U.S. Markets open in 1 hr 3 mins

Edited Transcript of ODC earnings conference call or presentation 11-Oct-19 3:00pm GMT

Q4 2019 Oil-Dri Corporation of America Earnings Call

CHICAGO Oct 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Oil-Dri Corporation of America earnings conference call or presentation Friday, October 11, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Daniel S. Jaffee

Oil-Dri Corporation of America - Chairman, CEO & President

* Jessica Doyle Moskowitz

Oil-Dri Corporation of America - VP & GM of Consumer Products Division

* Laura Guest Scheland

Oil-Dri Corporation of America - VP, General Counsel & Secretary

* Leslie A. Garber

Oil-Dri Corporation of America - IR Manager

* Michael Andrew McPherson

Oil-Dri Corporation of America - Chief Development Officer & Group VP of B2B

* Molly D. VandenHeuvel

Oil-Dri Corporation of America - COO

* Susan Marie Kreh

Oil-Dri Corporation of America - CFO

================================================================================

Conference Call Participants

================================================================================

* John H. Bair

Ascend Wealth Advisors, LLC - President

* Robert Smith;Center for Performance Investing;Analyst

* Ethan Starr

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2019 Oil-Dri Corporation of America Earnings Conference Call. (Operator Instructions) Please be advised that today's conference may be recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Dan Jaffee, President and CEO. Sir, you may begin.

--------------------------------------------------------------------------------

Daniel S. Jaffee, Oil-Dri Corporation of America - Chairman, CEO & President [2]

--------------------------------------------------------------------------------

Okay. Thank you. Welcome everybody to the fourth quarter and fiscal year-end 2019 teleconference. This is Dan Jaffee. I'm the President and CEO, and we're going to introduce everyone and this way you'll know who you can ask questions of.

--------------------------------------------------------------------------------

Michael Andrew McPherson, Oil-Dri Corporation of America - Chief Development Officer & Group VP of B2B [3]

--------------------------------------------------------------------------------

I'm Mike McPherson. I'm the Group Vice President of the B2B area.

--------------------------------------------------------------------------------

Jessica Doyle Moskowitz, Oil-Dri Corporation of America - VP & GM of Consumer Products Division [4]

--------------------------------------------------------------------------------

Hi. This is Jessica Moskowitz, Vice President and General Manager of the Consumer Products division.

--------------------------------------------------------------------------------

Laura Guest Scheland, Oil-Dri Corporation of America - VP, General Counsel & Secretary [5]

--------------------------------------------------------------------------------

Hi. Laura Scheland, Vice President and General Counsel.

--------------------------------------------------------------------------------

Susan Marie Kreh, Oil-Dri Corporation of America - CFO [6]

--------------------------------------------------------------------------------

Good morning. This is Susan Kreh, the CFO.

--------------------------------------------------------------------------------

Molly D. VandenHeuvel, Oil-Dri Corporation of America - COO [7]

--------------------------------------------------------------------------------

Hi. This is Molly VandenHeuvel, Chief Operating Officer.

--------------------------------------------------------------------------------

Leslie A. Garber, Oil-Dri Corporation of America - IR Manager [8]

--------------------------------------------------------------------------------

Hi. I'm Leslie Garber, Manager of Investor Relations, and I will deliver the safe harbor statement.

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 for joining us. Dan?

--------------------------------------------------------------------------------

Daniel S. Jaffee, Oil-Dri Corporation of America - Chairman, CEO & President [9]

--------------------------------------------------------------------------------

Yes. Thank you, Leslie. And before I turn it over to Susan for some play-by-play, I'm going to put some color on the fiscal year. This really was an incredible fiscal year. I mean on August 1, we went live with our new JD Edwards ERP system. And from what I've heard, the easier transition's that when you go from one system to another. The hardest transition is that when you go from basically no system to a new system, and that's what we had to do because the legacy software we had was written in the 1960s on punch cards and was just updated, updated, updated and was the farthest thing from an ERP system. It was just really a financial reporting system. Every -- the plants and the sales divisions for the most part have the workaround system and have their own packages to try and get the information they needed to do their job. So for the first time, we have an integrated real-time system. And on August 1, we flipped the switch, and it was painful. And those of you who have owned the stock through that period know what a tough financial quarter we had just trying to get orders shipped and invoices sent out and then collecting the money. So it was a very dynamic beginning to the year.

