Good day, ladies and gentlemen, and welcome to the Phibro Fourth Quarter Financial Results Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference maybe recorded. I would now like to turn the conference over to Mr. Richard Johnson, Chief Financial Officer. You may begin.

Thank you, operator, and good morning, everyone, and welcome to the earnings call of Phibro Animal Health. On our call today we will be discussing our fourth quarter and full year ended June 2019 results. On the call today are Jack Bendheim, our Chief Executive Officer; and myself, Richard Johnson, Chief Financial Officer. We'll provide an overview of our fourth quarter and annual results, and then we'll also discuss our expectations for the new fiscal year. Then we will open the line for your questions. Before we begin, let me remind you of some standard things. Our earnings press release and financial tables can be found on the Investors section of our Web site at pahc.com. We're also providing a simultaneous webcast of this morning's call, which can be accessed on the Web site as well. Today's presentation slides and a replay and transcript of the call will also be available on the Web site 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 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 press release. In addition, before we get into the numbers, we want to 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 unusual non-operational or non-recurring items, including stock-based compensation and restructuring cost. Other income and expense that we report separately in the consolidated P&L and income tax effects related to any pretax adjustments as well as excluding unusual or non-recurring income tax items. And now, before I get into the financials, let me introduce Jack Bendheim with some introductory comments. Jack?

Thank you, Dick, and thank you, everyone who is joining us this morning. For both the last completed quarter and our guidance for our new fiscal year, there are really two things, one external and one internal that are strongly dictating our financial performance. The external ones is obviously African Swine Fever or ASF and the internal one is our strategic decision is not to pull back the reins of our strategic investments despite the financial and operational impact caused by ASF. Let me talk a little about these two things. As we detailed in our press release, we expect roughly $40 million sales decline in our China business due to ASF in the coming fiscal year. From a [Phibro] [ph] point of view, I note that our projected impact is roughly the same as that publicly discussed by some of our large competitors and this speaks to the reality that despite the fact that we have a smaller bundle on less geographic scope, when it comes to head-to-head battles, we have more than able to hold our own. We has a company take great pride in the business we have built in China and while this clear the ASF impact, will be with us for longer than just this fiscal year, we know that when the dust fully settles, we will be positioned to once again gain a significant share of that market. On the other hand, $40 million sale headwind is much more significant to our company of our size than it is to some of our competitors. And we don't have the offsets to fully counteract its impact. One of the levers we obviously do have relate to spending, we have taken some focused measures relating to our [aid camp] [ph] and our manufacturing base, still as…

Thanks Jack. Let's start by reviewing the results for our June 2019 quarter. Our consolidated sales for the quarter were $204 million that was a 4% decline compared to the same quarter last year. Our Animal Health sales declined due to African Swine Fever in China and due to lower mineral nutrition sales on reduced selling price and product mix. Growth in Performance Products was a partial offset. Our reported net income was $8.8 million that was a $13.3 million decline due to the lower sales and also increased SG&A expenses including the pretax restructuring cost of $6.3 million we recorded for both the termination of a manufacturing agreement as well as employees' separation clause. For the quarter, diluted earnings per share on a GAAP basis was $0.22 that was $0.33 below the same quarter last year. I'll discuss adjusted results on the next page of the webcast. So looking at selected line items from the P&L, I'll get into the detail of net sales in more detail at the individual segment level. In total, adjusted gross profit declined $2.2 million or 3% compared to the prior year. The gross profit decline was roughly in line with the overall sales decrease. Animal Health gross profit declined in proportion with sales, mineral nutrition gross profit was comparable to the prior year despite the lower revenues and Performance Products gross profit improved due to sales growth, but it was partially offset by unfavorable product mix. On the SG&A line adjusted SG&A increased $4.6 million or 11% driven by strategic investments in key development projects to position ourselves for future growth. Our adjusted net interest expense increased $600,000 on higher variable interest rates and higher debt levels and that all came down to adjusted diluted EPS of $0.33 a share compared with $0.46…

Thank you. [Operator Instructions] The first question comes from David Risinger of Morgan Stanley. Your line is now open.

Great. Thank you. In fact, thanks Jack and Dick for the detailed slide presentation. I have a couple of questions, first for Jack, and then, I'll follow up with a few questions for Dick. So, I heard a little bit of buzz that ASF may be spreading somewhat to Eastern Europe, but I'm not sure if that is true. Can you talk about that including any potential risks to your European business? And then second, with respect to your vaccine business, obviously, it faced some pressures including some different dynamics, but could you just help us understand the competitive landscape to your vaccine business and whether there are any new competitors that are pressuring sales or is it other factors that had driven the recent declines? Thank you.

