Phibro Animal Health Corporation (PAHC) Q1 2016 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Phibro Animal Health Corporation's First Quarter Financial Results Conference Call. At this time, all participant lines are in a listen-only mode to reduce background noise, but later we will be conducting a question-and-answer session. Instructions will follow at that time. [Operator Instructions] I would now like to introduce your first speaker for today, Richard Johnson, CFO of Phibro Animal Health Corporation. You have the floor sir.

Thank you, operator. Good morning, everyone. Welcome to the Phibro Animal Health earnings call for our September 2015 fiscal first quarter. On the call today as Jack Bendheim, our Chief Executive Officer and myself Richard Johnson, Chief Financial Officer. We'll provide an overview of our quarterly results and then we'll open up the lines for your questions. Before we begin, let me remind you that the earnings press release and the financial tables can be found on the Investor Sections of our website at pahc.com. We're also providing a simultaneous webcast of this morning's which can be accessed on the webcast as well. Today's presentation slides and a replay and transcripts 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 descriptions of certain factors that could cause results to differ I refer you to the forward-looking statements sections in our earnings press release. Our remarks today will also 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 press release for a discussion of these measures. Reconciliations of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures are included in the financial tables that accompany the earnings release. So with that, I will turn it over to Jack for some introductory remarks. Jack?

Thanks Dick and thank you all for joining us on this call. I am pleased to report that we've started out new fiscal year with a strong first quarter. Our Animal Health customers experienced a choppy quarter with numerous challenges including currency and profitability, especially in the dairy market. Despite the challenging conditions, our Animal Health Group was able to deliver 8% sales growth and 19% adjusted EBITDA growth. These results have us further confidence in our decisions that continue investing and growing out our dedicated sales team in certain key markets. I am also pleased with the progress we have made in expanding production capacity needed to supply our growing customer base. We believe we have developed a very scalable infrastructure in many markets. So while we continue to emphasize organic growth we're also actively looking for acquisitions across our Animal Health business to further leverage our capabilities. And now I'll turn it back to Dick for some further color on our first quarter and I look forward to taking your questions after his presentation.

Thanks Jack. Before we start, just a note that all of the comparisons here in this presentation today are comparing against the 2014 numbers that excludes $6 million of milestone revenues and income that we received last year related to the licensing of some of our proprietary vaccine delivery technology. For a better understanding of the underlying trends, we've presented the comparisons with last year to exclude those milestone payments. So now looking at our consolidated results, first on the topline, consolidated sales of $187 million grew about $6 million or 3%. Now that growth was driven entirely by our Animal Health Group with almost $9 million of sales growth or 8% over last year. Our Mineral Nutrition business saw good volume growth also, but the revenues were affected by lower commodity pricing and so as a result, our reported revenues were down 2% year-over-year and our small performance products business saw about a $2 million sales decline from last year on volume decreases. So that $6 million of sales growth translated into about $6 million of gross profit growth or 11% as we increased our gross profit ratio to better than 32% of sales. That increase was driven by volumes and mix. It was driven by improved operating efficiencies in our manufacturing facilities where we were seeing the benefit of some of our capital expenditures and was also seen in favorable cost to goods driven by those larger volumes and also favorable currencies in some of our international manufacturing plants. At the same time, we've continued to invest in our operating expenses building out our selling, marketing and development effort. We increased across the entire company, SG&A of approximately $3 million or 9%. Almost all of that increase was in our Animal Health segment and put that all together we get down to an adjusted EBITDA of $27.7 million about a $3 million increase over last year or 13% and driving that EBITDA ratio are operating margin ratio to 14.8% of sales. On an adjusted diluted EPS basis, $0.44 compared to $0.33 last year. Again that comparison excludes the milestone revenues from last year or an $0.08 or 22% increase over last year. That improvement was driven by the growth in adjusted EBITDA and a income taxes that on a dollar basis were about flat with last year, which meant that they were lower effective rate than last year. Our tax rate in the quarter was about 11.5%. So turning to the Animal Health segment, within that 8% sales growth or again about $9 million, MSA and other, the biggest part of that segment grew $4.7 million or 6% as we saw a strong demand for our products across a number of international markets. Nutritional specialties with our focus in dairy primarily in the United States but also in Europe and some other international markets. In addition, an introduction of a poultry product to the U.S. market. Nutritional specialties grew almost $3 million or 15% in the quarter and vaccines was better than $12 million of sales in the quarter grew $1.3 million or 12% over last year. So $120 million in total sales for the Animal Health Segment and $9 million of sales growth at the adjusted EBITDA line, of that $9 million of sales growth, we saw adjusted EBITDA increase $5 million to $31.5 million this year or better than 26% operating ratio of about 240 basis point improvement. Driven by that gross profit growth, things I called out on the previous page; volumes, product mix, favorable manufacturing cost and offset in part by continued investment in growing our business and increasing operating expenses. Looking at the other segments; mineral nutrition $54.5 million of sales, down a $1 million or 2% from last year; within that, we did see volume growth, still strong demand in that business, but commodity pricing resulted in lower sales revenue. The operating margin was down slightly on sales mix, plus a small unfavorable SG&A comparison year-over-year but still a healthy operating margin at 5.8% of sales for this lower margin business. Performance products $12.5 million of sales, reduced volumes on reduced industrial demand and EBITDA just about breakeven. Corporate staying at about the same run rate; we've been seeing $7 million for the quarter, nothing major to call out there and then looking at our capitalization and capital allocation, our leverage ratio was 2.9 times at September as we had total debt of $307 million that includes being drawn on our revolver of roughly $20 million and on a trailing 12 basis our EBITDA was $107 million. Ended that quarter with $32 million of cash on hand and we used about $10 million of net cash before financing activities in the quarter and that really represented investment in our business growth. We saw increases in receivables, inventories and just typical timing of pay down of some payables for things like annual incentive compensation and some other payments. CapEx is in line with our higher guidance for this year. We spend about $8 million of CapEx in the quarter and just typical dividend no change there, $3.9 million paid in September, the same level of dividend declared to be paid in December at $0.10 a share. So that’s -- those are the highlights of our number for the quarter. So operator if you will open it up and we’ll have some questions and answers. Thank you.

