Good day, ladies and gentlemen, and welcome to the Oil-Dri Corporation of America Second Quarter 2017 Earnings Conference Call. At this time all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to turn the conference over to Dan Jaffee, President and CEO. You may begin.

Okay, thank you, Nicole and welcome everyone to our six months investor teleconference. With me we have the usual Doug Graham, General Counsel; Dan Smith, CFO, special guest, Mike McPherson, our Chief Development Officer. He’ll be here to answer specific questions including things related to Amlan as Ron Cravens, is somewhere in Asia I think right now. And Laura Scheland our Assistant General Counsel will be monitoring the call and taking us through the Safe Harbor Provisions.

Thank you, Dan. On today’s call, comments may contain forward-looking statements regarding the company’s performance in future periods. Actual results in these periods may materially differ. In our press release and our SEC filings we highlight a number of important risk factors, trends and uncertainness that affect our future performance. We ask that you review and consider those factors in evaluating the company’s comments and in evaluating any investments in Oil-Dri’s stock. Thank you for joining us.

And Dan, will you walk us through the quarter and the six months?

I will. Good morning to everyone. Oil-Dri reported EPS of $0.58 per diluted share for the second quarter of fiscal ‘17, which was about 10% than the $0.53 reported in the second quarter of fiscal ‘16. For the first six-months we reported $0.86 per diluted share, which was down substantially from the $1.28 reported in the same period in fiscal 2016. Second quarter sales of about $65.2 million were down slightly from the second quarter of fiscal 2016. Year-to-date our sales of $131.8 million were down above 1% from fiscal 2016. The sales decline for the quarter and year-to-date were driven by the decision to walk away from some low margin cat litters sales during the second half of fiscal 2016. Our gross margin continued to grow despite the sales decline. Sales of our higher value added product lines offset cost increases for the natural gas we use to dry our products. However, earnings for the year to date were still down compared to last year due to about $5 million more in advertising expenses in the retail and wholesale segment. Our retail and wholesale team reported about $5 million of profit for the quarter which was up above 16% better than the second quarter of fiscal 2016. Sales were down to the discontinued low margin business I had mentioned earlier. Gross profit was up due to our focus on Cat’s Pride Fresh & Light Ultimate Care and private label lightweight cat litters. Year-to-date the segments profit was down compared to fiscal 2016 largely due to the fact that we have invested about $5 million more in advertising and marketing this year. The spending increase was part of our ongoing marketing campaign to promote our Fresh & Light Ultimate light weight cat litters. However, we anticipate in the second half…

Great, thank you Dan. Yes, great quarter we are right on target with what we thought we were going to do and we’re delivering, so that’s great. Nicole would like to open it up for Q&A. And as always, ask your most important question first and then go to the back of the queue to allow everybody a chance to get at least one question. Thanks.

Thank you. [Operator Instructions] And our first question comes from the line of Ethan Starr, a private investor. Your line is now open.

Good morning.

Hi, Ethan.

You are spending a lot of money advertising the Fresh & Light Ultimate cat litters and I’m wondering what extents the retail sales are not meeting or exceeding your internal return on investment hurdles and is the shift of retailers and trade promotions from advertising due to these return on investment from advertising not meeting expectations?

Well you were only allowed to ask one question, and I understand. I’ll cover both. It’s a good question and obviously any time you are trying to get a snow ball to roll, your initial spend is going to be greater than what you could justify based on sales or income. However, as you’ll recall if you go back, I don’t know maybe six years ago when we launched Light Weight, I really said it was a two pronged strategy that what we needed to do was get the Dominos falling on the branded side and hope that the competition would jump in, validate the category and then jump in and come out with the private label side. So when I do the math, I count that all together, because we can’t get the private label if the brand doesn’t succeed. You can’t – nobody wants a private label of some item if there isn’t an existing success for brand that they aspire to purchase at a lower price but hopefully equal through a better quality. So, when I run the metrics, that’s how I do it. If you isolate just the Ultimate Care sales which is what the commercials are running, and then put the spend 100% against that, yes, no that would be an ugly ROI and not long term sustainable. But I would say, the way I look at the business, as I told our entire Light Weight business which started at zero really six years ago and then I take that entire business which has been growing and healthy, which is why you are seeing the margins of the company swing the way they have in the last five years and then you put the media spend against, it’s still not great, but the snowball’s growing and so it is more than sustainable which again is why we continue to generate cash even when we are spending so much against media. So net, net, net am I happy with the spend? The answer is absolutely yes, it’s been an unmitigated success for Oil-Dri and you can see it in the numbers. I mean, I [Indiscernible] you guys all with the metrics of per tonne sales, and per tonne gross profit and you guys can see the margin, the percentages that have gone up, up. So net, net, net it’s been a big win.

