Good morning, everyone, and welcome to the Phibro Animal Health Corporation's Third Quarter March 2014 Conference Call. And before we discuss our third quarter results, I would like to, just one moment, please. We've got a feedback problem. Hold on..

[Technical Difficulty].

My apologies. So let me start again. I'm on the cautionary statements on Page 2. Before we discuss our third quarter results, I'd like to remind everyone that the company will be making statements about its future results and expectations, which constitute forward-looking statements within the meanings of the Private Securities Litigation Reform Act.

Such statements are based on current expectations and the current economic environment, and are inherently subject to economic, competitive and other uncertainties and contingencies beyond the control of management. You should be cautioned that these statements are not guarantees of future performance.

Actual results may differ materially from those expressed or implied in the forward-looking statements.

Important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements are specified in our earnings release, and the registration statement on Form S1 filed with the SEC in connection with our initial public offering.

If you did not receive a copy of the press release, that's available on our website at investors.pahc.com. And we're also providing slides to accompany this morning's conference call which can be accessed on our website as well. .

Also, certain non-GAAP financial measures will be discussed on this call, and these measures are reconciled to the GAAP numbers in our press release and/or in our quarterly report on Form 10-Q, which is also available on our website. .

So with that, let me introduce the people on -- from the company on the call today, turning to Page 3, Jack Bendheim, Chairman, President and Chief Executive Officer; myself, this is Richard Johnson, I'm the Chief Financial Officer; and Daniel Bendheim, our Executive Vice President of Corporate Strategy. .

And with that, let me turn it over to Jack for some introductory comments.

Jack?.

Thank you, Dick, and thank you to all of you for joining us on this call today, which is our first as a listed company. The last few months have been a very exciting time for Phibro Animal Health.

We had the pleasure to meet with so many of you in the investing community during our recent IPO roadshow and to have the chance to introduce Phibro and to explain what I we believe is so unique about our company. .

And if you recall, one of the strengths I highlighted was the strength of our overall team. And this is underscored by the strong operational performance we turned in for our fiscal third quarter, despite all the distractions inherent in going public.

So I'd like to begin by recognizing and thanking all of my colleagues for their efforts in general, and specifically, over the last few months..

Phibro Animal Health is singly focused on helping our customers raise healthy and productive animals to meet the growing demand for worldwide protein, and that focus has allowed us to drive initiatives resulting in a significantly higher-than-industry growth.

Our consolidated sales were $173 million, led by our Animal Health division, which delivered 15% growth as compared to our third quarter last year, and that growth is seen across the Medicated Feed, Nutritional and Vaccine product groups. .

This revenue growth and accompanying margin expansion led to a consolidated adjusted EBITDA of $22 million, a year-over-year improvement of 16% and a pro forma adjusted EPS of $0.36, 28% greater than the last year.

And this bottom line strength was delivered despite the fact that we continued to spend on sales and marketing and development dollars that we are investing for the growth we expect in the quarters and years to come..

While Dick will discuss more fully our fourth quarter guidance a little bit later, we continue to feel very good about Animal Health growth initiatives and believe that we have strong operating momentum as we look to close out what for us has been an extremely exciting fiscal 2014.

While we have nothing imminent to report, we remain on the lookout for tuck-in acquisitions that can further leverage the growth, the strong teams and the market positions we have built to serve our industry. .

And now, I'll turn it back to Dick to walk through our Q3 numbers and to provide Q4 guidance. .

Thanks, Jack, and good morning, again, everyone. Turning to our quarter results for the March quarter, on Page 5. And if we just look at the chart on the right, about in the middle of the chart, net sales are $173 million, up 7% over the same quarter last year.

As we've seen in a number of quarters, recently, the Animal Health segment is leading that growth, almost $108 million of sales, 15% sales growth. And we will get into more color on the segments in the next couple of slides, so I won't say anything more here. .

Gross profit of 30.5% for the quarter, better than a 200-basis-point expansion over the same quarter last year. 15% improvement in gross profit. .

As Jack just mentioned, SG&A, $35.5 million, grew 14%. Most of that SG&A growth is in our Animal Health segment as we put sales, marketing and development spending behind our growth initiatives. We also had some increased corporate spending as we're beginning to see the cost of public company start to come into our P&L..

