O/T These are mycotoxic binders

[Guest guest]

Oil-Dri Corporation of America F1Q09 (Qtr End 10/31/08) Earnings

Call Transcript

Page 3 out of 9|December 10, 2008 | about stocks: ODC

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america-f1q09-qtr-end-10-31-08-earnings-call-transcript?page=3

We showed those of you who could make it, I appreciate it, we showed

an infomercial around it. It is our new Calibrin-A and Calibrin-Z

animal health products. These are mycotoxic binders. We have been

participating in a segment of this business historically with our

ConditionAde products. Many of our have used ConditionAde outside

the U.S. as a toxin binder for aflatoxin which tends to be more

focused on poultry, a little bit on dairy cows but the major

application was on poultry.

We never really competed in the zearalanone binding segment which

tends to impact swine production more and that is where our Calibrin-

Z now goes for. So we put a lot of time and energy all in R & D all of

which has been expanded as we have delivered results for the last

two years. We have also been able to invest in this growth

opportunity so we have done a lot of studies to prove the efficacy

of our products and are very excited by the fact that not only our

products are able to peddle to the highest levels of health and

safety from a regulatory perspective but also from an efficacy

standpoint are as good or better as anything to be found on the

market today in binding those mycotoxins, both alfatoxins with

Calibrin-A and zearalanone for Calibrin-Z.

This is a big market and it is only getting bigger. The toxin

binding market world wide is estimated to be $300 million and

growing at 15-16% a year. Our current share of that market through

our ConditionAde entrée is 2-3%. Obviously we hope to not only

convert our ConditionAde customers over to Calibrin-A and Z but also

because we are now participating in the zearalanone segment because

we have put a lot of data and research behind both the efficacy of

both the aflatoxin and the zearalanone binders we believe we will be

able to grow the business.

We have also attracted a lot of talent. We have a lot of doctors in

veterinary medicine now on our payroll led by, as we announced, Vice

President Ron Cravens who is leading up the team. He has 25-30 years

experience in animal health and nutrition products all the way back

to his time spent on farms and so forth, probably 45 years of

experience. We are very excited with what he and his team have

going.

Operator

The next question comes from Schwartz – Harvey Partners.

Schwartz – Harvey Partners

On Calibrin-A and Z could you go through two things for me? Number

one, the type of clay that is used and how it differentiates from

the other clay you might have. Then when the swine or chicken when

they ingest it do you kind of just chuck it into the feed? Is it

given to them specially? How is the delivery process done?

Jaffee

In terms of the type of the clay I think as an investor what you

really want to get at is how proprietary is it or how unique is it

to Oil-Dri because I don't want to get into specifics. It would be

like giving you the formula to Coca Cola or something like that. It

is very proprietary. We spent a lot of time and a lot of money

surveying our literally hundreds of millions of tons of reserves to

find a, not inexhaustible nothing is inexhaustible, but in the order

of magnitude of financial impact of this company it will be a great

day when we run out of this clay because it will mean huge sales,

huge profits for the company. So within a 10-year window

inexhaustible quantity of reserves which we then specifically mined

and segregate and then we actually process it at a different

location, specially processing each of them differently. So Calibrin-

A is processed differently than Calibrin-Z. You couldn't use A to

effectively go after zearalanone and you wouldn't want to use Z to

go after aflatoxin because it is priced higher. It is more specific

to get the zearalanone. It is more of a special application.

So from an investor standpoint, very, very proprietary. Very unique.

Then obviously really what gives people the confidence is the data.

It is the support behind it. If you think about any pharmaceutical

product you buy personally someone could create an exact duplicate

of it but if they haven't proven that it works or there is no data

or support behind it how likely are you going to be to ingest it or

take it. Having said that you get into generic analogies and all

that but in this business we don't know of anyone that has this

reserve. We didn't have it anywhere else. Actually if you had made

us predict going into this project two years ago would this be the

area we would find it, we wouldn't have. So it was even a surprise

to us which was nice.

We put a whole suite of products into the study and this one we

would not have predicted would have won and not only did it win but

it was a slam dunk winner. So we are very excited about that. Then

regarding the vehicle or how the animal ingests it, it is mixed into

their food at like 0.5% inclusion. It then goes through their gut,

binds the toxins and then they excrete them out harmlessly so they

never get assimilated into their bloodstream. It is a pretty neat

thing.

Schwartz – Harvey Partners

Dan, is it safe to say gross margin wise, another caller asked about

the gross margin difference between this and your other…obviously

private label is single digit gross margins. This is a $300 million

market growing 20% a year. It sounds like the gross margins are

maybe upwards of 40%. You probably wouldn't be crazy to think that.

How big, if we look out 3-5 years, how much of the market do you

think you could get?

Jaffee

It is all conjecture. We are excited. We wouldn't have gone all in

on it if we didn't feel like it could be a big deal. But we don't

even have a re-order yet. We have orders because we have stuff out

with distributors but now they are getting to the end-users and so

forth. I would say let's save it for another quarter and the first

question ought to be do we have any re-orders and we can start

talking about that. Then we can start talking about how big the

snowball and how much bigger is it getting every quarter. At the

moment we have got sales out there. We have product loaded up in a

number of our distributors. We have been registered in about 60% of

our existing market countries. So we still have registration to go.

We are still hoping to knock off China. That is something we can

talk about next quarter. Actually we are hoping that does happen

maybe by the end of next quarter. It might even fall into the

beginning of the fourth quarter but certainly China is one of the

next big countries we are looking to get our products registered in.

But we are registered in Mexico, Brazil, the Philippines, Thailand

and Korea. It is really a creep, crawl, walk thing but it is

exciting.

Schwartz – Harvey Partners

But I assume this was a pull product not a push? You didn't just

hire scientists and get this done because you thought it

conceptually was ready? You did it because there was some kind of

demand?

Jaffee

There is $300 million of demand but they are currently buying other

products as well. So it is going to take time. They are not just

going to convert on a dime. They make a rational decision based on

data, based on efficacy and based on performance. The people you

sell to tend to be nutritionists who say I'm not buying this because

it is a clay or because you want me to. I'm buying it because it

delivers value to me or apropos to your conversation or question on

margin it is a value based scenario not a cost-plus based scenario.

So yes the margin expectations are higher because we are sharing in

sum a sliver off of the value. There is so much value out there with

the way these products work. I'd say just keep hammering the

questions each quarter but more along the lines of okay where are

you registered now and do you have repeat orders, what is the

snowball doing?

I think we are at our half-hour point. I hope everyone who wanted to

ask a question got a question in. These are very dynamic times but

as I always say it is the best time in not only my short, although I

have been with the company 21 years but even my father's horizon and

he just celebrated his 50th year with Oil-Dri, it is the best time

ever to be a turtle or a tortoise. We are the ultimate tortoise in

the tortoise and hare race and we never apologize for that because

the tortoise wins. Every time I read that story the tortoise always

crosses the finish line ahead of the hare. When you ask most people

they all want to be hares and I scratch my head. Now isn't a time to

be a hare. Great time to be a tortoise. We are inching along but I

think you see we try every time you look up to make some progress.

We are looking forward to talking to you again in a quarter. Have a

happy and healthy holiday season. Thanks for your support.

Operator

This concludes the presentation. You may all now disconnect.

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[Guest guest]

Do they mention what the percentage of the feed is by weight that

needs to be the binder? 2%, 5%?