Good day, ladies and gentlemen, and welcome to the Third Quarter 2013 Oil-Dri Conference Call. My name is Erica, and I'll be your operator for today. [Operator Instructions] I would now like to turn the call over to Daniel S. Jaffe, President and CEO. Please proceed.

Thank you, Erica, and welcome, everyone, to Oil-Dri Corporation of America's third quarter and 9 months teleconference. With me, here in Chicago, is Dan Smith, our CFO; Doug Graham, our VP and General Counsel; and Reagan Culbertson, who heads up all of our Investor Relations. And Reagan, will you cover the Safe Harbor provision?

Yes, thank you, Dan. Welcome, everyone. On today's call, comments may contain forward-looking statements regarding the company's performance in future periods. Actual results on 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 for joining us.

Thanks, Reagan, and we'll stick to our usual format. We'll -- Dan Smith will walk us through the quarter, and then we'll open the phone lines to a Q&A and cover anything that's, first and foremost, on your radar screens. And as always, try and prioritize and get your first question in, and then go back in the queue so we can let everybody participate. Dan?

Thank you. Good morning, everyone. Well, the headline for the teleconference is the Oil-Dri reported record sales for the third quarter and for the first 9 months of fiscal '13. We also reported record earnings for the first 9 months of this year. Sales were $64.2 million for the quarter, up about 7% from last year. And for the first 9 months, our sales were $186.7 million, which were up approximately 4% from the same period last year. Our EPS was $0.46 per diluted share for the quarter, up substantially from the $0.26 earned in the third quarter of fiscal '12. Year-to-date, our EPS of $1.40 was up from the $0.86 earned last year in the first 9 months. Our previous full year EPS high was $1.33 in fiscal '09. The improved earnings in the third quarter reflected our increased sales and our improved selling price per ton. Partially offsetting these improvements were higher freight and natural gas cost. Our advertising expense was down about $1.3 million compared to the third quarter of fiscal '12. However, we expect our advertising and promotional spending in the Retail and Wholesale segment to increase in the fourth quarter as compared to the third quarter. We have and will continue to spend advertising and promotional funds to encourage consumer trial and expand our distribution of Cat's Pride Fresh & Light cat litters. Retail and Wholesale. Our team reported about 5% sales growth for the quarter and 3% for the first 9 months. The segment's income was up for both time periods. We continue to expect our overall advertising expense for fiscal '13 will be more than historical norms, but less than fiscal '12. Our B2B group reported sales increased about 12% for the first quarter and 6% for the first 9 months. We saw strong sales growth in our fluid purification and animal health products. Our Ag carriers were down a little bit for the quarter. The B2B team has reported approximately 13% income growth for the quarter, 8% income growth for the first 9 months of fiscal '13. Our gross profit percentage was 26.3% for the quarter and 27% for the first 9 months. Both of these values were substantially up from the same periods last year. Our balance sheet remains strong. Our cash and investment balances at the end of the quarter was over $40 million, which was up substantially from last year. Finally, our cash and investment balances continue to exceed our debt. Thanks. I'll turn the meeting back to Dan Jaffee.

Thanks, Dan. Great quarter. Great 9 months. Erica, at this point, let's open up the Q&A line.

[Operator Instructions] And our first question comes from the line of Ethan Star.

I'm wondering, are your marketing efforts resulting in more consumer trials for the Cat's Pride Fresh & Light?

Certainly. That's what we're focusing on. We're continuing to see strong repeat data, and so the key is to get more and more consumers to try it. So we are going to be spending heavily in the fourth quarter, putting those advertising dollars towards trial programs. So probably too early to unveil exactly what we're going to be doing, but you hit the nail on the head.

Okay. So you've seen good repeat buying?

Absolutely. Still very strong, hovering right around 40%, which, in our category, is very high.

Your next question comes from the line of Alex Martian.

In the press release, you commented about the efficacy of some of the marketing programs and how you're looking at the efficiency and some of the results that you're getting on the marketing investment that you're making. Can you talk a little bit more about that, like essentially what are the changes that are being made?