So as a result, the adjusted EBITDA line, $22.4 million of EBITDA, up $3 million or 16% over last year, and quarter-over-quarter a 110-point -- basis point expansion with operating margins of 13% of sales. When we dropped that EBITDA down all the way to net income and EPS.

And we've presented here a pro forma EPS, which shows the impact of our recent IPO and our refinancing, as if it had happened at the beginning of the period. So in other words, we're showing on a pro forma basis the lower interest expense and we're also showing the greater number of shares outstanding.

That gives pro forma adjusted diluted EPS of $0.36 for the quarter, up 28% over last year..

So now let's turn to Page 6 on the Animal Health segment. Again, first looking at the table on the right-hand side of the page. MFAs, the largest part of the segment, $81 million of sales, had very nice growth in the quarter of 12%. Nutritional Specialties, $16 million of sales, up 14%.

And Vaccines, about a $10 million per quarter sales level, up 46% over last year. So in total, those 3 product groups drove a 15% sales increase. .

The sales increase was largely volume driven. There were some selected pricing actions in the quarter that benefited the sales growth, but the vast majority of that 15% was volume-related. .

In MFAs and others, we saw growth really across almost all of our markets and countries where we do business. We've called out 2 regions, where, in particular -- they were the particular drivers of the growth in this quarter, and that's Asia Pacific and Latin America. Asia Pacific includes countries such as China, the Southeast Asia countries.

Latin America would include Mexico on down through Brazil and other countries in South America. .

Our dairy nutritionals, really led by our 2 flagship products, OmniGen and Animate, we operate in the United States and in selected countries in Europe. Strong volume growth there again.

A little bit behind the trend that we saw in the first half of the year as we saw just some timing of certain orders and, in some of our European countries, basically soften that rate a bit, but the business continues on the trend. .

And finally, Vaccines. Again, volume growth, driven by new product introductions, that we introduced over the last several quarters. And we saw volume growth in most of the markets where we operate with our Vaccine business..

So with that sales growth, and with the gross profit improvement, you saw that on a consolidated basis, but most of that gross profit improvement is, of course, related to the Animal Health segment, offset by the increased spending on SG&A, the segment adjusted EBITDA grew 25% over the last year.

So it's about $25.5 million of EBITDA, a 23.7% operating margin. That's a 200-basis-point expansion over last year.

And in addition to the volume and pricing mix benefits -- or the volume and product mix benefits, we did continue to see some gross profit benefit from production efficiencies as we're able to lower cost of goods with some CapEx investments..

The other segment performance on Page 7. Looking first at Mineral Nutrition, about a $50 million sales level in the quarter, down 4% from last year. EBITDA, just under $3 million, down $600,000 from last year, 18%. Volumes actually in this business were up slightly year-over-year, but on this dollar line, sales were down due to commodity pricing.

At the bottom line, margins were compressed on competitive conditions, so we saw a 5.6% operating margin here for this segment. This business, although it is down from last year, is really stable sequentially from what we've seen through the beginning or through 3 quarters of this year. .

Performance Products, $15.5 million in sales, about $1 million of EBITDA, down both at the sales and profit lines. Again, we had some volume decline, some pricing pressures in this business, but it's broadly also stable with what we've been seeing year to date. .

And finally, corporate expense, almost $7 million, an increase of about $800,000 over the prior year. And that's in part, the increase is due to -- we were beginning to see the cost of -- the incremental cost of being a public company come through..

So if I go to guidance now, looking forward to our June quarter, on Page 8. Our guidance at the sales line is $174 million to $177 million, 6% to 8% increase at the sales line over last year. Our guidance on adjusted EBITDA is $23 million to $24 million, 15% to 20% improvement in adjusted EBITDA. And, pro forma adjusted EPS, $0.19 to $0.21.

That compares to $0.30 last year on the same basis, so it's down. And that first bullet point on the left explains the major reason that's down is one of the adjustments we've been presenting is to put income taxes on a cash basis, and essentially our GAAP effective rate has been very choppy.

And so we've gone to a cash basis of presenting income taxes for this adjusted method. .

