Oil-Dri Corporation of America (ODC) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2007 Oil-Dri Corporation of America earnings conference call. My name is [Tolisha] and I will be your operator for today.

At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards 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 call over to your host for today, Mr. Dan Jaffee, President and CEO. Please proceed, sir.

Thank you very much, and welcome, everybody, to our fourth quarter and fiscal year-end teleconference.

Let me introduce who is in the conference room with me, and then we'll get into our Safe Harbor comments. But Andy Peterson, our Chief Financial Officer, and Charlie Brissman, our VP and General Counsel, and Ronda Williams, who has many titles, but one of them today, anyway, that she'll be serving as our Investor Relations manager. And Ronda, will you do the Safe Harbor?

Yes, thank you.

On today's call, comments may 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 risk 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, Dan, and as the Manager of Investor Relations, I pass it back to you.

Well, thank you very much.

And as always, we'll stick with our format. Andy will walk us through sort of the play by play. I'll put some comments to it as well and then we'll dedicate most of the time to the Q&A, although last time we did this, you guys didn't have any questions for us so it may be a short teleconference.

Just kidding, I know that's probably a sore subject. I'm just hoping our good results have put all of you in a better mood. That was not our problem. There was some technical glitch and we apologize for that, but they assure us that you will be able to get your questions in today.

And as always, though, we encourage you to prioritize your questions, ask your most important one first and then go back to the end of the queue so everybody has a chance to get in any question if they have one and then they can get on with their day as we then get to the bottom of the list of anyone who still has questions that have not been answered.

So without further ado, Andy, I'll turn it over to you.

Thanks, Dan.

We had a strong fourth quarter. Sales of $54.2 million for the quarter were up 5% from last year's $51.7 million.

The sales increase resulted from higher average selling prices. The higher average selling prices in combination with our cost reduction efforts led to a gross profit margin in the quarter of 22.2%, up 4.7 points from 17.5% in last year's fourth quarter. Our margin in the quarter was still less than the 23.3% we achieved in fiscal 2004.

Operating expenses in the quarter increased by $2.5 million in comparison with the prior year to 18.2% of sales. A significant portion of the increase in the quarter and year was due to an increase in the incentive bonus accrual, higher audit costs due to SOX 404, and stock-based compensation expense relating to the stock split.

EPS in the quarter was 29%, or $0.29, up 81% from last year's $0.16. Approximately $0.06 of this year's EPS was due to proceeds of life insurance policies on former key employees.

Operating cash flow was $16.9 million in fiscal 2007, up from $10.6 million in the prior year. We finished the year with cash and investments of $30 million compared with $25.9 million at 7-31-06. Notes payable were reduced by $4.1 million in comparison with the prior year.

Back to you, Dan.

Great, Andy, thank you.

And, you know, my only additive comments there are that the one thing I would highlight is that the momentum is building in the sense that you can see from a fourth quarter to a fourth quarter year ago a lot of progression. You even see progression from the third quarter to the fourth quarter.

And I went back and did a little historical look-back and for the first time in many, many fiscal years, we actually made more money in the second half of our fiscal year than we did in the first half, because our business does tend to be somewhat cyclical and it tends to be where it always has been before, where we make more money in the first half than we do in the second half. But because we put on a lot of new business, because we continue to focus on our strategic pricing initiatives and at the same time do everything we could to reduce, or at least minimize, the outside controllable costs that we have through our procurement efforts and through our manufacturing efforts and their focus on metrics, all that came together in such a way that our fourth quarter was actually our most profitable quarter of the year, where we made $0.29 after having made $0.28 in the second and the third and $0.24 in the first. And that enabled us to make more money in the second half than we did in the first half.

And so, you know, as an investor, you can draw your own conclusions as to where this momentum is heading and how long it will last and all that kind of stuff. But the fact of the matter is, you can see in the historical results the snowball rolling and building and that's good. And as Andy said though, you know, we're still, I wouldn't call it struggling, we're just still moving towards rebuilding the margins that we had just a few years ago where we did make 20 -- a little over 23% in fiscal '04. And we'd love to see ourselves get back to the thing I'm most proud of.

And I didn't go back and look at the transcripts, but I'm pretty sure we've had questions about a year ago, where do you see the margins going, because we had just absorbed high fuel costs from Hurricanes Rita and Katrina in fiscal '06 and so we -- in our crystal ball, saw this coming, were able to communicate it to you guys and then went out and delivered on it.

