Richard Johnson - Chief Financial Officer

Katie Tryhane - Credit Suisse Mike Ryskin - Bank of America

Good day, ladies and gentlemen and welcome to the Phibro First Quarter Financial Results Conference Call. [Operator Instructions]. I would now like to turn the call over to Richard Johnson, Chief Financial Officer. Sir, you may begin.

Thank you operator, and good morning everyone. Welcome to the Phibro Animal Health earnings call for our first quarter ended September 30. On the call today is myself, I’m the Chief Financial Officer; Jack Bendheim is traveling internationally and most likely will not be able to join us. On the call today, we will provide an overview of our quarterly results and also some updated guidance for our fiscal year ending next June, and then we’ll open the lines for your questions. Before we begin, some of the standard things like we remind you that the earnings Press Release and financial Tables can be found on the Investors section of our website at www.pahc.com. We are also providing a simultaneous webcast of this morning’s call, which can be accessed on the website as well. Today’s presentation slides and a replay and transcript of the call will also be available on the website later today. Our remarks today will include forward-looking statements and actual results could differ materially from those projections. For a list and description of certain factors that could cause results to differ, I refer you to the forward-looking statements section on our earnings press release. Our remarks today also will include references to certain financial measures, which were not prepared in accordance with generally accepted accounting principles or U.S. GAAP. I refer you to the non-GAAP financial information section in our earnings release for a discussion of these measures. Reconciliations of these non-GAAP financial measures for the most directly comparable U.S. GAAP measures are included in the financial tables that accompany the Earnings Press Release. Before we get into the numbers, let me remind you and let me remind everyone that we present our results on a GAAP basis and on an adjusted basis. We present adjusted results that exclude acquisition related items, that exclude unusual non-operational or non-recurring items, certain other income and expense items as separately reported in our P&L and the income tax effects related to any of those pre-tax adjustments, and also we exclude any unusual or non-recurring income tax items. So, now turning to page five. Let’s start by reviewing the highlights for our September quarter. Consolidated sales were $200 million for the quarter that was a 3% increase versus the same quarter last year. The revenue increase was driven by growth across all of our businesses, including volume growth in the Animal Health business. In addition, our Mineral Nutrition revenues increased due to higher average selling prices, resulting from underlying commodity costs. Reported net income of $16.3 million and diluted EPS of $0.40 per share for the current quarter increased 3% over the prior year, and were driven by an increase in gross profit due to the sales growth, offset in part by increased selling, general and administrative expenses as we invested in product and organizational development. We saw favorable foreign exchange gains, that are a separate line in our P&L. These are primarily related to intercompany balances, and we do exclude these items from our adjusted results. And finally, income tax expense increased, both due to the higher pre-tax income, but notably due to the onetime effects of exercise of employee stock options where we had a much larger favorable benefit last year. Our adjusted EBITDA was $30.1 million for the quarter, that was even with the prior year. We saw adjusted EBITDA increase due to improved operating results in the Animal Health and Performance Products businesses, but reduced profitability in the minerals business and by corporate higher spending or corporate costs for development activities in corporate basically offset the favorables. So looking at some selected line items from the P&L. Adjusted gross profit increased $2.3 million or 3% over last year, that was in line with the sales increase. Favorable trends in the Animal Health business were offset by reduced margins in the minerals business. We’ll talk more about segment performance on the next few pages. In total, adjusted SG&A increased $2.3 million, $1.2 million of that increase was in the corporate departments and $1.1 million of the increase was in the Animal Health segment. We have increased spending on product development and organization capabilities, to position ourselves for future growth. Adjusted net interest expense was slightly favorable; we saw improved earnings from short-term investments and the adjusted effected income tax rate