driven by market dynamics and not by us losing share in the overall market. And so, hopefully, this year is bad year, maybe next year is good year that is usually what happens is, it whips off.

Okay. And the, can you give me a sense of what the capital expenditures going to be this year?

Through 6 months, we are at about 4 million. I would expect the year would be 8 to 9 million. I think that it's higher than it has been historically. I think as you kind of look at our trend, it's kind of in that 4 to $5 million, it's kind of a replacement maintenance mode. We are actively looking for capital projects that can allow us to reduce our costs. And we have several of those going on this year that will result in reduced labor costs, our reduced fuel cost. And in our hurdle rate from an internal NIRR standpoint has got to be in excess of 20%. So that higher level of CapEx is going to result in expected higher EBITDA in future years.

Okay. And I take out 8 million of CapEx and you're still going to generate 12 million or so free cash flow. You've been buying back $2 million worth of stock of recorder. Why not just to a Dutch tender and take out that 10 to 20% of your float in one shot and judge a true demand for your stock?

I cannot respond. I mean, that's an interesting idea. I can tell you -- and Charlie, do you want to comment on?

Yes. You -- that's one of many good ideas that come to us through our own thinking and through outside investors and other sources on what to do with the cash and the strong cash generation that we have experienced. All I can tell you is explicatively and implicitly that topic is always before the board. And we will certainly add that to the list of things that are being tossed around from time to time.

And this is a special dividend being tossed around, as well?

No. It's not.

Would you consider that?

I think, that we're looking at all kinds of opportunities. And we're in a great spot in the fact that we're generating that kind of excess cash flow. But I think, that to speculate as to what we're going to do with it or when or how, I don't think that's warranted.

Thanks, guys.

Okay. Thanks, Blain.

You have a follow- up question from Ethan Starr.

Yes. What can you tell us about Oil-Dri's a new BA product and how long, do you think, it will take before to make a significant difference in sales and earnings?

You know, what I can tell you about this, this comes directly out of our focus out at the, what we call the IC of innovation center. Trying to come out with value-added, business-to-business products, many products that are not marketed through consumer channels. So that overtime, we are driving more of our sales and profits from the area that we think, we have the best ability to compete in, which is on the business-to-business side of the equation.

So this one falls right into that line. We are in active testing mode right now. Major customers are seeing the benefits of what we saw in the labs and in small trials. They're actually running large trials. To the extent those large trials go well, it could have a non-material impact on F'05 and hopefully in material impact on F'06.

Okay. Also 2 quarters ago, you told us that your expected sales of new products in 2005 to be $5 million. And so I'm wondering, have you passed the halfway mark there?

Well, the way, we account for trade spending and flouring, which is the way, you have to account for it but it's a departure from the past. Means that, when you do all of your heavy up launching costs, those come right off sales, where is the use to come below the line, as advertising expenses. So the point of all this is being that all of the new sales that we've generated on those for instance Jonny Cat Scoop item, have been pretty much wiped out by all of the launching costs associated with getting those on the market.

So along with an answer, no. We're not at the halfway point, but I am not sincerely disappointed about that because we are way over the halfway point on the launching cost. So now every dollar of sales in the back half is actually going to register in the cash register, as a dollar of sales versus the first half or it's a dollar of sales, we took back at the launch -- at the cost of launching that looked like and net-net it shows that we have no sales. So along wended answer, we're not at the halfway point, but I am still cautiously optimistic that we will be within throwing range, one way or the other of that number probably at the end of the year.

Great. Thanks. I'll get back in the queue.

Okay. Thanks.

You have a follow-up question from Robert Smith.

You said in passing that you've seen some promotional activity in the litter business. So can you just elaborate a little on that, from competitors or at least that's the just, what I heard I -- I thought, I heard?

Yes, now you heard it and it's absolutely right. I think, some of it is in response to our launch of the scope items out west. I think, that's natural that they see that those should have staying power and if they don't do something to defend their own provisions, they could be the one that end up losing the share because those products are going to get sold. I mean, I was looking -- I think I can talk about what we sold on gross terms before. I mean, this will also answer Ethan's question. In the first 6 months of the year, we broke -- we've sold about 1.2, $1.3 million of gross sales of those scope items out west and then we've to -- then back off all of the trade spending I think, so that net sales were not, what I wanted but you can see, we're actually here on the first push out the door.