Additionally, we made a number of very important senior management organizational changes, and I'd like to review them with you because, as of always, investment in Oil-Dri is really an investment in the people who are coming in every day to try and Create Value from Sorbent Minerals. And I'll do these in chronological order, best of my memory as to when the moves were made. But Flemming Mahs joined us as President of Amlan International pretty much August 1. So I know I got that one right. And then Susan Kreh joined us as Chief Financial Officer. Kevin Dombrowski joined us as Head of our IT group. Caleb Stephenson joined us and take over our treasury function. Molly VandenHeuvel joined us as our Chief Operating Officer. Jessica Moskowitz was promoted to VP of the Consumer Products division and General Manager. Tom Cofsky became our Vice President of Global infrastructure, which then opened up Manufacturing. So then Aaron Christiansen became the VP of Manufacturing. He even made a couple of moves where he moved a plant manager, David Downs, from Ripley over to Georgia to take the place of [Hiram Rivera] who was -- moving on to other duties within the company. And then George Handler was promoted in Ripley to take David's role. So -- and Tracy Smithey was promoted in Mississippi as the Regional Manufacturing Manager overall with the Midwestern plants there. So a lot of dynamic changes.

And as you see in the progression of results, pretty much -- I'm not going to say they're all for the good. But to me, they're all for the good. I mean it's hard to declare victory in 1 year, but I'm proud of every single move that was made. It sure made my life easier as the team is very solid. And then we had a lot of people who stayed in their existing roles, long-time players running each of our divisions. And so it really was a win-win, a blending of the new with the old, a new system and then implementing S&OP to try and take full advantage of that system.

So we're very excited that the year ended on a high note. Oh, and I forgot, and we actually won a patent litigation case, which was an amazing thing in and of itself. And that was the culmination of about 4 years of legal work so -- and a validation of our IP efforts. So a lot going on during fiscal '19, a lot of momentum heading into fiscal '20. And as I told the inside team and as I'm telling you now, I really believe this is going to be one of the most important years in the company's history. It's going to be a sentimental moment when we sort of transformed from basically everything running through me because that's just the way the old system demanded it. There just wasn't enough visibility for everyone to do their jobs and make the decisions they needed to make. And now each of these individual leaders not only has the skill set to do -- to make their own decisions, but is now empowered to do so and actually have the information they need. So I'm still very much engaged, but I'm able to actually do the job of a CEO and not always have to get down into the minutiae of details. So I'm very happy.

And I'll tell you, as an investor and from a Board standpoint, they've been pressuring me for years to find succession planning and to get myself out of the details. And for the first time, I'm really there. So I get to do what I like to do, which is create and think about the vision and where we're heading 2, 3, 4, 5 years out. And then the team is doing a great job of blocking and tackling and make sure we take care of the day to day, the month to month, quarter and the year. So I couldn't be happier with the direction of the company.

So I'm going to turn it over to Susan. She'll give you the play-by-play for the fourth quarter and fiscal year. And then as always, we'll take your questions.

--------------------------------------------------------------------------------

Susan Marie Kreh, Oil-Dri Corporation of America - CFO [10]

--------------------------------------------------------------------------------

Thanks, Dan. Yesterday, Oil-Dri released our fourth quarter and full year earnings. Oil-Dri experienced some continued momentum during the fourth quarter with stronger sales and with an easing of the year-over-year cost pressures that we've been experiencing in the prior quarters. This morning, I'm pleased to be able to share with you our full year fiscal 2019 results.

We reported full year sales of $277 million, which is a 4% increase over our fiscal 2018 sales of $266 million. Sales in our Retail and Wholesale Products Group of $171 million were up 6% for the year driven by a strong 9% year-over-year growth in cat litter, which continues to grow both in our Cat's Pride Scoopable litter as well as our private label offerings.