was 28% for the current quarter. The rate was favorable to last year due to reduced federal statutory income tax rate that came about from the tax reform legislation, December of last year. We do now expect to be subject to another aspect of the new tax legislation, something called, an acronym called GILTI, which is the Global Intangible Low-taxed Income provisions of the new legislation. Those provisions will add between 1.0 and 1.5 percentage points to our effective tax rate for the year. Turning and looking more closely at the Animal Health business, we had sales of $131.2 million in the quarter. Those sales grew $2.3 million or 2% over last year. The growth was driven by volume increases in the MFAs and other product category. Our sales of MFAs and other were $87 million in the quarter; a $7.4 million or 9% increase over last year. International sales were the primary growth driver and notably in the cattle sector. We saw good international growth despite unfavorable currency effects in certain countries. Our nutritional specialty product sales of $27 million declined $3.8 million, or 12% from last year on weak dairy industry conditions and a poultry business that was roughly equal with last year. Sales of vaccines were $17.2 million in the quarter, that was a decline of $1.2 million or 7% from last year, as certain of our international markets were affected by turbulent economic conditions and the timing of some distributor orders also had a negative effect. In the Animal Health segment, gross profit increased $3 million on the volume growth, on favorable product mix and on continued improved operating efficiencies. We increased our segment SG&A spending by $1.1 million, including investments for increased product and organizational development. That left adjusted EBITDA of $35.7 million, that was an increase of $2 million or 6% as the sales growth and favorable gross profit results were only partially offset by the increased SG&A spending. And now, looking at our other segments. The minerals business, mineral nutrition net sales were $54.8 million in the quarter, that was an increase of $2.8 million or 5% over last year. The increase was due to higher commodity pricing. Our selling prices in the minerals business generally move in direct correlation with the underlying commodity costs. At the adjusted EBITDA line, segment adjusted EBITDA was $2.6 million, that was a decrease of $1.2 million from last year. That was due to both unfavorable product mix within the business as well as a competitive pricing environment. The performance products segment reported net sales of $14.1 million, those sales were ahead of last year, and that resulted in improved adjusted EBITDA. And our corporate expenses were $8.9 million in the quarter; they increased $1.3 million over last year due to investments in increased development costs. Now looking at capitalization and capital allocation: Our gross leverage ratio of debt-to-adjusted EBITDA was 2.5 times at the end of September, and we had $76 million of cash and short-term investments on the books at the quarter end. For the quarter, we used $15 million of cash for operating and investing activities, including $10 million used for business acquisitions, and we also had some seasonal working capital needs that used cash. Notably, we have increased the quarterly dividend by 20%. The increased dividend of $0.12 per share will be paid in December 2018. The increase reflects Phibro’s positive cash flows and balance sheet strength. And looking at our updated guidance, we’ve updated our annual guidance based on our expectations for the effective tax rate for the full year. Because of the GILTI tax aspects of the recent legislation, we now expect the effective income tax rate to be between 28% and 28.5% for the year. The higher taxes as a result of the higher effective rate, result in an adjusted EPS of $1.68 to $1.72 per share, that’s a reduction of $0.04 to $0.05 per share compared with our initial guidance. We are reaffirming our guidance for sales and profit, but we now consider it more likely to be at the lower end of the ranges provided. Animal Health sales growth in the current year will be more weighted to the MFAs and other product category. We continue to expect nutritional specialties and vaccines will grow at double-digit rates as our business develops. However, current year growth will be more subdued. Our operating visibility for the year has been reduced by a number of negative or difficult factors; including volatile currencies, economic turbulence in some international countries, unfavorable short-term challenges in the minerals business, continued difficult dairy conditions, ongoing trade disputes and various other factors. Operator, that’s the end of our prepared remarks. If you would please open the lines for questions. Thank you.