Sure. Thanks, Alex, and again, I'll try and answer your questions as best I can without sort of tipping our hand to the competition and sort of letting them know what place we're running in advance. But a couple of different metrics that Thierry Jean, who heads up our Consumer division, has implemented, he and his team. One of them is just trying to focus on your dollars on working versus nonworking advertising dollars. So a nonworking ad dollar would be the creation of an ad, a working would be actually running the ad. Or a creation of a TV commercial would be nonworking, but then actually running the commercial would be working. So while our total ad dollars are down this year, advertising dollars versus the prior year, more and more have been geared towards working versus nonworking. So that's sort of just common sense, and it make sense. The other thing he's very focused on is the ROI, what return to do we get on the advertising dollars that we run, and we have found certain areas where we spent our money have driven high ROIs. And again, I don't really want to get into the specifics, but that's then where we're putting more money, so it makes sense. So going forward, we should have a greater percentage of our dollars going towards working advertising, and then those dollars should be geared towards those vehicles that have given us the highest return on investment.

Your next question comes from the line of Robert Smith. [ph]

Welcome, Alex. This is a nice surprise. Please [indiscernible] extend by 50% percent [indiscernible] analyst on the call is at least the ones that are right up front. So again, welcome. So Dan, can you give me -- just refresh my memory, give me the third and fourth quarter advertising expenses from last year.

I mean, I don't have them. Dan Smith, do you have them?

In terms of just the -- well, in the quarter, the third quarter last year, we spent about $2.9 million.

And how about the fourth quarter?

I don't have that immediately available to me.

Do you have the yearly number?

It was about $10.3 million for the full year last year.

[Operator Instructions] Your next question is a follow-up question from the line of Ethan Star.

Dan, I'm wondering if -- are there any major new customers stocking the Cat's Pride Fresh & Light since the last quarter's call?

Yes, there are, and I'm going to put you on hold for one second. Okay, I'm back. Yes, I mean, we've got some major distribution voids historically, the #1 being Target, and that is still a void. The #2 is Dollar General, and that is no longer a void. So we are on the shelves. We've shipped, and it should be almost fully on their shelves. We're getting full distribution with Fresh & Light. They wanted a smaller size. So they're going to be in a 9-pound jug, which is equivalent of like a 12 for the competition, which is where the competition is at Dollar General. So we're very excited about that, and we're continuing to work on maybe the third, fourth and fifth voids as well. And we're certainly not giving up on Target. We think Fresh & Light is a great item for the Target guests, and we're going to keep making that pitch to them. I know the better we do in the marketplace, the greater likelihood it will be that they'll take it on.

Sure. No, I would love to see that void filled, as well as whatever the anonymous third, fourth and fifth voids are. Also, the press release mentioned new Fresh & Light product offerings. Can you enlighten us some more on those?

Yes. We are out there with the Fresh & Light 100% recycled paper litter, which is in competing in what's known as the alternative segment. Clay still dominates cat litter for a host of reasons. It really is the best performing product. The density is -- can range, but it's right in the range that consumers like, which keeps low tracking and low dust. But there is a segment, 5%, 6%, 7% of the category that is interested in alternative. They want something that they perceive to be more environmentally friendly. And so it could be a corn cob or a wheat or a paper, a recycled paper product. So that was our entrée. We wanted to absolutely live up to our quality commitment that if we're going to compete in that segment, we want to have the best product, and we are confident that our product performs as well or better on a number of important metrics against the other alternatives. So it clumps very well, very low in dust, very high absorption, so very good odor control. So that's in Walmart and other retailers as well, and we will keep presenting that as we move forward.

Yes, but anything beyond the recycled paper litter? I mean, you said -- that was news last quarter. I mean...

Yes, we do, but nothing I want to talk about. So that's what I was willing to talk about. We do have a couple of other items that we're in, being presented and being received, but they're not on the shelves yet. So I'm not at liberty to talk about them.

Okay, that's fine. I have more questions, but I can either stay or get back in the queue?

Ask one more and then go back in the queue.

Okay. What's driving the sales of Calibrin to several new customers as reported in the 10-Q, and can it continue, hopefully?