Great. Okay, and the shift to more trade promotions?

That’s just a marketing mix things. So we are trying to play money ball, well it just gives you spend x-million to dollars, does it mean every single spend has equal value and what we are finding is if you run too much too much media all you really do if you don’t get the trade behind it drive your [out] of stocks [Indiscernible]. So instead of going out of stock on Saturday, you go out of stock on Thursday, but either way you are not selling any more incremental units because there are no more units until Sunday night when they replenish the shelf’s and prepare for the next week. So what we are doing is just balancing it out where we are getting the trade to load up. So we are dangling incentive deals, where they are giving us and isle displays, and caps, quarter pallets, half pallets all sorts of incremental. They only get the money if we get incremental distribution so that we can increase the holding power of its shelf. Then you run the TV and loan behold you see the incremental lift because there is more units to be sold. Does that make sense?

Absolutely, very helpful. I’ll get back in the queue.

Thank you. And our next question comes from the line of Robert Smith of Center for Performance. Your line is now open.

Hi, good morning. Thanks for taking my question.

Hi, Bob.

So I guess you said that Mike’s on board here.

Yes.

Okay, so in your press release about Varium you said “It is well known that there is a global effort to reduce or eliminate the use of antibiotics and live stock production and we continue to believe that Varium will become one of several viable options helping poultry producers in this effort”. Mike, could you give me a headups on what are the other options that are available?

Sure, poultry producers around the world especially in Europe where antibiotics have been banned for a while though use essential oils, such as Oregano oil, peppermint oil, those types of oil are believed to have anti microbial properties and will kill certain types of bacteria.

Do you have any idea as to how Varium specs up against those other items?

Yes, we’ve compared that In-Vivo and it compares well, so it’s favorable.

So you have a brand of product.

Well, we’ve proving it up in the fields, we’ve also had some producers that have trialed it. In a production environment against essential oils and Varium has come out favorable, meaning it’s had a greater impact on the birds and essential oils. Fatty acids and there’s 17 of them, I won’t get into all the different types, but various fatty acids are used, they are also believed to have anti microbial properties, direct feed, microbials is another class [various planned] extracts are reported to have properties, a lot of these if not most of them have no efficacy data to support their claims. You got a lot of marketing, lot of PR, not a lot of research like Varium.

The release that said that they have ten for one return on investments sounds tremendous. I mean they take that to the bank, I mean so how are you guys seeing that taken in the field so to speak. I mean did that get to raise some eye brows or....

Yes, from the producer’s standpoint, yes it’s raised a lot of eyebrows. They couldn’t believe the results, so they did another study that usually what we’re seeing. The results have been very positive. They go back and do another study to further validate it. That particular producer had two studies in a row with that level. They are now using it in about half their production and they are going to run that way for about six more months and if it continues to have the favorable effect, they are going to be eliminating antibiotics even though they have no regulatory pressure to get rid of them because it is performing equally but then it does some other things to the birds that are favorable.

Okay, well it sounds like you are on the customer, something really very, very positive. So I’ll keep my fingers crossed. Thanks, I’ll get back in the queue.

Thank you. Our next question comes from the line of John Bair of Ascend Wealth Advisors. Your line is now open.

Excuse me, good morning Dan.

Hi, John.

In your press release you said, you mentioned that the removal low margin cat litter business, lower sales, to what extent is the removal of that coarse grain stuff being replaced or augmented by the newer products, or is the sales just kind of going away? Does that make sense?

Yes, I mean, it’s like anything. It’s not black and white, it’s not a 100% where we’ve gotten out of the course and we’ve replaced it with high value light weight. But that there are numerous examples of where there’s happening. Unfortunately there’s a timing issue. So in one of the major accounts that we moved away from, we are now – we’ve been awarded the light weight business, I’m not going to get into the details but we are working on packaging and all that kind of stuff. So it hasn’t started shipping yet. So we’ve had all the negative, a race really because it wasn’t great business for us, but from the topline stand point we are taking all the hit. And the positive boost is still yet to come.