For the full year, our Business to Business Products Group sales of $106 million ended the year 1% higher than the prior year after having been below the prior year for the first half of fiscal 2019. We experienced 4% year-over-year growth in our Bleaching Clay and Fluids Purification products primarily in North and Latin American markets where sales to edible oil producers were impacted favorably by the characteristics of recent crops. We also saw strength in our sales on our engineered granules in our Agricultural sector, which grew 2% over the prior year.

Conversely, sales in our Animal Health & Nutrition business continued to be below last year's level as our Amlan business in Asia continues to experience decreases driven by the widespread impact of the African swine fever. As we have said previously, while we don't expect an immediate turnaround in the swine industry in Asia, particularly in our key market in China, we do project some recovery in our Amlan business going forward as we continue to work with our customers on trials and adoption of products in other geographies such as Latin and South America and other channels such as poultry.

For the full year, our gross profit as a percent of sales dropped to 24% from 27% in the prior year. And as we've talked about in our prior quarters' calls, we've experienced significant increases in freight and packaging costs. We've also experienced increases in natural gas and nonfuel manufacturing costs. Because of these cost headwinds, we raised our prices in May and saw the benefit of this cost recovery on our gross margin during the fourth quarter.

Our fiscal 2019 net income attributable to Oil-Dri was $12.6 million. This compares to $8.2 million for fiscal 2018. Now for purposes of comparability, I will point out that during fiscal 2018, we incurred a onetime net tax charge of $4 million that resulted from the implementation of the 2017 Tax Cuts and Jobs Act. Also, in our 2019 fiscal year, we had a onetime item in the form of a confidential legal settlement that we booked in other income. Our 2019 diluted earnings per share were $1.67 compared to $1.11 per diluted share in fiscal 2018.

So now let's talk a little bit more about our operating segments. First, Retail and Wholesale. Sales for our Retail and Wholesale team were up 6% in the quarter and 6% for the full year compared to fiscal 2018. Segment operating income was $8.7 million for the year, up 24% over our fiscal 2018.

And now let's switch gears and talk about our Business to Business segment. Sales for the quarter were 9% higher than the same quarter in the prior year and were up 1% for the full year as we continued to experience sequential quarterly improvement year-over-year. So as we move through the year, our growth -- our sales in the first quarter were actually down 7% compared to last year. In the second quarter, we were down 3%. In the third quarter, that turned around and moved up to growth of 5%. And in the fourth quarter, we see growth of 9% year-over-year. So some really nice strong sequential improvement there.

Segment operating income for fiscal 2019 was $31.4 million, down 24% compared to fiscal '18 due to the higher cost impacts of freight, manufacturing costs excluding fuel, natural gas and packaging. And we also experienced the unfavorable mix impact that resulted from the reduction of sales in our profitable Amlan business.

So to round out our discussion, I'll make a few brief comments on the progress we're making on reducing our trade working capital. During fiscal 2019, our trade working capital was impacted by our ERP implementation as we went live, as Dan mentioned earlier, on our new system at the start of the fiscal year, on August 1. Cash was used during the early part of the year to fund the build in inventory and receivables while we learned how to leverage the new capabilities of our ERP as well as while we worked out the kinks associated with going live.

As of July 31, 2019, inventory increased $1.6 million from the beginning of the fiscal year primarily in finished goods and packaging. Some of this inventory increase is the impact of increased costs we discussed earlier and some have been driven by the build of incremental safety stock resulting from launching our ERP.

During the fourth quarter, we have made good progress in reducing our inventory levels as inventories dropped $2.5 million from the third quarter of fiscal '19. This occurred primarily in finished goods as safety stock moved towards more normal levels.

During the year, we've also seen an increase in receivables of $1.9 million. This was driven by stronger sales in the fourth quarter. So to put a little color on that, fourth quarter sales this year of $70.1 million compared to fourth quarter sales last year of $65.6 million. So this increase has been partially offset by improvements we've achieved in driving down our days sales outstanding. We've driven them down by 10.1 days from the peak of 58.8 days just subsequent to launching our ERP.