[Operator Instructions] Our first question comes from the line of Louise Chen from Guggenheim Securities. Your line is now open.

Hi its [Brendon] on for Louise. You have an agriculture business, could you just give us some color around how big it is today and what are the growth potential for that business? And then what products are you focused on growing right now? Is there anything you can talk about in your pipeline even if it's more broad discussion? Thank you.

So thanks for the question. It’s going to be a very broad discussion. As you remember we just launched our efforts in Aqua over the last two years. What we're concentrating right now is reviewing and testing our current offerings and seeing some products we own, control or have IP on. And seeing how these products can be used and what species and what markets. So we're ongoing on that and we will be launching some products earlier in the coming calendar year. We're also looking to get into the vaccine market where we're doing -- currently tests in our manufacturing site to see exactly, which vaccines and which diseases we think we can bring some value to the market to. And finally we are as we said earlier, looking in possibility of various acquisitions to go in that sector. So it’s a long answer to a question, which is currently our sales are de minimis, but we hope over the ensuing quarters and years for this to become a significant contributor to the company.

Great. Thanks so much.

Thank you.

Our next question comes from the line of Erin Wilson from Bank of America Merrill Lynch. Your line is open.

Great, thanks. So are you essentially kind of reiterating your guidance for the year and what is that incorporated as far as fundamental underlying utilization trends and then also how should we think about the tax rate going forward.

Yeah, we haven’t made any changes or updates to our guidance Erin. So it stands as we put it out there before. I think the tax rate on a full-year basis was around just one moment, probably around 17%. So this first quarter was low, that the guidance we gave for the year gets us to a tax rate of around 17%. So again that earlier guidance we gave still stands.

Okay. And can you speak to kind of what that new portrait product is on the nutritional specialty side and what that could potentially add in where you've launched the product?

I don’t think we go through real breakouts on products, but we're all seeing the effect and we applaud the most judicious use of antibiotics. So many of our customers are trying to control the various bacterial diseases with non-antibiotics and this is a line of products that we've launched, we've been testing it. We've had it in the market ready about a year on some tests. We've been developing it for the last four years. We think it's pretty unique and as you said it's for the poultry market and it helps control various pets and bacteria that will enhance the help and safety of the chickens. So we're seeing nice uptick in that business and we expect that to grow further.