Thank you. [Operator Instructions]. Our first question comes from Erin Wright from Credit Suisse. Your line is now open.

This is Katie Tryhane on for Erin. We are just wondering, what was the acquisition that you mentioned in the press release, and can you just elaborate or quantify that contribution? Thanks.

I didn’t hear the word, Katie, what that we mentioned on the press release?

What was the acquisition?

The acquisition. We had – well we did two things in the quarter, one that we talked about as part of our year-end release. We finalized the full purchase of the, it’s called MJB swine vaccines in the United States, and that was the bulk of the spending in the quarter, like the business acquisition, cash flow in the quarter, that was a swine vaccine. We also bought a small vaccine manufacturer and sort of a developer, which we haven’t released more information about. But they do have some, and we did acquire some interesting technology and potential products for the agriculture industry.

Okay, got it. That’s helpful. And then can you just speak a little bit more to when you could get back to double-digit growth in vaccines and nutritional specialties? Thanks.

It’s hard to say, you know precisely when. I think, as we said we are seeing this year our visibility is probably more cloudy than it’s been in a while as far as the – as what our customers are thinking how their businesses are progressing. So, I’m hesitant to say precisely when, I think, you know it will be - it’s hard to say when. So, can’t really put a date on it. But I think we still have a lot of confidence and belief in the portfolio, and we see our customers more and more broadly accepting the fact that these are kind of the best products for them to use. But there’s a lot of other factors affecting our customers right now.

Okay, got it. Thanks.

[Operator Instructions] And our next question comes from Derik De Bruin from Bank of America. Your line is now open.

Hey guys, it’s Mike Ryskin on for Derik. Thanks for talking the call. A couple questions, I want to start with sort of your closing remarks there. You talked about all the challenging conditions. I think the biggest one still in my mind and correct me if I’m wrong, is the challenges in the dairy markets and how that’s affecting some of the nutritional specialties. That’s been ongoing for some time, but it seems like it’s really, you know in the broader market gone to worse in recent months. Do you have any sense of visibility into when that will improve, because in my understanding that’s mostly tied to just the glut [ph] in the market in terms of oversupply, but if you could just talk about the dairy markets in a little bit more detail?

Yes. This is a global problem, Mike. But most of our business today is in the United States. And so what we’re seeing is dairy producers, the farmers are just getting squeezed unmercifully by the supply demand imbalance. So this is only going to sort itself out when the industry probably sorts itself out in terms of only the strong survive and some of the weaker players fall away and you know supply comes back into more of a balance. There’s also global factors of how much of dairy products. And when you think of dairy, everyone thinks of liquid milk, but really we are talking about skimmed milk powder, whole milk powder, components of dairy really that go into many foods around the world. So, I think this has been lower, longer than many people have expected, and the industry will come out if at some point, but hard to put a timeline on when that might happen.

All right, thanks. And especially in vaccines and some of the other segments you talked about the international impact on some of the timing. I was curious if there was, if you could break out a currency, a straight FX impact as well.

Actually, so the currency is not so much just, that we - the currency is the fact that in many markets we price in U.S. dollars, but if the local currency devalues by 20% or 30% or more percent, all of a sudden you know that customer’s price in his market has gone up by 20% or 30%. So it’s a complicated equation, we don’t have a precise number I can give you. But I can tell you it was a negative to our business in several markets. And then in some markets, we do price in local currency, and there we’ve seen currencies devalue, and that’s hurt our top line and hurt our profitability too.

Okay, thanks. And then, one last one if I could squeeze it in. You talked a lot about you know investment in SG&A, investment in the portfolio, if you could give a little bit of color on whether the investment is going to the commercial sales force or the R&D, the product pipeline. And specifically on that, if you could talk a little bit more about any products that are coming up that we should keep an eye on, or if you have any progress on some of the companion animal investments going on there?

I’d say our investment is more in - so first of all, our investment is focused on the nutritional specialty and vaccine categories, and so it’s really pipeline development. In the case of vaccines, we are looking at some new products; we are also building out and developing the idle vaccine facility that we purchased six months ago or so, and we’re spending money on that as we ramp-up that facility. You know products, I can’t give you any specific products, but those are the categories that we are working on. I would say in the companion animal space, we continue to make progress, both in the product that we talked about previously and another one or two products. And so, we could be out there at least doing some test marketing in perhaps the next six months, but it’s too early to really say where that might go.

Great, I appreciate all that. Thank you.

Alright.

Thank you. And I’m not showing any further questions at this time. I would now like to turn the call back over to Richard Johnson for any closing remarks.

All right, everyone. That’s a wrap for today. We’ll talk to you again on our next quarterly call. So until then take care. Bye now.

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