And so that, you know, that makes us feel good because we rarely, as you know, like to predict touchdowns until we're in the end zone, as we like to say. But that one, you know, we felt pretty confident on because we saw where our costs were, we saw where our hedging program was and we saw where our price increases were when they were likely to take effect.

So it was a pretty safe prediction and as I recall, we pretty much nailed it. I mean I think we said the high end was about 21.5 and that's where we finished the year. So the team just did a great job during fiscal '07.

As always, I'd like to dedicate most of the time to Q&A and cover any issues that -- that you guys have. As you know, this is really your one chance to interact with management and I encourage you to take advantage of that. So Tolisha, what I'd like to do is open up the Q&A line and again encourage people to ask a question and then go to the end of the queue.

Thank you. (OPERATOR INSTRUCTIONS) Our very first question comes from the line of Ethan Starr. Please proceed.

Good morning. Congratulations on a nice year.

Thank you, Ethan.

Let me say, I hope you got your money back on the last teleconference.

I'll leave that up to Ronda. I was going to joke with you. I think you ought to go on "Jeopardy". You're always able to buzz in the fastest, which is impressive, so I'm looking forward to your question.

I've spent a week exercising just to do this. Thank you, also, for the dividend increase.

You've been CEO now for 10 years and you've had plenty of time to put you own stamp on the Company and I'm wondering how the efforts of you and everyone at Oil-Dri over the time frame you've been CEO have set the stage for much greater things to come in the next three, five, 10 years and how and why are greater things still to come?

That's a good question. You know, I think the more recent history is more relevant and certainly more positive so I'll focus on that. The team -- I mean it's really a team game and we've got a great team in place. We've been able to blend, you know, the people that were there 10 years ago with a number of people who have joined us in the last three to five years and that's challenged some of the long-timers like myself to raise the bar on our own performance.

And at the same time, the newcomers have not only had to, but have really embraced, had to embrace the Oil-Dri culture. They love the Oil-Dri culture and so we've got a team that's functioning very, very well. I mean they're working together, we're doing things that, frankly, we wouldn't even have set out to predict that we would've done and so we've exceeded our expectations in certain areas.

I would say the one area where we have fallen short and that we are hoping that the future five-year period, let's say, looks a lot better in, is in new product development. We have done a great job at the core business. It's healthy, reasonably healthy. It's -- we've returned margin back to the business, and that's been a good thing. That helps us, then, plow money back into the new product development effort.

But, clearly, if you stripped away the core and just said we'll make you, you know, in your report card be solely on new products, we've had some real big success stories.

The Cat's Pride Scoopable Light Density 40% More is the number one selling single SKU in mass merch for a reason. Because it really delivers value to the consumer every day. I mean if you think about it, I know I've talked about this before, but for new investors, consumers use cat litter by volume. They don't put their scale on a, on -- their tray on a scale and weigh in six pounds. If they did that, you would be better off selling them a tiny little jug of lead shavings that weighed 50 pounds and they'd have to buy so many jugs to fill their tray.

The reality of it is they fill by volume. They go to two or three inches and to the extent they get more product per pound, they get a better value, all other things being equal. As long as the odor control is good and the clump strength is good and the price is competitive, to get 40% more product per pound is an everyday value for the consumer, and they recognize that.

And that's why that product, when it was repositioned, we took a negative, where our Light Density was sort of hurting us and spun it into a positive with the 40% more, and that has been a real positive. And that was a whole new product launch. The Cat Kit was a revolutionary item and it is doing very well for us.

We've made some good acquisitions. But having said all of that, going forward, what we're -- where our sights are set are on the B-to-B side, on coming out with new products that deliver real value to our customers and where we share in that value, i.e., we don't just take our cost of goods and mark them up so that we make a 21.5% margin or something like that. We focus on what benefits do they deliver to the end user and then communicate those benefits and share in them through value-added pricing. And right now, we're at, you know, right at the beginning of that whole process, but it's looking good.

I've referred in the past to all-in initiatives and the major one is in the B-to-B area. And again, it's too early to open the kimono too much because I never like to tip the competition off to what we're doing, but the fact of the matter is we've got some exciting new products that are scheduled to be launched by 7-31-08.