So with that brief summary, I'm going to turn it back over to you, Dan.

--------------------------------------------------------------------------------

Daniel S. Jaffee, Oil-Dri Corporation of America - Chairman, CEO & President [11]

--------------------------------------------------------------------------------

Great. Thank you, Susan. And before I open up to Q&A, I just want to let everyone know, I'm on the road here. We are at a Latin American animal health conference, and it's been fantastic. We've had a lot of great customer meetings all around our new product offering, Varium. But then I sat in on a couple of lectures, and not only are they talking about ABF, which is antibiotic-free, but now it's moving rapidly towards NAE, which is no antibiotics ever. And then they have NAE+, which is no antibiotics ever plus the animals are fed all vegetarian products. So the globe is moving rapidly in favor of eliminating all antibiotics from the food chain, which creates a huge void because there are many issues that need to be solved that the antibiotics were solving. And we believe if we don't have the next best mousetrap, we certainly have one of the next best mousetraps. So we are in test and getting orders from all sorts of new customers. And the science is firmly on our side that our play has a very synergistic benefit on some of these other additives that have been known to help for years and years. So we're very excited about the future of our Amlan International Group.

And if you sense a little disconnect in how this call is going, it's because Mike and I are in Latin America. A bunch of them are in Chicago. And I think someone else is actually dialing in from somewhere too, but maybe I'm wrong.

But anyway, let's open up the call to Q&A as always. Ask your most important question first and then get to the end of the queue. This allows everyone the chance to ask at least one question. And let's go from here.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question comes from John Bair from Ascend Wealth.

--------------------------------------------------------------------------------

John H. Bair, Ascend Wealth Advisors, LLC - President [2]

--------------------------------------------------------------------------------

Very nice summary here. Got a number of questions that I'll go with. First one is you indicated in the press release that your advertising expense is expected to be higher in fiscal 2020 versus '19. How does that relate to, let's say, your spending levels from '17 and 2018?

--------------------------------------------------------------------------------

Daniel S. Jaffee, Oil-Dri Corporation of America - Chairman, CEO & President [3]

--------------------------------------------------------------------------------

Sure. And I can take the first part of it, and then I'll turn it over to Jessica for the second part because I was running the division back in '17 and '18. It will still -- while it may be higher than '19, which it's going to be, it's going to be well south of what we did when we first launched Fresh & Light and ramped up the advertising. But I'll -- Jessica or Susan?

--------------------------------------------------------------------------------

Susan Marie Kreh, Oil-Dri Corporation of America - CFO [4]

--------------------------------------------------------------------------------

Yes. So this is Susan. I mean taking a look forward at our budget, and Jessica can talk to you a little bit about what we're going to use it for, but we don't see the level in 2020 returning to the level that it was in '18. So it will be split somewhere between what we spent this year and what we spent then because we're doing it a little differently.

--------------------------------------------------------------------------------

Jessica Doyle Moskowitz, Oil-Dri Corporation of America - VP & GM of Consumer Products Division [5]

--------------------------------------------------------------------------------

Yes. The key from an advertising perspective is just to obviously increase our ROIs and make our spend more efficient. So we're looking at tactics that have proven out to be more efficient like digital advertising, focusing on markets where we have high distribution like the Northeast and just overall looking at our marketing spend to make sure that it's as efficient as possible.

--------------------------------------------------------------------------------

Daniel S. Jaffee, Oil-Dri Corporation of America - Chairman, CEO & President [6]

--------------------------------------------------------------------------------

I hope everyone saw that we are on Cat Week again this week. Today will be the fifth and final day of Cat Week on Ellen, and once again brought to you exclusively by Cat's Pride. And they've worked our product into all sorts of fun integrations. If you've missed it, just go to ellentube.com, and you can see all the reruns. She's got them all out there on her website.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

And our next question comes from Ethan Starr, private investor.

