Oil-Dri Corporation of America (ODC) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter three 2006 Oil-Dri Corporation of America earnings conference call. My name is Lisa and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session toward the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to Mr. Daniel Jaffee, President and CEO. Please proceed.

Thank you, Lisa, and welcome everybody to the third-quarter and nine-month teleconference. As always, we're going to try to keep our individual comments to a minimum to allow maximum time for you to have access to me and the management that are here with me, as we have remained very disciplined to not meeting in between the quarter. It allows us to focus on the business and then you have access to us for an hour. So I will dig right in. Joining me today is Andy Peterson, our CFO; Charlie Brissman, our Vice President and General Counsel; and as always Ronda Williams, Head of our Investor Relations. Ronda, do you want to hit our Safe Harbor?

Sure. Thanks, Dan. Welcome everyone, and I too thank you for joining Oil-Dri's third-quarter conference call. On today's call comments will contain 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 important factors, trends, and uncertainties that may affect our future performance. We urge you to review and consider those factors in evaluating the Company's comments and in evaluating any investment in Oil-Dri stock.

Thank you, and again with that, I'll turn the call over to Dan.

Thank you, Ronda, and before I turn it over to Andy, I just want to have some sort of 50,000-foot level comments on the quarter. We wrangled with some wording in the news release, specifically in my quote on whether or not to call the results for the third quarter and nine months positive. And I and the management team felt very strongly that they were positive. As I have learned from Bud Seelig, our long-time director and friend, as he learned from his father he always says nothing is good or bad except by comparison. And that is why it was such a positive quarter; it is in comparison to what it could have otherwise been.

When we were sitting here in August after Hurricanes Katrina and Rita had hit and gas had spiked at the time north of $15 in MMBtu, we had no idea what the third quarter was going to look like at that point, and we had two choices. We could, as we said, put the business in cardiac arrest and price our product to the $15 an MMBtu level or we could take a long-term approach, see where things settled out and then price our products accordingly. We obviously, as always, took the long-term approach. We are in this for the long-term.

We think in time chunks of 3, 5, 10-year periods and not in terms of 30 days, 90 days or three quarters. We just don't, we never have, and none of that will come as a surprise to those of you who are longtime holders of our shares.

So we waited to see how things would settle out, knowing that they weren't going to go back to normal. So we raised prices to a certain level, but certainly not to that $15 an MMBtu level. I'm glad we didn't because gas has come down. It is still higher than it was a year ago on any forward basis, but it is much lower than $15 an MMBtu.

So when you take all that into account and we mention in the news release that just on the processing side, we have spent this fiscal year in nine months $6 million more than we did a year ago, when you take that into account and say where did we come in for the quarter? Well, we came in at $0.21 a share against $0.33, which in and of itself is not fabulous, but when you add back the onetimer of $0.09 which had nothing to do with this fiscal year really, or very little -- it was really the accumulation of many fiscal years -- and taking advantage of an IRS incentive to repatriate foreign cash, that is $0.09 of it. And without stealing too much of Andy's thunder -- and he will go through all the details of the accounting -- but basically when you take out the onetimers, we were within $0.01 of last year despite the fact we absorbed $6 million of processing and many more hundreds of thousands of dollars of freight, of packaging and resin cost increases, all the trickle-through and ripple-down effect of rising oil and gas prices. So it was a positive quarter for Oil-Dri, both quantitatively and qualitatively.

I'd like to turn it over to Andy Peterson, our CFO, and he will take you through some more of the details.

Thanks, Dan. I also view the third-quarter results as strong in light of the continued difficult environment brought about by much higher energy costs. We had record sales for the first quarter -- third quarter of $51,764,000, up 7% from last year's $48,249,000. Gross profit as a percentage of net sales for the quarter was 19.4%, which is down 0.8 percentage points from 20.2% in fiscal 2005's third quarter. The trend is positive, however, as the gross margin percentage for the third quarter was 0.5 percentage points ahead of the year-to-date fiscal 2006 results, reflecting the impact of higher average selling prices.

The $15 million of senior unsecured notes that we closed on last quarter did not impact the EPS comparison for our third quarter. Interest expense was up $202,000 compared with last year's third quarter, but this was offset by $207,000 in higher investment income because the Company had more cash to invest and because of higher market rates. Net income in the quarter was $1,223,000, with EPS of $0.21, down from last year's $0.33. The quarter's EPS was reduced by $0.09 because the Company took a tax charge in connection with the repatriation of accumulated earnings from its foreign subsidiaries. Last year's third-quarter EPS would have been $0.02 lower if stock option compensation expense had been recorded like it was this year.

Looking at our balance sheet and cash flow, in the first nine months of fiscal 2006, the Company bought back $4,538,000 of common stock and paid out $1,775,000 in dividends. As a result of the Company's continued efforts to buy back stock, fully diluted average shares outstanding for the nine months were 2% lower than in the prior year. This positively impacted year-to-date EPS by $0.02.

