Good day, ladies and gentlemen. And welcome to the Q2 2018 Oil-Dri Corporation of America Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions for how to participate will follow at that time [Operator Instructions]. I would now like to introduce your host for today’s conference, Mr. Dan Jaffee. Sir, you may begin.

Thank you. And welcome to our six months and second quarter teleconference. I just want to recognize that my father passed away during the quarter. And he led an incredible life. He was the best man in my wedding. He was the best man in my life. And do I miss him? Yes. But I maxed out. So he and I worked together for 31 years, building this business together and he said his biggest regret in his life was that his father didn’t live long enough to see what he did with the business, his father died when he was 26 years old. And so, I don’t have that regret thankfully. He got to see a lot of what we did. But he and I both believed and I still believe the best is yet to come. So I am sure I will be saying in a few years I wish my dad could see this. But he is looking down and smiling. And so, I just wanted to recognize that. Joining me here in the conference room is Dan Smith, our CFO; Mark Lewry, our Chief Operating Officer; Laura Scheland, our VP and General Counsel; Reagan Culbertson, our Investor Relations Manager. And then on the phone from Asia is our Chief Development Officer, Mike McPherson. So Reagan, you want to take us through the Safe Harbor?

Thank you, Dan. 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’s stock. Thank you for joining us.

Great. And I would like to turn it over to Dan Smith to review the quarter and six months.

Thanks, Dan. Good morning, everyone. Oil-Dri reported sales of $68.9 million in the second quarter of fiscal ’18, which was a 6% increase over the second quarter of fiscal ‘17. We also reported sales of $135 million for the first six months of fiscal ’18, which was a record for the first six months of a fiscal year. Our B2B team led the sales improvement of low double-digit growth in the second quarter and high single-digit growth in the first six months of the year as compared to the same period in fiscal ‘17. The retail and wholesale team sales for the first six months of fiscal ‘18 were basically flat when compared to the same period in fiscal ‘17. Despite our record sales, our earnings and diluted earnings per share were significantly impacted for the quarter and the first six months by an approximate $5 million tax expense in deferred tax asset adjustment. The adjustment was a result of the federal tax rate change in the 2017 Tax Cuts and Jobs Act enacted in December of 2017. The tax expense adjustment effectively reduced our diluted net income per share by $0.69 for both the quarter and the first six months of fiscal ‘18. This adjustment drove a reported loss for the quarter and reduced earnings for the first six months of fiscal ‘18. Without this adjustment, our year-to-date earnings per share would have been better than value reported for the first six months of fiscal ‘17. Our gross profit margin remained consistent at 28.5% for the second quarter and the first six months of fiscal ‘18. This was down from the 29.3% reported in the same quarter and the 30.2% in first six months of ‘17. We experienced increased fuel, freight, manufacturing and packaging costs which all have reduced…

Thank you, Dan. And before I open it up to Q&A, I do have some kick-off questions from Bob Smith, he can't be on the call today. But I did want to cover his questions, let's turn it over to Mike McPherson from Asia. But Mike you've got his questions and I'll let you ask them and we'll answer them.

Okay, Bob's first question was, what was some of the progress that was made in the last three months for our animal health business. And the business performed well in the quarter. Without getting into specific customer level activity, we continued to get poultry accounts and swine accounts, adopting our new products Varium and NeoPrime. We continue to optimize our distribution, especially in Latin America and focus on rolling these products about NeoPrime and Varium to the market that's where the focus has been in the last three months. That led I think to a second question on what's the significance of getting the patent in China for something that we refer to as our clay plus or our modified formulas that are the backbone of our NeoPrime and Varium technology. Obviously, we were very pleased to get those patents issued in China. That's one of many countries where we've applied for patents, they were the first to recognize the novelty of the technology and the formulas that went into NeoPrime and Varium. And in terms of the value, obviously, we have our patent protection in China, which I think is going to be helpful there. It also has helped as we’ve promoted the poultry and swine producers in other parts of the world, the recognition that the formula is unique. And I think that’s generating a lot of interest and continuing to trial the product and getting further traction in the adoption of product, again recognizing that it’s unique and patent pending still in many other countries.