And in our fourth quarter, we will be seeing about 6 -- well, we'll see about $8 million, total of cash taxes, and that's $2 million of routine level, as well as we'll have about $6 million of unusual or nonrecurring items relating to foreign withholding taxes on some repatriated cash.

And in addition, we settled a tax audit during the June quarter, and that will also be a cash cost. Those 2 items are about 50% each of that $6 million. That $6 million would represent about 15% -- $0.15 per share EPS cost..

And just continuing down, a couple of notes on what we'll be reporting in the fourth quarter. We'll report interest expense around $6.7 million in the quarter, and that's because we will continue to have on our books the senior notes until they're actually redeemed May 16.

And so we won't have the benefit on a reported basis of our new debt capital structure until we get into our new fiscal year.

And then we will also have almost $24 million loss on extinguishment of debt in the June quarter, and that comes fundamentally from paying off the senior notes early, both redemption premiums as well as writing off costs that were on the balance sheet, deferred financing and some OID..

outstanding shares, 38.8 million; and then for our dilution purposes, the options of the warrant outstanding on a net basis would add about 600,000 additional shares to get to a fully diluted share base. .

If I go back to the table then and look at the fiscal year, with the fourth quarter guidance, that will put net sales for the year somewhere in the $682 million to $685 million, that would be a consolidated sales growth of 4% to 5%.

And that will put adjusted EBITDA in the $89 million to $90 million range, a growth of 17% to 19%; and a pro forma-adjusted diluted EPS, $1.19 to $1.22, similar growth to EBITDA. .

And then the last note we make here is that we will provide guidance for our next fiscal year, fiscal year ending June 2015. We will provide that guidance when we release our actual results for June '14, and that release will come sometime middle of September is our current timing. .

And turning to capitalization and capital allocation. Just a few other points here. Our pro forma leverage at March was 3.4x. That's using the new Term B debt that we -- is the only piece of debt we now have outstanding after the refinancing compared, with $86 million of LTM adjusted EBITDA. And that's a first step.

In the S-1, it was 3.5x looking at LTM December EBITDA, so it's come down a tick just based on the increase in EBITDA, and it's a first step towards midterm improvement going forward..

In our pro formas for the IPO and refinancing we had $17 million of cash at March. We're forecasting about that same level of cash at the end of June as there will be one final payment of interest during the June quarter that will use up what otherwise would have been some positive cash flow for the quarter..

In addition, we're affirming our intention to pay a dividend. We plan the first payment in September 2014, most likely with an August 2014 record date. Our plan is to pay a $0.10 per share quarterly dividend. That's approximately $15.5 million annually. And that translates into about 30% payout based on pro forma adjusted net income.

And at yesterday's market close, that was about 2.2% yield on the share price..

So that's the end of our prepared remarks. So operator, if you'd open it up for questions and answers. .

[Operator Instructions] Our first question comes from the line of Louise Chen. .

I had a few. So first question I had is what is driving your faster than market rate growth in the Animal Health business? Maybe if you could give us more specifics, either products or markets or what have you. Second question I had was on M&A.

You noted tuck-in deals, but I'm wondering if you would consider a larger-scale M&A given the fact that it looks like there's some consolidation in the Animal Health space happening. And then lastly, a question that we often get is what key factors distinguish Phibro from its competitors? And I was hoping you could help us provide more color there. .

Louise, it's Jack Bendheim. So what we've said, or rather what we claim to say is, unlike some of our larger competitors, we focus just in production animals. So we're not in the universe of both the pets as well as production animals.

So we -- in other words, we need to be compared pretty much to whatever growth these guys are having in their production animal business around the world, number one. And we are active in those markets that grow a lot of animals. I mean, our ultimate goal is, healthy animals create safe food.

There was a worldwide push in growth in the consumption of animal protein, and literally that's the markets we serve, and we're enjoying that growth. Besides that, we're focusing on some new areas that I think are unique to us specifically in our dairy business and in some of the specialty nutritional products that we spoke about.

Again, the consumption of dairy products around the world, I think, are at all-time high. Pricing is at all-time high. And our products help the dairy cow farmers produce a higher-quality milk at a higher level of productivity with the animals staying healthier longer.

So again, it's all these secular trends that are really driving our growth a bit faster than Nielsen puts out for the industry. I think your second question had to do with M&A, with some of the larger acquisitions that are out there.

