Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2019 Oil-Dri Corporation of America earnings conference call. At this time, all participants' lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [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.

Okay. Thank you. Welcome everybody to the fourth quarter and fiscal year-end 2019 teleconference. This is Dan Jaffee. I am the President and CEO. And we are going to introduce everyone and this way you will know who you can ask questions.

I am Mike McPherson. I am the Group Vice President of the B2B area.

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

Hi. Laura Scheland, Vice President and General Counsel.

Good morning. This is Susan Kreh, the CFO.

Hi. This is Molly VandenHeuvel, Chief Operating Officer.

Hi. I am 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?

Thank you Leslie. And before I turn it over to Susan for some play-by-play, I am 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 a JD Edwards ERP system, and from what I have heard, the easier transitions of when you go from one system to another, the hardest transitions are 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. The plants and the sales divisions for the most part had 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 invoiced and 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 would like to review them with you because as I have always said an 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 will do these in chronological order, best of my memory, as to when the moves were made. But Flemming Mahs joined…

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 have been experiencing in the prior quarters. This morning, I am pleased to be able to share with 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 and 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…

Great. Thank you Susan. And before I open up to Q&A, I just want to let everyone know, I am on the road here. We are at a Latin American animal health conference. And it's been fantastic. We have been to a lot of great customer meetings all around our new product offering, Varium. But then I sat in on a couple of lecturers 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-plus 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 with the antibiotics we are solving and we believe if we don't have the next best mousetrap, we certainly have one of the next best mousetrap. So we are already testing and getting orders from all sorts of new customers and the science is firmly on our side that our play have a very synergistic benefit on some of these other additives that have known to help for years and years. So we are 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, bunch of them are in Chicago and now I believe someone else is actually dialing in from somewhere too, but maybe I am 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 there.

[Operator Instructions]. And our first question comes from John Bair from Ascend Wealth. Your line is open.

Thank you and good morning. Very nice summary here. I have got a number of questions but I will go with first one is, you indicated in the press release that your advertising expenses are expected to be higher in fiscal 2020 versus 2019. How does that relate to, let's say, your spending levels from 2017 and 2018?

Sure. And I can take the first part and then I will turn it over to Jessica for the second part because I was running the division back in 2017 and 2018. It will still, well, it may be higher than 2019 which is 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 Jessica or Susan?

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 are going to use it for, but we don't see the level in 2020 returning to the level that it was in 2018. So it will be split somewhere between what we spent this year and what spent then because we are doing it a little differently.

Okay.

Yes. The key from an advertising perspective is just to obviously increase our ROIs and make our spend more efficient. So, we are 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.

Okay. Very good. I got other questions, but I will get back in the queue. Thanks.

Thank you.

I hope everyone saw that we are on Cat Week again this week. Today, it 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 vote for product and also it's a fun integration. If you missed it, just to ellentube.com and you can see all the reruns. She has got them all out there on her website.

Thank you. And our next question comes from Ethan Starr, a private investor. Your line is open.

Good morning. Thank you for presenting at the Midwest Ideas Conference in late August. I found the presentation very helpful and would like to encourage you to present to 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?

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

Okay. Thank you. I will get back in the queue.

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

It's the Center for Performance Investing. Hi. Good morning. My question is about the R&D effort. Can you give me an idea what the spend might be in 2020? 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? Thank you.

Okay. Thanks for your three-part one question. I am 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. It might be up a little bit but not materially. I am 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 Dr and now we have actually had to take on new space and we have a whole new lab. So Mike, why don't you tell him about it?

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 will 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.

Well, what is the current staff? You are going to 15, you said at max . So what do you have now?

Spend?

Staff.

Staff.

No. The number of people.

Right.

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

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

Yes. We have room to grow.

Okay. Thank you. I will get back in the queue.

Thank you. And we do have a follow-up from John Bair from Ascend Wealth. Your line is open.

Thanks. In your earnings release, you mentioned that there was a pickup in coarse cat litter, which I found kind of interesting. Could you speak to that what that's coming from? And is that something that you think is a one-off event or how do you look at that?

Jessica, I am 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 course, 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 three major players. We went to all three and we raised the price just to look. We are not going to tell you who the other guys are but you can know that we are basically the primary supplier here. We are not making money. We were happy to get out of this business. But if you guys want this product, here is what it is going to cost. One of them took it and retailed it at $1.18. The other two walked away, found a new supplier where they could keep their price of $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 the $1 at the other locations got a very inferior product. So that's start of the dominoes falling towards us getting that business back. At the same time, we had other customers call us who were marketing a course 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 were supplying it, it's going very well. Jessica, would you want to add anything?

No. You covered it. Thanks.

Okay.

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

I wouldn't quite say we are 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 are not just hurting that individual aisle, but if I am a consumer and I am buying a private label at any account, you name it, I am not going to name all the accounts we got, but there were a number of them and it's inferior and I am not happy, I am not 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 is a spillover effect that where you leave the consumer with a bad impression on quality in one aisle, they are going to assume that bad quality exists in other aisles. So we are 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 is coming back to us and they are recognizing, you know what, paying for quality and service is valuable.

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

No. You are mixing sort of apples and oranges. So there has always been two segments of the category. You have got the coarse non-clumping which is what we are talking about here which was how the whole category started back in 1947. And then you have 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 are talking about here is coarse cat litter, which in no way is impacting what's going on, on the Scoopable side.

Okay. Very good. I will get back in the queue. Thanks.

Thank you. And in the interest of time, we will be taking our last question from Robert Smith from Center Performance. Your line is open.

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

China is either the number one, number two or number three. It depends on the species and swine, poultry, shrimp production, tilapia production. They are 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 had the strongest research on the benefit of using our by-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 to be able to weather when anyone 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 so the lesson here is, you need to be in all the segments. So when there is a problem in one, you are buffered by the other segments.

So do you need different the marketing authorizations?

More distribution. Generally, in the animal health market, you will 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 will supply products and their product line offering is for a particular species. They will 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.

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

We are 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.

Right. And thank you, Bob. Yes, we are out of time. And so I just want to thank everybody for your interest. Like I said, I think fiscal 2019 is going to go down in the annals of Oil-Dri, that was our 79th fiscal year and it's going to be one of our most important one. So thank you everybody and we will look forward to talking to you next quarter.

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.