I got some real movement on those items in the first 6 months, especially in terms of a lot of the accounts in the first trades, advertising didn't hit, until late in the first quarter. So a lot of those sales were in the quarter, not in the 6 months. So we've had a lot of activity around that. People are trying to defend their position.

And then, you just have the usual activity, but it just seems to be more and more fears by the big guys trying to grow their own shares. So it's just, it's like in the consumer arena, which is very, very competitive. And again, I can tell you, my dad, as the largest shareholder, is very happy to hear that. What we're doing is we're working with accounts, where we bring something to the table and a value, what we can do and they are not looking for us to be like the National guys.

They know they can get the national programs from Clorox and Arm and Hammer, that's fine. If we're trying to do that, we become completely redundant. Instead we're the guys, who are more of the local the friendly guys. We'll do the private labels. We'll give it to them in mixed truckload configurations. We won't try Jam national programs in national pricing at them.

And so there are many accounts that still valued at highly, as an offset. They couldn't have all the accounts look like us, but they have none of the account, none other suppliers look like us, they don't value that, either. So they kind of like us, as an offset to the National guys and so that's who we're. I think, I was saying that internally -- I think, there's a certain share point at which, if it's gets too low, you were in jeopardy.

But I also believe, there's a certain share point, where it gets too high, you are in jeopardy because the big guys are going to bet the crap out of you. I think they're sort of that under the radar screen level, where we're annoying but we're not so annoying that they will go after us.

All right. Okay. Can you just refresh my memory, as to what BA product is?

Your memory is perfect. I have never said, what it is.

Okay.

And we're not - I'm not really going to get into it, actually.

What does BA stand for, I mean? Is that a code word?

If I told you, I would have to kill you -- and I don't want to do that. Charlie, you have got something.

Bob, we are assuming that Eaton's question on this topic from time to time, it come from his -- looking at some publicly available information and the fact that the BA trade name or references to it have been out there publicly. That doesn't mean that we're ready to talk about it in terms of Oil-Dri's prospects.

Okay. It's a good enough for me. Dan, is there any way in that -- some suggestions that may raise today about the use of excess cash, is there some way that we can express our own views? Do you want us to write? I wouldn't want you guys doing something that I would object to. So, what should I do, just write your letter? Sure or you can mention it here. You've done it before in the past, and I will take your comments to the board just I will take blames to the board. At the end of the day we value all of the various usages of our cash and trying to make both of this.

Yes. I think you have done wonders in the last few years and I like your -- the fact that you choices and options for corporate strategy. I would like those to remain in evidence. I would be quiet against a special cash dividend. It take my -- and I am a long-term investor, and I want to stay. So, I am not looking for necessarily return -- immediate return on my investment.

I mean your comments are well taken. And I can tell you right in line with mind and my father's -- does investors, that's exactly how we feel. And I'm talking about the plain hours almost going to respond it. You know, if you're looking for major capital structure change, like a sale or a big onetime dividend or all of that, we are not the stock for you.

As I always say, and this right that you saying, it's the Tortoise and The Hare. We're the tortoise and every time I read this story to my kids, the tortoise wins the race. So, I am never going to apologize for being the tortoise. The Hare and I'll read it again when I get a home that hare not going to win. And so we're the tortoise and I agree with your opinion do investing in tortoises, we are the company.

And just a -- as a follow on in this -- ensuing 3 months since we spoke last, the R&D effort, is there anything further that can be said? I mean, 90 days of further work in that area.

I mean, the best thing to be sad is that we continue to have the pipeline full. We have just, we have more ideas than we have manpower to handle and so we are continuing be in the enviable position of privatizing and trying to go after the ones that we feel are the closest in to our business and the easiest technologically for us to manufacture and would have the most value to our customers to the extent that we could achieve the performance that we know would be necessary in order to create a product. It would be interesting to them.

So it's really exciting, I mean, I wish it is all launching today. Although we couldn't handle or getting them all out there. But the good news is the pipeline is full whereas 2 years ago the pipeline was empty and we were filling the pipeline. So, you're just starting to hear us talk about some of these BA's and we have other acronyms for all sorts of stuff, but it's going to be the kind of angry plant the seeds and every year we should be able to incrementally layer more and more on.