Because of higher receivables and inventory, only $3,374,000 of cash was provided by operating activities in the nine-month period ending April 30, 2006, compared with $7,819,000 in the prior year. This is the result of higher sales and the impact of much higher energy prices being reflected in our inventory costs. The trend was positive, however, with $2,919,000 of cash provided from operating activities in the third quarter compared with $2,160,000 in last year's third quarter. Cash and investments at 4/30 was $26,800,000, up from last year's $19,435,000. Back to you, Dan.

Thank you, Andy. Before I open it up to the Q&A, I just want to draw your attention to another part of our news release, the second paragraph under the third-quarter review. Just to make sure everyone spotted that, what we were able for the first time to exceed an average selling price of $200 a ton, and you can back calculate the math. That has been a compound annual growth rate of 7.1% over the past four years, which means we started out at under $155 a ton and we're now over $200 a ton.

That is an incremental $45 a ton on a million tons. That is an extra $45 million of revenue to help cover the increased costs of not only fuel and processing, but also healthcare and all the other rising costs that are way outside of our control. And that has obviously been a big piece of the earnings equation.

So -- and it choked up Charlie, so if you're hearing coughs in the background, that is Charlie. Lisa, why don't we open up the floor to Q&A, and as always I would like to urge you to try and restrict yourself to one question or one line of questioning around one central them, and then put yourself back at the end of the queue, so other people who are time pressured can get their question in and get on their way.

(OPERATOR INSTRUCTIONS). Your first question comes from Ethan Starr.

With the change in accounting for the overburden removal, I'm wondering if overburden removal is roughly the same over each quarter of the fiscal year, or is it higher in some quarters and lower in others?

Yes, if you look back, Ethan, it moved around quite a bit. So far this fiscal year it has been relatively flat, but it does -- you know, it certainly moves.

Okay. I guess what causes it to move?

It relates to the operations of the business. I mean how much overburden are you going through, and sometimes you have an opportunity to get ahead. It depends on which mines that we happen to be working, depending on what -- there's a lot of factors from an operational standpoint.

Okay. On the balance sheet in the press release, current maturities of notes payable as of April 30th is listed as $3.08 million, and I'm wondering if you restructured the debt with TIAA and Prudential Financial, or should that number be $4.08 million?

I think it is correct as it stands.

Oh, really? Okay. The most recent 10-K says you are due to pay off $4 million in debt next April 15th.

We will take a look.

Robert Smith with Oil-Dri (sic).

So what is happening in new products, and first you could say something about the brick product?

I was anticipating there would be a question on that. We are continuing to see the trend, which is each quarter is dramatically higher than the quarter before. So that reaffirms some comments I made at the second-quarter teleconference, that we have yet to lose an account. They are very slow to adopt and we are still hoping as we were to put on one, two -- we said we weren't even dreaming in color -- to put on all three of the big guys by the end of this fiscal year, but we're still very much focused on that. We are in touch with them.

They are now getting into the negotiating terms and contract standpoint, which is a good thing. To me that tells me they are taking it seriously. It has cleared their performance hurdles, and now they are getting into financial procurement type focus. So it is all good. It is all still very immaterial from a grand scheme of things standpoint, but suffice it to say that this quarter our sales were 50% higher than they were the quarter before, which were roughly 35 to 50% higher than they were the quarter before that, and so forth and so on. The snowball is still rolling very rapidly, but it is still a small number. But at those kind of growth rates, it wouldn't take too long before it would be a real meaningful number.

So we're still very bullish on the opportunity, and we still are seeing the same dynamics we saw, which is this is an industry that is slow to change which is sort of frustrating on the front end, only because you want a bunch of sales. But I think we will be very reassuring on the back end that once you get in, they have done their homework and they are going to be slow to change on the back end, too.

I am not too clear what the status of the product is. In other words, is it beyond the test?

Well, it is beyond the test with two accounts. Two accounts have fully adopted it, have fully spec'ed in and are ordering every day. Other accounts are testing, so you have different people at different points of the product lifecycle. Fortunately, to my knowledge, nobody has tested it and then rejected it.

Of how many?

Well, I mean there are a lot. We are just going in our blue zone right now. We figure why go too far outside the radius of our plants. So there are -- I don't know how many brick potential customers there are, but there are hundreds and we are only taking it to the first ten, let's say. And we have got two adopters, and the others are either testers or to be tested, but it is all moving in a positive direction. But those ten could swamp our productive capacity. I mean, if they all adopted, it would be a real nice problem to have.

So what is the opportunity then, I mean dollar wise? What is the market size of those ten?

With those 10? You know, I don't know that I am prepared to answer that question. Suffice it to say it would be a materially positive impact for the Company.

Why aren't you prepared to just state what the opportunity is?