Thank you, David. So, to the first question. I mean African Swine Fever has been out there for quite over a hundred years. And it's been in Europe a long time -- a lot longer. I mean, there have been outbreaks in Spain and there have been outbreaks in Eastern Europe. And the Chinese claim it spread to China from Kazakhstan. I mean from way East in Europe. So it's been out there. The difference is that the way it's been handled up to now is, was very, very good biosecurity and pretty much Western Europe, Eastern Europe has managed this disease with good biosecurity. And for that matter just it's also spread to Vietnam and now in the Philippines and other markets in East Europe. Again, it's still somewhat contained. In China for whatever reasons -- it's much more difficult to have good biosecurity. And subsequently, we've seen the devastating effect it's had there. So, we're talking in China about over 50% of the pigs having disappeared. And you understand something David, which is -- it's not like every pig has gotten sick, right? But, what happens is, if it is such a virulent disease that if it hits a farm over 98% of the pigs die. And then, that same farmer is quite reluctant to put new pigs back on -- back in the barn because the vaccine -- the fever -- the virus, sorry stays around. So once it happens no one is putting new pigs back on. So, I mean the Chinese say that they've killed around a few million pigs, but the reality is that we're talking about standing pork population between 360 million and 400 million that over 200 million have disappeared. So, it's so much more devastating in China than we see in the rest of the world. Plus China itself accounts over 50% of all the pigs in the whole world. And that's why when everyone talks about African Swine Fever they talk mostly about China. To your second question. We don't sell MFAs in Europe, so the fact that that it is popping up here and there in Europe has no effect on our business. And finally, we see the same competitors we've seen in our poultry vaccine business. And as you recall, what we've said a few times that the reason for the drop in our sales is, we've lost the distribution of someone's product in nine states last October. And on an annual basis, we will have annualized that in a few months.

That's extremely helpful. And then, could you set a little bit more color on China. So, what were the China total sales last fiscal year that just ended fiscal '19? And could you just explain a little bit more what the MFA risk is, you obviously quantified. I believe the total sales decline of 40 million in China in 2020. But, how much of that is due to the new regulatory initiative relative to ASF?

So MFA sales in China have been that $40 million and we expect basically the business to -- at least for the coming fiscal year, it's not in our numbers because we do have inventory in the market and because of the great decline in the amount of pigs available to consume that inventory. We think it matches up. And it dovetails into what is surprising that the Chinese have still looking to change their regulatory status and to go as well to therapeutic claims and not leave and what they have, just to make them more difficult to raise pigs and wherever they have, whatever they still have the ability to raise pigs. Our distributors in China, one wait for new regulations to come out and want to make sure that they have the right label on their product. So, the trailing inventory, change regulations and as we said in our statement because it's difficult to get pigs to be tested to move pigs around and have them tested. It's going to take us now maybe a year, maybe up to two years to get the new therapeutic claims. So, it's all ones around the same numbers. So, we've lost -- we have no anticipation of sales for that market. We think it's going to take, I just saw something this morning and some of the press -- people think it can take four to five years for the Chinese to restock and that is with some assumption on good biosecurity and some potential vaccine, which right now no one has. So, this is going to be a long time. But, what the reality is in terms of -- from our business point of view and I think even you are looking out around the world is, there is still demand for protein in China. And it's going to ship around the world and might not be satisfied by pork, but be satisfied by chicken grown in China and chicken imported and pork imported and cattle imported and increase in fish industry in China. So, this is going to affect the whole world with some big and small ramifications.

That's extremely helpful. And if I may, just pivoting to Dick. Dick could you just talk about the outlook for cash flow from operations in fiscal '20 relative to the $47 million in cash flow from operations that you booked in fiscal '19. And then, if you have any comment on dividend prospects? Thanks so much.

Dividend prospects are unchanged. We expect the dividend to continue at its current level. No discussions of any change in the dividend. I have to do some quick back calculating.

If you want to circle back on the cash flow…

Let me come back to you on that. I just don't have the schedule in front of me.

Okay. No problem. Thanks again.

Thank you, David.

Thank you. And our next question comes from Erin Wright of Credit Suisse. Your line is now open.

Great. Thanks. Do you foresee any sort of turnaround or stabilization in the dairy market at this point particularly in the U.S. or domestic market and have there been any sort of major shifts in the competitive landscape there when it comes to your OmniGen product? Thanks.

Well, what we're seeing and is that -- what we've seen is possibly 9.3 million dairy cows that exists and still exists and they were there four, five years ago and they are today. And the big shift has been in the dairy economics on the farm. So, there are very, very few small 100, 200 dairy farms left in United States. And they have been an increase and still increasing farms over 5000. And that has posed, it's still going to pass some challenges to us because our business -- business knowledge was really built on these small farms and the products that I mentioned sort of at the opening of this conversation, as we readjusted and reformulated OmniGen, to where we feel we will have increased the value to way this is presented to some of the larger farms. So, we're very optimistic that with those changes, we will get back market share and even grow the business.

