Jack Bendheim - CEO Richard Johnson - CFO.

Louise Chen - Guggenheim Erin Wilson - Bank of America David Risinger - Morgan Stanley Irina Koffler - Cantor Fitzgerald Douglas Tsao - Barclays.

Good day, ladies and gentlemen, and welcome to the Phibro Second 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 follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the call over to Richard Johnson, Chief Financial Officer. Please begin..

Well thank you, operator and good morning, everyone and welcome to the Phibro Animal Health Corporation earnings call. This is for our fiscal second quarter ending December 2014. On the call today, are Jack Bendheim, our Chief Executive Officer, and myself Richard Johnson the Chief Financial Officer.

Well, we will provide an overview of our quarterly results and then we'll open the lines up for your questions. Before we begin, let me remind you that the earnings press release and financial tables can be found on the Investor Section of our website at PAHC.com.

We're also providing a simultaneous webcast of today'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. Now our remarks today may 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, we refer you to the forward-looking statements section in our earnings press release. In addition 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 and we 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 earnings press release.

And now here is Jack Bendheim?.

Thank you, Dick and thank you, everyone who is joining us on this call. As Dick will detail in a couple of minutes, we had another very solid quarter with double-digit topline expansion in our core animal health and nutrition business and strong consolidated EBITDA growth.

This continues to be a great business environment for the animal protein industry and we in it to play our part in helping our customers produce healthy and wholesome animal protein products for the growing world.

I am also extremely excited about our entry into the swine vaccine business to our partnering with MJ Biologics, which we announced in late January.

Those of you who have met with our management team know that our long-term strategic vision is to be agnostic as what speeches is produced as well as what means the farmer utilizes to keep his animal healthy and it's meat safe. And the entry into the swine vaccine market is another critical step towards fulfilling that vision.

I also think the MJ Biologics partnership is yet another example of partners willing to help the onus of smaller animal health companies with unique offerings, fulfill their vision of growing the business before exiting.

Like we have our rate down with a number of products and daily nutritional specialty markets and are in the beginning stage of join the agricultural space, we envision helping MJ Biologics expand their portfolio of products and geographic presence prior to outright purchase of the business.

This approach benefits both Phibro and the sellers as we believe we're unique among our competitors and having a history of successfully implementing deals as they saw it. I will now turn is back to Dick to give a little more color on our second quarter..

Thanks Jack. Turning to Page 5 of the presentation, walking you through the consolidated results for our December quarter, our December sales were approximately $189 million, that's about $16 million of sales growth or 9% overall.

The table shows and breaking it down a bit by segment, our Animal Health segment grew almost $11 million or 10% over the prior year. Mineral Nutrition business had another strong quarter with $8 million of sales growth, 16% over the prior year and our performance products business was down about $3 million compared to last year.

If we go down to gross profit, we see that gross profit improved 10% on the 9% sales growth performance and most of that gross profit growth obviously was due to the sales growth, most of it volume related with some selected pricing actions. I did mean to say that on the sales line for the 9% sales growth, the bulk of that growth was volume related.

There was smaller effect due to pricing, but largely volume driven. At the SG&A line, about $36 million of SG&A just over $2 million increase over the prior year or about 6% as we invested monies in our Animal Health segment and we also saw an increase in our corporate expenses as we transition to being a public company.

That's where really of that year-over-year increase came from on the operating expense line. Coming down to adjusted EBITDA, $25 million or adjusted EBITDA in the quarter. $2.7 million of growth over the prior year or 12%.

As we saw leverage, we saw that sales growth we leveraged both at the gross profit line and at the operating expense line, giving us that EBITDA increase of 12%. On an EPS basis, on an adjusted diluted EPS basis, $0.35 of EPS in the quarter.

So now if I turn to the Animal Health segment on Page 6, and drilling down a little more on Animal Health, Animal Health sales overall about $119 million of sales. Close to $11 million of sales growth or 10%. The biggest part of the Animal Health segment, MFA and others grew better than $7 million or 9% over last year.

Nutritional specialties had another strong quarter of growth, growing better than $4 million or 27% over last year and vaccines $10.6 million, that's a pretty consistent number on a run rate basis. However it was down from the year before, largely on a volume decrease due to some international registration delays compared to last year.