Well, main reason because I don't want to be wrong. Because, you know, you never know what they're going to do. They may adopt it entirely, thy may adopt it for just a portion. As we have said in past teleconferences, there's really three different kinds of brick. You have got your buff, which is sort of tan; you've got your coated, which they can make it anything they want because it is coated, and then you've got your traditional red. So depending on which of those three streams or all three that they would spec it into would dramatically change the volume that any individual plant would mean to you as a supplier.

So to try and guess, well, we will do buff here, we will do buff and coated there, we will do red, buff and coated there, by the time you put all that guesswork into it, my number wouldn't have a lot of meaning.

But what is the difference between these three and the market opportunity? I am unclear about that. I mean, this is a product that would not be seen. It is part of the inherent structure of the brick.

Right.

I'm a little confused as to why they would do one and not the other.

Oh, because you can see it, because our product tends to fire it at high temperatures. The basic product, BA 1000, tends to fire a lighter color, and so you can see it in a red brick. You cannot see it in a coated brick, and you cannot see it in a buff brick.

How much of brick is red then?

Half.

Half, okay.

And than half is buff or coated.

So half of the market opportunity would be more assured than the other half.

That is what we believe at the moment.

So I'm kind of looking at what the market opportunity is.

But the plants we are testing with, for instance, one of the biggest ones is all buff. That's all they do is buff. They don't do any coated and they don't do any red. So at that plant if they ever spec'ed us in, it would be 100%. I mean, I know it is frustrating for you, but like I have said a million times and I'm going to stick to my guns on this one, I would rather wait until we have something to report historically retrospectively than to paint this unbelievably rosy picture, have that have any impact on anything and then have it not come true.

I mean, I just -- why would I do that? There's no benefit in it for me. I'm in this thing for the long haul, as are you. So when we get in the end zone, we will celebrate.

What is the expectation for the remainder of this year then?

The expectation for the remainder of this year is to continue supplying the customers we are, and then to continue testing with the remainder of those in what we call our blue zone, and continue to make progress on those tests. But we cannot force their time schedule.

I understand that.

We just can't. We try to a little bit. We are using certain sort of pricing incentives and so forth to try and get them to accelerate their testing and evaluate it, and it is working. So that is good. We are trying to move it forward faster, but they're going to do what they're going to do.

Anything else in the new product area that you would be willing to share with us?

Yes. I mentioned this at a prior teleconference, that we came out with a new, higher active bleaching earth that is used in the edible oil industry, and it's enabled us to expand our servable market a little bit. Our historic product lines had some limitations. This one has less limitations. It still has limitations, but it has expanded our servable market. So when we get sales, it is incremental to us. It is not cannibalizing our existing product line. It is actually taking us into oils or accounts that we couldn't previously compete in. So I took a look before I came in, and we did about $101,000 in sales of those products in the quarter. So that was good.

And it's growing, and I talked to the general manager and he expects it to continue to grow. They are in tests with more accounts and expects that to continue to be a nice add-on to our bleaching earth business, which as you know from our segment reporting is in the B2B side. So it has incrementally better margins than the Company in total.

Anything further on Poultry Guard?

Yes, just that it has been hurt pretty hard and you always -- when you start hearing excuses, you start to worry. So I am worried about Poultry Guard, but the excuses seem to not only be -- in fact, they are not just coming from us. I mean you see Tyson Foods making the same excuses, avian flu, and I think their business was down 35% in the quarter, something like that. The poultry integrators are getting hammered, because people are going away from chicken. Well, obviously, that then is hammering our Poultry Guard business.

So our guys in the field are saying, look, we are not losing accounts. We are just -- the market is shrinking at the moment and we are swimming upstream. I hope that proves to be the case.

Anything current on [Camturner]?

Nothing new on Camturner.

(OPERATOR INSTRUCTIONS). Ethan Starr, private investor.

You may have covered this with your response just now to Robert Smith, but is there anything new in R&D?

There's plenty new. The question is, is their anything new that we can actually talk about. If I have given this quote before, I apologize, but it is a classic and I love it. My dad was once flying on an airplane seated next to Alan Greenspan, and he turned to him and he said, Mr. Greenspan, would it be prudent of me to ask you which way interest rates are going? And he said, yes, it would; it just wouldn't be prudent of me to answer. And that is how I'm going to answer that question.

Well, I haven't heard that story before.

I love that one, though.

The press release noted that you have absorbed $6 million of increased fuel cost this year. Roughly what percentage of that amount do you hope or expect to cover in fiscal 2007 through price increases?

All of it. I mean it is -- I would hope to -- I mean we are almost -- let me look at my numbers, but our margins in '05 were about, yes, 21% for the year, 21.5, I think. We dropped obviously this year. In the most recent quarter, we were at 19.4. I guess the question is can we get back to 21.5 for the entire fiscal year of '05. I guess just to hedge my bets, I would say that we -- our expectation is to be north of 20, and yes, we would consider it a great year to get back to 21.5.

Okay. How have the price gyrations in energy and fuel inputs since Katrina affected Oil-Dri's competitive environment?