Okay. That's helpful. And then, can you quantify a little bit for us the microbial market for you over time and how big that could be and how products such as Provia Prime is positioned in this market and when is your contribution be more material and in what Osprey also adds for you there? Thanks.

I mean that is a great question. So, the microbial have been around for a very, very long time. And but not used that much in the animal industry. And the reason why it isn't used that much would be -- we had some really very effective product for antibiotic. But antibiotics now are out as we all know, I mean the -- as the producers look around for products that makes sense, the products that will affect sort of the gut of the animal at reasonable cost and still fit into some will call natural. There is nothing better than taking products that sort of originated from the dirt and extracting and developing ranges of microbial products. And that's where -- so the potential is huge. I mean the potential for the markets are in the -- near-term tens of millions long-term greater than that. And as we said earlier, Ospreys is very well positioned. They have great technicians, great plans domestically located and fits all the various points. One of the things that attracted to west, the fact it was owned by a woman that was important for us as we [indiscernible] look at, what we should be doing domestically. So, hit all the points and we think we'll do great with the company.

Okay. That's great. And then, just one last one, I guess I was just curious if given some of the further consolidation that we've seen across the larger Animal Health manufacturers, do you think that you could benefit from any sort of disruption, sales force deceptions or product line divestitures at all? Thanks.

So, this is something that could depend on how the FCC looks at this acquisition coming up. And, if there's any four divestitures obviously we will look. And beyond that there's always opportunity and disruptions. And I think, if there will be opportunities we will thoroughly look and see if we can gain by them. But, on the face of it, I think it's a great acquisition for Lanco and it doesn't do that much for us.

Okay. Great. Thank you so much.

Just before the next call, circling back to David's question, are the numbers we put out would imply cash flow from operations of between $40 and $50 million next year, David, that's roughly right in the same range as we had this year.

Thank you. And our next question comes from Kevin Kedra of G Research. Your line is open.

Great. Thanks for taking the questions. Maybe first one for Dick, for the clarification on the comments about the EBITDA decline being probably captured within the first half of the year. It sounded like a lot of that was a function of the movement of revenues. But given the increase in SG&A, is that going to be kind of stable throughout the year or are we going to see that SG&A increase also front loaded in the first half of the year and thus leading to that EBITDA decline.

Well, the spending we talked about on all of the various initiatives that give or take going to happen evenly across the fiscal year. So, we will have -- we will have higher operating expenses coming right out of the gate at the beginning of this new fiscal year. And then, you're right, the revenue, we'll see more of a hit to revenue in the first half of our year and that's why we're going to see the most other -- really all of the year-over-year decline hitting us in the first half of the year.

Okay. Thanks for that. And then, was hoping you might be able to quantify a bit more about how much you're spending on the African Swine Fever vaccine and the spending on that program. Talk about it being maybe a three to five year program, is that something we should expect to be -- spending to be consistent over the next several years, is that lumpiness there. Just want to kind of think big picture about that program?

So, we sort of put a bunch of things together. I think these spending will be heavily this year possibly to next year. If we are successful in developing a vaccine, what takes so long is in the testing to the approval [plan and] [ph] testing. What's unusual about our approach to this vaccine is that there's always two things funding any product out of the marketplace. One is safety. Obviously, safety is the most important and efficacy historically was done by the market, but now is also regulators wants the efficacy of a product. What's unusual about our approach to this vaccine is, we're not incorporating the African Swine Fever virus into it. So, putting a vaccine won't spread the virus. So it's not a safety issue. It is obviously the efficacy because our approach is sort of different we're just looking to the protein side. So, we take three to five years because everyone says three to five years and a new vaccine especially when there's great demand. I don't know. It could be faster, if we show the regulators that we have a product that can work that can slow down this virus and have an effect. And as I said earlier, it's such a huge market. And basically one has to vaccinate every pig because you want to basically protect every pig from the potential. So, if we just see initially that this thing only looks like it's going to work a 50%; 50% of $135 billion or is, I don't know, $65 billion market you're saving. So, the potential is huge especially with our approach because again we are working looking a little bit different, [indiscernible] is very different, but we made some very, very interesting successful step so far.

Good. Thanks.

Thank you. And our next question comes from Michael Ryskin of Bank of America Merrill Lynch. Your line is open.

Hey guys. Thanks for taking the questions. First, I want to start with something we've talked about a lot in the past and it's the expectation that as ASF is sort of ravaging China and all of Southeast Asia and the supply in those markets goes down, you expect a little bit of a rebound in Latin America and Brazil in terms of production of swine and some of your revenue losses in China specifically? Didn't spend as much time on the call although you kind of hinted at it, I want to get a better sense if you have any update expectations on that in terms of timing or magnitude probably not the next couple of months, but is this something that could factor into your rebound in the second half of the year in terms of fiscal 3Q, fiscal 4Q pickup.

