Phibro Animal Health Corporation (PAHC) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Phibro Fourth Quarter Financial Results Call. At this time, all participants are in listen-only mode. [Operator Instructions] Later, we will conduct a question-and-answer session and instructions will follow at that time. I’d now like to introduce your host for today's conference, Mr. Richard Johnson, Chief Financial Officer. Sir, please go ahead.

Thank you, operator. Good morning everyone and welcome to the Phibro Animal Health earnings call for our fourth quarter and fiscal year ended June 2017. On the call today are Jack Bendheim, our Chief Executive Officer; and myself, the Chief Financial Officer. We will provide an overview of our quarterly and annual results for fiscal 2017 and then we will discuss our fiscal year 2018 guidance and then after that we will open it up for your questions. Before we begin the standard language, let me remind you that the earnings press release and financial tables can be found on the Investors section of our website at pahc.com. We’re 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 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 on 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 press release. So with that out of the way, I will turn it over to Jack Bendheim for some introductory comments. Jack?

Thank you, Dick, and thank you everyone who are joining us today for this call. Our June quarter was a solid finish to our fiscal year. Our animal health business saw continued strong growth in nutritional specialties and vaccines. MFAs, and other sales declined due to the ongoing reduction in United States sales of medically important antimicrobials, and a continued challenging economic environment in Brazil. We continue and are increasingly investing in animal health product development and organizational capabilities to build the business for future growth. Our Mineral Nutritional business completed the year with another strong quarter of income growth and we are optimistic about our business in the broader animal health industry as we enter our new fiscal year. We have numerous opportunities to grow our business through additional penetration, geographic expansion, new product introductions, and acquisitions. We expect continued double digit growth in nutritional specialties and vaccines. We see growth opportunities for MFAs and other products in international regions, and US sales of medically important antimicrobials are expected to level out about mid-way through our fiscal year. We will continue to spend P&L dollars on animal health product development and organization as we build the business for the longer term. I will now turn it back to Dick and look forward to our discussions after his prepared remarks.