Overall, again most of the 10% sales increase in the Animal Health segment due to volume growth.

Adjusted EBITDA grew 15% on that as we had good leverage and operating improvement both at the gross profit line and moderate operating expense investment behind our growth initiatives, gave us a 15% adjusted EBITDA and brought our operating margin for the quarter to 23.8% better than 100 basis point improvement over the same quarter last year.

Looking at our other segment on Page 7, as I said, mineral nutrition had another strong quarter. This is really three quarters in a row now where we've seen substantial growth and profit improvement in this business. It's primarily volume driven.

Some of it is pricing driven by underlying commodity pricing as happens in this business, but largely volumes are driven by increased demand and as demand is increased, we've been able to a certain extent, expand our margins.

So you see our margin 6.4% of sales compared, up compared to last year by 70 basis points and that over 6% margin is comparable with what we've been doing now for the last three quarters and including this quarter. Performance products about $11 million of sales in the quarter, down $3 million from last year.

Reduced industrial demand in the quarter saw sales soft compared to last year, primarily volume related. There was some reduction in the sales line due to the effects of underlying commodity pricing, which also pulled sales down somewhat.

And as a result of the sales decline, adjusted EBITDA of $200,000 down somewhat in line with the sales decline from last year. Corporate expenses for the quarter just over $7 million, up $1 million over last year, really driven by the effect of public company cost, as a result of our IPO.

So we're still overlapping quarters where we had a lower corporate expense base. So then if I turn to capitalization and capital allocation, at December 31, our balance sheet was such that we had a 2.8 times leverage ratio, $289 million of total debt.

Fundamentally the Term B loan, we were undrawn on our revolver and had a very insignificant amount of capital leases outstanding and compared against our $102 million of trailing 12 month adjusted EBITDA. We closed the quarter with $21 million of cash on hand. We generated roughly $5 million of net cash flow before financing for the quarter.

Used that cash flow to fund the quarterly dividend payment and to fund some scheduled debt reduction that you see on the slides there about $3.9 million for the dividend and $800,000 for the debt reduction.

And then as we announced yesterday, we have declared a regular quarterly dividend for the same amount $0.10 per share that will be payable on March 25 of 2015. So that's the end of my prepared comments operator.

So if you would open it up please for questions?.

Thank you. [Operator Instructions] And the first question is from Louise Chen of Guggenheim. Your line is now open..

Hi. Thanks for taking my questions. I had a few.

First question I had was on your MJ Biological Vaccine Agreement, just curious if you could give more color on what stage your development these products are in and what the peak sale potential of these products will be and maybe just live vaccines are interestingly seen a lot of animal health companies move towards.

So I am just curious what is the growth opportunity there.

And then secondly, with respect to your volume growth, it looks like it was robust and curious if you could characterize how much of that was U.S., how much of that was outside the U.S., if you've seen any slowdown at all in volume growth outside the U.S.? And then lastly, in terms of business development where are you seeing the best opportunities? What type of area in animal health, what types of drugs is diagnostics or what have you? Thanks a lot..

Well so why vaccines? To me the I would say the drive generally of vaccines is preventing diseases and it's widely used and with the growing population of animals, the vaccine is clearly in the space that everyone in the animal health area really wants to get into. And it’s not easy to enter the space.

The regulatory capital intellectual property is quite high. So I think we were quite futurist in developing this relationship, this partnership with MJ Biological. It gets us into the swine vaccine business as you know out of our Israeli sub. We are in the poultry vaccine business internationally.

And in the United States on the poultry side, we have this arrangement with Epitopix where we're selling both [Klebsiella] [ph] vaccine into the breeder and growing in the layer industry.

But the swine industry is a rather large business and I’d say to everyone is rather rare and one of the exciting things about this arrangement that will be an acquisition in 2020 something. It’s the work they’re doing on developing PED vaccine.

There was a quick article about that in the New York Times a few months ago and it’s in the development stage. So various diseases affecting swine is of interest to us. It’s way too early for us to put a dollar on that, on one of the market, market opportunities or our percentage of it, but it’s something that we’re really excited about..