So are they going to help this year? No, they're not. In fact, they'll probably be a drain on this year.

But having said that, the core business and the momentum that I spoke of in my opening comments really is going to enable us to deliver, you know, knock on wood, everything -- I got to Safe Harbor everything -- but keep the momentum going, deliver a really nice year for the shareholders, but at the same time, invest, reinvest in the future so that we then '09, '10 and '11 and beyond have these new products to play out.

Ethan, that's sort of long-winded, but it was an open-ended question. Does that help at all?

It helps, but how many new products do you plan to launch by 7-31-08?

Two is my guess.

Okay. I have lots more questions. I'll get back in the queue.

Okay. Thanks.

And our next question comes from the line of Mike Sloan with Harvey Partners. Please proceed.

Hi, guys. Thanks for taking my call.

Sure. Thanks for joining our teleconference.

Real quickly on the retail and wholesale products, the volume growth was in excess of the total revenue growth, implying some price pressures. Can you talk a little bit about what's going on in the price environment and competitively? And also if possible, could you break the volume down into Cat Litter versus Industrial and Automotive?

Well, it's predominantly Cat Litter, so you'll draw all the conclusions you need on that front. Just assume it's Cat Litter because it really sways the day.

But regarding pricing pressure, really what you're seeing is mix. You're seeing that, and we've mentioned this in various news releases, we've been putting on a lot of new private label business. Private label in general on a per ton basis is lower than branded because oftentimes they supply the packaging.

Even if they don't supply the packaging they certainly supply the marketing or anything there is to get the brand to move off the shelves all -- it's not all, but it's what we do, is we're mining it, manufacturing it, putting it in a package and sometimes delivering it, sometimes even not, they may pick it up.

So what you've got is a mix issue there, but I can tell you if you segmented the brand from the private label, our brand prices are up and the private label prices are up. And so, you know, we have -- this industry is heavily dependent on fuel to dry the clay and then deliver the clay.

Additionally, you know, we're subject to the general market pressures of health and safety and regulatory issues that are always making our business more complex and more costly. And then when you finally get down to the specifics of the mining industry, every year, we're getting farther from our plants and deeper into the ground, as is our competition. Nobody leads the close-in high stuff for the future. You always mine what is the next most economically advantageous clay. So our costs are always going up.

So I can just tell you the cost pressures are always there. But the pricing we put in, as you can tell, may not have covered it all, but certainly has helped us repair our margin.

Right. So the private label, even though it's a lower price, can it -- on some occasions -- actually be higher margin than branded?

It depends on how you want to define margin. If you want to go percentage, yes, sometimes. I mean it could be, because you got a lower selling price so making the same percentage on it would yield less per ton. In general on a per ton basis, the brand is more profitable.

I mean is that, does that effect you were describing, is that part of what's driving the tremendous Company-wide gross margin improvement? I mean without -- in spite of that mixture, if you're getting a tremendous gross margin improvements -- ?

Yes, to me the homerun shot is, and the news release, if you just look at the chart and you say, okay, and you may not have heard this on prior calls, but we basically ship 1 million tons a year of finished product. So when we can, as a company, take our average price from $2.02 to $2.16 and ship roughly the same million tons, yes, they get put in different type packages and they get sent to different customers for different applications, but at the 50,000-foot level, we ship another, same million tons but pick up an extra $14 million in revenue, that's powerful. That covers a lot of the costs that I was saying and goes some way to repairing margin.

So the real $1 million question, or million ton question for fiscal '08 is what's the net sales per ton going to be in '08? Is it going to start sliding? Is it going to go down to $2.10 or is it going to go up to $2.20 or $2.25?

And our belief is you're going to see it continue to move along that progression. It was $1.69 in '03. It was like $1.58 or something in '02. It was $1.80 in '04, $1.90, $2.02, $2.16 and you got to figure out where that point is going to hit in '08.

But that's really the power of this business is that we have been able to increase our prices by nearly $50 a ton and keep the same million tons. We have the same plants, same infrastructure, same number of people, same everything. But we're getting an extra $15 million for the tons we're shipping.

And if I could get one last one and then I'll jump back in the queue.