--------------------------------------------------------------------------------

Ethan Starr, [8]

--------------------------------------------------------------------------------

Thank you for presenting at the Midwest IDEAS Conference in late August. I found the presentation very helpful. I would like to encourage you to present at the conference again next year.

My first question is for Mike McPherson. On Page 18 of the Midwest IDEAS presentation, it states that, "Biological crop and plant protection is moving from liquids to granules in selected applications." What applications are shifting to granules? What's the time horizon for these shifts? And how has and how will this benefit Oil-Dri?

--------------------------------------------------------------------------------

Michael Andrew McPherson, Oil-Dri Corporation of America - Chief Development Officer & Group VP of B2B [9]

--------------------------------------------------------------------------------

Ethan, that's some of the detailed market information that we're not going to be comfortable disclosing on the call. There's just a general trend for certain segments within the biologicals market to move to granules.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

And our next question comes from Robert Smith from Center Performance.

--------------------------------------------------------------------------------

Robert Smith;Center for Performance Investing;Analyst, [11]

--------------------------------------------------------------------------------

It's the Center for Performance Investing. My question is about the R&D effort. Can you give me an idea what the spend might be in '20? And you said you completed the second phase of the new lab, which enhanced the scope of your research capabilities. Could you give us some color on that? And if this was the second phase, are there going to be subsequent phases?

--------------------------------------------------------------------------------

Daniel S. Jaffee, Oil-Dri Corporation of America - Chairman, CEO & President [12]

--------------------------------------------------------------------------------

Okay. Thanks for your 3-part one question. No, I'm just kidding, Bob. We can answer that. So I mean spending on R&D is going to be in line with what it's been historically, might be up a little bit but not materially. I'm going to have Mike -- because really this was his brainchild, Richard M. Jaffee microbiology lab, which started as just an adjunct to our existing facility right there at 777 Forest Edge Drive, and now we've actually had to take on new space and we have a whole new lab. So Mike, why don't you tell them about it?

--------------------------------------------------------------------------------

Michael Andrew McPherson, Oil-Dri Corporation of America - Chief Development Officer & Group VP of B2B [13]

--------------------------------------------------------------------------------

Yes. Yes. The new lab, Robert, will have the ability to hold up to 15 microbiologists. And for the foreseeable future -- I mean well within we expect the next decade, there'll be more than enough room to allow for the expansion of our life science research to support our work in biological carriers and our Amlan animal nutrition business.

--------------------------------------------------------------------------------

Robert Smith;Center for Performance Investing;Analyst, [14]

--------------------------------------------------------------------------------

Well, what is the current staff? You're going to 15, you said, Mike? So what do you have now?

--------------------------------------------------------------------------------

Michael Andrew McPherson, Oil-Dri Corporation of America - Chief Development Officer & Group VP of B2B [15]

--------------------------------------------------------------------------------

Spend?

--------------------------------------------------------------------------------

Daniel S. Jaffee, Oil-Dri Corporation of America - Chairman, CEO & President [16]

--------------------------------------------------------------------------------

Staff.

--------------------------------------------------------------------------------

Michael Andrew McPherson, Oil-Dri Corporation of America - Chief Development Officer & Group VP of B2B [17]

--------------------------------------------------------------------------------

Staff.

--------------------------------------------------------------------------------

Robert Smith;Center for Performance Investing;Analyst, [18]

--------------------------------------------------------------------------------

No, no, the number of people.

--------------------------------------------------------------------------------

Michael Andrew McPherson, Oil-Dri Corporation of America - Chief Development Officer & Group VP of B2B [19]

--------------------------------------------------------------------------------

The current number of life science people that are moving there are approximately 8.

--------------------------------------------------------------------------------

Robert Smith;Center for Performance Investing;Analyst, [20]

--------------------------------------------------------------------------------

Okay. So it's about double, your goal or room to grow?

--------------------------------------------------------------------------------

Daniel S. Jaffee, Oil-Dri Corporation of America - Chairman, CEO & President [21]

--------------------------------------------------------------------------------

Yes. We can -- we have room to grow.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

And we do have a follow-up from John Bair from Ascend Wealth.

