International Absorbents Inc. (IAX)
Interview with:
Gordon Ellis, Chairman, President and CEO
Business News, Financial News, Stocks, Money & Investment Ideas, CEO Interview
and Information on their
cost-effective absorbent products derived from waste wood fiber (cellulose) for applications include commercial/retail animal bedding and litter, oil and hazardous spill cleanup and control, oil/water filtration, and packaging.

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International Absorbents CareFRESH® pet bedding has superior odor control, is super absorbent, and does not contain aromatic hydrocarbons found in pine and cedar shavings

Basic Materials
Reclaimed Industrial Products

International Absorbents Inc.

1569 Dempsey Road
North Vancouver, BC V7K 1
Phone: 604-681-6181

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Gordon Ellis
Chairman, President and CEO

Interview conducted by:
Lynn Fosse
Senior Editor
September 2004

Gordon L. Ellis has been the Chairman of International Absorbents Inc. since 1990, when he assisted in the formation and subsequent public listing of the Company.  He has also occupied the posts of President and CEO since 1997, during which time the Company has experienced a dramatic turnaround, including strong profitability.  His responsibilities include developing plans and strategies for the direction and administration of the Company’s daily and long-term objectives.  Mr. Ellis is a Registered Professional Engineer and Economist with a Masters in Business Administration, International Finance.  He has over 25 years of experience with the development, finance and management of diversified domestic and international companies and projects, including manufacturing, high-tech, and resources.  Mr. Ellis is also holds interests in a variety of public and private businesses.

Company Profile:
International Absorbents Inc. (AMEX: IAX) through its wholly-owned subsidiary, Absorption Corp., is engaged in the development, manufacturing, and marketing of proprietary, cost-effective absorbent products derived from waste wood fiber (cellulose), a by-product of the pulp and paper manufacturing process.  The Company’s environmentally-safe, non-toxic, lightweight products are utilized in a broad range of industrial, agricultural, and consumer applications.  These applications include commercial/retail animal bedding and litter, oil and hazardous spill cleanup and control, oil/water filtration, and packaging.

All of its animal care products are 100% natural, and are superior in preventing and neutralizing odors to competing pet care brands. They absorb more moisture, and are easier to handle and clean up than shavings or corn cob based bedding, or clay cat litter.

CareFRESH® is the ideal pet bedding for small animals. It has superior odor control and is super absorbent so your pets stay cleaner and drier. Clean up is fast and easy because CareFRESH® won’t stick to the cage or pan. CareFRESH® does not contain aromatic hydrocarbons found in pine and cedar shavings and it lasts twice as long between bedding changes as other pet bedding because ammonia odors are controlled. It is sanitized to kill bacteria, mold & fungus.

International Absorbents’ cat litters ensure the health of both pets and their owners, as they contain no known health hazards, such as respirable silica dust. CatWorks® minimizes tracking, and both CatWorks® and ECOFreshTM Cat Litter are flushable. The Absorption Corp’s line of animal products also includes HealthyPet, Puppy Go Potty™, AgraFRESH and CareFRESH® Ultra.

International Absorbents’ products, in addition to its pet care and spill cleaning absorbents lines, extend to commercial agriculture, oil and water filtration and horticulture. Cleanup and spill-control products are made from waste wood fibers and 100% reclaimed cellulose fibers, providing safe disposal options including incineration, landfill and land farming. International Absorbents’ Industrial products, led by its Absorbent® line, are targeted for industrial-based companies. This includes the oil and gas industry, the chemical industry, marinas and the boating industry. The industrial products include Absorbent® W, Absorbent® GP, Spill-Dri Particulate, Spill-Sorb Particulate, and HazPak.

CEOCFOinterviews: Mr. Ellis, what was your vision when you started International Absorbents and where are you headed today?

Mr. Ellis: “The vision in 1987 was that the company was going to take the world by storm, with the most environmentally friendly and best cat litter on the market. The cat litter was the best but we found that people liked it as animal bedding because you can put it into the cage under the birds, gerbils, rabbits and even horses. We learned from our customers that we had a very good product, used by veterinarians, students, and doctors. We manufacture our product from fiber and are now the largest manufacturer of pet bedding in North America. When a paper mill makes paper, the long fibers that fall through become a waste product, and they are too short to be used by the paper company, so there is a disposal problem. We take the disposal problem and make it into a product. CareFRESH® is our main product and is about 60% of our sales.”

CEOCFOinterviews: What makes your product the best?

Mr. Ellis: “If you use it in a bed, it is comfortable to animals and the animals like it. It is environmentally friendly, is cost effective and it controls the odor in the animal’s bed.  Veterinarians use it and many people tell us their veterinary hospitals have never smelled so good and it lasts longer and they do not need to change it as often. It can be disposed of by flushing it down the toilet, burning it, or putting it in the waste; it is an excellent product. It does not contain things like aromatic hydro-carbons.”

CEOCFOinterviews: Do you do anything outside of North America?

Mr. Ellis: “We are doing an exchange program with a company in Europe called Supreme PetFoods, which makes a line of pet foods. We sell the pet foods in North America and they sell CareFRESH in Europe. When we first started to make our products, we also made industrial products. We sell a lot more of those in foreign markets than in North American markets. We sell overseas but our prime target is North America; we manufacture on the West Coast and plan to open a manufacturing plant on the East Coast. Our focus is to sell where we know there is room for expansion here in North America.”