I think positively, in the sense that we are all in the boat together. So whereas -- when there isn't something this dynamic, you may be feeling pressure that your competitors aren't or vice versa. Maybe you are in a deeper part of your mind or they're in a deeper part of their mind, or they got hit with a bunch of workers' comp claims that you didn't or vice versa. But when this kind of thing happens, it dwarfs all those other things, and so we are all feeling the hurt. So we have all been, you know, addressing our business in a rational way. So that has been good.

Okay. I guess you're the biggest company or one of the biggest in the industry. I would imagine it is easier for Oil-Dri to weather it than some other companies.

Yes. You know, I think this one came across the wires -- at least it came across my radar screen. I won't put names on it, but one of the fledgling players finally waved the white flag during the quarter and sold out to another fledgling -- a smaller regional player, I'll call him that. So that is, again, less mouths at the trough then when we go to bid on business and so forth. I think that is going to be the general trend. As I have said before, I can't remember the last time there was a new plant opening, and there have been many closures and many acquisitions.

So you have seen a net reduction in the competitive landscape which was the right thing, because it was not healthy five to six years ago, and now the industry is starting to get back towards health, which is good.

Okay. I get the impression with the change in segments to B2B and consumer and the new precision products division, that you have really worked hard to improve the B2B marketing efforts. I'm wondering how the improved B2B marketing efforts over the last few years have paid off.

Well, I think what you're seeing is, and hopefully will continue to see -- it's what we want to see -- is better margins, better growth rates in the area where we are putting our best and our brightest people. And that is what we're trying to do. We are trying to take what the market will give us, and the market is telling you loud and clear that on the consumer side, you are more of a "me too", maybe a fast follower, but you're certainly not a market leader. And due to our research and development center which is state-of-the-art and nobody else has anything like us, due to that, the B2B side values that; that we can understand customer problems, opportunities, needs, and turn those needs, problems and opportunities potentially into new products as we better understand the mineralogy of our deposits.

So clearly, that is where we want all the best and the brightest people on, not to minimize the effort that the retail guys are doing. They are paying the light bills, there's no doubt about it; that they're the biggest percentage of our business, they're carrying the most overhead and they are certainly funding what is going on out at the Vernon Hills Research Center. So it is a team effort. They are keeping the lights going and keeping the ball moving while the other guys and gals are focused on growing the business.

Okay. Do Oil-Dri's clays have any potential applications in the processing of ethanol or other alternative fuels?

We certainly hope so and we believe so. We believe there are multiple opportunities, and we are obviously putting that at the front of our ideation and our new product screening process, both biodiesel and ethanol, in order to see what role if any we can play at the various processing stages. You know, again, it is so nebulous at this point, all I can say is I will be very disappointed and surprised if we played no role in that, because it just doesn't make sense. I mean, at the very least if it means more acres of corn, one of our major product lines is our Agsorb carrier group, and while no doubt GMO has taken a chunk out of the corn rootworm business, it is still out there. And to the extent corn acres are increasing, corn rootworm ought to be an increasing marketplace, and so we would hope that would continue.

We think there's all sorts of other areas due to the adsorptive nature of our clays, its ability to filter things chemically, that we have a role to play in ethanol. We're working on it internally, and then obviously we'll be trying to partner up with some of our major customers, like ADM is a big customer, always has been, and people like that to try and help them better take advantage of this opportunity.

Okay. Has Oil-Dri looked into the possibility of using plastic based on renewable resources for its litter jugs instead of plastic based on petroleum?

I will answer part of that question. First of all, we have always used recycled plastic for our cat kit disposable trays. Those are by nature meant to be disposed, and so we made that push well over ten years ago to use 100% recycled material in the manufacture of those trays. On the other side, on the jug side, I don't know the answer. I think we probably looked at it and it is probably more expensive than just taking virgin resin.

Okay. I understand you're now selling the Airena dust suppressant product through the (indiscernible) distribution network, and I wonder how it has been doing?

You understand we are or we are not?

Yes, you are.

Oh. Well, we are not.

Oh.

I thought you said aren't. No, that was a success in a sense. It went through what we call our infinity process, which is the screening out at Vernon Hills. And when we finally got through with it, the opportunity was too small and the market was too fractionalized to justify taking it out to a full launch.

Thank you. I'll go back in the queue.

Brad Evans with Heartland.

Can you give us tonnage for the quarter?

Tonnage for the Company?

The quarter, yes.

Yes. Do we have a problem with that? I'm just talking to Charlie. Okay, I can give you that. I will give you a ballpark. We did just over 250,000 tons in the quarter, and as always we tend to do about a million tons for the year, so you could call this an average quarter from a volume standpoint.

I am looking at NYMEX prices for natural gas. I mean the average for the third quarter of your '06 was $7.23. The third quarter of the prior year was $6.85. The sequential quarter of -- your second quarter was $11.49. Would you say that this proportionate amount of [absorption] on the gross profit line, is that more a function of a little bit of volume slippage in the quarter?