Okay. And then just general speaking, can you speak about like the health of this poultry market particularly in the U.S. kind of how some of these changes have evolved in the utilization of antibiotics, but also just fundamentally speaking overall demand trends?

I would say right now the poultry business in the United States is quiet healthy. Everyone is leading in some sort of scale anticipation of the Avian influenza time period to hit. So far as best we can tell it is not hit the U.S. as we start getting into winter months yet. Overall, I think the effect of the strong dollar is hurting our export market. So it’s causing some lower prices here because it's harder to export poultry, but our customers are still benefiting from lower feed prices and from a fairly strong domestic market. So I think the overall industry is quiet healthy and will continue hopefully it will be some.

Okay. That’s great. Thank you.

Thank you. Our next question comes from the line of David Risinger from Morgan Stanley. Your line is open.

Hi this is [Anu] [ph] on for Dave. Thank you very much for taking the questions. I have two questions. First could you please comment on the outlook for herd in 2016 relative to last year and including what percentage increase you expect? And secondly could you provide more colors on the outlook for the December quarter related to last year? Thank you.

Let me take the second part first and that is we give annual guidance and don’t really focus on quarterly numbers. So if you go back and take a look at our guidance, we say that -- we expect each of our quarters to be similar to our annual guidance in terms of growth etcetera with more strength in the second half of our fiscal year. So that is detailed as we've gotten on quarterly numbers. And on your question on herd size, I wasn’t -- I didn’t quite catch all of the questions. Could you repeat that please?

Yes, sure. So we're wondering if could provide some comment on the outlook for the herd sizes in 2016 related to '15? What are you expecting whether, you think the herd sizes will increase or in what percentage it will increase, are you expecting?

As you know from our business we -- other than our dairy cattle, our beef business is not the biggest segment, but we watch the overall market and this year we are seeing increases in herd sizes. If we talk about the United States we're seeing increases in herd sizes in all places that they should be. So we expect people have products for those markets, will see increased sales this year.

Okay. Thank you.

Okay.

Thank you. Our next question comes from the line of Kevin Kedra from Gabelli. Your line is open.

Thanks for taking the questions. First just wondering if could give a bit more detail geographically on where you're seeing the more strength for the MFA business? And then on the Aqua culture business, recently saw a competitor go out and buy a company for what looked like a relatively rich multiple about eight to nine times trailing sales. Just wondering if when you look at some of the inorganic opportunities out there in Aqua Culture, is that the kind of multiple or evaluation that you're seeing out there? Are there some less expensive assets that you might be able to pursue?

So first on the breakdown of antibiotics, we're seeing strength in most of the international markets. Our strategy has been and we've stated this for the last couple of years of growing this business into the cattle areas in many markets. The results the returns to grow is phenomenal over 10 to 1. So we're concentrating on countries that have raised a lot of cattle on, whether it's Turkey, sorry, Australia, whether it's Brazil, Mexico where we have the registrations and we have the permissions and the approval to do it. So those we're seeing a lot of growth. We're also seeing growth in our poultry and swine segments around the world. And so that remains strong. We never comment about competitor's pricing in terms of acquisitions. We think it was the acquisition that we did and we think we're worth at least that, but I think our financial ability would restrain us from competing in those kinds of markets.

[Operator Instructions] And that are all the questions that we have from the queue at this time. So I would like to turn the call back over to management for closing remarks.

All right. Before the close of this, I just want to pass on a note that I received yesterday from National Turkey Federation because of the fermentation last year, there is less fresh Turkeys in the market and more frozen meat. So we're going to use more of those in deep frying, they recommend that you allow nearly a week to safely defrost at £20 Turkey. So be safe, be careful. Have a great holiday season and I'll hand it over to Dick.

So there you have it ladies and gentlemen. We're always interested in -- I hope the Animal's healthy wood a healthy world and healthy people. So we'll leave it at that. Talk to you next quarter. Bye now.

Ladies and gentlemen thank you again for your participation in today's conference. This now concludes the program and you may all disconnect your telephone lines at this time. Everyone have a great day.