Thanks Jack. Well before we get into the numbers, there is one page in the slide that just talks a little more in depth about the GAAP and non-GAAP financial information. Just as a reminder, our adjusted numbers are adjusted to exclude all acquisition-related items, so in a common parlance, that would be purchase accounting or business combination accounting type adjustments. We also exclude any unusual non-operational or non-recurring items. Over the course of this year, we’ve had things like pension settlement cost, a gain on insurance settlement, and loss on extinguishment of debt. We also exclude the foreign currency gains and losses that we report separately. And then lastly, we adjust income tax expense to reflect any income tax related to the pretax adjustments and also to remove unusual or non-recurring items that are in the GAAP income tax provision. So with that, let’s first review the highlights for our June quarter. Consolidated sales were $195 million for the quarter, a 3% increase compared to last year. That increase was driven by volume growth in the animal health segment, and also volume growth and some pricing in the mineral nutrition segment. GAAP results included a $2.6 million pre-tax loss on extinguishment of debt related to the refinancing we completed in June 2017. GAAP results for 2017 and 2016 quarters, the quarters each benefited from sort of unusual or one-time items and the income tax provision was $2.5 million in 2017 quarter and $2.9 million total in the same quarter a year earlier. And these were benefits from the release of a valuation allowance related to foreign operations, the exercise of employee stock options, sometimes known as a windfall tax benefit, and the recognition of previously unrecognized benefits. The adjusted results, when we talk about those exclude all of the items I have just talked about. We exclude the loss on debt extinguishment and we exclude the favorable income tax items. At the adjusted EBITDA line, adjusted EBITDA was $29.4 million, up a little more than $1 million over last year, we will get into that in more detail when we look at the segments in the coming slides. And our adjusted diluted EPS was $0.39 a share. That was up $0.07 or 22% above last year. That was driven by a number of positive factors, including improved adjusted EBITDA, we had lower depreciation expense in the quarter, reduced net interest expense, and a lower adjusted effective tax rate. All of those items contributed to the adjusted net income and the EPS growth. So turning to Page 6, looking at just selected line items from the P&L, not a lot more to talk about here, but you see consolidated sales grew 3%, and adjusted gross profit, which basically removes again acquisition-related items grew by 4%, grew faster than sales on favorable product mix. Adjusted SG&A increased $1.1 million in total. The entire - more than the entire increase was driven by the animal health segment as to position ourselves for future growth. We continued to increase spending on product development and organizational capabilities. And looking more closely at the animal health segment, we had sales of $128.6 million for the quarter, that was growth of $2.4 million or 2% over last year. We saw similar trends to what we have been seeing in recent quarters. The growth was driven by strong increases in nutritional specialties and vaccine product group. We did see a decline in the MFAs and other category. Nutritional specialties of $28.1 million grew $3.4 million or 14% over last year. The same -- continuation of the same story and that is volume growth of products for the US poultry and dairy industries and a bit of geographic expansion of those products also. Vaccine sales on the quarter were $16.3 million, that was growth of $1.2 million or 8% over last year, and that again was due to volume growth. I would say that our underlying vaccine demand remained strong, but timing of certain customer shipments resulted in a lower than typical growth rate in the quarter. For the MFAs and others, sales were approximately $84 million in the quarter, a $2 million or 7% decrease from last year, sorry that should be a 3% decrease from last year. We saw continued reductions in sales of medically important antimicrobials in the US due to regulatory and due to consumer preference factors we saw sales decline in Brazil resulting from challenging economic conditions. However, we did have sales growth of other products in other regions that partially offset the declines I talked about. Adjusted EBITDA of $31.2 million for the quarter decreased $200,000 or 1%, just slightly below last year. Nice gross profit growth in the segment was offset by increased operating expenses as we talked about. In looking at our other segments for the quarter, mineral nutrition’s had a very nice quarter. Net sales were $53 million, up $2.5 million or 5% on volume growth and some commodity pricing. The nice part about this business was the $4.4 million of adjusted EBITDA with an increase of $700,000 over last year, well ahead of the sales growth and so good profit performance as we have seen really all year from the mineral nutrition segment. Our performance products net sales were about $13 million, slightly above last year, adjusted EBITDA was also slightly ahead of last year, and corporate expenses were slightly favorable to last year. So now if we look at Page 9, looking at a summary of our full fiscal year, our net sales for the full year were $764 million that was about $13 million of growth or 3%, and those sales generated growth in adjusted EBITDA of $7.4 million. And obviously - I mean, we’ve talked about this a number of times, our gross profit grew faster than sales on favorable product mix, and also ongoing benefit of manufacturing cost efficiencies we’ve been seeing from some of the CapEx investments we have been making. Adjusted SG&A across the entire company for the year increased $3.5 million, driven entirely by investments we’re making in the animal health segment. Adjusted net interest expense was favorable due to interest income on deposits and foreign jurisdictions. The adjusted effective income tax rate for the year was 30.1%, up slightly compared to 29.5% last year. And that brings us all down to adjusted diluted EPS of $1.51 per share for the year, up $0.08 or 6% over the same period last year. Looking at capitalization and capital allocation, our leverage ratio, which is debt to adjusted EBITDA was 2.6 times on a gross basis at June 30, our positive cash flow continues to improve the leverage ratio. We also had $56 million of cash on the balance sheet at year-end. For our June quarter, we generated $9 million of net cash flow before financing; and for the year, we generated $76 million of net cash flow before financing. And on the dividend front, we paid a routine quarterly dividend in the quarter and have declared the same amount per share to be paid in September. So now turning to guidance. On Page 11 and I guess 12 and 13. You see the numbers on Slide 11. We’ve given guidance on both a GAAP and adjusted basis. There is more detail in the press release on these numbers. These are some of the highlight numbers. We forecast animal health net sales at $500 million to $515 million. That’s up to a 3% increase over last year at the top end of that range. We continue - we expect that nutritional specialties and vaccines will continue to grow at double-digit rates. We expect MFAs and others sales will decline something in the single-digit neighborhood. As we expect continued reduction in US sales of medically important antimicrobials through the first half of our fiscal year, we do expect continued growth in international markets, which will be a partial offset to those declines. In mineral nutrition, we expect revenues to remain steady to slight increase with volume growth being offset by reduced pricing related to commodity prices and performance products we expect to remain stable or decline slightly. At the adjusted EBITDA line, sorry so that gives you - for the total company, consolidated net sales of between $765 million and $790 million expected next year. Again up to a 3% increase. On a GAAP basis, we expect GAAP diluted earnings per share of $1.43 to $1.56. That’s down from 2017, primarily due to a higher call it more normalized GAAP effective tax rate. The 2017 effective tax rate and therefore tax expense included some unusual benefits that we do not expect to recur in fiscal 2018. So looking now at adjusted EBITDA, we expect that adjusted EBITDA for our fiscal 2018 to be in the $123 million to $126 million range. That’s 3% to 6% increase over 2017. We expect margins to improve - bottom-line EBITDA margin or operating margin to improve by 30 basis points to 40 basis points, and that will be driven by an improved gross profit ratio really due to favorable product mix. However, we will continue with increased spending on operating expenses for product development, which will partially offset the gross profit growth. We expect adjusted EPS will be between $1.55 and $1.61. That’s 3% to 7% increase over the prior year. The growth in adjusted EBITDA is really the primary driver of the growth in adjusted earnings per share. We expect adjusted EBITDA for our September and December quarters, so the first two quarters, the first half of our fiscal year. We expect adjusted EBITDA for the first of will be approximately equal to the comparable quarter last year. So we expect that the growth in adjusted EBITDA will come primarily in the second half of our fiscal year. And finally, we expect positive cash flows and remain interested in acquisitions. So that is the conclusion of my prepared remarks. So operator, if you would please open the line for questions.