Of volume slippage or pricing on the fuel? I didn't catch where you are heading.

I'm assuming that volumes were done sequentially from the second quarter, correct?

Oh, yes. Second quarter is always our biggest from a volume standpoint.

So would you say that the effect -- I guess the question is, did volume have a larger impact on gross margin or natural gas at this point, considering the fact that gas prices were not up significantly linked quarter?

Well, I think --.

I'm sorry, year-over-year, excuse me.

So not second quarter to third quarter, but third quarter to a year-ago third quarter?

Correct.

Volumes were relatively flat third quarter from a year ago to third quarter this year, and I think what you are pointing out in the gas is exactly what I was alluding to early on, which is while gas has been coming down, in general it is still higher than it was a year ago. So I think what you are seeing is the effect of all the price increases to try and cover that incremental gas price. But from the second quarter to the third quarter, you know, the fixed costs per quarter are going to be generally the same. So to have been able to show margins pretty much even, yet having declining volume in the quarter, was strong.

I mean, I can tell you that if you look back historically at what has happened, our margins have tended to be lower in the third quarter than the second quarter, and in this year they were roughly even. I mean a year ago, our margins in the second quarter were 23.4%, and in the third quarter were 20.2%, a pretty significant margin drop. This year 19.6 to 19.4 was almost a push.

I guess I somewhat misspoke, because I would have thought that with natural gas prices coming down pretty significantly, again $11.49 to $7.23, that you would have seen a little bit of relief on the gross margin line sequentially, notwithstanding the fact that volumes were down slightly on a linked quarter basis.

Right. I mean that spot versus -- as you know, we forward buy about half of our need, so we're always going to get about half that. And then you've got to then -- that is not a great predictor. In fact, it is not a very good correlation at all of a predictor of what the used or the recycled oil or any kind of other alternative fuels would be doing. So with oil actually going crazy, we haven't -- we didn't benefit as much as you'd think.

Got it, that make sense. What was stock-based compensation in the quarter?

Was that me? You can't see me; I'm looking at Charlie and Andy. That could be my restricted stock thing.

You're talking about the stock option expense?

Yes, it was $111,000 for the six-month period. What was it for the nine-month period?

I think it was roughly comparable.

Okay, fair enough. I'll just wait for the Q on that. So, Dan, just a little bigger picture question then. If you're able to recover through pricing the significant cost pressures you're facing, we should be thinking that the Company should be in an ideal world kind of in the 21, 22% gross margin with an operating margin that would look something on the order of 8 to 10 -- 9, 10%; is that correct?

Certainly on the gross profit. I don't have my operating margin trend numbers in front of me, so I'll just take it on faith that you have done the homework correct. So if that is what you're seeing correlating to the 21'ish gross profit, then the answer is yes.

Okay, thanks.

Robert Smith with Oil-Dri.

I just joined the Company.

Yes, exactly.

In the R&D pipeline is there anything under development that would be of a size or significance as the brick?

Yes, I mean everything really. We have financial screens, and so one could obviously be a lot bigger than the other because we have our minimum hurdles. We don't put maximum hurdles on it, but we have a number of opportunities that we feel very positively about that could have a real financial impact. I was making the point with our senior management group this morning, we meet as a team every other Friday. And we are such a small company that $80,000 pretax is $0.01 per share, roughly, given our shares outstanding and our tax rate. And if you think about that, that means about $41,000 could round up to $0.01 per share.

Well, that is an amazing thing. We have people who have joined us from much, much bigger companies and the number is more like $50 million, where they would have to impact pretax earnings by $50 million in order to put $0.01 a share to the bottom line. We make $40,000 decisions a lot, and so everyone has a chance to impact that. Well, these new products all have the ability to significantly impact our per-share earnings, I mean to the tune of 10, 15, 20%. They could be at that kind of growth to a year, were they to hit. So yes, everything in the pipeline is of that nature.

Looking back on the history of the Company, your peak earnings here, I think, was about $1.40, $1.41 or so on a higher month -- higher number shares outstanding. Is the brick product something that can move you through that if it is successful?

Could it? Of course, yes.

Anything you wish to say about the insider transactions in the last quarter or six months. There has been quite a number of sales, but I don't know --.

I only want to speak for myself. I don't want to speak for anybody else. But my motivation is I want to accumulate more shares. I'm very bullish on this company. To me, the more Oil-Dri I own, the happier I'm going to be. I was very thankful and grateful the Board recognized the performance that has gone on in the last three to five years by awarding me restricted stock grants that will vest over the next five years, I think it is. But at the same time, I have a bunch of options that are due to expire within 2.5 years, and frankly, I can't even flood the market. I am restricted from doing a certain amount.

They hold you to 1% of the market cap, which is about 55,000 shares in any quarter period of time. But as you know, we are so thinly traded that if I were just to dump 100,000 or 150,000 shares of options on the market, it would have a material impact on the price. So I'm pretty disciplined about getting it out there, but at the same time what I am doing is piling up the cash and then turning around and exercising and buying shares to hold.

