Good day, ladies and gentlemen, and welcome to the Phibro Fourth Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded..

I would now like to introduce your host for today's conference, CFO, Richard Johnson. Please go ahead, sir. .

Thank you, operator. Good morning, everyone. Welcome to Phibro Animal Health earnings call. We're going to be talking about both our fourth quarter and fiscal year ended June 2014 today. We'll provide an overview of our quarterly and annual results for 2014. We'll also talk about our guidance for our fiscal year 2015.

And then we'll, after our presentation, as the operator said, we'll open it up to your questions. On the call today are Jack Bendheim, Chief Executive Officer; and myself, Richard Johnson, CFO..

Before we begin, 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 for this morning's call, which can be accessed on the website as well.

Today's presentation slides and the 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 these 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.

Reconciliation of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures are included in the financial tables that accompany the press release..

And with that, I will turn it over to Jack Bendheim for some introductory remarks. .

Thank you, Dick, and thank you to all of you for joining us on this call today. I'm proud that we once again able to deliver strong top and bottom-line performance in our fourth quarter, capping off a truly transformational year for Phibro Animal Health..

The transition from a private to a public company is understood to be a difficult one. That is a testament to the work and focus of my colleagues throughout the organization that we're able to meet and exceed our targets despite many distractions..

At the end of this call, Dick will be sharing with you some of our goals for the fiscal year we embarked upon in July.

We continue to see multiple opportunities across overall Animal Health business units and have tremendous confidence on our ability to deliver both top and bottom line growth, while at the same time, continuing to invest substantially in growing our sales organizations related to our key initiatives..

I will now turn it back to Dick and look forward to answering any questions you may have at the end of the call. .

Thanks, Jack. Turning to Page 5. Let's look at our consolidated results for the fourth quarter. We had net sales of $183.7 million that was $19.5 million of sales growth or 12% over the same quarter last year. That sales growth was driven by our Animal Health segment, better than $13 million of growth and 13%.

In addition, our Mineral Nutrition business had very nice sales growth in the quarter, over $6 million, again, 13%. And our Performance Products business was stable year-on-year..

So dropping down through gross profit and operating expenses. Gross profit, 29.5% of sales, grew at the same rate of -- roughly the same rate, slightly faster than sales grew 13% overall. And SG&A, about $41 million. That includes a loss on an insurance claim that I'll talk a bit more about later.

And the good chunk, well, of the $8 million increase in the fourth quarter, $5.3 million of that increase was at one-off insurance claim. So x that claim, $2.6 million or 8% growth in SG&A for the quarter..

Coming down to adjusted EBITDA, $24 million -- $24.2 million of adjusted EBITDA in the quarter, $4.6 million of growth or 23%. And really, all segments contributed nicely to that EBITDA growth..

And then coming to a pro forma adjusted EPS number of $0.22 for the quarter. And you'll see the footnote on, if you're looking at the webcast slides or also, in the press release, we have shown you EPS on a pro forma basis as if the IPO and refinancing has been in place for the entire periods.

And in addition, we've adjusted out certain either onetime or ongoing expenses to come to an adjusted EPS number. We also reflect -- in the adjusted EPS; we are reflecting cash income taxes because our GAAP income tax rate has been so volatile due to a number of onetime adjustments.

And we did have substantial cash income taxes paid in the fourth quarter, $7 million paid of a $12 million annual number. So that was what brought adjusted EPS down for the quarter..

So turning to Page 6. Looking at our Animal Health segment again, for the June quarter, sales of $114 million, 13% sales growth. And we give you a breakout of product groups well within that. And you see that MFAs grew 12%, Nutritional Specialties, 17% and Vaccines, 21%. So double-digit growth across all of our product groups during the quarter.

Largely, it was volume growth driven..

In the MFA business, most of the growth came out of international markets, including Brazil, other Latin America countries, which would include Mexico, and across to our Asia Pacific region..