So, if the focus is on more becoming a specialty products company because that's why the profitability lies, would you consider kicking up the R&D effort as a greater part of your revenue, I mean, that you spend each year? I mean, not extraordinarily, so but just we think that hire some additional people?

We have been doing that. I mean, we've kicked it up significantly. I mean, when you look at new product development investment versus what it was prior to 2 to 3 years ago, we are up 3 to 4 times because what we were doing with our R&D was a lot of tax service, just sort of supporting our existing lines. We weren't putting lot of dollars either into people terms or dollars and tests and so forth I'm coming up with new products. We have switched our balance such that now almost two-third of the money we spend out there goes right to new product development.

So by swinging the pendulum that way and increasing the prior with more dollars, we have like I said the tripled or quadrupled the amount of money we're spending on new product development. So, yes, and we would consider to keep doing it, although, I think, Steve Azzarello the VP of new product development, obviously, I will see, I tell you he has got about as much as he can handle. I mean, we're moving about as fast as we can absorb as a company. So he is not pushing me for dollars and I'm telling that more we can afford because we have to make a quarter or something like that. None of that going on, we're investing as fast as we can prudently evaluate the opportunities.

And is there any possibility of further contact with Tom? Because he didn't -- his talk did raise some questions for me. I do not have a full grasp about what he was talking about, which I would like to get.

Okay. You know what -- if you could get your questions to Ronda, she will get you the answers.

Okay. That's well.

Okay.

Yes.

All the best. Good luck.

Good. Thanks Bob.

Your next question comes from Chris Kyper (ph) with Bridgestone Company.

Hi guys. Congratulations on a quarter.

Hi Chris. Thanks.

Question for you. When you're looking at the consumer business -- and I was sort of going back and looking at the last 12 months versus the same period 12 months before. It's basically, quite, I mean, it drop by 60 basis points and obviously, you mentioned that you have some launch costs in there. If you're to exclude those launch costs, how much you think the businesses up, and what you sort of think, as long-term growth rate for that business?

I think that maybe -- I do not know what, I want to get into the specifics, but I think it's up slightly, if you take that out. I mean it's not a rapidly growing business. And by default because what we are really focusing on is trying to be more important to the key accounts and not be everything to everybody. So, it -- the strategy is working. I mean, I think, Andy answered it well. We would be -- if you back out the launch costs that's for sure.

Is it sort of like 2% or 3%, and I guess maybe you could help us separate out what's going on with volumes with product going out the door on the consumer side versus the price per unit. And I think you've been sort of holding run up price per unit.

Yes. I am looking to - am I allowed to (indiscernible) if I can. Yes, I mean, our price per unit is up. It's up nicely in the consumer area. So again continuing to sell more of the higher price stuff and get prices up, the combination of that is making that business incrementally more profitable. Obviously, we are investing back behind it this year, but those are one time launch costs. And hopefully we have an attraction behind those items, where though get up on the way.

If you look at -- are down slightly. It's a getting -- selling it at a higher price, getting more for what we sell, which I think has been a continued thing.

Going forward -- I mean, we're not growing any more of this clay. While we have years and years and years of reserves and we're committed to continuing to expand that, we still take it very seriously that we want to get the most for every ton we ship out.

Definitely. Can you comment it all on the industrial and automotive side? You know, in the past quarter, is if you sort of look at the segment they doing you break it out, that's in you know, slight loser to break-even, it look like you've done some things on pricing now. Is that going to start to contribute some earnings? Or how do see that sort of going forward?

Well, you know, the input that I give to those guys, so that they because they are doing a great job, and so they continue to not feel better -- their heads against the wall is yet on a reported earnings standpoint, that business doesn't look so good. But again, you know, I think a lot of savvy investors are starting to look through earnings and trying to getting in the cash flow, which is one of the reasons why I think, our stock has performed so well, because people are starting to see all that, from a cash flow perspective, that industrial business is a gold mine.