[Operator Instructions] Our first question comes from the line of Brett Wong with Piper Jaffray.

Hi guys, thanks for taking my question. First, just looking at your guidance, what’s driving your expectations or confidence of double-digit growth next fiscal in vaccines given the more difficult comps that we have already started to see this recent quarter?

It’s probably a global footprint. We are increasing our penetration of some markets in the Far East where we are seeing sort of dynamic growth in protein. One on the consumption side, but more importantly is the countries there are more concerned about food safety. They are getting their arms around treating animals to make sure that healthy animals enter into the food supply. So we're seeing increase both on vaccines side as well as on various MFA sides in those markets. That’s confidence and the other side of it is, as part of it as we’ve discussed in the past as we sit here, what we need is in a way for our business is we need - we are controlling diseases. So, we are expecting a normal run of both poultry and swine diseases around the world, and that’s on our normal expectation, so that’s what’s driving our guidance.

Yes and I would add to that Brett. We are out there - I will call it prospecting in the market, presenting our products to potential customers and I think we see good strong interest in our products in with a number of both customers and segments of the industry and geographies where we’re optimistic about turning some of that customer interest into sales in the coming year.

Okay that’s helpful, and then just kind of looking at the MFA side with your expectations of ongoing declines in the first half of the year, can you provide a little more detail around your thoughts for the back half, what’s factored into that expectation of stabilization or improvement and what could result in that back half, either declining again or proving to be more optimistic?

I think it’s mostly driven by the fact that we are lapping this year. The US regulatory changes went into effect at the beginning of 2017. So we saw last year, sort of in the back half of 2016 calendar, sort of an increase in sales as people put some more inventory in. They will either use up some inventory they had on hand, but then the game changed, so we are going to get through that six months over the first six months of our fiscal year, the back half of the calendar year, and then starting next year we are in the new world that we have been in now, so we think things will stabilize. I mean in the US, the customers; especially in the poultry side have broken down into three worlds. There have been the customers who are - well, they call themselves NAEs or no antibiotics ever, so there is no antibiotics literally from hatchery through processing, then there are customers who are raising antibiotic free birds, that has to do with the US government's list of medically important antibiotics, but they are using a range of antibiotics to control diseases. And then there are customers who are just doing conventional birds who are saying that logically as long as the animals are sick, the best way to treat them are using the products -- the best products available that happen to be antibiotics. And that’s not saying that the other customers are not treating their animals, everyone is treating their animals, but everyone is treating their animals in different ways with different products, which is why our nutritional supplements business, especially nutritionals’ have grown because we have entered into those markets with a new range of products that are taking hold, but they will take a while because this is again a new world for everybody. So that’s how we view the world. The rest of the world, while the influence in the US about using less antibiotics clearly is built around the world. It’s more than offset by the fact that I was mentioned earlier is that as customers around the world are being driven heavily by China, because they are the biggest influencer in the Far East, I am very concerned about food safety, and this is the stuff I think you - maybe having written about the smaller farms, the backyard farms are being shut down or are closing down, and people are concerned and the animals are moving to more commercial farms where you can control what they eat. They even control the health and the well-being of the animal, and in those kind of markets, we find that our product ranges and our products from MFAs through vaccines through nutritional specialties have a greater acceptance. So that’s the balance of the business as we see for this coming year and as we see out into the future.

Excellent. That’s really great color thanks. And then just one last one from me, just wondering if you can provide a little more color on potential M&A in the space? Do you think there will be any consolidation from large players, with the tuck-ins that you're looking at on valuation and all that good stuff? Thank you again guys.