Nutritional Specialties continue to be driven by the dairy focus, primarily in the U.S., with expansion into Europe. And Vaccines, we continue to see volume growth in most markets where we operate, as we introduced some new products in various markets over the course of the last year..

Adjusted EBITDA, $26.1 million, just under 23% of sales, grew in line 13% with the sales growth. The operating margin remained stable. Most of the EBITDA growth was due to the volume increase and the margin coming off of those volume that coming out of the sales increase and the margin coming off of the sales increase.

And we did continue to make significant investments in our operating expenses to continue to drive these growth initiatives as we move forward..

If we turn to Page 7 and look at the other segments of our business. For the June quarter, Mineral Nutrition was up very nicely, 13% on the top line, which dropped down to a 26% increase at the adjusted EBITDA line. And the operating margin improved to 6.4%..

Volumes were up. This is the -- the sales gain was volume driven. In fact, there was a small offset by commodity pricing. And the margins in the business was really driven by increased demand. And then just as a reminder, this is fundamentally a U.S. business. So it was demand across most species in the U.S. business.

Performance Products, as I said earlier, really, a stable sales performance in the quarter right what it's been running now for a number of quarters, plus or minus. We did see -- we saw the nicest operating margin of the year at 10.4% for the quarter.

And that was just a mix of products within that overall sales mix that gave us a little better operating margin..

On the year-over-year comparison, we had some significant environmental costs a year ago. Those were not repeated. So we picked up better than $3 million of the EBITDA line on that overlap..

And then, last, corporate segment, which is certain expense categories, $6.9 million in the quarter, is now reflecting the cost of being a public company. In our GAAP reported numbers, that segment is where we include the loss on the insurance claim and this adjusted EBITDA presentation that is excluded from these numbers..

So now turning to Page 8 and just very briefly summarizing our fiscal year. $692 million of sales, 6% sales growth, driven completely by growth in the Animal Health segment, as Mineral Nutrition was roughly flat and Performance Products was down somewhat from the year earlier..

Within Animal Health, again, if we look at those product groups, MFAs for the full year grew 8%. Nutritionals grew 21%, and Vaccines grew 44% for the year. .

Down at the bottom line, adjusted EBITDA, $90.6 million of adjusted EBITDA, a 13.1% operating ratio. 150 basis points stronger than a year earlier and 20% growth over the prior year. It really driven by that Animal Health sales growth and getting operating leverage down through gross profit and SG&A..

So it was a year, I think, that we were happy with overall and a year that it was on expectations. And as a result down at pro forma adjusted EPS $1.22 for the year. Again, doing those same pro forma and other adjustments that I discussed for the quarter..

And turning to Page 9. Looking at just the balance sheet and cash flows for a moment. We ended June at a 3.2x leverage ratio. Total debt was just our Term B Loan outstanding that's $290 million of principal and then a very small amount of capital leases in addition to that over the adjusted EBITDA, gives the 3.2x ratio. So that continues to come down..

We ended June with $12 million of cash on the balance sheet. We're forecasting $25 million of CapEx for the coming fiscal year. And on the dividend, we have announced, and it will be payable in the next few days. I guess, at September 24, the $0.10 per share dividend.

And we are targeting to continue that dividend quarterly, and that would equate to $15.6 million annual rate..

So let's turn to the guidance for fiscal '15, that's on Page 10. And let's just look at the chart first. We're forecasting sales between $735 million and $755 million. That's a 6% to 9% increase over what we reported for this fiscal year.

And that sales growth, in part, offset by continuing investment in operating expenses that sales growth will generate adjusted EBITDA between $99 million and $103 million. That's a 9% to 14% EBITDA growth target..

And bringing that down through interest expense, cash taxes, shares outstanding, it should -- it would equate to pro forma -- it won't be pro forma next year, it'll just be adjusted EPS of $1.46 to $1.51. So an EPS growth of 20% to 24%..