I think it's just continued penetration in the market with our sales team and with the data that we have. Our product works and it works very well. And so, as you recall, the first couple of years were all about registration. We're now registered in 100% of the target countries that we're focused on. And so now it's a matter of continuing to penetrate those markets with sales and through our distribution networks. So it's really just positive. I mean, the market's growing. It's hard to tell. There's not really an IRI-type thing. So it's all anecdotal. But it looks to be maybe 8%, 10% a year, it's growing by. And so if we just hold our share, we get that growth, but we've obviously been growing faster than that, and so we've been gaining share. So we're continuing to be very bullish on Calibrin.

Okay. Do you get comments from the customers as to the efficacy of the product compared to previous other products they have tried?

Yes. I mean, the ultimate comment is a repeat order. I mean, these guys are very, very data-based decision makers. They don't want to see a lot of smoke and mirrors. They want to see data, and then they want to put it out in their fields or in their populations, animal populations in their farms, that's the word I was looking for, and then see the performance. And if -- they want a multiple back. So for every dollar they spend, they want to get $3, $4 back. And obviously, a repeat order is a validation of that value.

Your next question comes from the line of Robert Smith. [ph]

So just parenthetically with the paper litter, do you have a lightweight paper? I don't want to be facetious, but I don't understand that. And then I just want to go on to the question of the -- you said on the last call that you were in these trials for the really big, big market and -- for the mycotoxins, I guess, and where is that? I mean, is that still going positive -- positively, those trials? Give me some framework of reference time-wise, and I just want to know that things are moving along well?

Boy, don't jump out yet because I need to ask you a question review. So you jumped around. You were in consumer, but then the trials, are you talking Calibrin?

Yes. No, no I just made that aside about the Fresh & Light because I didn't understand where we are with the marketing emphasis.

Yes. So the paper litter is 40% lighter than a clay-based cat litter. So it's even more of a volumetric play.

No, but I mean, Dan, how is it versus the other paper litters? It's...

Well, I mean, there really aren't other paper litters of any kind of national distribution. I mean, you've got a wheat, you've got a corn, you have a pine. There is a paper, but it's pelletized. It was called Yesterday's News. So it's a pretty unique product. And then on the Calibrin, yes, we're still on target. I mentioned about a 2-year window, and so we can refine it a little bit. I mean, the marketing team, given the timing of the trials and assuming we continue to clear hurdles positively, and so far we have, January of 2015 would be about when you would see that product commercially available. And it's -- but it's exciting, and it's so far, so good.

Okay. And the Target, when does the Target come up again so to speak?

They're doing another category review, I want to say at the end of this month, and we will be participating in that in the sense that we get to make our pitch. So that's a somewhat positive sign. There have been plenty of times they have done a category review where they have not invited us to participate. So the fact that we are, at least, invited is, like I said, a somewhat positive sign, but I wouldn't read anything into that. We still have a long row to hoe with Target.

Well, I'm watching Mad Men, I don't understand why they're not taking it. So maybe they'll surprise me.

To give them credit, they're doing very well. So they're outperforming the category. And you don't want to fall into the trap of "If it ain't broke, don't fix it," but there's clearly a mindset that if you're outperforming the category, whatever you're doing is working. So we believe that they could be doing even better with our product, and we have the data to show that they would attract incremental shoppers and sales to their category. It's an incrementality study that Thierry again pulled together. So we think we have a compelling argument, but nothing is -- the most compelling thing is when things are going poorly, then you can come in and try and have a solution. All we're trying to help convince them is that, yes, you're doing very well. We think we can help you do even better. And we believe that, but they're not as motivated.

Yes, I'm that sure that, that is the key point, and they've got to come around at -- in time.

Your next question comes from the line of Brad Evans.

Dan, where do you think margins, on a segment basis, should be longer term within the retail and the wholesale product segment?

I think they're going to settle in. I mean, we've seen nice margin improvement the last few years, not just on a percentage basis, but also on a per-ton basis. And that's relevant because we've been through mix and selected price increases, raising the average selling price. So if we had just held our margin percentage, we would have been seeing a gross profit per ton increase. But we got both going on. We got the average selling price going up and the average margins going up. I sort of see the percentage margins settling into where they're at. We're probably not going to push them much harder. Although with mix, you could certainly see a benefit. But as the average selling price continues to go up, you're going to see increased gross profit dollars. So I don't know if that answers your question for you, but I -- yes, the new products that we've launched are a higher average margin, but you've got to keep a certain base load of volume going through the plants to stay profitable. So you need some of the historic old, lower margin business as well. So somewhere in this range is a pretty good range.