Valuations are high, thank you. And so it makes sort of larger acquisitions for us difficult, I mean while we have a very strong balance sheet, it is not strong enough to do very, very large acquisitions. We do see continued consolidations in the industry though nonetheless. We see - people seem to be sort of rightsizing their portfolios. There’s some very, very big players that sort of we anticipate as things go forward, they might decide to concentrate on one aspect of the business and divest other aspects. And as this business was the same before, internationally we might be seeing more opportunities of some very, very small players there, sort of feeling the heat of larger companies come in and looking to possibly sell. So it’s all those things that we’re looking at. There are a lot of deals in the market, and we constantly look, so that drives our optimism about acquisitions.

Our next question comes from the line of David Risinger with Morgan Stanley.

Great. Hi Jack and Dick. Congrats on the results. I have, I guess a couple of questions. First, with respect to vaccines Jack maybe you can speak to, how you see the underlying growth rate obviously it was up abnormally depressed at about 8% this quarter, but it would be helpful to understand how you see the underlying growth trend? And then my second product-related question is, could you just talk about how you see consumer preferences continuing to impact MFAs long term, I just don't know how to gauge how depressing the organic trend will be and how much it will constrain MFAs longer term? And then two quick questions, actually I’ll pause there. I have got a couple of quick financial questions for Dick as well.

So you don't want Dick to answer these questions? Anyway Dave, I think, first of all, we have the double - I mean our business has been on vaccines growth, double-digit, and I think last quarter is just a question of timing of shipments, so I wouldn’t - I wouldn't read anything more into that? What we’re seeing again, in the US with the movement away from how we raised birds historically. You and I have spoken about this quite often, it’s nice to have a regulation, it’s nice to have consumer preferences. Someone has to tell that to the animals, the viruses, the bacteria. At the end, the disease pressures remain. Now clearly, people prefer, if you can come up with a vaccine, which literally will help make the animal stronger, prevent diseases that is a reference. You've got to balance that will cost, you have to balance that with some of the side effect, but we are seeing because of that people looks and says in the US, and where both in the poultry and the swine business here, one we are increasing our sales and penetration of certain poultry vaccines and we're seeing customers who historically have now look - beginning to look. We are a very small player, obviously it’s a big potential. On the swine side, the vaccines we sell are known as autogenous. So basically we go out to the farms, we pick up the viruses, we take them back to the lab and we make effectively a custom vaccine. This is, this will never be the largest part of the business because it’s not one size fitting all, it’s more the spoke, then it is going to be, I wouldn't say it is not a good example, but just Amazon, but what we do is that the vaccines because they are looking at the viruses on the farms. Yes, they are more expensive, but they also work effectively against the viruses that are on those farms. So we are continuing to see in the changing environment that’s quite effective and we continue to see growth in that business. So that’s our approach. In the US, our poultry vaccine business out of Israel are more general vaccines and we sort of followed the diseases around and we see continued growth in that business. As I said Far East is a big opportunity there. The organic pressure, I think is a slow growth. I mean it’s easy to put organic or any kind of label or no label on a bottle on a package, it’s hard to raise animals like that and it is quite expensive. So, yes in the US, yes we will see a growth, but still the amount of truly organic poultry in the United States, our estimate is less than 3%, 4%. The amount of animal poultry that’s raised with reduced level of antibiotics is quite high. That could be 60%. In that environment, we do quite well. All right because it’s a combination of MFAs, yes we will see a decline. We will also see an increase in the nutritional specialties, as well as vaccine. So the business we are in is we need, we want to see lots of animals being raised with our products. We continue to be and that’s the goal of our business over the next five years or longer to be totally agnostic of what the animal will use or what the grower will use of our products to raise those animals. As long as they are raising those animals and we have a product available that will let them have, in case of birds or pigs or cattle or dairy that they will have a healthy animal that will produce to its maximum ability whether it is weight gain, product quality, milk production, we won't care, we don't care. That’s how we’re driving our business. So, one, we are in this every month, every quarter category of MFA nutritional specialties, vaccines, believe me if it wasn't for the account I would love to get away from that because we like to look at our businesses and animal health business and not really care what people are buying. We still report that way, but over time it will become less important to us and hopefully to you.

Okay. That’s extremely helpful. Can you still hear me?

Sure, yes.

Great. So Dick with respect to cash flow from operations, it was quite strong in 2017, it seemed to benefit a little bit from investment in inventory moderating and a swing in accrued expenses, so could you discuss that, talk about the outlook for cash flow from operations in 2018? And then my final question is just, how should we think about the tax rate longer term? Thanks so much.