In the past, the way we were able to do it -- and they have eliminated this ability; it's called pyramiding -- where you wouldn't even see the sale because I would be taking the gain in shares. Now what I have to do is sell the shares, take the cash and then turn around and buy the shares. So while it looks like I am a net seller, I am a net buyer. My personal holdings have done nothing but go up, and I continue to do that and they're going to continue to do that.

So yes, I could put out a news release whining about all of this, and I'm not going to do it.

The other officers and directors, I mean --.

Well, they have got to do what they have got to do, but I can tell you they have been for years and years and years and didn't make a lot of money on stock options. Rightly so, the Company didn't have performance that justified it. Now they do. I'm glad they're taking some money off the table.

Bob, it's Charlie Brissman, and you can see all this through the Form 4 or the Section 16 reporting that the executives do. Outside of Dan, I think the only general comment on the other activity you have seen particularly over the last quarter is, you know, it was only natural with the Company hitting not only a 52-week but sort of a ten-year high that executives with share grants going back to the late '90s would be exercising and selling some shares, and I think that is what you saw.

And I hope we can see another dividend increase in the fall. I mean that is my expectation, and I hope that you are looking at this on a long-term basis, and that is my thought.

The beauty of me accumulating more shares, I am in the same boat you're in.

Ethan Starr, private investor.

Yes, I can certainly understand why several members of senior management have been exercising their options of late, and I certainly am pleased to see them finally benefiting from the options. But at the same time, I would like to see fewer shares out there, and I'm glad you keep buying back stock, but I'm just wondering do you plan to continue and how many shares are left to the authorization now?

The buyback authorization?

Yes.

I will let Andy dig that up. (multiple speakers)

Approximately -- not approximately, 481,000 are still available to purchase under the program.

And we're still buying back all that we can, so -- when the window is closed, we're not buying. And then when the window opens, we have all these sort of rules that we are buying back, and it is our intention to keep doing so. And as a management incentive, it is our intention to deemphasize options and replace them with more cash-based incentives that are tied expressly to performance. So that is sort of the feedback that we have gotten from our major shareholders and makes the most sense.

As has been shown, pretty much all the managers -- and rightly so -- have converted their options into cash. They value cash. From a diversification standpoint, that makes sense. So we are going to be continuing along that trend. So I think you will see very few if any options issued, but in good years you will probably say why is your SG&A up so much as a percentage of sales or something, and we would just be telling you that was the cash bonus was paid out that year to the senior execs.

Okay. That sounds good to me as long as the cash is equivalent to the amount corrected through options.

Yes, absolutely. That's the goal.

Okay. Good. I would love to see those number of shares of common stock get smaller.

Me too.

CapEx this year, it is a little higher than your D&A. And I am wondering how will it benefit the Company in the future as far as savings, operational savings?

In terms of the absolute numbers, I think we are $1 million. Our CapEx are $1 million in excess of depreciation and amortization, and I think we talked about this last quarter. Basically, that is the amount of the land purchases that we did earlier in the year, you know, acquiring additional mineral opportunities.

Oh, that's right. I forgot about that. Can you tell us what county that is in?

Well, actually, it is all in the counties in which our plant is located in the adjacent county. So it's Thomas County, George; Colquitt County. I can't remember if Grady County is in there or not. But those are the three -- our plant in Ochlocknee, Georgia is in Thomas County. The adjoining counties are Grady and Colquitt.

That's very helpful. And I guess one other question, you know, could you please explain the rationale behind this new policy of not meeting with investors between conference calls?

We don't like you guys and so -- no, it is nothing personal. It allows me to focus on running the business, and I just don't -- I mean you probably only perceive, well, boy, if I just call once or twice a quarter, how is that a big deal? You do the math on all the different people who want to call once or twice a quarter, and now I am spending 10 or 20% of my time dealing with investor issues. I don't want to do it, and I don't think you want me to do it as a key investor.

So it is the accumulative effect, and we've just shut it all down. So I do this once a quarter for an hour. You've got Ronda and she does a great job of fielding the questions and then getting the right people and getting the answers back to them that she can. But to have access to me that much is not efficient use of my time.

Ethan, it's Charlie Brissman. It's very fashionable to blame the lawyer for a change like this, and in my own defense you can't blame the lawyer here at Oil-Dri. It is plainly and simply a matter of recognizing that at our size and with our float, we don't get the benefit that comes from the greater interaction with investors that larger, more widely held companies get, and without that benefit it really does become a distraction and a time drag. So we certainly understand the frustration, but plainly and simply it does not add up for us, and that is why we changed.

No, I certainly can understand the time reason, that time is valuable and I understand that. But, you know, it is just I wish -- well, I am not happy with it, put it that way. But I can certainly understand your reasonings.

Fair enough.

Brad Evans from Heartland.