Since you brought up mining sort of deeper and deeper into the earth, we spoke to the SMI and they said we should value Fuller's Earth at $10 a ton for what they have in the ground. How do you think about the value of what you have in the ground because it seems like there's a disconnect -- maybe you're not getting credit in the stock price certainly for some of that asset value?

Charlie Brissman will take this one.

Yes, Mike, let me take a stab at that. You'll see in the prior 10-Ks and you'll see again this year, the vast majority of our tons are carried at zero on our balance sheet. The only reserves in the ground that are valued at all are those that were part of acquisitions and for which we had to allocate --

Right.

(multiple speakers) for the purchase price. I will tell you as a management team, we don't think about price of tons in the ground at all in, you know, we occasionally do have investors who think about Oil-Dri as sort of a commodity play.

You know, the bottom line is that whatever value you assign to clay in the ground, it is a low value industrial mineral when compared to lots of other industrial mineral segments that are out there. We don't spend any time thinking about that value and we sort of discourage investors to think in those terms as well. And as a balance sheet matter, it has almost no impact at all.

Right. Okay. Fair enough.

Good. Thanks, Mike.

And our next question comes from the line of Robert Smith with Center for Performance. Please proceed.

Hi, good morning.

Hi, Bob.

You used the word the "snowball" and we're entering the wintertime, so I'm waiting for the snowball. I'd like to see it go downhill and gather a lot of extra snow.

So the question is, as you indicated, the R&D effort has really been elusive over the last few years. You did set up a separate facility and there was great hope and promise for this. It hasn't really been realized, and you were candid enough to say that as well.

So what has to happen to kind of foster a different expectation? What, do you need some luck or -- ?

I would take that. What do they say? Better to be lucky than good. You know, I don't want to be too hard on us because, again, raising our price by $50 a ton in five years did not come without a lot of value communication.

The only way you can communicate that value is if you first understand it. Customers aren't going to come to you and say, you know, you really are under pricing me because I'm using your stuff for all these kind of neat things, that's filtering out neat things, it's doing all these neat things for us. That's never going to happen.

So the R&D group, they are the IC effort, has really helped us in understanding the unique value of our various deposits and then finding applications that better suit those particular attributes. So this was not just luck that got us from, you know, $150-something a ton up to 216. It was a lot of hard work and, frankly, it's one of the unique things about Oil-Dri because we're the only ones in our industry that are plowing $2 million a year into better understanding on mineral.

So given that backdrop, where it is absolutely accurate to say, okay, fine, it's helped you on your core business, you've taken core products on a new applications forum or found better ways to communicate value or understand that value. But on the new product side -- meaning either totally new markets or totally new uses of existing products -- yes, we have not done a good job on that, but it hasn't been for lack of trying.

We've had some moderate success. But the fact of the matter is we're putting a lot of hopes, a lot of resources, a lot of energy into these couple of new all-in products. The preliminary on it looks fabulous. They are global in nature.

They -- because they are so value-added the freight is not a big a percentage as the end cost, so then you can afford to ship them around the world because the customers are not buying them because they're on a cost plus basis. The customers would be using these because of the value they bring. They will be in markets that are significant of size.

We believe the existing market for two of the products that we're launching is about $150 million right now and growing, and doesn't mean we're going to get that obviously. If we could get 10% of that, that would be fabulous.

But we do believe that there, it's not like we're creating a market and it's not like we're going into a market that is so infinitesimally small that even if we get a huge share it isn't going to do anything to Oil-Dri. The fact is, if these products succeed, they will have a changing impact on Oil-Dri.

What does the term "all-in" mean?

I don't even play Texas Hold 'Em, but it's just sort of a lexicon of the day. If you flip on ESPN 2, you'll see guys with glasses and hats going all-in, meaning they literally slide all their chips into the pot and it just means you're putting all your resources behind it.

So what it means to Oil-Dri is, we're too small to do everything. We can only do one or two things well. Sometimes we can't even do that, but we certainly, if you can't do one or two things well, you can't do 15 things well.

And in the past, our new product pipeline was so jammed with ideas that nothing ever came out the other end. So we decided as a management team to go all-in on a couple of initiatives. We went all-in on procurement and that has been a rousing success for Oil-Dri.

We, on the new product side, so that was on sort of the cost side. On the new product side, we have decided to go all-in on this initiative where basically their projects, the money that we have, the budgets we have, whether it be in marketing, whether it be in R&D, whether it be manufacturing, legal for the regulatory issues, all the various things, their projects go to the head of the class. They get priority over everybody else.

