Good day, ladies and gentlemen, and welcome to the Quarter 4 2012 Oil-Dri Corporation of America Earnings Conference Call. My name is Dave, and I'll be your operator for today. [Operator Instructions] As a reminder, the conference is being recorded for replay purposes. I'd now like to turn the call over to Mr. Dan Jaffee, President and CEO. Please proceed, sir.

Thanks, David, and welcome, everybody, to our fiscal '12 year-end teleconference. With me is Dan Smith, our CFO; and Doug Graham, our VP and General Counsel; and Ronda Williams, who heads up all of our Investor Relations. And Ronda, you've got some Safe Harbor.

Yes. 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 ask that you review and consider those factors in evaluating the company's comments and in evaluating any investment in Oil-Dri stock. Thank you.

Great. And as always, I'd like -- we're going to turn it over to Dan Smith to give a little play-by-play, and then I'll have some qualitative comments, and then we'll open it up to Q&A because we really want to spend our time on those issues that are most important to you guys. So, Dan?

Thanks, and good morning to everyone. Oil-Dri ended the year with sales up about 6% for both the quarter and the full year. Our full year sales of $240 million established a new record for the company. Our EPS of $0.85 per share for the full year was down from last year's $1.26. We reported a small EPS loss for the fourth quarter. Generally, the story for the quarter and the year was continued heavy marketing and promotional spending for our Cat's Pride Fresh & Light launch, partially offset by a very strong performance of our B2B group. We also recorded a pretax capacity rationalization charge of $1.6 million in the fourth quarter. The charge was the result of a plan we announced in the third quarter to relocate certain products from our Illinois plant to our facilities in Mississippi. We continue to see lower natural gas prices in our manufacturing processes. These factors and a more profitable product mix accounted for gross profit margin increases from 21.5% to 25.4% for the quarter and from 22.1% to 24.5% for the full year. B2B had another strong quarter. Sales increased 12% and contribution increased 58%. For the year, sales increased 15% and contribution increased 47%. Animal health, fluids purification and agricultural carriers all reported sales increases for the quarter and the year. Our sales of co-packed litters continue to increase along with the general decline of coarse cat litter. The Retail and Wholesale Group saw sales up 3% for the quarter and 2% for the year. We continue to see increased sales of our branded cat litter, especially Cat's Pride Fresh & Light scooping litters. Traditional coarse litters were down again this quarter, especially private label products. Group income was negative for the quarter and down 80% for the year, driven by the increase in advertising and promotional spending to support our Fresh & Light product launch. Our balance sheet remains very strong. Our cash and investment balance at year end was $36.3 million, which was an increase of $2.5 million from fiscal '11 year end. This increase was achieved while spending approximately $7 million in capital, $6 million in stock repurchases, $4.5 million in dividends, $3.6 million in debt repayments. We also incurred an additional $9.3 million of consumer, promotional, media and trade spending during fiscal '12. Our cash and investment balance actually exceeded our debt by more than $6 million. Finally, we remain committed to dividends. During the fiscal year, we raised our dividends for the ninth consecutive year. Our quarterly dividend rate of $0.18 per common share represents a yield of greater than 3% compared to the closing stock price at year end. Thanks. I will turn the meeting back over to Dan Jaffee.

Dan, great job, and didn't leave me much to embellish upon. Really, it spoke for itself. You did a great job there, and I would just say exclamation point on the cash generation. We always have that saying around here: Earnings are an opinion, cash is a fact. And to be able to start the year with $33.7 million, spend $30 million-ish on all the various things you talked about and finish the year with $36.2 million, to us, was very rewarding. So that was our year in a nutshell. I'd like to turn it open to Q&A, so I can respond to the questions you have. As always, please prioritize, ask your most important questions first, and then go back into the end of the queue, so everyone who wants to ask a question has time to do so. Dave, can you open up the queue?