Great. Thank you, Mike. And then Bob had a question on private label lightweight, which I am sure everyone else will have as well. So it is starting or it has been showing up and it's really starting to show up in greater extent in the consumer data of the Nielsen data that we subscribe to. And so we’ve talked in the past about what our share is of the private-label lightweight segment for the 52 weeks ended February 24th, a year ago, our share was 61% of that segment it's now 72% of that segment. For the 12 weeks we were 66% a year ago, we're now 81%. So you can see we’re gaining momentum and we really are the lightweight private-label player, which is great because the heavy we are -- our share is very small. Of the heavy now -- it's not concerning, it's growing as a percent of the whole category. Now I am looking at units, that was dollars this is units. Private-label lightweight represented 0.4% of the category a year ago and units is now up to 0.8, so it's doubled but it's small. And just to put that in perspective for you of course private-label which is the non-clumping is 11.7, and heavy private-label is 7.4. So all private-label represents 20.8% of the units sold in the category, that's on a 52 week basis ending February 24th of '18. So that just gives you an idea and that's consistent with what we’ve said in the past. So Jimmy, at this time, I'd like to open it up to Q&A, I like everybody to ask your most important questions first and then get to the end of the queue, so that everybody has a chance to get at least one question. And as always, we are going to have a hard stop after 30 minutes. Thanks.

[Operator Instructions] Our first question comes from Ethan Starr. Your line is now open.

Just part of -- you answered part of this, but I am curious to what extent the sales velocity at retail increasing for both private label lightweight litters as a result of the line pricing initiative and also for Cat's Pride Fresh & Light as a result of the new marketing initiative with animal shelters, the Litter for Good?

I missed the first part of your question, what was the first part…

Sales velocity at retail?

Sales for…

You’ve seen more movements up?

Absolutely, and I am not going to get into specifics because I really can't. But I can tell you that obviously was all categories I would say other than luxury, luxury items are priced, related to some extent and usually the lion’s share of the category, and that maybe niches wont' be, cat litter is absolutely that way. And we are seeing our movement where we’ve executed more aggressive pricing on our lightweight private labels where we’ve gone to parity with the heavies we are seeing a tremendous increase in velocity. And then we’re executing aggressive strategies at retail on our brand as well whether can the retailer will give us incremental shelf space or end caps or quarter pallets or things like that in exchange for more aggressive pricing and that's working. The Litter for Good program is exceeding our expectations in the short run, but it’s going to be a long slot. This is a program that’s going to take a lot of execution. We have to reach out to the shelters. We have to get them signed up and authorized, even receive our free litter. And so who knows, no one knows exactly how many shelters there are. But there -- I’ve heard any number from 12,000 to 13,000 shelters in the U.S. So at this point we’ve may be activated 1% to 1.5% of them. And I can tell you as a leading indicator this is what I look at Cat’s Pride club membership. We were signing before Litter for Good may be one to two consumers a day on average for like the three years leading up to Litter for Good. Since the launch of Litter for Good, which has only been really two full months, we’re now signing up on average 72 a day. So a 36 to a 50-fold increase depending on how you want to round our past numbers, and that’s with 1% activation. So if you can imagine, 10% activation or bringing an HD a 100% activation, you can imagine what that would mean. So clearly it’s resonating with the consumers and the donors that have heard about it. We’ve actually made our first shipment of free litter or made more than that but we’re off to a brand new shelter that’s new to us, it’s getting a truckload of litter. We’re actually going to be sending another one out in East Coast this week and our program manager will be out there to take pictures and do all PR around it. But the program is working and it’s very exciting.

What’s you at activation levels, you mentioned that I just didn’t understand that?

Well, here’s the deal. So we send out email blast to do shelters, but they then have to recognize that they’ve gotten this email and then they have to go -- there is a special shelter section of our Web site that’s private to them where they have to put in all sorts of information so that we can actually make the donation. And then they need to actively market which they would do so that they can get free litter to their donor base. But if they haven’t taken the time to register then they are really -- they are not active yet. And so while we send out email blast to about 10% of the shelters, and I’ll say may be covering 30% of the adoption, because we obviously went for the biggest ones first and those were the easiest ones to find, ones that have a Web presence and things like that. So while we send out to 10%, only about 10% of the ones we sent out to were actually responded. So now we have to call them all, and that’s not so easy. You’ve got to get names and numbers and all that kind of stuff. So it’s an executional war but I love our chance at it and it’s a snowball, once you get them activated and get on-board it’s amazing. I can give you just anecdotally. We have one huge shelter that wasn’t really participating like they should have. And in the first month and a half, they got very few nominations. Once we reached out to them and actually put an e-mail blast out to their donors, they got tripled those donations in three days from nomination in three days. So they just need to activate their donor base and let them know hey we need you to buy the green jugs so that we get free litter. So it’s a great program, but it’s a ground war not an air war.