So that's what it means to Oil-Dri to go all-in. We are pushing our chips behind this and we'll see how it plays out.

Okay. I'll get back in the queue. I have other questions. Thanks.

Okay. Thanks.

(OPERATOR INSTRUCTIONS) And our next question comes as a follow-up question from Ethan Starr. Please proceed.

Yes, regarding the increase in operating expenses, can you break it down a little bit more? I mean was any of that related to just, well, I guess fuel is cost of goods sold, but you mentioned the stock split expense and how much was that, the stock-based compensation expense relating to the stock split? How much was that and what was bonus accrual and how much was due to audit costs?

In terms of the aggregate on a year-to-date basis, the incentive bonus, audit cost and the stock dividend compensation, that represented on a year-to-date basis about 75% of the increase in operating costs year-over-year.

Of which the largest piece was bonus, is that fair to say?

Yes.

Okay. So what was the other 25%?

The other 25% is just the kind of the normal increase in operating expenses. Obviously as sales go up commissions go up. As gross profit goes up commissions go up, advertising, promotional, et cetera.

Okay. I guess insurance probably went up, too.

Insurance and, yes, the kind of the -- everything that goes up with, you know, on an annual basis.

Okay. I have more questions to ask. Now I'll get back in the queue.

Okay. Thanks, Ethan.

And our next question also comes as a follow-up question from Robert Smith with Center for Performance. Please proceed.

Can we go over biodiesel and front end and give me some color on this?

Well, I know we talked about it, might have been two times ago because we didn't have the Q&A I think last time. What further do you want me to talk about?

Why don't you speak to it as if it hadn't been mentioned?

But it has and our transcript is out there, but anyway, real brief, because I'm not going to put any numbers around it, but it has been successful. It's been a good application for us to, for our fluids purification group is the biodiesel application and the front end is before the reaction and that's where our products seem to have value. We're also working on some back end products to see.

But so far it's been good, you know, incremental, it's not company-changing or anything like that, but it's, you know, when they're already in the area calling on edible oil plants, it's nice to have these other plants to be calling on as well. So it's been good, but it isn't going to change the face of the Company.

Well, the possibilities of biodiesel are enormous so why do you say that?

I don't think so. I think when you run the math, I mean there isn't enough acreage to make a dent in the (inaudible), I mean I think even in Bush's wildest dreams, you know, biodiesel/even ethanol, biofuels column may represent 10 or 15% of our total consumption and that's in his wildest dreams.

Is the product applicable to cellulosic biodiesel?

I don't know the answer to that, but I think it is.

Okay. Well, that could introduce a different element then.

Charlie, jump -- ?

Bob, it's Charlie Brissman.

Don't hear us wrong. I mean we're certainly keeping our eyes on this, but just to use cellulosic biodiesel as an example, the -- I think conservatively the idea that switchgrass will get planted in sufficient quantity to be refined in sufficient refineries to become a meaningful contribution to the relatively small segment of vehicle fuel consumption that will be biodiesel broadly defined is a years off progression of events.

We may be rooting for it as consumers and as a business, but in terms of thinking that it's going to have an observable impact on results of operations at Oil-Dri, sure, we hope it's going to happen, but we're certainly not banking that it's going to happen.

Okay.

So again, we, you know, I've been around for a long time, Dan, it precedes your assuming the helm, so we kind of get somewhat excited about these new products that come to the market, any number of them, I guess, four or five, maybe, and then their success is somewhat elusive, to put it mildly. Where is the brick? What's happened with that?

That one, you know, again, I mean I -- you either can give up and stop trying, which we'll never do, or you keep going for it. So we took a good swing with that product.

We have some customers, but it's not material. It didn't take off the way we had hoped. But we tried and we gave it our best effort.

But why didn't it?

At the end of the day, you know, this is a thousands-year-old industry and very hesitant to change, and hard to quantify because, frankly, they don't have the metrics even in place to quantify the sort of value that our product, we believe, brings.

I mean when we get a test where you can, you've got the metrics in place, where you can measure operating efficiency and fuel usage and all the various aspects of making a brick, our product helps. There's no question about it. But it's very hard to measure that. So--

Maybe you could sponsor some research or testing at a university or something to give some, you know, meaning to this fact, everyone's looking to save money.