Let me just say -- clarify that then. Because if you go back in time, you were -- on the retail wholesale side, you were kind of in that 10%, maybe a little higher segment margin. And then last year was less than 2% for the reasons that we all know. Year-to-date you've had some volatility. I mean, there was 11% in the first quarter, 5% in the second quarter, and we're back up to 8% this quarter. So is 10% type of an operating margin, you think, is kind of a long-term target?

Well, good clarification. When you said margin, I was thinking gross margins, and you're talking operating. Operating margins, absolutely. You should have every expectation that if, and there's a big if, if we are able to achieve the scale that can sustain consumer products, then you will absolutely see better operating margins. If we are not able to continue to grow and get the scale where it needs to be, then we're going to have some tough decisions to make. Everything we're seeing is positive. But look, the competition isn't rolling over, and these guys are fierce, highly sophisticated competitors. And so it's going to be a long, long fight. But at least in the early stages, it looks good. But yes, you're -- you should see operating margins continue to go up as we grow that segment.

Let me sneak one more in, then if -- can you give us, roughly, what volumes were year-to-date through the third quarter versus the prior year?

Volumes. You mean like -- what do you...

Tons shipped, yes.

Tons shipped.

It was about 620,000 tons shipped, which is down about 3% for the year-to-date numbers.

Your next question comes from the line of Alex Martian.

Hi Dan, when you say heavy ad spending in Q4, should we expect something closer to Q2 of this year or Q4 of last year? Can you just kind of help me understand that a little bit better?

It's going to be in between, actually. And the lot the spend -- it depends on where the dollars fall. It could be in advertising, it could be in additional sales incentives, which could fall under sales, revenue and cost of goods sold, so it could show up in margin. So we're working out those plans right now.

Okay. And you all have a significant net cash position right now, ignoring some of the post-retirement liabilities. Have you thought about repurchasing stock, because underlying earnings power of this company is probably significantly higher than what it's at today, and it doesn't seem like the market is giving you credit for that. So I mean, why would you not buy back significant amount of stock here because it would probably be highly accretive to shareholders?

Well, it's a good question, and clearly, yes, it's on our radar screen. It's a nice problem to have. Generating cash is a good thing. We have our board meeting tomorrow, and clearly, that will be on the agenda is uses of cash and stock buyback is one, taking dividend action, and Bob, I know how you and we all feel about that, and that will be on the agenda. So point well taken.

Your next question comes from the line of Robert Smith. [ph]

Okay. So can we move on to Verge? How are things going there?

Things are going well with Verge. We use it as -- in the Ag area as a product segmentation offering. So meaning, where we can get customers to embrace the higher value they can achieve by using the granule because of the product's uniformity and low dust, and therefore, we can get a higher price point. They can get a higher price point. It's working. When we -- that gets us to the table a lot of times where they start to balk a little bit at the price, and they want a more competitive product. We then come in with Agsorb, so -- which is a very fit-for-use, our historic Ag carrier. And so Verge is actually helping us sell Agsorb, which is a good thing. So it's sort of you show them the BMW, but they actually want to leave with a Ford, so fine. It all works. We are actually using it. And we've said this all along, it's sort of a platform technology, meaning it's going to help other areas of our business. And we're testing products right now in the animal health area using a Verge-type granule. So it's generating positive cash flow. It's been a very good investment. We do not have the volume at the moment to justify going to stage 2, meaning doubling the capacity. We're just sort of revenue managing the first tranche of capacity that we've put in. But very positive at this point.

Okay. And in my last call, I inquired about your efforts in R&D with the universities and such. And I was -- and I also mentioned nanotechnology. So are you guys active or let's say, even more active now in exploring nanotechnology in [indiscernible]?

No. I would say no, not on nano. But you have raised the point, and we are actively involved with hospitals, universities on various studies and tapping into their expertise on other -- of our more technical B2B-type product. So that we do do, but nano is not on the radar screen at the moment.