[Operator Instructions] And your first question comes from Ethan Starr, [ph] private investor.

I'm just wondering, how is the Fresh & Light doing? Can you give us some more color on that? And to what extent is it cannibalizing sales of your other scoopable litters? And can you give us any idea of what you might spend in marketing for the next -- in fiscal '13?

All right. Let me take your questions in some order. Dan, I'm probably going to let you answer the third question, but I'll take the first 2. Interestingly enough, this is the first period where the IRI now captures Wal-Mart sales. So that's good. It increases the percent of the category that is now covered. So in the past, I think maybe 55% of the category was covered. Now I would say it's about 85% because the 52-week data I'm seeing shows the cat box filler category at $1.5 billion, and we think it's probably about $1.8 billion to $1.9 billion. So you still got the clubs who aren't reporting. Pet specialty, like PetSmart, is not reporting. But now with Wal-Mart being in there, you got a biggie. So we're now seeing a greater percentage of the pie. So that's good news. So you asked how was Fresh & Light doing, and did it or did it not cannibalize. I think one of the best ways to look at it is to look at what was our biggest item other than Fresh & Light, and that was our Cat's Pride Scoopable. And we finished the year, the 52-week period, the category grew by 2%. Cat's Pride Scoopable grew by 19%. So I would say the numbers speak for themselves; that no, it did not cannibalize, and in fact, it enhanced it. They gave us a greater shelf position. It gave us more importance to the retailers, and we were actually able to expand some distribution there. So Cat's Pride Scoopable grew to nearly $25 million at retail for the 52-week period and grew by 18%, far outpacing the category. Fresh & Light finished the year, the 52-week period, with $22 million at retail, so not quite Cat's Pride Scoopable but…

Yes, Ethan, we're going to spend less in '13 than '12, and we disclosed that in our press release. But we're going to spend more than we had historically spent. The team in consumer is looking at the most efficient utilization of the cash and how they can target the cash. So I don't want to give you a hard and fast number because I think we want to plan flexibility into our processes, but I'd say our current expectation, we'll be spending less in '13 than '12.

And your next question comes from the line of Robert Smith from Center for Performance Investing.

So guys, how are you as far as your budget for the year?

Are you talking looking back at fiscal '12 or looking ahead at '13?

Yes. No, looking back.

And specifically, I mean...

I mean, for the year, how did that play out as far compared to your budgets?

It varied by group. The groups that were not in the dynamic mode, the Division 3 was in that -- sorry, that's our consumer division, did very well against budget. Our historic businesses, the animal health and the bleaching earth and the ag carriers and the industrial did very well. The consumer division, some things were real good, some things were not so good. It was so dynamic that I would say, how well did we budget? Not very. Give us a C on budgeting in the consumer division but probably an A in the other divisions.

And Robert, we did not plan, obviously, for the capacity rationalization charge, so that...

No. Yes, I x-ed that out, sure.

Yes. So I don't know if that answers your question. But the good news is we should be able to do better in '13 because it's not as dynamic. Now we know what our distribution is. We know what our velocity is. We have our arms around a lot of the spending we're going to do. So fiscal '13, we ought to do better.

Okay. Is the spend for advertising going to be back-loaded as it was this year?

It's pretty...

I would say it's probably more in the second and third quarters. But we're going to be flexible with what the market needs are, and we'll adjust accordingly.

The good news is we got a winner, and the key is we got to keep feeding the beast.

And the next question comes from the line of John Bair of SKA Financial Services.

A quick anecdotal observation that Ethan might like here. There's a Wal-Mart right down the road from our office, and I have been going by there over the last couple of months, and the Fresh & Light is right about at eye level. And usually, there's not very many boxes of it there. So I hope that's a good sign. They are selling out pretty quick. So anyway, the other question I have, or couple questions, actually, is what do you anticipate your savings may be for the relocation of the Mounds plant?