I think looking at our size and looking at the size of our competitors, I think we're going to stay pretty focused on, as we said before, our tuck-in acquisition, smaller acquisitions that we could handle both in terms of our financial strength and our ability to absorb. So we will not be competing for the larger assets that are out there.

And finally, the key factors, I think I've already pretty much covered it in the first answer. I mean, we absolutely focus in markets and in countries mostly on swine, on dairy cattle, and on cattle from selective markets. And those customers are doing great. Our products perform well for them, so we're -- we've done well this quarter.

We've done well this year. And the plan is to continue to do well going forward. .

Our next question comes from the line of Erin Wilson from Bank of America. .

How would you characterize the fundamental dynamics across the production animal business right now in light of the weather conditions that we saw over the past several months? And how would you characterize, I guess, the varying species groups there and how should we think about it over the next couple of quarters and beyond?.

It's a great question, Erin. I mean, first of all, the drought that had existed and so much affected many people's businesses in the United States has subsided a bit. So we are seeing, I mean, from the cattle market, a very, very slow repopulation of feed lots.

The other side of that factor is the prices of beef are so high that a lot of people are selling off their cows before they get to feed lots. So the growth, it's happening, but it's happening a lot slower. And again, sticking to the United States.

I think a bigger effect to the protein side is this virus in the swine population, which we all read about and which we see. I mean, there, literally, I think from what we hear, the availability of pork will be down 4% to 5% for the year.

But the reality is, that is a combination of higher rates for the live pigs, but you're talking about death of piglets running at maybe 10% or larger. So that will have an effect. What it's doing is, it's keeping prices high. I think it's causing a bit more positive trend on the poultry side. As you know, you can cycle poultry a lot faster.

So we see poultry numbers, both in terms of weight and actual hedge increasing slightly. At least in the short term, I think that will accelerate going out the next 2 or 3 quarters. And, at the pig market, this virus is far from being over, so we're going to continue seeing those pressures.

The other side of the world is, you have a big drought down in Brazil. It's not exactly clear the full effect of what's going to happen, because Brazil is the largest producer and exporter of beef in the world. We all talk about weather a lot, and we're going to continue talking about weather, as we go out for the rest of the year. .

Okay, great. And you mentioned some fluctuations in ordering patterns in the Nutritional Specialties segment.

Is that something that could potentially benefit the fourth quarter? Or how should we -- or could you just elaborate on the dynamics there?.

Yes, we, in our European business especially, Erin, we do business sharing distributors there. So as we were ramping up a year ago, we were been saying some startup orders. And just so the overlap against that now, look, I think it's mostly a 1-quarter effect. We would expect to see better growth in our next quarter. .

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

My 2 questions are, first, for Jack, at a high level, could you just frame for us your growth opportunities in Europe and in Asia, in particular? It appears that you're in very early innings of growing your poultry vaccine franchise in Asia and also your dairy cattle franchise in Europe. But if you could help frame that for us, that would be helpful.

And then, Dick, if you could just talk about key variables that we should think about for the fiscal fourth quarter sequentially versus the March quarter that you've just reported.

What are the sort of puts and takes that we should be thinking about that could drive the results slightly better or slightly worse than how you're expecting them today?.

Thank you, David. It's Jack. So firstly, our business in Europe is pretty singular. We're focusing on the dairy cattle market, and we're focusing with our Nutritional Specialties products.

Europe is different than the United States because the Europeans are -- first of all, they have, I'd say twice, or more than twice of them have hedged dairy cattle than we have in the United States, number one.

But number two, Europe is now, as the price supports are decreasing in Europe as they go to I think at the end of '17, when there will no -- when it looks like there would no longer be support for the dairy industry across the EU.

The Europeans have started to go through some of the stuff we've gone through in the United States, and the needs, I would say, tend to flow through larger farms, and these farms [ph] are being more productive.

The tools that we're offering them, which we've done sells quite successfully in the United States, allows for the productivity increases of the dairy cow. It allows us it remain in production out of the sick base, so to speak, for a longer period of time, and it increases the quality of milk.