Commentary there, Animal Health will continue to be the primary growth driver of the business. Within Animal Health, if the products groups like we see that the MFA business will -- the growth will remain strong, that the Nutritionals will continue to grow at double-digit rates, and we see Vaccine growth continuing.

However, we think the growth will moderate somewhat as we overlap some of the growth we had this year in markets and new product introductions..

In addition, benefiting '15 will be $4 million of revenue and EBITDA coming from the licensing of our proprietary vaccine delivery technology. These are milestone payments that are due during the course of our fiscal year. And so they're in -- those numbers are included in this guidance.

Not guaranteed, but our expectation is that there'll be -- they will be realized over the course of the year. And Mineral Nutrition sales and profit will also contribute to the overall growth of the business in '15..

And with that, I don't have any more prepared comments.

So operator, if you would open up the line for questions, please?.

[Operator Instructions] Our next question comes from Erin Wilson from Bank of America Merrill Lynch. .

Great.

Can you speak to the fundamental demand trend across the livestock industry in the U.S, particularly as it relate to the poultry and dairy markets, and what's embedded in your guidance as it relates to that fundamental utilization trend or demand trend?.

Erin, it's Jack. I mean, what we're seeing, especially in the United States, across is a continuing growth in poultry and I think a quite strong growth in poultry. This is pretty much generated by the higher cost of both the pork market, as well as the cattle market. So we're seeing combination. Definitely, weights up in poultry, as well as numbers.

People up putting on, for the first time in the long time, putting in -- putting more birds down in the market. We're seeing a growth as well in the swine business. I mean, the industry still fighting PEDs. I think, up-to-date, something like 50% of the herds have been embedded gone through it.

And I think the expectation in the industry is, in the course of the year, the rest of the herds, of the swine herds will also see it. So that will be a combination of growth in weights, as well as replacements.

And we're seeing the cattle markets; we're seeing growth there as well in numbers, as people are looking to restock after the last couple of years. In the dairy market, dairy market continues to be strong. We don't see a lot of new cows being placed, but we see lots of efforts in increasing the productivity of the herd. So generally growth.

And we don't really see on -- it's just dangerous to answer a question you're going ask it, but we don't see a big effect of the Russian ban on the U.S. poultry industry. .

Okay. That was a question.

But on that note, on dairy in particular, what are you seeing as far as traction with OmniGen in the U.S., but as well as in Europe? And where do you stand with approval in China?.

We -- we're close. We expect within the next 6 months to have our approvals in China. And we continue to see traction -- continuing traction in the United States as we add salespeople. We increased our sales. And we are -- I think Europe is running a little bit behind where we had wanted to be at this moment.

But we're -- then we'll be getting growth month on month. And we're still quite optimistic to see good growth in the European markets for all the reasons that we laid out, both in the S1 and the roadshow and in our conversations. .

Okay, great. And then just one last one. You have substantial operations in Israel.

And can you give us a sense of what sort of exposure there is to the recent turmoil across sort of that region, if you could comment on that, if you're at all exposed?.

I think -- best answer for that is that we're all very much aware of all the activity went on this past summer. I don't think we missed the beat. I mean in other words, we deliver to our customers on time. We exported our products on time. We produced continually in our factories there.

So we didn't -- we saw no effect as far as running operation in Israel. .

And our next question comes from Irina Koffler from Cantor Fitzgerald. .

I wanted to explore your initiatives to improve margins. Can you just comment on what else you're continuing to work on? And it looks like CapEx guidance maybe ticked up from what we were expecting earlier. And I just wanted to see if there was any relationship between that increase and improved efficiencies. .

Yes. That's spot on, Irina. We do -- we are continuing to spend CapEx to improve our cost of goods position, whether it's by cost savings, projects to just lower the cost of manufacturing for existing quantities, or it's adding marginal capacity at marginal rates.

So we can add another 5%, 10%, 15% capacity and add that at a relatively low incremental rate. So that's really a large part of what our capital spending has been in the past and what we'd expected to be going forward into '15. And that will give us some margin leverage. .

Okay.