Okay. And is that typically what happens if a private label will off course buyer decides to or maybe it’s on your front where you back off of it there is a lag time to convert them to saying, hey you really need to do the finer grained modern day product.

Yes, and it’s so dynamic, this is such a disruptive innovation that a lot of this is unchartered territory. It’s not like this goes on everyday, where you go to a retailer and say, we no longer want the old technology business even though there are plenty of consumers that were going to with it, but it’s just not profitable for us, we want the new technology and this is where you want to go as a retailer because this is where all the growth in the category is. So it’s there is a lot of its and starts to it, but net, net, net it’s a big win. It’s not like one step up and two steps back, it’s the other way around. It’s one step back and two steps forward and it’s just going to, it’s going to take patience. It’s going to start, it’s already showing in the margin line but it will even start showing in the topline as we move forward.

Okay, I’ve got another question but I’ll get back in the queue per your instructions.

You are the only who want to listen to me. I mean Ethan about fire-up two, three at a time.

All right. And our next question comes from Ethan Star, Private Investor. Your lines now open.

Hey. I just follow what everyone else does.

You’re the leader. No one’s ever done than before you.

Well, I try. I know you just mentioned when you response to John Barr, another, a new Private Label lightweight customer, if it hasn’t gained from the other new private label customers in the last three months?

Numerous, the dominoes are continuing to fall. Our technology is proving to be the best. And what's really going on now is many of our partners now are wanting to put the efficacy, the loads concept onto the package, so that’s going to start rolling out, we want that to become the industry standard. And so, that you'll actually have to tell the consumer how many loads you're delivering, because what's happening is people are calling stuff lightweight which would be like calling something concentrated in liquid detergent analogy, but then instead of it being 80 loads in the big format and 80 loads in the small format they just took out 40 loads and its’ 80 and 40. Well that’s a rip-off, that's not innovation. So we’re putting it on the package. We’re putting it on all our brands and now our private-label partners are all putting it on their packaging. So we believe that the competition is going to get dragged, kicking and screaming into adopting this as the standard. Well, they’re going to have to disclose how many loads are delivering to the consumer.

Okay, great. So when we’ll see all these private label customers, private label lightweight customers going from the top-line and bottom-line?

I mean I don't know. It takes time. I know everyone's impatient, but this is going to be a big win, long long-term win for the company. So getting the packaging right, they’ve got to take off old stuff, they got to work in the new stuff. They have to rebalance shelves. There is all sorts of dynamics going on. So I'm not really -- I don’t get too much for guidance, but within your lifetime you'll see it.

Okay, great. First, how is this Katherine Heigl packaging doing a s far as retail velocity compared to the packages of that or [picture]?

Too soon to read, but we’re certainly, the anecdotals are very good, we’re waiting for it actually hit the syndicated data, but that’s too soon to read that, but…

Okay. Thanks. I’ll get back in the queue.

Okay. Thanks.

Thank you. Our next question comes from Robert Smith of Center for Performance. Your line is now open.

Hi. So I just want to know – have the clarification. So, for the first six months year-end promotion budget was up $4.6 million. Is that true?

Robert, about $5 million.

Well, 5 million, minus 400,000, so you’re saying…?

Well, in the first six months it was about $5 million.

Okay. So that's going to be retraced in the second half, so you’ll be adding really $5 million for the second half versus the comparative figure for the last six months of the prior fiscal year?

That’s not necessarily a case.

But you said total and promotional budget will be lower than 2016 – than fiscal 2016?

Okay. Yes. The total advertising spend is currently projected to be lower than fiscal 2016, but you’re assuming that the first half and the second half plans were exactly equal which they may not have been.

No. I’m trying to recapture the $5 million in the first half, which was an incremental spent, right, so if that's going to be reduced to less than last year. So it's got to be minus $5 million?

Robert, we’re refocusing some of that advertising spend to trade promotion. So, we’re still spending money. It's just being spent differently.

Okay. So I misinterpreted what you said.

I believe that's fair to say.

Okay. All right. I’ll get back in the queue. Thanks.

All right. Thanks.