Yes. So cash flow, I would say, we have said, we expect positive cash flow in 2018. In the working capital components specifically, I think we will see some cash being used by working capital as we grow sales, we are going to need to grow accounts receivable. We may need to grow inventories slightly. We’ll get a little offset on the liability side of the balance sheet. Part of the performance in 2017 was bringing inventories back into line after putting a lot of cash into inventory the prior year. So, I think we will see good control over working capital in 2018, but we will see some cash going into working capital. On the longer term effective tax rate, our 2018 guidance is an adjusted effective tax rate of about 30.5%. Over time I would see that staying fairly stable perhaps ticking up slightly it will depend on the mix of our profitability and basically in the US versus international locations, but I don't, you know borrowing whatever if any effective tax reform, but given status quo tax loss, I think we're in that low 30% range going forward.

Great. Thanks again.

Our next question comes from Erin Wright with Credit Suisse.

Great, thanks. Can you speak to the US dairy market trends and how that’s impacting the overall sales of OmniGen, and have you historically, I guess you’ve historically mentioned some market share from OmniGen in terms of I guess utilization across dairy cows, where does that utilization, I guess stand now? And can you comment on the competitive landscape across nutritional specialty? Thanks.

Thanks Erin. So as we’re seeing out there and what we’re hearing as well, the dairy business is in somewhat of a recovery. It’s coming off a pretty bad couple of years. It hasn’t returned across the board to the profitable business it was two, three years ago, but our customer is trying to make more money and as such we are starting to see , we turned it across the board to rob of business for us to 3 years ago, but our customers sign to make more money and as such we are starting to see after sort of leveling out or maybe a slight decline in the US, in the use of OmniGen, we're signed to see growth again in OmniGen and Animate and the other products who are selling to the dairy industry, plus a penetration around the world is starting to increase. We made efforts over last bunch of years to enter into Europe and that’s growing month-to-month, quarter-to-quarter and we’re even beginning to start making sales in China, which is something we again, I think we started speaking about over two years ago. So all that’s happening in a positive way. With the ability, there has been a shift to the marketplace, so we assume our market share, basically our headcount is about the same, may be slightly above, it is sort of high to keep track of that. We had some numbers in the past, but we have some that a market share is still to be about in the low 20% of the market. We’re optimistic that we will continue to grow as our customers make money, our products really help them make more money. So - and they recognize it. So, we are quite optimistic about that product line.

Okay, great. And you mentioned incremental costs associated with the product development initiatives, I guess what initiatives are currently in place and what new initiatives are you implementing in 2018 and how should we think about the quarterly progression, I guess, of those efforts and associated expenses? Thanks.

We had discussions here, told them like yesterday, its how you look at a business. Basically, I view a business in terms of the steps. You build and then you get the next rise and you build and you rise. Now when you do that, it is great to grab, so you grab, it always looks like its increasing day-to-day week-to-week month-to-month. I mean that is literally how analysts look at a business, but we are right now in the sort of the first part of building that step before we get to the rise, and we are doing it by adding product development people. We’re adding research people. We’re putting more animals on our farms. We’re looking at new species. We are looking at geographic growth. We are doing all of that. And we are doing that partly because we know there is a big market out there and a changing market. It’s hard to say right now, which of those efforts is going to produce, the riser or the step, sooner than another one, but we are doing all of that. So, we're spending money. So it limits our EBITDA growth. It sort of makes the curve with - still on a rising curve, but I think we’ve tempered the curve, but we are doing that because we see amazing amount of opportunities out there. Again, geographic species, product changes, et cetera et cetera. So that’s how we want to run the business and that’s our plan to run the business.

It is implied that most of our investment, may be all of our investment is really behind the faster growing product categories that we have been talking about. So nutritional specialty is whether it’s taking an existing product and expanding it to a new species or a new geography or developing, which is largely in licensing efforts developing additional nutritional specialty products. And on the vaccine side, it’s somewhat the same thing. It’s expanding our portfolio to take on more diseases to upgrade to the latest version of a disease. So that we have the most effective product on the market and can gain market share to that way.

Okay, great. That makes sense. Thanks.

Our next question comes from the line of Derik De Bruin with Bank of America Merrill Lynch.

Hi. Thanks for taking the call. It’s actually Michael Ryskin on for Derik. Congrats on the quarter. I had a couple of quick questions, lots have already been covered, but on the animal health side this quarter you posted some relatively strong numbers in MFAs from outside the US growth of $5.2 million, if I’m not mistaken, can you talk a little bit about what you saw there, particularly in APAC that’s just a big number got of that base and what your expectations are for 2018, all US particularly in that segment?