--------------------------------------------------------------------------------

John H. Bair, Ascend Wealth Advisors, LLC - President [23]

--------------------------------------------------------------------------------

In your earnings release, you mentioned that there was a pick up in Coarse Cat Litter, which I find interesting. Could you speak to that, where that's coming from? And is that something that you think is a one-off event? Or how do you look at that?

--------------------------------------------------------------------------------

Daniel S. Jaffee, Oil-Dri Corporation of America - Chairman, CEO & President [24]

--------------------------------------------------------------------------------

Jessica, I'm happy to take this, and you can maybe add color if I leave something out. But a few years ago, we were making all of the 7-pound bag. It was coarse, it was 7 pounds, it was all retailing for $1. And everybody was winning in the equation, the retailers, the consumer, except for Oil-Dri, who was getting killed. We were basically putting money in every bag because there just wasn't enough margin to retail cat litter at $1.

So we were basically supplying 100% of the market. It was 3 major players. We went to all 3. And we raised the price and just said, "Look, we're not going to tell you who the other guys are, but you can know that we're basically the primary supplier here. We're not making money. We're happy to get out of this business. But if you guys want this product, here's what it's going to cost." One of them took it and retailed it at $1.18. The other 2 walked away, found a new supplier who -- where they could keep their price at $1. But you know what they found and it was a great validation to our quality was the guy who raised it to $1.18 saw their business growing by 20% and 25% every period because the consumers who were buying it at $1 at the other locations got a very inferior product. So that started the dominoes falling towards us getting that business back.

At the same time, we had other customers call us who were marketing a Coarse Cat -- private label cat litter, and they were seeing the same phenomenon that they got what they paid for by going with some of the cheaper, lower-end suppliers. And they were more than happy to pay us a little bit more, let us have a margin and then see the quality and see the growth come back. So where we're supplying it, it's going very well. Jessica, would you want to add anything?

--------------------------------------------------------------------------------

Jessica Doyle Moskowitz, Oil-Dri Corporation of America - VP & GM of Consumer Products Division [25]

--------------------------------------------------------------------------------

No. You covered it, thanks.

--------------------------------------------------------------------------------

John H. Bair, Ascend Wealth Advisors, LLC - President [26]

--------------------------------------------------------------------------------

So are you getting a higher price now for selling to these folks? Is that part of the helpful equation? Or...

--------------------------------------------------------------------------------

Daniel S. Jaffee, Oil-Dri Corporation of America - Chairman, CEO & President [27]

--------------------------------------------------------------------------------

I wouldn't quite say we're getting a higher price. What I would say is we are sticking to our disciplines of this is our price. This is what we need to provide you with the quality and service that your customers expect and demand.

And by the way, if you cheapen up your cat litter, your private label, you're not just hurting that individual aisle. But if I'm a consumer and I'm buying a private label at any account, and you name -- I'm not going to name all the accounts we got, but there were a number of them, and it's inferior and I'm not happy, I'm now thinking that, "Oh, but I bet their private label vitamins or private label ibuprofen are good. They just have bad private label cat litter." We believe and I think they do, too, there's a spillover effect that where you have -- you leave a consumer with a bad impression on quality on one aisle, they're going to assume that bad quality exists in other aisles.

So we're not necessarily raising anyone's prices. We just couldn't get the business in the past because we weren't willing to lower our price to match what we perceive to be inferior quality and service. And the market's coming back to us and they're recognizing, "You know what, paying for quality and service is valuable."

--------------------------------------------------------------------------------

John H. Bair, Ascend Wealth Advisors, LLC - President [28]

--------------------------------------------------------------------------------

Okay. So am I hearing then that this is a sticky situation in the sense that the buyers of this Coarse Cat Litter are not necessarily transitioning over to the lightweight stuff and that it's just -- it's all a price point kind of thing from a consumer standpoint?