CEOCFOinterviews: What is the market for the product?

Mr. Ellis: “Animal bedding is broken into the two areas of pet market and big boxes/ generic food market. We attacked the pet market first and sell through Petco, Pet Smart; virtually every pet-chain in North America. There is about an eighty million-dollar market for our product in this market segment. We are selling 15-20% of that at this point and over half of that market segment is held by hundreds of manufacturers of wood shavings and similar kinds of products. The other segment of the animal bedding market is big boxes like Wal-Mart, Kmart, Target and regular local grocery stores. We are just entering that market with Wal-Mart and introducing a product called Critter Care. You can buy CareFRESH at pet stores or you can buy Critter Care or HealthyPet at other big stores. That is another eighty million dollar market and you are talking about 160 to 200 million dollar market place for animal bedding in North America.”

CEOCFOinterviews: How do you get more of that market?

Mr. Ellis: “We get more of that by doing two things; one is focusing and increasing our market share in the specialty pet area, which is one thing we are doing. The other thing, which leaves us with a bigger market potential right now, is to focus on all of the areas where we haven’t made penetration yet and that is all of the food chains and big block stores. We have developed an excellent distribution network within the pet market. We have about 15-20% of the bedding market with CareFRESH. We cannot compete on price alone with things like shavings locally. We built a new product line called Super Shavings. It has an excellent marketing program and we are moving into the shavings market. With the distribution system we have in place, we are putting more products on our plate to be able to offer to our buyers and among those are cat litter and shavings.”

CEOCFOinterviews: Will you tell us more about the new facilities?

Mr. Ellis: “We have always tried to build the company for the future. We grew fast over the last six to ten years. In the state of Washington, we had seven different facilities and a lot of overhead. We built a new 120,000 square ft. facility in Washington State and we moved all but one of our plants into that site, which cut our costs significantly. We have also tried to automate what we are doing. There are two major costs that we have that we are trying to control, the first of which is shipping. Our product is light, which means we can fill a truck up to the top. Over half of our customers are on the East Coast and we are building another 100,000 square ft. facility there. When we finish that, we will have cut our costs even more. We are now at a 40% operating margin and we want to improve on that. When we get the facility finished on the East Coast, we will be cutting our transportation costs, there will be more automation and we will be cutting some of our labor costs. Every time we make a new move, we try to cut costs to make a higher profit. All this is allowing us to build an infrastructure to service customers throughout North America and the East Coast will allow us to service Europe. As you see us continue to grow, you will see us improve our profit margin.”

CEOCFOinterviews: Does the cost of the raw material fluctuate much?

Mr. Ellis: “One of the reasons that we moved back to our plant in Georgia is because there are a lot of paper mills in the southeast. The cost of pulp can rise and fall quite a bit depending on the availability. Here in the northwest, mills have shut down and we have had to find sources in other places. Sometimes people will pay us to take it away, which means we have negative costs for our raw materials. Other times the mills have been shut down for some time when they have had problems with their raw materials and we have to go out and buy it for four hundred bucks a ton. We cannot always control that. We have gone and chosen a location where there are multiple sources of paper, and we are building our next manufacturing plant so that they can easily accommodate other types of raw material such as recycled newsprint. By doing that we are stabilizing our costs and making it more consistent so that we can retain our margins well over 40%.”

CEOCFOinterviews: Are there areas that you would like to control, but have not been able to as of yet?

Mr. Ellis: “We have things under control and we are moving down pathways that will allow us to control most of our costs. The one thing that we do not have any control over is heat; we have to dry our products and gas is expensive. As you know, fuel prices are going up and down, and gas prices are volatile. We can become our own power generator. We can manufacture our own products and add to our own power. Our last quarterly statement showed that we made almost a million dollars before taxes for the quarter and between four or five million dollars in sales and that is a darn good margin. I look at the financial statements of other companies who sell a hundred million dollars worth of products and they talk about how they made a million dollars worth of product this year. If they had any variation whatsoever in their costing then they are under water. We have a stable product in a stable market. People pay to take care of their pets sometimes even when they could not take care of themselves; it is not a very elastic market. We will continue to sell and people will continue to buy for their pets even when the economy goes down. On top of that, we have a margin in our organization that says we will continue to make a profit even if things do get bad because we are in good fiscal shape. It is a good organization.”

CEOCFOinterviews: What should investors know that they might not realize when they look at the company?

Mr. Ellis: “They should look at the financial statements and understand that continued cash flow is critical for us and that we generate a fair amount of cash flow for a relatively small, growing company. We can continue the growing plan and apply our income to things like a new plant in the east and a new plant in the west to further improve our profits without jeopardizing the welfare of the organization and without going into debt that is questionable. Even when we do finance through debt, we do not want to dilute the shareholders position. The debt we get is supported by government bonds and by local development agencies and very low rates.”

CEOCFOinterviews: What are your challenges going forward and how are you ready?

Mr. Ellis: “Our challenges are to prove that we can continue to grow at a good rate, and that means that we have to do more than just animal bedding. We can triple the size of our company with animal bedding but we are not going to get ten times bigger with animal bedding alone. We have to capitalize on our strengths, which are marketing and distribution and the ability to manipulate and manufacture products, and find markets. An example of how we are doing this is our current pursuit of the cat litter market, which is a multi hundred million-dollar market. We also need to look at the investment market place, which is strong so that we have the long term capital that we may need to continue to grow.”


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