Dairy farmers get paid on somatic cell count numbers, SCC. Europe has a huge cheese production. Most of the milk ends up not in liquid form, but for cheese. You need a higher quality milk for that. So the demand and the product that we have is unique, and we have experience in, I'd say -- sort of documented experience, over 400,000 cows that we watch.

We sell to over 20% of the U.S. $9 million dairy cows. It gives us a lot of experience. So we're just ramping up. It is new territory. It's new markets for us. So that will continue to grow as we go forward.

To the poultry side, our vaccines, we're relatively newcomers in that business, and we have a quite small share of what is $1 billion dollar poultry vaccine market in the world. And we're concentrating in Asia. We see some of the same diseases in Asia, a lot of diseases that we see. And Israel is the country where we produce most of these vaccines.

So it's just a question of, again, ramping up our sales and technical teams in these countries to increase our sales of the vaccines. And besides that, in Europe -- mean, the far east is where we see most protein growth. It's the fastest-rising population, it's the fastest-rising middle-class within the population.

So all of those articles we read all the time, whether it's milk consumption in Europe or protein consumption, pigs, chicken, hogs, et cetera, I mean, that's where we're growing, and that's where we keep pressing on. .

Yes, and to your second question on key variables sequentially looking at the June quarter, we've given you 6% to 8% sales growth guidance. I -- we're quite comfortable with that. I don't see -- I don't see any major downside risk to the bottom of that range.

And maybe we have an opportunity to do a little bit better at the top end, but nothing major there. That business is going along in the fourth quarter, much as it was in the third quarter with a little bit of a pickup sequentially. We've seen the Brazil currency strengthen against us in the last maybe 6 weeks.

So that won't have a major effect on our fourth quarter. It could influence our thinking on where we'll be for next year, but nothing in the June quarter of any magnitude. Then there's always the unknown, but I can't think of any other major items, David. .

Our next question comes from the line of Matthew Korn of Barclays. .

A question on the tax impacts, Dick, that you talked about coming up for the next quarter? It looks like this is about $3 million from repatriated cash that you decide [ph] to just do and then another, like you said, there's a tax settlement, retroactively.

Could you give us a little more detail? It sounds as though you believe this should kind of close the loop on those issues. And I just want to make sure if there's any remaining exposure there. And then secondly, if you could just give us an update for the partnership with Epitopix and how the penetration to the U.S. market is doing.

And then I guess lastly, any update on what you've been finding on how things at AquaVet are going. .

Okay. Yes. First to taxes, the withholding taxes on the cash repatriation was an absolute onetime item. There's -- we hadn't done that in 15 years, and we have no plans to do it again any time in the foreseeable future. So that's a onetime. And the tax audit, this was in Israel. It settled 4 years of opened items.

And sometimes it's better to just settle rather than fight. We thought we had good defensible positions on many of these issues, but we reached what we thought was a number we could live with, and so we went ahead and settled. There are -- there is another piece of our Israel operations that did not close. There's a couple of other subsidiaries.

Those are still under audit. We expect those to be done fairly soon, but we don't expect any meaningful cash costs to come out of those audits, at least that's our current reading. And we don't have any other significant audits in process anywhere else in the world.

And generally, the tax authorities have looked at our returns and have not had major issues. So, yes, I don't see any major items on the tax side.

On the Epitopix question, I'll turn that one over to Jack, okay?.

Right, okay. Thank you. The business with Epitopix is going well. I think we're a little over 3 months into sales of this product, and we're gaining market acceptance across the poultry market that we've been calling on. So sales are growing.

I mean, we'll have more say about this thing in future quarters, but the results and the acceptance of the product is very, very gratifying. We'd like to say [indiscernible]. We thank God for helping that business grow. It's been great. The AquaVet business, I mean, it's a new venture for us, as you know.

Aqua is the fastest-growing protein in the world, and we are currently screening the team over there, screening our current portfolio of products against the various aqua diseases, and we're putting together an aggressive business plan. But so far, there are no sales. .

[Operator Instructions] And there are no further questions in queue. .

All right. We thank everyone for listening in this morning. And we'll be in touch again with our year end results at some point in September. We'll confirm up the date as we get closer. Thanks, and have a good day, everyone. Bye now. .

And that concludes our afternoon teleconference. You may disconnect your lines..