I mean, we are a process industry, so it's very hard to -- when you get a rotary kiln dryer and you're putting tons through it to properly allocate all the cost, but just intuitively, we know the last time, we really invested behind the industrial division, you know, joking just by 1941, when my grandfather started the company, I mean, everything since then has been about diversification of the capacity expansion. Any time, we tried to put in grinding to make a different cut of this or different cut of that, it's all been the support the other businesses, yet the industrial division has to carry a load of the overhead and the fixed cost. So, its looks like it's not at all profitable, but I can tell you if we've lost it, we would be sucking one big time from the cash standpoint.

They are -- we are non-investing any capital into their business hard way at all and they are kicking in huge cash. So, I am happy with the industrial business. Yes, they're pushing the prices north and yes, they want to make real fully loaded profit and I'd love to see them do it too, but not to jeopardize the volume. I mean, when the marketplace is selling at a certain price, we can get a little premium with the Oil-Dri name, but we can't be 25% higher and expect to sell lot of (inaudible) it just doesn't -- going to happen. So, I am happy with the industrial business. It's a good cash generator.

Okay. I was to get on the call a little bit late. And I read the release, you put out obviously, you are not appealing the Nevada decision. Have you guys, thought about what you're going to do with your assets in Nevada? Are you just sitting on them for now or is there an opportunity to sell those at some point?

Chris, we're looking at all of our options. If you follow the company's balance sheet and our disclosures about the case as it's proceeded, I mean, we do have owned property, least claims, and other assets out there. With the litigation behind us, we are sort of freed up to think about, what if anything we want to do. And the decision not to appeal is only a few weeks old at this point. So, we're just getting started on that evaluation.

Right, if you add up the historical price and I realize you've written a lot of this up down. What's the dollar amount of assets in Nevada that you could possibly exit? You know, sort of a -- it's original cost, that you guys paid for it?

It's actually -- quite an immaterial amount Chris, because as a general matter, reserves, for example, are carried at no value on our balance sheet unless we acquire them through acquisition and we are required by purchase accounting to allocate some value to it. So, while there are some of Nevada asset balances on the balance sheet, they're immaterial.

Helpful. Thanks a lot, guys.

Great. Thanks, Chris.

Your next question comes from David Fondrie with Heartland Fund.

Hi, good morning.

Hi, David.

Great. Could you go over again the new products? I know you are reluctant to talk specifically about it, and but can you talk about the pipeline and -- in general terms and how many new products you think you may launch, remainder of this year and into 2006? When I say new products, I am really not talking about another label of cat litter, but really something like the BA product that you have been discussing.

Okay. I can certainly tell you -- for the rest of this year we are expecting to launch 2 new products in the business-to-business side. Well, 3 actually, 3 new products in the business-to- business side. One of them is an existing product that we're selling into a whole new market, whole new application for it. And that is the BA product that we -- and that's the only reason we're talking about this is just this allows us to get the benefit of it without educating the competition of the analyst folks -- folks who'll then figure this out after the fact.

We'll -- going to be launching another product in our Ag division, which we're excited about. And now we're launching as third product right about now. Again this is a material we're hoping its going to generate maybe $300,000 of gross profit between now and the end of the fiscal year in our fluids purification division. So we have 3 of them coming out that combined --will maybe break-even this year, because on one we have some marketing expense behind we can generate GP and the other. But for next year, we're hoping that they will be incrementally better and ultimately be material where we'll have to break them about and tell you about them.

And then in the pipeline, I mean we've got some exciting stuff that is not going to be launched this year, its not even going to be been tested this year. It'll probably start to get tested next year, tested and validated. And then really it wouldn't have much impact in '06 but would hopefully, impact '07. But we've got these '05 ideas that are hopefully going to impact those test. So it's that constant snowball concept. So, I hope that answers your question.

That's very helpful. And there can you -- is there an opportunity to prepay any of your debt?

One any review the slight one you

Yes. The basically, if who would repay our debt, that we would incur about a $2 million penalty. So it -- currently at the -- that the current interest-rate, that really doesn't make a lot of sense.

But where is -- where is that point, where interest rates get to something -- I can't remember where, but its North?

Yes, another 2%.

Big of another2% then they make all provisions pretty much go away. And then it's sort of like your home mortgage. So right now, it's not only we're doing

Okay.

But it might get worth doing.

If it helps not?

Yes, I think everyone does but I think we're probably, all thinking, interest rates are more likely to go up and go down, but who knows.

Okay. Thank you very much.

Again, I have enough problems selling cat litter, so. We have time for one more question if someone got one.