Thank you. Our next question comes from the line of John Bair of Ascend Wealth Advisors. Your line is now open.

Okay. Thank you. I want to go back to your response to Bob's question about the Varium and what is, or can you shed some light on the differential of using those oregano oils and forget but the other was versus Varium. Is there a cost effectiveness of using one verse to the others from the poultry producer’s vantage point? How competitive is your product versus those alternatives I guess is what I’m getting at?

On a cost per use basis, Varium is favorable to any one additive. What we’re finding when we talk to producers in the United States and pretty much anywhere in the world. Due to the fact that those alternatives to antibiotic that I mentioned, essential oil, plant extracts, direct-fed microbials, none of them have the same efficacy or the same outcome that you get with using an antibiotic. So as a result, they use combinations of those things. Without a lot of rhyme and reason the industry stay – it’s still trying to find efficacious solution. So they’ll use for example, [a yeast], a little bit of an essential oil and a little bit of a plant extract and they’ll do that and use it for a while. And then when they have an upset condition in their farm and their mortality starts to go up or the feed conversion starts to rise they’ll just change. They’ll get rid of essential oil on those substitutes -- some other material in. So, I’d say typically no fewer than two, but I’d say more typical three different additives are used to try to get the same outcome as an antibiotic. Varium we’re finding can be used by itself without any of those other additives and from that standpoint it's less expensive.

Okay. And how did they – how are those oils -- how does the animal ingest that. Is it just s mixed in with the feed or how just in general I’m just curious?

Most of its put into the feed, there’ll be a couple of additives that are added to the watering system and some do both. Some will put the essential oil in the feed. Some will deliver it through the watering system.

And then, roasted chicken have an oregano flavor to it, and that will be interesting. Okay. Thanks very much.

[Indiscernible]

Thank you. Our next question comes from the Ethan Star, Private Investor. Your line is now open.

Prior to 10-Q you said 26% more tons of animal health and nutrition products in China and this year’s Q2 versus last year’s Q2. Is that increased sustainable or what are the factors behind this?

Is it sustainable?

Yes.

Before we expected to continue growing strong that's been all, we’re relatively new to China. All of that is new account acquisition and prior accounts that we obtained in the previous year more broadly using our products and their operation as you might imagine. These producers in China are absolutely enormous. Most are involved in poultry and swine. So sometimes you get into their swine operation. They’ll expand into various parts -- different segments of their swine business over the course of a 12 month period and then begin to expand you into the poultry business. So growing with these big mega producers is a multi-year prospect. But once they love your products they’ll provide a lot of growth.

Okay. But it sounds like it’s still very small in dollar terms?

Yes.

It’s probably a fair statement.

Okay, great. Anything new you had in the innovation center?

Yes. Let us tell you all the secrets. Yes, no, I can’t talk about this. But yes, we got exciting things going on really in every division and then I would say the most exciting thing we’re doing out there is breaking down the barriers because the chemistry around something you might do in one division actually has applicability to another division. So it use to be very side-load and now it reports up in the Mike. And I don't know if you want to about but I’m loving the cross collaboration. I'm loving when I'm reading the reports and I'm seeing things one guys working on. We used to have nothing to do with cat litter for instance. It’s now taking his expertise on formulations or whatever and then bringing it over to cat litter.

Great. Okay. I’ll get back in the queue. Thank you.

Okay. Thanks.

Thank you. And out next question comes from the line of Robert Smith of Center for Performance. Your line is now open.

Hi. So Walmarts been putting some pressure on suppliers to reduce prices and I’m wondering how that effects you or might affect you, and the question is then doing free shipping would seem to imply that it would be in their best interest to really push the lightweight litter, so just give me some idea as to how you feel about that?