Your next question comes from the line of Ethan Star.

Yes. You just mentioned hospitals. Is that for hospitals for animals or humans?

I mean, really, animals, but they have a lot of humans are animals, too. So no, there are specific that are teaching hospitals that have specific knowledge about certain toxins and things like that. And so we tap into it, but it's, for our benefit, would be on the animal side.

Okay. Also, I'd like to echo Robert Smith's [ph] call for hopefully dividend increase tomorrow. I'm curious, what was the revenue per ton so far this year? Has it been increasing quarter-per-quarter?

It's 301 for the whole year.

301. Third quarter?

Third quarter, year-to-date.

Great. Okay. Glad to hear that. And I guess, that's up over last year?

Yes. Up nicely.

Good. I'm wondering what's your long-term strategy for Oil-Dri's Canadian and U.K. operations? I'm in no rush to get rid of them, by any means, but it would be nice to have them become profitable.

I agree. We've got a team in place and we have a strategy. We're going to give them time. Luckily, the rest of the business is doing well, so they have the time to try and execute that strategy. We have a very aggressive saleswoman who just joined the company within the last few months on the consumer side. And she's already uncovering the opportunities that we haven't been seeing out of that -- out of the Canadian location. And the U.K. is really solidified by helping us sell other products for our other divisions. It's a great launching point into Europe, and so I'd say U.K. is stable. In Canada, we've got plans in place to really turn that around. But like any business, we've got to give them the time to execute their strategy and then assess. And as long as we're hitting the milestones, hopefully we'll have Canada back into profitability.

Okay. Do you sell Fresh & Light into Canada?

We do, but we -- that will be part of the plan of doing more of it.

Okay. And you had mentioned before, this January 2015 thing, what -- is that a mycotoxin binder that might be ready by January 2015?

Yes, well, we call it a Clay Plus [ph]. It's all around the area of gut health, and so that's sort of what we're doing in. So it's not anything revolutionary for where Oil-Dri is, it's evolutionary, but it will be pretty -- as I've said, it's revolutionary for the market in the sense that what it is, is to replace antibiotic. It would be a non-antibiotic solution to a current gut health problem. And in our first test, I mean, we did outperform the antibiotics. So now we have got to do other species and other tests, but so far, so good.

Okay, great. Can you do similar things, competing against antibiotics for other toxins?

That's the goal. There's a big market push towards that. And so our clays are a non-antibiotic potential solution to some interesting issues.

Your last question comes from the line of Robert Smith. [ph]

So I have a question, about how much of your cat litter moves by major carters with the trucking companies, and what are the implications of them switching to natural gas? And would that help you with moderating costs in transportation?

Well, all of our cat litter is full-truck loaded. Really, it's not -- well, 98% of it is full-truck loaded because it's fully not economically feasible to do less. We do have a certain percentage of customers who pick up, but they pick up in full truckloads. So it's all going over the road pretty much, or we use boxcars to then get to a warehouse, so then it goes over the road so -- in a truck. Yes, I mean, look, anything that would help reduce the cost of freight would be good for us. There's no doubt about it, and good for our customers. And again, that's one of the real benefits of Fresh & Light to the retailer is that they can put 22% more units on a truckload. So we weight out a truck. We hit that 44,000-pound maximum. And so putting more units on a truck is advantageous. So to answer your question, yes. If the natural gas becomes a big thing for trucking and lowers the overall costs, that would be good for us. All right well, thanks, everybody. And look, we're pretty much out of time. We're very happy with the quarter. Looking forward to the fourth quarter, where we said we're going to continue to invest, but pay as we go. I mean, obviously, fiscal '12 was a year of investment, where we dipped down the earnings. '13 has been a "pay as you go," where we've been able to deliver positive earnings trend, very positive. As Dan Smith mentioned, we've reported more earnings through 9 months than we have at any 12-month period. So should be able to deliver a record year at the end of the fourth quarter. We have to qualify everything. But we're looking forward to it and continuing to push the high-value products where the customers find the most value in them. So thank you, and we'll talk to you in 3 months.

Thank you for your participation in today's conference. This concludes the presentation. Everyone may now disconnect, and have a great day.