You have a follow- up question from Jack Ripstein.

Okay. Last question. Hi, Jack.

Hi, Thank you. Well, actually, maybe give you guys the opportunity to talk about some of the key hires. I've noticed there's been some reportable key hires and assuming that, something unusual most manufacturing companies are -- in your boat or firing to keep costs low. Can you a little about your plans there and kind of, introduce those guys little bit?

Sure. I mean the most notable one was the most recent one where we put our news release about the creation of a new position of Vice President and Chief Procurement Officer, Brian Bancroft. And that was directly lined without focus, let say, taking our focus to a whole new level. I mean about 3 years ago we got focused on, I mean we're an industrial minerals company and we need to focus on cash, and you've have seen the benefits of that. And you can -- what we did in our most recent strategic planning session, we do this every August right after the fiscal year ended, was refocus that and say, "Okay, how can we go to the next level?"

And we've adopted the concept of being operationally excellent. We're going to compete on is -- there is basically 3 ways to compete those by many more, but they're trying to fill it down and these are sort of your Harvard Business concepts where you got product leadership, where you're going to keep obsoleting yourself and coming out the newest, the best, the brightest, you got your Microsoft and so forth. You got customer intimacy where it's like a Neiman Marcus, where you're going to kiss the needs and all that kind of stuff; and then you got operational excellence where you're going to get your processes from cradle to grave, very efficient, where you know when you're competing, you can get product to your customers at the least cost, generating the most value to them.

Obviously being an industrial minerals company that's focused on mining 2.5 million tons a year, the concept of being customer intimate with one who's intuitive is not where we felt our strength needs to be. And recognizing that you can't ignore product leadership or customer intimacy, you have to be parity but where do we want to excel? We want to excel on operational excellence. So the first thing we identified as being a biggest gap was twofold. Number one was in the area of our ability to cost our products and really understand how we can lower our costs. Until you measure something, you can't improve it. That's where Andy, our CFO joined us and he's really been spending a lot of his time and energy on that whole area of the equation.

And then the second area was, we've never tried to centralize and leverage our buying scale, our economies of scale through purchasing. And it's always been sort of, an ad hoc basis. We have a lot of excellence in the Company, a lot people doing a lot of good things. But for the most part, they're working independently and they're now working in profits, they're now together. Brian Bancroft is a gentleman who, I was fortunate enough to have in my Kellogg class at Kellogg, and he was a Director of Procurement at Sara Lee, he's had extensive career in all of the disciplines. We sent out the news release with SmithKline and with Coke. And I think Unisys was the fourth one.

So here's a gentleman from a very big company structure but who is very steeped in the processes and disciplines of procurement. And yet at the same time also, very much down to earth, ground level, which at a Company our size is very important. So, he's already hit the ground running. We're very excited. I think our biggest challenge now is just to keep everyone from inundating him with so much stuff that he gets nothing done. So this is a real commitment by Oil-Dri that we're putting our money behind operational excellence and trying to be the best supplier we can be to our customers. And David is that too long winded for you or does that make sense? Sorry Jack, I thought David. I'm sorry about that.

No. No. That's perfect. It's just.

I actually called you David. No objection.

He'll walk back in, but no it's perfect and, you know, it's like I said, everyone else is cutting, cutting, cutting to get to the bottom line. It's nice to see someone investing. But that's great. Thank you.

Sure. Thanks Jack and sorry I called you David.

That's all right. It's not the worst thing I've been called.

Just thank you and you can call me worse next time. We'll be even. Good. Well, I think we're out of time. It's 11 o'clock. Again, I very much appreciate this spirit of give-and-take. That's why I like to dedicate. I think we've dedicated 45 or 60 minutes today to the Q&A. And as you can tell, we continue to be very enthusiastic about our business. As always, I'm glad we don't give quarterly guidance because we don't manage our business that way.

We are long-term managers for the long-term investors. And yes, it is our focus and intent to make every year better than the year before. And so that's what we're working real hard to do, and we're going to work real hard on the back half of this year to make sure that F05 is what it should be; at the same time investing in all those opportunities that are facing us for F06 and beyond. So, thanks everybody and we'll be talking to you again in 3 months.

Thank you. This concludes today's conference call. You may now disconnect.

END