I have more questions I am happy to get back in the queue if Bob was not on the call.

So go back in the queue and hopefully someone else will have a question.

Thank you. And the next question comes from John Bair. Your line is now open.

Good morning, Dan and condolences again to you and your family and the entire Oil-Dri family. Dad was pretty special even though I didn’t get to know him that well, but always very generous and a real gentleman. Okay, on to business here. Noticed in the release you said your ag carrier application granules were up rather significantly, and I guess it was 50%. So I was wondering if that is due to a new customer, a new product launch -- and is it something that you believe it will -- the momentum of that will continue obviously not necessarily at the 50% rate, which would be nice, but wondering if you could tell us a little bit about that.

Hey Mike, I think I’ll refer to you.

It’s primarily driven from the acquisition of a new customer. Although, there are several other customers in there that contributed to it, but far in a way it was one significant customer. And in general, over the last several years, there's been a resurgence in the use of our clay granules as carriers, not only in the bio-pesticides area but also with traditional synthetic chemistries. And there are a number of projects that we have underway with customers that are in the works that we expect to continue coming to commercial fruition over the course of the next several quarters. So we think the future looks very bright for the continued growth of our ag carriers business.

So this is something that has some momentum behind, it will be recurring product sales, if you will. Is that a fair statement?

In general, yes. And also this particular new account, this isn’t a one-time seasonal purchase this is for an ongoing product that they commercialize.

But it is seasonal. Is that what I caught there?

No, I'm saying that it is not seasonal, it's included in one of their formulas that they had just introduced. So we expect this to be a reoccurring business, not a one-time formulation, let's say, we'll use it for a season and then move off in the following season.

And a corollary question with Latin American sales. Is that improvement also something that you feel is a -- that will have some continuation to it?

Yes, you're referring there to…

There was a reference in the release that there was an improvement in the Latin American animal health business…

It was due to the animal health business or Mike, it was due to the animal health business that was the right…

Yes, it was animal health and the specialty business also was up in the quarter. On the animal health side, we've been working on a number of things, which we do expect to continue to accelerate the growth going forward versus as we have in the past. We've made a number of distribution changes. We've made changes in our marketing mix, our promotional activity, how we engage perspective customers in the region that have directly resulted in greater sales velocity of our animal health products. And the currency situation in Brazil has improved somewhat, which has allowed greater use of our production grade products in Brazil. And as long as the exchange rates remain favorable, we would expect that to continue.

Thank you. And we have a follow-up question from Ethan Starr. You line is once again open.

Are you continuing to get new private label lightweight customers?

Yes.

Would it make a difference, a substantial difference in sales or it's minor?

I mean they’ll impact to our overall business. They’re still rolling on and they're already committed just working on packaging and roll updates and things like that.

Can you foresee a time somewhere in the future when lightweight will be proportional to private label business that you can almost eliminate heavyweight?

Well, in my dreams I would love that, sure. I would say there's nothing on the short term horizon to say that but that's certainly the goal. I mean again logically speaking, if you can get the consumer equal performance at an equal price and they get the benefit of half the way, nobody is valuing rates. They either don't believe they can get performance or the price, but yes. So logically speaking there should come a day when we shouldn't be talking about heavy and lightweights, it's just cat litter and it's by volume, just like animal baiting is used by volume, no one things about how much these cedar chips weight that they put in their hamsters have a trail. And we want to get it to the point where weight comes out of the equation.

Hopefully, you'll be saving a little bit of money once fiscal '18 passes with the tax bill. I wonder do you have any plans for the money or whatever was saved. I mean sure if you want to you can find ways to spend it, but you might want to save it and let it accumulate in the balance sheet?

We’re going to continue to look at our cash balances and look at investment opportunities in terms of capital and other acquisitions as we've always done in the past. And we are not going to discuss any individual plans that may or may not be on horizon.

I know at the annual meeting you mentioned you had hired an environmental manager for the company. And I am just wondering would that help reduce cost across the company?

I wouldn't think so. We’ve always got an environmental manager we just hired a new one. So we’re in the mining business so…

Yes, I know. I just didn’t know. Okay, I’ll get back in the queue.