Well, I mean, look, I love Walmart. They are transparent with their strategy. You make it sound like this is a new direction for Walmart like now Walmart is going to be all about price. They've always battled hard. They've made it clear to us, they are not our customer. Their customer is our customer. And we need to work together to take cost out of the supply chain, do everything we can so that there they can bring really a better quality of life to the middle and lower half of America. I mean I think they’ve ran a statistic, and I'm probably misquoting it, but it will be directionally correct. That like, 70% of their shoppers don't have a credit card. I mean, these people get the pay check, cash it and go right to Walmart. That's why the first week of each month their business spikes because that’s when people are often getting paid. So that's not a new direction for them and they’re very transparent with their strategy which I like because I tend to do better at bowling when I can see the pins and they let you see the pins which is great. And then regarding lightweight absolutely, I mean think about it, not only is a good for the environment, but if the whole categories switches to lightweight and we can cut the number of trucks in half. Well that frees up I think something like 22,000 truckloads not having to go into Walmart distribution centers. Well, that's a big problem for them is bottleneck at their DCs and so it's absolutely in their best interest to see lightweight continue to take over the category because they can cut the number of trucks coming into the distribution centers in half. So it's good for the environment. It’s good for consumer. It’s good for the retailer and just coincidentally it's good for the Oil-Dri.

Yes. I was thinking more in terms of them shipping the product to their customers, so if they are providing free shipping, I mean it’s certainly a cost advantage to them to pay less in shipping the products?

Sure. Not, I mean, that’s true with the same-store of [Amazon and Julie]. So the e-tailing business in cat litters is actually going up. And I think that’s the exact reason why, because there’s more value per pound than there ever was. You can’t afford to ship a 50 pound bag of low value course cat litter anywhere.

Thanks.

Yes.

Thank you. And our last question comes from the line of Ethan Star, Private Investor. Your line is now open.

Thank you. How is your afford to upgrade consumer manufacturing lines is progressing?

Excellent. We did a divide and conquer strategy when we brought in Aaron Christiansen and he and his team are -- as we say, that’s not even low hanging fruit. They have to step over the fruit to get to the line. And Mike in his development team are been working hand in glove with them and they’re making huge progress. So our quality has never been better. Our efficiencies have never been higher and yet we all believe we have a long way to go. So it's all about continuous improvement but we don't feel like we've played out the string on either one of them, either the quality or the efficiency side. Higher quality leads to lower cost because you reduce waste, you reduce mass inspection, so it all works hand in glove and I would literally say we’re at the beginning of the whole curve not the end, but it's exciting because we’re finding huge areas to focus and improve on. So it's been a great focus for the company.

Great. And then, about the ERP implementation, how is that going and are you already seeing cost savings?

No cost savings, but Dan why don’t you take that?

The ERP process is going, Ethan. We’ve spent a little bit of money. Our CapEx is up. But it’s a journey. We don’t anticipate getting the system up and running until mid to late fiscal 2018.

Well, and just I guess to manage expectation. So at the beginning it’s going to increase costs. So for instance, let’s give him forward look at one thing. The Grant Thornton is basically going to have audit two systems. When we go live they’re going to have to – it’s almost a doing a new audit. And so, they’re auditing costs are going to go up that year. It’s not going to a saving. Now that will be a one-time thing and then the next year that will start to trend back and eventually it should get back to where it was, maybe it will end up being even lower because they can have greater reliance on systems.

And you’re going to spend a lot of capital dollars putting the system in place and that will raise your cost initially, but then you hope to get productivity and operational gains from better information that type of thing?

But I will tell you again, this is good disclosure for those on the call, these are the Oil-Dri and if you’re involved in any other businesses. For years we tried to justify it on a pure ROI basis and so we never approved it, because it's so disastrous, you’re using all those incremental resource and then finally you get to the point where it's infrastructure, it's like we had lead pipes and we needed to put in copper. We had tube and knob, but we needed conduit, just to be on the come in and go work in ship, bill and invoice we needed to gut the house and put in new infrastructure. We really didn’t get, we are going to get some new rooms and maybe their lights will come on a little faster, but in reality it was just to allow us to keep doing business. We could no longer find people they could program on the old system, nobody wanted to learn that technology because it was literally started back with the old cards on the system three in the late sixties. So, it was all about infrastructure and the future. So in my mind, any efficiency gains we get is [gravy] but really the goal is the day after the implementation to be able to ship and bill an invoice. And if we can do that, I’ll be a happy camper.

Great. Thank you.

Okay. Thanks.

Thank you. And that is all the time we have for questions today. I like to hand the call back over to Dan Jaffee for any closing remarks.

Okay, thank you Nicole. And thanks everybody for your interest and we’ll be with you in 90 days to report the third quarter in nine months. So thanks very much. Bye, bye.

Ladies and gentlemen, thank you for participating in today’s conference. That does conclude today’s program. You may all disconnect. Everyone have a great day.