--------------------------------------------------------------------------------

Daniel S. Jaffee, Oil-Dri Corporation of America - Chairman, CEO & President [29]

--------------------------------------------------------------------------------

No. You're making sort of apples to oranges. So there's always been 2 segments to the category. You've got the coarse, nonclumping, which is what we're talking about here and then -- which was how the whole category started back in 1947. And then you've got the scoopable where it forms a clump and the consumer pays more for it on a per pound basis or per volume basis, but they don't use it all up all the time. They just use up what the cat went to the bathroom on and then maybe once a month they clear it up. So their cost of use isn't that much higher.

So anyway, what we're talking about here is Course Cat Litter, which in no way is impacting what's going on, on the scoopable side.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

And in the interest of time, we will be taking our last question from Robert Smith from Center Performance.

--------------------------------------------------------------------------------

Robert Smith;Center for Performance Investing;Analyst, [31]

--------------------------------------------------------------------------------

So Mike, this is for you. You referenced in the release that in lieu of the difficulties in -- with swine flu that you're emphasizing poultry, cattle and aquaculture. So can you give me a heads-up as to -- is there any kind of market for that in China itself in those 3 categories? And what is the differential, so to speak, between swine market opportunity and the other 3 that I mentioned in China and elsewhere?

--------------------------------------------------------------------------------

Michael Andrew McPherson, Oil-Dri Corporation of America - Chief Development Officer & Group VP of B2B [32]

--------------------------------------------------------------------------------

China is either the #1, #2 or #3. It depends on the specie, in swine, poultry, shrimp production, tilapia production. They're just an enormous country and an enormous producer of animal protein. So all of these segments are very large. It represents about half the world's protein production when you look at it in total. And the challenges where we were over-reliant on swine when we first entered. That's really where we have the strongest research on the benefit of using our clay products. So we were a little slow to expand into these other segments. Our products also provide the same type of value. All these animals have intestinal tracts. All of these intestinal tracts are contaminated with different toxins that are produced by mold in the feed or produced by bacteria that these animals ingest.

So the problems are prevalent. You just have to get into all the species and have the right access to those market segments and be able to weather when any one segment gets a particular disease outbreak. Six years ago, they had avian flu in China. If you were only in the poultry market, you got hit pretty hard. And you need to be -- the lesson here is you need to be in all the segments. So when there's a problem in one, you're buffered by the other segments.

--------------------------------------------------------------------------------

Robert Smith;Center for Performance Investing;Analyst, [33]

--------------------------------------------------------------------------------

So do you need different marketing authorizations?

--------------------------------------------------------------------------------

Michael Andrew McPherson, Oil-Dri Corporation of America - Chief Development Officer & Group VP of B2B [34]

--------------------------------------------------------------------------------

More distribution. Generally, in the animal health market, you'll get a distribution company that will specialize in a certain animal. So the distributor will hire veterinarians that are specialists in, let's say, poultry production. They'll supply products, and their product line offering is for a particular specie. They'll have customer relationships with producers of, let's say, poultry and they specialize. It means you need multiple distributors in China that serve all these different segments. We went into China initially where we were strongest in swine, but we stayed in it too long. In hindsight...

--------------------------------------------------------------------------------

Robert Smith;Center for Performance Investing;Analyst, [35]

--------------------------------------------------------------------------------

So what are the prospects for 2020 in these other areas in China?

--------------------------------------------------------------------------------

Michael Andrew McPherson, Oil-Dri Corporation of America - Chief Development Officer & Group VP of B2B [36]

--------------------------------------------------------------------------------

We're already growing in poultry. Again, the products work. You just have to get the distribution and you have to start making the sales calls to the poultry industry. It isn't rocket science. It's just having the discipline to realize we have to call on all producers in a country, not just one.

--------------------------------------------------------------------------------

Daniel S. Jaffee, Oil-Dri Corporation of America - Chairman, CEO & President [37]

--------------------------------------------------------------------------------

Thank you, Bob. We're out of time. And so I just want to thank everybody for your interest. Like I said, I think fiscal '19 is going to go down in the annals of Oil-Dri's -- that was our 79th fiscal year, and it's going to be one of our most important ones. So thank you, everybody, and we will look forward to talking to you next quarter.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day.