I mean, first a comment. I think it is kind of an absurd policy actually, because sit in our shoes for a second or even worse sit in the shoes of a prospective shareholder who doesn't own your stock. What type of message does that send when you're totally inaccessible to a new shareholder who wants to learn about the Company, Dan? I mean you are walling yourself off from new investors. I think you're closing the circle on your available potential buyers of the stock. So I think you should reconsider it as well.

Gross margins, with respect to the pricing dynamics that you just articulated, I am assuming that all things being equal, we should start to see a little bit of gross margin expansion here in the fourth quarter?

What was your [tons] in the fourth quarter of last year?

It was in the 230'ish range, so the fourth quarter tends to be weaker. Therefore, your asset utilization is going to be weaker. But your expectation is in line with mine. It may not happen, but I sure hope it does.

Great. Can you just talk about a little bit about why -- I mean, your sales growth was 7.3% on flat bottoms, so mostly price. What is happening in the SG&A line that is causing SG&A to be up 9% year-over-year in the quarter and up on a year-over-year basis on the nine-month period as well?

Well, I guess if you look at operating expenses on the nine-month basis --.

I'm sorry, they're down. Excuse me.

Yes, they are down. If you kind of divide the operating expenses that we have for nine months this year by three, you end up pretty close to what we had in the quarter. So when you do the same thing for last year, you see the last year's quarter was lower than the trend was for the year and lower than this year. And I think it was primarily a function of how trade spending fell in last year's third quarter. But I think, again, I think the most relevant number is take a look at it as year-to-date, I think we're doing a great job.

I was focused on that quarterly number, so you are exactly right. Your capital budget this year is currently slated, so you've got $1 million above D&A. So you're looking at something on the order of 8, $8.5 million for the year?

Yes, I think that is in the general range.

Do you have a preliminary number for '07 at this point?

No.

(indiscernible) up or down?

I think as you look at this year, I think we are probably going to be in the 8 to $10 million kind of range, and I think that that is probably not dissimilar to what we would expect next year.

Dan, what is your R&D on an annualized basis?

It depends on how you want to account for it. We don't -- it is not perfectly easy to get your arms around it all, but our general number internally is about $2.5 million. I think it is really higher when you take all the -- I mean we have a thing called the GOT, the growth opportunity team, where we get all the senior managers together on a fairly frequent basis and go through all the new products as they try and go from stage gate to stage gate, and on the ideation sessions. Well, none of that is valued in that $2.5 million. So pure sort of bench guys and all that kind of stuff, and research and studies and all that is $2.5 million.

I mean, how do you measure the return on that investment?

I think the only way to do it is just over time. You have got to take a look at what new products are coming out and what they mean to the Company, and knowing that they wouldn't be coming out. On the other hand, we recognize there's a tech service component to our business, so it is maintaining or sustaining our core product lines as well. Not so much on cat litter, but certainly on bleaching or to add carriers on our B2B side for tech service is pretty important.

So it is hard to measure, but the proof seems to be in there over time that we tend to do better on a per-ton basis with our clays than those companies that don't invest in research.

I mean, do you have a metric that you can share with us vis-a-vis say percent of revenue from products introduced in the last two, three, four years?

No.

No?

We don't.

Would that be a material number, do you think?

Looking back three to five years, it would be -- suffice it to say I sure hope it is bigger looking forward three to five than it is looking back three to five. We just started reenergizing and reorganizing the R&D effort about three years ago, and so it got into a very reactive tech service mode where almost 75 to 80% of the dollars was on tech service. We have got -- now it's flip-flopped, where about two-thirds of the dollars are now on new product development. But that is only the last couple years.

And we should assume an effective tax rate that returns back to that 26.5, 27% range moving forward?

Yes.

And that should be within the range for next year, as far as you can tell at this point?

Yes.

Robert Smith.

Dan, can you tell me or can you get some information for me about the inherent mineralogy of your clays as opposed to bentonite that would not make it suitable for nanotechnology R&D?

I don't know, I'm not touching that one.

Bob, Charlie Brissman. You are asking a question that I think even some of the brilliant mineralogical minds that work for us would have difficulty answering. I think in prior calls we have said that nanotechnology which itself is such a misused term these days that it's hard to know what it means, but we are not making any sort of bet on nanotechnology at the current time.

Well, that's what prompts my question, though, because AMCOL is and they have a different type clay.

I think even as a lawyer, I can tell you that as a matter of basic mineralogy, there isn't anything that prevents our mineral from being analyzed, developed or exploited at the nanoscale, if that is what you're asking.

I am.

Okay.

So this is a field that at least is projected to really blossom in the coming decade, so to speak. So why wouldn't some effort be made there, through joint venturing or whatever? I mean not only specifically on your own initiative, but through partnerships or whatever.

The main reason is just return on investment and risk, and for right now we have enough less risky, better return opportunities. I will let AMCOL speak for themselves, but I know they had some public statements and they do, I think, segment it out. They have done nothing but lose money on the nano side.