And then those $4 million milestone on the Vaccines business, what quarter is that expected to come out in?.

We would expect $2 million of that in our September quarter. And the remainder will be some time later this fiscal year, depending on when the milestone is achieved, et cetera. .

Okay. And then, I guess, the final question is this.

Can you just make a broader comment about M&A in your space and your own interest and appetite for additional products, as well as opportunities to -- for the company itself to be -- consider a potential takeout?.

That's a great question. I mean, we continually looking to add products to the portfolio that fit into where our core strength is. So as we've done in the past, we're not looking at all in the pet space. But in the production animal space across all the species, we are always looking to add products and relationships.

In acquisitions, again, if we see something that will bring some interesting products, I think we will do tuck-in acquisitions. Right now, we're not looking at any transformative acquisitions or disposals. .

And our next question comes from Louise Chen from Guggenheim. .

So my first question is just on the sales growth. I know you said it was mostly volume. I was wondering if there is any way that you could break that out more.

How much actually percent was volume and how much was price? I'm just wondering if there's potentially more room for price increases here, because I think some of your competitors site that there's a lot of pricing power in the Animal Health industry, so just wondering what you think of that? And then secondly, another question we get a lot was just on your margins.

I know you're just livestock versus some of your competitors, who have a combination of livestock, a companion animal, and how to compare them apples-to-apples. So I was wondering if you give more color there.

And then, lastly, just on your antibiotic labeling changes, any update there?.

Yes. So sales growth, let's see, so for the fourth quarter, overall, let's just focus in on the Animal Health segment or maybe to -- let's just say that Mineral Nutrition and Performance Products, basically, 100% of the sales change is volume related. It's very little pricing in either of those on the fourth -- in the fourth quarter.

Animal Health grew $13.4 million in the fourth quarter. And $2.5 million of that was due to pricing. So $11 million of it was due to -- basically due to volume. So whatever percentage that is 1,113, 80-ish percent was volume growth. .

And is there room for more price -- more pricing increases here? Just because I think some of your competitors just say that pricing is very strong in the industry. But I mean I'm just curious what you think. .

Yes. I think we evaluate our pricing routinely on a segment, on a -- I'm going to give you a very generic answer here, on a -- by product, by region. We look for pricing opportunities when we're there. And we certainly keep an eye on what our competition is doing.

The second part of your question was sort of companion animal versus pets and how do we compare. We don't really know the companion animal business at all. So it's hard to say. We think our Animal Health margins are competitive with the other companies in the industry, people we compete with. And I don't really have a lot more insight than that.

And then the third piece on the antibiotic label... .

And so, on the antibiotic changes, I mean, we continue the whole industry, as the FDA announced, I think, 3 or 4 months ago, has written and agreed to go forward with the voluntarily changing labels and giving up growth motion claims and changing label that will allow vet prescription and just prevent control and treat claims.

And I think, I mean, that's continuing. It's requiring data, it's requiring some fieldwork and we're in the midst of it. And I think that's -- I mean, that's the overall trend and that's where we'll be, I think, when this -- these regulations go into effect, which is, I think, sometime at the end of 2015, or be early 2016. .

And our next question comes from Douglas Tsao from Barclays. .

In terms of the volume growth that you saw in the medicated feed business. Obviously, you sort of highlighted that most of it came from volume.

I'm just curious if we should have dig down into that volume component, how much was just overall growth of herd size or flock size versus the expansion in terms of the number of accounts you're selling into?.

The thing we have to deal with is we are -- this is a global business. And we are preventing and treating some bacterial diseases. So it's -- all of this really at the end of the day is a combination of disease pressure and what kind of animals; were in the world. And it moves around all the time.

I mean, I think what we try to do, and try to do as a goal is we -- overall, at the end of the day, if you ask us, where do we want this business to be? We want to be sort of -- maybe overly used the word agnostic. But agnostic of who's growing the animals, where they're being grown.