Yes, Bob, believe me, in the brick industry in particular, the role of university-sponsored research and university-sponsored foundations was critical and we were there and met, you know, we firmly believe the thought leaders who needed to hear about the product. But when you bring it down to the ground, the vagaries of production differences at these decades-old plants in an industry that at least prior to the most recent few quarters had the luxury of being completely sold out, you know, over all of their planning horizon, it just didn't get traction.

We haven't abandoned it, but it got to the point where we could say it's no longer one of our all-in initiatives and we're going move on.

Yes, I think the whole concept of introducing new products into new industries, I mean if you look upon that from what other companies achieve, I mean the batting average of that is not very high. I mean it's going to take several products to have a big success.

We've had the several. I'm waiting for the (inaudible).

Well, you know, as a management team, Bob, we're telling you, you know, time will tell and we would agree with you, that this is sort of the qualitative measure of our success for the next few years. We recognize that the new product development initiatives haven't brought to market the successes we were hoping for.

We've, if anything, we've gotten even more focused and like you, that's a big part of how we're going to measure our own success for the next few fiscal years. The flip side to that is, you heard Dan talk about the relative lack of success in how he sort of views the last 10 years, you know, the risk of new product launch is one of the, it is the very first thing we talk about in the risk factors of our 10-K. It'll still be there this year. This is one of the biggest challenges facing Oil-Dri.

The good news is the core business is very, is healthy and vibrant and so better to have that, you know, and yes, I'd love to layer in new products that were vibrant and healthy as well and we're going to keep swinging. We've got some exciting ones.

Where is (inaudible)?

I have no updates since last time.

Do you still have your 11% interest?

Yes, nothing's changed.

And carried at zero, right?

Carried at zero.

Okay. I'll get back in the queue.

And our next question comes as a follow-up question from Mike Sloan with Harvey Partners. Please proceed.

My question was actually answered. Thanks, though.

Okay. Thanks, Mike.

And our next question also comes as a follow-up question from Ethan Starr. Please proceed.

Yes, back to the all-in initiatives. You mentioned two of them and, you know, can you open the kimono a little bit more and what can you tell us about it and why do you think it will be a success and not something that is ultimately like another Poultry Guard, which has been discontinued?

We're actually selling Poultry Guard, we just spun it off to a guy and we've supplied the clay. So Poultry Guard, the [demise] of Poultry Guard has been greatly exaggerated.

Oh well, it was hidden in the 10-Q basically in the second quarter 10-Q but you said it was discontinued.

Well, we stopped making it, marketing it. We sell the clay now that still supports the basic product.

But anyway, and to answer your first question, no, I'm not going to open the kimono anymore on these all-in initiatives because it wouldn't be good for you as an investor. You might get some short-term psychic pleasure of knowing what we're going to do, but long-term it could derail the whole effort so I'll stay mum on that one until it's--

Okay. Let me ask you this. Do the products work and if so, then why aren't you selling them now?

No comment.

Okay. Okay. What's the Cap Ex budget for fiscal '08?

It's going to be similar to our depreciation, like it was this year, $7.5 million kind of number, $7.5 million, $8 million.

Yes, barring an acquisition.

Okay. To what extent did the private label cat litter business added late in the third quarter boost fourth quarter sales and earnings?

I would say when you see the K, you'll be able to see the segment breakout pretty well and you'll see the retail and wholesale group was up pretty significantly.

Right.

Okay. So up would be about $2.5 million, $3 million?

Well--

It's going to be out in a few weeks.

Yes.

Okay.

The third quarter 10-Q mentioned a new private label cat litter product. What's new about the product? Is it the customer type of product or something else and do you have a comparable branded product?

Definitely of comparable branded products. I'd say what is new is just a lot of these retailers focusing more on quality than just price. We are not the cheapest in any way, shape or form. So all this new business we got, there were people well south of where we were at.

What they were valuing was the product performance, product color, product attributes, and quantity of supply, logistics, our on-time delivery rate which is north of 99.5%. I mean it's almost as close to 100% as you can get, and all those factors, each of these major customers was valuing. They had to value it in very tangible terms because like I said, we were not the low bidder by any way, shape or form in any of these, and they did value it.

Okay.