As I said, I answered to Erin's question, there's a protein shortage in China and I think it will be filled. Obviously, if there is pork available that would be number one. The places you can add relatively easily for production is in South America mostly Brazil. You can do some growth in the United States. The U.S. is caught up in -- the trade war, that side is difficult. But none of this will get anywhere close -- and a pork protein that's missing. So, we do expect to see in our business around the world both in the U.S. and in South America because this tends to be the intangible. Ever anyone's raising protein, so whether it's -- whether you're fishing or you're doing poultry or pork or cattle all these things, the prices are moving up rapidly. It's one of the articles about this morning it said in the last three days, the price of pork in China jumped 9%. So, all these things will have an effect. And yes, it has effect and people put on more increased production as people raise to heavier weight, as people look to get better yields. All these things will benefit our business and yes it's somewhat factored in. It's hard to take a big plug number, but it is factored in to us. And I'm sure of all our competitors as well.

Okay. Thanks. And then, on the comments on SG&A increase year-over-year, the reinvestment back into the business, you highlighted that about half or 15 million is discretionary, going beyond the comments on the ASF, you just talked through. Is this sort of the new spend going forward or is this a little bit of fiscal year 2020, we have to adjust to the market, so we're going to ramp up then, but then in the out years, you can see that number return back to fiscal year '18, fiscal year '19 levels?

I think to answer that, how wisely we spend our money. And you are trusting us and we're trusting ourselves to spend it wisely. So, we think these various projects who are working on will give us great returns, every single one of them. If we do that, then hopefully we'll bring those product to market we'll make more money and we'll find new things to spend money on that will be the great way to grow this business. And you will be very happy with us and we will be happy with ourselves. So, on the other hand, if we are completely unsuccessful and we don't know what the hell we're doing. Then we're going to stop.

All right. Thanks. I appreciate that. One last one if I could squeeze it in. I got a follow up on the earlier comment on the [indiscernible] acquisition. And I want to focus on your balance sheet and your optionality to do some tuck-in M&A. Can you talk through your leverage and we know about the Osprey deal, but still I know you were very active where you try to get involved when Boehringer Ingelheim and Merial were doing there asset swap and some assets came up for sale. What's your ability to sort of leverage up now and is that still a focus for you going into this year or is the focus more on the internal operations and getting the initiatives you've outlined executed on.

I have my attorney at this table and he frowns on me. But someone told me I should take a look at that we work IPO to look at leverage. I don't know today. We're dealing in a crazy world out there. We put up on the screen that I think we are up.

With Osprey, we will be a little north of 3x leverage.

Normally, if I'm sitting opposite to you, you would ask me do I sleep well at night, with such high leverage. But, the fact remains that at a lot of money out there, one can do it, the right acquisition and I think money is available.

Great. Thanks so much.

Thank you. [Operator Instructions] Our next question comes from David Westenberg of Guggenheim Securities. Your line is now open.

Hi. Thanks for taking the question. So, can you remind us again on your companion animal strategy, if you're going to maybe be adding any headcount there, if there's any in companion animal that accounts for some of that 30 million in additional SG&A spend. And then, if companion animal opportunities do become successful, is there opportunities to maybe change that thought in terms of investment there?

That's a good question. I am opposed to companion animals is that we've said it from the beginning, we are starting with a clean slate. We're not looking to add sales force. We're not looking to work in that direction. I think we're looking to bring products -- unique products to the market. There may be or not going to be as large in the sector -- some of these joint companies are doing. And as they consolidate, obviously, the interest of them again in smaller products reduces. So, we think these are some unmet needs. And right now our strategy as we said was to work organic foods globally exclusively with one distributor and using that distributor sales force as we go ahead and we target and try to grow these products. So, right now, we've launched one. We're looking to do more. But, we're not looking to spend a ton of money there on SG&A. The money we are spending in on, is on research and on…

Development.

Development.

It's not an organization. It's not the sales force.

Yes. Okay. And then, just a quick bookkeeping kind of question. It gets a little bit on the accretion on Osprey. I know we can do a little bit of the math with $20 million and a 3% increase in SG&A due to that. But, can you -- maybe run us through, maybe on a EPS level or if you give us the cost kind of work our way through that math. Thanks.

Yes. I think we've told you what we're going to tell you. The pieces -- it's a nicely profitable business. It more than covers the increased interest expense from making the acquisition. So it's accretive after covering all incremental costs.

Okay. Thank you very much.

Thank you. And this does conclude our question-and-answer session. I would now like to turn the call back over to Richard Johnson for closing remarks.

All right, everyone. Well, we thank you for your interest and the discussion this morning. We will talk to you again when we put out our first quarter results. Until then, thanks and take care. Bye now.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.