As long as this constant growth of consumption, we want to be able to provide our products to create healthy animals, which will turn into a wholesome food. So it's a long answer to saying, talk to me to say, whether it's directly in poultry, on this market, that market. It moves around all the time.

Our job really is to be there with the right solutions at the right time. .

And maybe a little more numerically, Doug. We grew -- Animal Health sales grew 13% in the quarter, call that 11% volume growth. Just if you look at it the other way around, the number of animals in the world didn't grow 11% year-over-year. So we're treating more animals for diseases, for other new applications, et cetera, et cetera. .

I mean, I guess it's sort of a follow-up, though, in terms of -- trying to sort of understand the dynamics of that 11%.

How much is that, perhaps, sort of opportunistic in terms of sort of conditions in particular regions that might necessitate your products versus the sort of expansion of your sort of core customer base if you will, and sort of that we can count on seeing consistently?.

Well, I mean -- I mean, sorry, I mean, it's a great question. Our efforts are in expanding. That's a money we're investing in our SG&A around the world. And we're looking to go into markets. I mean, the trend of the world, I mean, we come back to the -- to that looking at the highest level. I mean, the population is growing.

And in order to continue feeding and meeting the demand from poultry, the only way to do it is what we want to call modern agriculture, which is basically raising lots of animals together. It's -- and the end result of that is it uses less water, it uses less land, it creates less pollution. It creates much less global warming.

And it does all that and delivers protein to growing world population at a reasonable price. And if you do that, then you need our products. So I mean, China, this is one example, has 400 million pigs, but they have it -- they historically, the bulk of those pigs are raised in backyard farms of 2, 3, 4, 5 pigs.

The trend in China in order for them to get that kind of control over the quality of food and healthy animals is to move those farms that have a minimum of 500 or 5,000. So as they do that, and they can start counting, is where our products fit in. So we're out there. And we see basically this; call it, secular growth across the world.

And that's where the growth will come from. And so it's going to be in China and in Latin America and in Africa and in the Far East. It's the bulk of where the growth soon it come from. So yes, I mean, that's -- I mean, that's the future of this business. .

And our next question comes from David Risinger from Morgan Stanley. .

You've gone through a lot of commentary that's extremely helpful. I wanted to ask the couple of specifics financial questions. So maybe you can talk about the tax rate for 2015 a little bit more detail, including the benefit of NOLs next year.

And then it would be helpful if you can remind us when you expect the NOLs to be exhausted? And then, with respect to cash flow, obviously, cash flow is set to increase in 2015.

I was hoping that you could maybe provide some detail around your forecast for EBITDA and then what you're ultimately expecting in terms of free cash flow for 2015?.

Sure. Let's talk taxes first. So in our adjusted EPS numbers for '15, I've used -- I've given guidance of $10 million to $12 million of cash income taxes. That would represent a 15% to 17% effective rate on pre-tax income.

And that's really because we're benefiting from our net operating losses -- net operating loss carryforwards in the United States, where we're not a cash taxpayer in the United States. Given the size of those NOLs, we have somewhere between over 2 and perhaps, 3 years before we become a taxpayer in the U.S.

So we've said in the S-1 and other guidance that we have several years yet before we run out those NOLs. So I think that answers your question on taxes. Cash flow, we've given you all the pieces to build an expectation of cash flow next year. We've said interest expense is going to be $14 million.

And there are some smaller piece of that is noncash, but most of that's cash. You've got cash taxes. We've given your CapEx forecast. And I would say on working capital, our expectation is working capital will grow in line with the sales growth. So from that, I don't have it in front of me, I'm sorry. But it's pretty easy to construct a cash flow model. .

[Operator Instructions] And I'm not showing any further questions in queue at this time. I would now like to turn the call back to Richard Johnson for any further remarks. .

Well, we thank you for listening in this morning. And we'll be back at you with our September quarter discussion, which will come in the first half of November. We haven't set the exact date yet, but be back in less than 60 days; we'll be talking to you again. So until then, take care, everyone. .

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