Bob, don't hear me wrong. Our ears and our eyes are always open, but I think if I could use sort of characterization, we look at the current landscape around nanotechnology, and making no commentary on our good friends up in Arlington Heights at AMCOL and their efforts, but there is a land rush mentality that is very much about sort of rhetoric and expectation, and doesn't seem to be much focused on important things like profitability, feasibility, and return on investment. So we will certainly keep our eyes and our ears open, but in terms of setting expectations for even the close in long-term, that is not where we are putting a lot of effort.

I understand that. I welcome your comments.

Ethan Starr, private investor.

Yes, I would like to echo Brad's comments about meeting with new potential investors, especially institutions. And I have another question and that is, I go to the grocery stores and see your stuff on the shelf, and I'm very impressed by the smaller Johnny Cat litter box liners package. And just wondering, I mean that's one more thing that saves money, and is that a substantial savings over a year with a smaller package?

The answer is yes, and it was more efficient, meaning why waste the packaging. We didn't have to reduce the size of the liner at all. It was just a bunch of freeboard that was a win-win, win for the manufacturer, a win for us and a win for the consumer.

Oh, absolutely.

It put us in a better position to not have to raise prices as much when resin has done what it has done, but yes, it has been a good thing.

I guess the biggest savings is probably in the truck freight.

Sure. I mean then you can get more per case and more in a truck, and yes, it ripples all the way through.

Out of curiosity, is the savings like north of $50,000 a year?

Yes.

Wow, that's impressive. Thank you very much.

Brad Evans from Heartland.

I think this will be our last question.

I figured, Dan, since I won't be able to talk to you for about four months, I better make sure I get all my questions answered.

Four months? How many months you got in the quarter there, Brad?

Well, it's your fiscal year, so we won't talk to you for a little bit longer.

You got me on that one. Good one.

And just to the point of clarification, so if I were to come down to Chicago and visit some companies, I couldn't come in and sit down with you and just discuss the business within the confines of Reg FD at all; is that right?

We would have you turned away at the door.

Boy, okay. That's troubling. So help me understand this so I have my numbers correctly. Volume growth in the first quarter is about 3.5%; year-over-year volume growth in the second quarter was about 2%; and then this quarter I guess you characterize it as flat. Is there something happening there if I have my numbers correct?

Yes. I mean what is happening -- and you are sort of new -- you are a new old face to our calls. This was probably a year or two years ago, was a concerted effort on our part to stay relatively flat on volume. I mean, yes, we want to grow the volume, but only when every single ton we are shipping is a healthy, happy ton.

No, I understand.

And we still have some unhealthy, unhappy tons. So when we start putting out these new products and raising prices and getting margins and so forth, you know, every so often you'll lose an account. And you tend to lose the guy who is most focused on price, least concerned with quality, and you basically -- yes, he fired you, but you kind of fired him by raising his price. So I am happy if we can stay in the million ton level and just keep getting that price per ton up, to me that is a much happier way to get to 300, $400 million than holding the price per ton the same and doubling the rate at which we use up our nonrenewable resources.

I know you gave this, and I did not get it -- I was not fast enough to write it down, but the price increase you just implemented is how much and effective when?

No, I didn't give that out, but we did put out a news release. What is the date of that?

Oh yes, I recall that press release. Okay, I can go back.

May 2nd, you can zero in on that.

Okay. And just for -- I mean, I guess back to that, I guess with the biggest potential from a new product perspective being on the infrastructure side, the brick product, I mean if that product were to be successful, could that be 100,000 tons a year of opportunity? Is that the type of magnitude we're talking about?

I think if you did all the math of all the brick plants in the United States and if they all adopted, yes, easily, but you are not going to get there. But, you know, 20,000 tons, is that a good milestone to call it a success? Yes, I will buy into that.

So a 2% increment on a volume at a higher price point.

Right.

Okay, thanks.

Good. Well, thanks everybody. I appreciate the spirited questions and comments, and on the one hand, yes, I understand and I sense your frustration on not having access to me during the quarter. On the other hand, as an investor, you ought to be happy that that gives me a lot more time and focus to run the business. We are so lean and mean, and I have, I don't know, 12 or 13 direct reports, that we are all forced to both look out at the bough end and have an ore in our hand, because I am doing rowing as well.

There just isn't time if you do the math that there's six or seven current institutional guys and then six or seven prospects, and they all want a day of your time and you do the math on what it turns out to; all of a sudden, I am spending 20% of my time and where is that going to come from? It is going to come from running the business. And I just don't think that is a good use of any of our resources.

So you've got me once a quarter. I'm very open, very candid, happy to get answers for Ronda to any questions you might have. But to have direct access to me during the quarter I think is not good for your investment dollar. So I am sticking with that.

Thanks. We will see you, as Brad said, in a little more than three months because we do have the year-end, so we get a little longer time to pull our 10-K together, and we will be back at you then. Thanks very much. Have a safe and happy holiday Memorial Day weekend.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.