Okay. And did you have a second question? I mean, I'll answer that question. I don't know how much we're disclosing on that. But we haven't...

It's obviously going to generate a savings, but we haven't disclosed any specific information.

Okay. I'm just trying to play that back in as far as what your -- under the capacity rationalization charges and so forth, and obviously, it's probably a onetime deal, but it may play into, I'm assuming, the overall operating expenses then would improve by closing that.

That's a good assumption.

Okay, well, that's what I was trying to get my hand. And on as far as your advertising, does that go in under -- that goes in under your cost of sales, correct?

Advertising is part of SG&A. Trade spending goes into cost of goods sold -- or actually reduction of sales, sorry, or the gross profit.

Okay. And one last question and I'll get back in the queue is you'd mentioned in your press release about purchasing stock, and looks to me like it was about 192,000 maybe in the fourth quarter. Look at the year-over-year, looks like it's not that much different. Is that -- am I right on that?

For the year, we purchased about $6 million, about 300,000 shares, a little less than the 300,000 shares for the full year. I don't have the quarter right in front of me.

Got an average cost on that? No, I guess I can figure it out.

It was right around 1…

The next question is another from Ethan Starr [ph].

All the stock buyback information is in the K, so please read that. And the question is how are Calibrin and Verge doing? It sounds like Calibrin had a really great year.

Yes, our animal health business did very well in the year, and we continue to be bullish about it going forward. We've known all along and we've said all along our products, really, are the best. We selectively mine and process. The products work very well, and we've got the science behind it. We've done the in vitro and the in vivo science to prove how well they work. And then our team, our animal health team, really, it's all been about getting registrations, which continued to come last year. We still have even more that are going to come this year and then putting on the distribution network to take advantage of those registrations. So it's really a snowball that's rolling, and it was materially significant in fiscal '12, and we expect it to continue to grow in fiscal '13.

So if it was materially significant, can you tell us the number?

I don't know. I'm seeing heads shaking. Look, at the end of the day, you don't want to hurt your own investment. So I mean, it's in the B2B group, and you can probably do your own extrapolations and get pretty close.

Okay. Anything on the horizon as far as the new products go?

Always things on the horizon. I'm not sure what I can tell you about. I would just say in general, one of the things that was a big success with Fresh & Light was really establishing ourselves as the category innovator, and we were challenged by several of our large accounts. Look, you guys are the horse. Don't become the cart. Meaning stay out in front. And so we have some exciting new innovations there that we're -- we'll be rolling out over time as the -- our network can absorb and handle the growth. So we're not going to just dump them all on the market at the same time, but we've got plenty of innovation going on there. I would say really, in every single business unit, we've got something fairly interesting going on. It's a next logical step, but it fills a currently unmet customer need unmet by Oil-Dri. And so we've got exciting new product opportunities in almost every area of the business.

Okay. Well, I hope the new cat litter stuff, products, ideas will be as revolutionary as Fresh & Light.

Yes. I mean, they may not be as revolutionary, but they won't be as costly either. So I can tell you that. They'll be incremental, I won't call them product line extensions because they really are innovations. They're different, but we're not expecting to have to spend tens of millions of dollars launching them either.

Okay. Well, now that we have 3 people asking questions on the call, you really got to extend them. That's all I have for now.

Hey, we still have 7 minutes, Ethan.

The next question comes again from Robert Smith of Center for Performance Investing.

So could you give us a little more color on Calibrin and Verge? I mean, what can you say about them for '13?

I'll focus on Verge. Let's focus on Verge because I already sort of talked about Calibrin. We had a great year in Verge in fiscal '12. Both sales-wise, the team met their goal and hit their tonnage goal for the year, which was, again, a good stretch for them and they hit it. But then on the production side, we really stabilized the process, really having another year under our belt of figuring out where our losses were coming from and what variability was being added to our process. They were able to hammer all that out. And so we were able to actually contribute variable gross profit to the company in fiscal '12, whereas it was a loss in fiscal '11. That was purely an investment mode. So from a delta standpoint, it was a strong contributor. Verge was very successful in '12. We're looking forward to continuing to grow it. We have, again, growth plans for '13, and that would then ultimately justify and necessitate going to the second phase, which would be to expanding our capacity. So knock on wood, so far, Verge has been very successful, and we're looking for continued growth on it into the future.