Thank you. And we have a follow-up question from John Bair. Your line is open once again.

Just a follow-up there to Ethan's question about the cats so you do have pretty much excess cash. Have you done any share buybacks recently on this price dip of the stock, and can you address that?

It's a valid question and obviously, we're always looking at it. We do have shares that have been authorized so we do but I don’t know if…

And now had a floor ceiling, we do have around 300,000 that have been authorized and that information, the exact information is in the 10-K that was release in October. And we always just consider from time-to-time.

So we’ve got a Board meeting coming up, I am sure that will be a topic of discussion. But that’s a possibility.

And then in the past you’ve usually made a comment about resin costs and transportation and so forth. And I know we had a spike in nat gas prices and so forth. I am wondering if the resin prices, shipping costs have abated. I know there’s been a lot of tightness in the shipping area and so forth. I am just wondering what you’re seeing in along those lines?

So natural gas, yes, we’ve seen an increase year-over-year. We certainly anticipated some of that when we budgeted because futures were up at that time. What we didn’t anticipate is really the cold snap we had in January, which reached down to our southern plants. And so we had some increases in cost there. But those have already modulated and we don’t expect anything significant out of natural gas for the rest of the year.

The price was down pretty low, yes, I mean there’s a pretty…

Exactly. Yes, it’s under $3 in MMBtu. So we don’t really see anything there. Your question on freight is a good one, particularly in the second quarter we saw a continued tightening of the supply and demand. There has also been few changes in regulation, which have restricted driver hours. So that looks like it’s take a little more time to even out and rebalance and so we’re expecting that to go on for a period of time before that equilibrates.

Thank you. And we have time for one more question from Ethan Starr. Your line is now open.

Yes, I am wondering how the ERP software installation is going and are you starting to see savings from that? And also I’d like to encourage you to increase the length of the conference calls, even 10 or 15 minutes will be helpful. It will still be shorter than a deposition what you had recently.

That’s what we’re going to compare it to. Yes, and whatever, I won’t go there. ERP, we are coming in faster and under budget? Not. I mean I think everybody that ever goes through these things knows, they take longer and they cost more. We have a current go live date of 8/1. Everyone is working very, very hard to make that happen. We believe we are on track for that. We’re having to add incremental resources to make sure we meet all the deadlines necessary on the critical paths in order to get that up and running. So in terms of savings, no, I think those savings at this point it’s pure cost. But long-term, there should be savings. But no, it hasn’t gone live yet, it comes up hopefully on 8/1.

Can you just give us the cost from that, the invest -- potentially the profits once the cost disappear?

Say again Ethan, you cut out?

Can you give us an idea of the cost involved that will disappear once you implement, once it goes live in stock and hopefully that will be -- it’s accrued profits in the future, the costs?

Ethan, we have not broken out on that level of specificity and I am not prepared to do that at this time.

Okay, thanks. And I want to hear John Bair’s last question.

Let’s give John one last question.

John Bair's currently -- your line is open once more for your last question.

I guess maybe I didn’t hit the star one after I said I had one more, since anyways. Okay. At the inter-meeting, you're talking little bit about the -- you had I guess a bottleneck of some sort within China with a reformulation that put things on hold with animal health. And I was just wondering if there's been any progress with the entity due to the merger, some Chinese companies or whatnot and wondering if that's working its way through to where they may come back online with you or not.

Mike, you want to?

John, you're referring to the last quarter call?

Yes, there was a drop off, because this company, the Chinese company change their formulation or mix or something. And so it bumped you out I guess as far as -- until they got their systems straightened out or testing or whatever it was that they…

They stopped making their own feed and they have another customer of ours making the feed for them. Although, that other company did order a lot of our material in the second quarter, we don't think that there was enough to really indicate that they're making, they're using our product in the feed that they're now making for our former customer. But we're going to see how it plays out over the next quarter and then we’ll have a better understanding, if eventually they're going to begin to incorporate our materials into the feed they're making for the former customer or if in fact somewhere in the transition we lost that opportunity. But we're in China right now, the Amlan team and they have a lot of other exciting opportunities that we're working on. So long term. Although, that transition affected the one quarter we still expect ongoing and continued growth in China.

And just want to thank everyone for your continued interest and looking forward to the next three months and we'll be back at you after the end of the third quarter. So thank you everybody and we'll talk to you again.

Ladies and gentlemen, this does conclude your program and you may all disconnect. Everyone, have a great day.