Last year and the last, I guess, year or two you had a capital improvement project to capacity to one of your higher margin businesses. And is that project complete and if so, have you been able to sell any additional capacity?

Yes, on time and on budget and it really enabled us to, again, achieve very high delivery rates whereas we were oversold in that area earlier and it was just causing us all sorts of problems including missed orders, including salesmen not having the confidence to go out and put on new business because they knew we couldn't get out the business we had and so it's like that old adage, you can't do business from an empty wagon.

The wagon is full and our salesmen know they are guns a'blazing, getting as much new business as they can. And, yes, it's in our highest margin area of our business. So that's been a good one.

Okay. So how much, if you were at 100% before, what are you at now as far as where you were before with (inaudible) business?

Yes, we're probably over 100% because of having to use inventory and shuffle and then missing, you know, delaying orders and things. So let's say we were at 110, we're probably at 65 to 70 now.

65 to 70 what?

Percent capacity. Utilization.

Okay. Utilization. So, but you increased it from like 100%. If you were at 100 before, you were maybe at 125, 130 now in capacity?

Oh, I see how you're looking at it. I'm saying we were over utilized before I was doing utilization. So we were at 105% before (inaudible) inventory and all sorts of things to meet spike and we dropped that. So we added, basically if we had 2 mills, we added a third so that you added 50%. In the way you're looking at it, you added 50%.

Okay. And so how much of that extra 50% capacity are you actually using? Half of it? A quarter?

I would say half.

Half. So we can look at basically it's a 25% increase in your sales on that line?

Yes, or maybe even more because, again, in units, yes, but then again, we're pushing the prices and creating, trying to use a higher value-added application, so sales could go up by more. But unit growth, yes, that sounds reasonable.

Okay. So what will that mean for sales in that line for increased revenues from that line for fiscal '08?

I have no idea. Anybody else? Nobody has any idea here. I mean we're just not going to get into that level of specificity.

We got to keep you cranking out there. We can't do all your work for you.

Well, I'd like to try to get to you do all my work for me.

I know, but we're not going to do it.

Are we talking about $1 million, $5 million, $10 million?

No idea.

No idea. So you don't know? How can you budget effectively?

Luckily I didn't do the budget. Ethan, you're getting into a level of detail that's not relevant on this call so I could say no comment, no idea, it all means the same thing. I'm not answering those questions.

Okay. Anything else new to report with R&D or the new product front?

No. I mean we're fully -- well, we're pretty well fully staffed. We've -- doing very well out there actually, doing a great job supporting these initiatives, the all-in initiatives, mainly. But we have some secondary and tertiary ones as well and they're all moving forward.

Okay. Does new leadership in the consumer products group have any plans to invest to invest more resources behind, in the Cat's Pride or Jonny Cat brands?

Yes, there you go. That's a good question.

We are in the process of launching new products in the consumer area. You know, they're not revolutionary, they may not even be evolutionary, but they're new and we've got some sizzle around them.

We're going to do some print ad campaigns. You're not going to see any Super Bowl commercials or anything on either of them. One of them is along the lines of natural, the whole -- it's not organic, but that concept of people that really want natural in their homes, certainly as their pet is interacting with the product and so that's been received so far very well, should be on the shelves sometime in calendar '08, but it's being presented now and it's being received well.

Our goal is to make sure it's not cannibalistic but to the extent it is, then it's a positive cannibalization, that it's going to lead to more sales and more profits and enable us to continue to support the brands. So that's, you know, that's a good one.

I mean it's like I said, the reason we didn't even mention it, we're not going to be on TV. We're not going to [crater] the earnings in rolling this thing out like we used to. We're going to pay as you go and get it out there but in a reasonable manner.

Okay. So where might I see ads for this? In the Sunday coupon insert?

I think you'll see (inaudible) you'll see, like, what is that, Cat Fancy magazine, you know, target-specific magazines. They might be in something like a People or Glamour or something like that but our marketing guys are making that call given their very constrained budget.

Okay. Now it sounds like kind of like a scoop and a scoop and a flush thing. Is it paper, recycled paper, or is it wood?

No, it's nothing like that. It's nothing like that.

Does it have any clay in it?

Oh, yes.

There's clay in it. Okay. Are you manufacturing it?

Yes.