And then, well, the growth rates were very robust, percentage-wise. So are you looking for comparable numbers? Or as the product's getting larger, I mean, is that percentage increase going to shrink in '13?

Yes. I mean, I would say focus on maybe the dollar increase, so the percentages start to water down, so you won't see the huge percentage jumps all the time. But from a dollar standpoint, we're looking at that.

So can you say that you're targeting similar dollar increases for those products?

No, I wouldn't yet. I mean, what I will be willing to hold myself to, because we've got so many diverse businesses, is that we don't give guidance for the fiscal year, and it's really not helpful to anybody because most of the time, we're wrong anyway. But what little guidance I'll give you for fiscal '13 from an expectation standpoint is I'm not expecting huge top line growth in fiscal '13. We'll see. But we are still absorbing the market dynamics that led us to reduce the Mounds plant. Coarse cat litter is continuing to shrink. Floor absorbent is continuing to shrink. So we've got some of the historical product lines that are continuing to decline as some of the new ones are starting to grow. So I would say as an investor, your expectation should be, I don't know, relatively flat on the top side but strong earnings bounce-back because a lot of these onetime expenses are going to be gone. And we're certainly not going to kind of pull back all the spending because we do want to incentivize trial. But there's going to be enough there where you should be pretty happy with the bottom line, barring some currently unforeseeable raincloud.

Will the bottom line exceed '11?

I'm not -- now I'm getting too much into guidance, so I'll just stick with what I told you.

Okay. So what kind of a buyback authorization is still left?

I don't know, and it looks like no one in this room knows. I think it's like...

It's in the K.

It's in the K. I'll take a guess.

Okay, drop it. What is -- on the noncurrent liabilities, what are the main categories of that $40 million?

Where are you looking at specifically, Robert?

The balance sheet.

The balance sheet. We have a large pension change that was driven by, basically, a discount rate change.

Yes. What did you change it to?

The discount rate went from, I believe, 5.25% to 3.75%, and that increased our pension liability somewhere in the neighborhood of $10 million.

Then I'm glad you did it. Okay. So that's the bulk of that?

I would think that would be the bulk of it. The number of that -- Page 22 of the Q, 320,000...

I was going to go 300,000. So 324,000 shares are still left in our buyback authorization.

And the next question comes from Jim Schwartz [ph].

So because you brought up your earnings power for next year, and even though it is an opinion, the gross margin this quarter was very strong. You haven't really addressed it yet. Obviously, it's the function of natural gas prices and the way you guys are managing your business. But on minimal revenue growth, if very little revenue growth, with a gross margin that, I don't know if it's a new sustainable number, 25%, but if we could get there, I mean the earnings power here is probably 250-plus in time. So it's your point about how the stock in time is undervalued, and we could really see some earnings power going forward as SG&A comes down and gross margin kind of sustains a certain number. So I guess my question is as the older products move away and the new products bounce back or come on stronger, is the gross margin change, the upside a function of those new products? Is it a function of natural gas? Maybe just explain that a little bit.

Yes. It's probably all the above, but the biggest part of it is what you just highlighted, which is the products that are on the decline, coarse cat litter and coarse floor absorbent, have very low margins, 10% and south in some cases. The products that are on the upswing, the Amlins and Cat's Pride Fresh & Light and the -- I've said on another call, let's have greater than our average margin at the time. And so as one is dropping and the other one is gaining, you could theoretically not even change the sales of the company but dramatically change the earning power of the business as you're swapping unprofitable business for profitable business. To the extent you're growing on top of that, that's a double win. And then you highlighted natural gas, which absolutely is in a good place, even though it has bubbled back up to $3 -- whatever, $3.80-ish. Now it's still way less than what we've historically paid because historically, the rates were higher and we were forward-buying. And so our blended rates in past years was...