So, I would again, in some markets our customer purchases and therefore our revenues can be a little bit lumpy just depending on timing of customer orders. So be a little bit cautious reading too much into one quarter and one smaller part of the world, but in the broader sense we continue to be optimistic and we expect growth in international markets of MFAs, there is no question. So, and it’s mostly the markets we’re in today. So, we’re in pretty much throughout Latin America, Brazil, Mexico, other major countries. We’re in various countries in Asia, China, down through the Southeast Asia countries, Australia, New Zealand et cetera. So tempered by what Jack said earlier, which is, the world pays attention to what’s going on in the United States as far as antibiotics and pressure on antibiotics, but you have to at the same time balance that with the desire for and the need for healthy, affordable, good quality food and that’s what we’re seeing out there.

All right, thanks. Appreciate that. And then one other point you saw, a very nice bump up in gross margin this quarter, over 100 bips in the adjusted gross margin, you attributed that to some favorable mix, but also to some operational improvements. How do you see the runway there going into 2018 and beyond, both with mixes continuing to move around your portfolio as you discuss the change with MFAs, but also with the steps you are taking operationally?

Yes, I think most of - in 2018, I think most of our gross profit improvement is going to come from mix and driving favorable product mix. We will continue to get some cost efficiencies, manufacturing cost efficiencies, it will be the smaller part of the equation in 2018.

Great, thanks again.

[Operator Instructions] Our next question comes from the line of Kevin Kedra with Gabelli.

Great. Thanks for taking the questions. Most of mine have been asked and answered, so just want to ask about mineral nutrition, saw a pretty good bump up not just for the quarter, but for the year on the EBITDA margins there, I think around 8%, how should we be thinking about the margins for that business going forward, do you have a lot more room for leverage there or are we getting near the top for the margins on that business?

I think we have got more room for - this is going to be kind of an arithmetic answer. We have got a lot more room for profit growth. The margins could move around depending on commodity pricing. So, if commodity prices take off we may actually see the percentage margin dip, but what we watch in the minerals business and what we expect long term is that we’re going to be able to drive continued growth in the bottom line.

I think the math answer, I mean what Dick just said, would most likely outweigh anything we try to do. But what we concentrate on - what we can control, right? We can't control the prices of zinc and copper and manganese, et cetera, et cetera, but what we try to control is our product mix, is our concentration on our customer mix. And to that end, obviously we are driving to try to increase our margins to put out specialty products where we will be less - those products are less affected by commodity moves, but overall in that business as zinc goes up $100 a ton it is going to have our a lot bigger effect on the dollars then on anything else we can do.

I just would repeat. We are fundamentally no exposed to commodity prices. This is a transparent pass-through business and so when the price of copper goes up or goes down our prices, our cost of goods, and our prices to our customer goes down very quickly, very proportionately. So this is - some people are concerned that we’re exposed to commodity fluctuations and that’s not the nature of our minerals business.

Great thanks.

Thanks Kevin.

We have follow-up questions from the line of Erin Wright with Credit Suisse.

Great. Just two quick follow-ups. Can you give an update on aquaculture, the initiatives there? How big of an opportunity that could be as of faster growing species segment? And then also any sort of incremental efforts to de-emphasize the performance products business at all? Thanks.

On the performance product side, we, as we have said in the past we always - we are looking to de-emphasize that business. We saw some increases in this last quarter, but we look for opportunities to get out a piece of that business, that business is made up of a lot smaller pieces, and we keep our antenna out enough to see for ways to step away from some of those businesses. So that’s an ongoing effort. On the aquaculture side, we continue stepping forward. This is a business literally - relative compared to all the other parts of the animal production animal health business. It is a relatively new business, which means that products, there are few products out there that are registered, but most of these products are not. So we have to go through a long registration step. Years of products had been on the market maybe 30, 40 years in other species, but because this is a new species because government only grows. There are more hopes and more steps and more people to see. So, we are making progress in the key markets, registering products and we are investing in putting people on the ground and starting the sales, but it highly appears in our sales mix right now, but this is something that over the near future we will see growth all the time.

Great, thank you.

I’m showing no further questions at this time. I’d like to turn the call back to Mr. Johnson for any closing remarks.

I thank everyone again for your time and listening in on the call this morning. And we will talk to you again when we release our September quarter numbers. So, until then take care. Bye everybody.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.