Okay. I guess whatever materials you have might have you buying them from someone else. Okay. Has the increases in corn prices effected the demand for Oil-Dri's animal feed or animal health products as some farmers switch to other kinds of food to feed animals?

No. Okay. The SEC recently announced new interpretations with SOX regulations that are intended to lower audit costs somewhat. Will this change save you any money in future audits?

Yes, I think it'll save us some. It's probably $100,000 or $200,000 maybe next year versus this year.

Okay. Well, not much, but I'll take it.

Back to the biodiesel briefly, are you currently selling clay to biodiesel manufacturers and if so, what is the name of the product you're selling them?

We are selling into that process and that's about as much as I'd like to educate you on, but, yes, we're selling into it.

Okay.

And back to Poultry Guard for a second, how much money will it save you not manufacturing it, just supplying the clay to somebody else? I assume you're making money by selling the clay as maybe you weren't making money on the Poultry Guard product itself.

Yes, that's all true, but it's immaterial.

It's insignificant.

Okay.

And our next question comes from the line of Robert Smith with Center for Performance. Please proceed.

Yes, that was getting a little -- okay. So I'm back on.

Fiscal '08, what are the major drivers? What's going to color this, the question of fuel? Do you think you'll have the ability to offset any fuel increments with price increases? That's a question and maybe you can address the more general.

Well, you can't say any, I mean if you had another, like a Hurricane Rita/Katrina event, which doubled the price overnight, no, I would never make that statement. Anything that we can see in our crystal ball, yes, we feel pretty good. We've already bought -- we have our, you know, our hedging program in place, where we've basically hedged half of our natural gas requirements for the year and so that's in place.

You know, you said what's '08? '08 is going to be all about rolling out these new private label customers, to these customers. Some are going to start at the end of this quarter, some the next quarter, some in the third quarter. We had a big one pop in the fourth quarter of last year, so we get three quarters' benefit of that.

And then you got the new product, the Cat's Pride Natural, so that's good. And then on the B-to-B side, it's all about keeping the core healthy while we invest in these new all-in products so that they can be up and ready to launch by fiscal '09.

And there'll be some margin constriction there because of increased R&D in this particular area?

Yes, I mean -- but the margins will be of a nature to more than compensate.

I don't mean that. You said that that effort would cost you more than bring you some--

In '08, right. That is correct.

Okay, but -- all right. Okay.

And the -- I want to thank you for the dividend. It's really an important part of total return as I see investing. I'm grateful to you for that.

Well, you're welcome, and then it's always been a part of our philosophy that when the cash flows are good and you see we created, generate over $5 million.

Are you guys going to come to New York?

I don't -- we don't have anything on the books at the moment. Unfortunately the dates that were set up with Eric May didn't work out. So at the moment we don't. We have something set up in Boston.

When is that?

The 19th.

That's for the Monday, the Monday before Thanksgiving.

Okay. Because I enjoyed your visit to New York and I'd like to see you do that occasionally.

Absolutely, and to the extent I can get out there, I'll do it. So we're in Boston. We do one in Chicago every year and we try and get them in New York maybe every other year.

There's nothing in quarterly variation that we might be surprised at as '08 unfolds?

An expand on quarterly variation.

Well, I mean, I don't want to be -- is there anything happening that might loom larger in one quarter or another than traditionally?

Not that we see at this moment, no.

Okay. Good. Thanks. Good luck to you guys.

Well, thank you.

And there are no additional questions at this time.

Good. Well, thank you.

I mean, you know, it's -- we're proud of the five-year progression. We understand it's merely a point along the road. We certainly have not reached the promise land and so don't take any of our exuberance or positive comments as thinking that we think it's time to let up on the accelerator. The opposite is really true.

That's what excites me most about the future is that we're not, if we're an eight -cylinder engine, I think we're only firing on three or four cylinders and this is what you're seeing. So, you know, when we start firing on more, it's, I believe the future's a lot brighter than the past and that's why me and my family are continuing to not just dedicate our lives to this business, but all of our financial resources, you know, all of our eggs are in this basket pretty much. So that speaks volumes, I think, for where we see the future prospects of the business.

So look forward to being with you in 90 days at the end of the first quarter and, hopefully, you guys will, you know, be happy with that as well. So thanks very much and we'll talk to you soon.

This now concludes your presentation. You may now disconnect and have a great day.