Much higher.

Much higher. So yes, what you're saying is exactly what's giving us confidence for fiscal '13. And then the key is to keep growing, keep the new items going and keep the momentum.

Fantastic. I mean and as we look at SG&A, for next year, is it -- obviously, it's more than fiscal '11 was. It'll be less than '12, something in between is kind of what you guys are hinting at?

Yes.

That's what we're indicating in terms of our advertising spend, which was a major driver for fiscal '12.

So if you kind of maybe annualize the maybe third fiscal quarter, it makes more sense than the fourth, something like that.

Yes, I'm not sure we want to get into quite that level of detail, but..

Okay, good, no. But look, the earnings power is starting to be unleashed here, so congratulations guys.

Thank you.

Thanks.

The next question is from Ryan Dallavia [ph] from Singular Research.

Year-over-year, I'm just looking at your operating profit. It's flat. Is there anything beyond ad spend and new product development that you're doing to address this?

Now hold on. I've got our year -- am I looking at the wrong page? You said our operating profit. Are you saying on a percentage basis?

Yes, on a percentage basis.

Oh, okay, yes, because our operating income was down significantly and even on a percentage basis.

I'm looking at 13.7%.

Right. Was…

And then 13.5%.

I'm not sure where the 13...

I got 10.079%.

Correct.

10.079%. Interesting.

For 2012. I like your number better, but unfortunately, I think mine is right.

Well, we'll go with your number, but we'll stay with the question. Is there anything else that you're doing to operating profit beyond what you've already said?

I mean, the cool thing that's starting to take hold, as Jim Schwartz [ph] sort of highlighted, was we're just starting to see the margin enhancement. And those of you who have been involved with us for a while know our mission statement is creating value from sorbent minerals. And the key way to create value is you have to be delivering value to your customers. They have to perceive that there's a reason to be paying you more than they could pay someone else for some similar product or service. And so our heavy investment in R&D has been paying off. But then on the flip side, a really strong corporate initiative which we started over a year ago, we call it AIQ, our All in Quality initiative, where we're very much focused on continuous improvement on processing -- processes and training our people. Those people closest to the action have to be empowered to own their processes and reduce waste, reduce loss. And it's really starting -- it's a snowball, and it's really starting to show up, and it's going to continue to show up in the margins of the business. So I would say Jim's comment about the earning power of the business starting to grow is a fair observation.

Okay. So it'll show up in your SG&A line?

No. That would show up in our cost of goods line. SG&A is driven heavily last year by this incremental media spend, and we'll come back to, as we said, somewhere between what was heavy in '12 and what was light an '11 will be, somewhere in between will be '13. Were there any other people who have not yet been able to ask a question, I'd be happy. If it's, Ethan, Bob, Jim, you guys I think, hopefully, you got your questions asked -- answered. Any new askers?

No new askers at the moment, sir.

Okay. Okay, well, then I think, look, this has been a great call. I really appreciate the additional participation by John and Ryan, and even Jim jumping in there. But Ethan and Bob, I'll always appreciate your participation. So thank you. As we've always said, we take a very long-term view of our business. Fiscal '12, we believe, will prove to be a very important year, maybe not financially because it was not – look, no one -- we're happy with the cash generation, but nobody's happy with the bottom line. But we knew it was coming because we had to spend heavily to get Fresh & Light up and off the ground. But we believe the investment made in '12 will benefit '13, '14, '15 and beyond. And so time will tell. So let's get back together in 3 months and look at the numbers and take it from there. So thank you very much, and we'll talk to you then.

Thank you very much for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a very good day.