Yeah just one other piece of your question there Louise, MJ, we have -- one of the agreements we signed with them is a distribution agreement. And we’re distributing their current product line. So they have a product in the market it’s out there. So it’s already in commercialization.

So I don’t -- to your question asked, what stage where they out there? They have a product that is commercialized and has been for some time and then in addition as Jack talked about there’s development opportunities that we were excited about both in the U.S.

and perhaps internationally for expanding their range of vaccines to other diseases other applications.

Yeah let me take the second question of yours and that was on volumes, I would say in our Animal Health business, where we're doing business outside of the U.S., we’re seeing good volume demand and your question was, are we seeing a slowdown in some of the international markets and on balance, certainly not.

We’re seeing good strong demand in the international markets. And in fact a good part of our growth in the quarter I think we called out was due to growth in the international market and certainly that’s true in the MFA business. In the nutritional business, it's more the case where we're still taught primarily a U.S. business.

But we’re seeing a good pickup in demand in the select international markets that we’ve entered in that product category also. So international going well and then I think the third piece of your question was business development, what do we see yeah and that’s we’re always looking Jack, do you have any other comments on that..

I think we’re always looking -- there is nothing eminent and if anyone on this call has some ideas, we're happy to take them..

Thank you..

Thank you. The next question is from Erin Wilson of Bank of America. Your line is open..

Thanks for taking my question. So are you reiterating guidance here and what does your guidance incorporate as far as fundamental demand trends in foreign currency fluctuations and any sort of commentary you can give on how we should think about the tax rate over the next few quarters. Thanks..

Yeah, we’re not updating our guidance at all Erin. So the guidance that we put out there stands at this point. So that would imply that the tax rate as I recall I talked about roughly a 20% cash tax rate for the year. We’re probably running slightly below that, but we’re not updating our guidance at this point.

Foreign exchange as we’ve said in the past, most of our sales outside the U.S. tend to be dollar with reference to dollars and so we’re not directly impacted as some other businesses are where our sales are set in local currency.

Clearly at the margin, things could be our products could become too expensive, but we don’t see foreign exchange seriously changing our sales trends in the near-term..

Okay. Thanks and can you speak to the approval of OmniGen in China and that potential opportunity and how that should ramp over time.

And also do you still expect that $2 million milestone payment later in the year on vaccines?.

On the milestone payment right, but it’s in our guidance and that we still expect it yes..

And as we had said, we receive the approval of legislation for OmniGen in China. We have bind up a distribution agreement with a major Chinese Animal Health company and they’re in the process of hiring sales people to go directly on the larger dairies as well as on the distribution chain over there and we’re ramping up with our own people in China.

So it’s too early to put a numbers on it, but overall as we all know and from what we read, that China is a big growing demand for our dairy products and commercially I think they’re looking to end up with something like five million head, which will be -- it's a potentially very large market for us..

Okay, great. Thanks so much..

Thank you. The next question is from David Risinger of Morgan Stanley. Your line is open..

Yes. Thanks very much. Hi Jack and Dick.

So I got a couple of questions I guess first with respect to the MJ Biologics deal, I was hoping that you could just frame for us how we should think about the initial revenue opportunity annually for Phibro and the longer term opportunity just so that we have a sense for whether we should think about it being -- I don’t know, I'll throw out number A; a $1 million revenue opportunity in two years or a $20 million revenue opportunity in two years any sort of framework would be helpful.

And then Dick in terms of the next quarter, so the March quarter sequentially any color you could provide so that we have a sense for any anomalies or any inflections in the business that we should be aware of one we’re modeling the March quarter relative to the March quarter of 2014?.

Great try there, but no we’re not comfortable yet. We’re way too early in the MJ Biologics business to really put at any numbers at all. As Dick said, they have some sales, very, very small sales.

We’re just getting our sales force acquainted with these products I mean this is something that we will be much smarter about them and if I can talk a lot better about it in future quote is. But for right now as Dick said we’re not changing our guidance we’re very thrilled to be in this segment. It is a big segment and has lots of competitors.

So it’s really too early to say how we're going to do, but we’ll our best to make an impact..

Okay, great..

Yet on your other question on this trends, anomalies, inflection points, we don’t see anything -- we don’t see anything different from the ordinary course of business.

So of our may have more demand or less demand depending on disease pressure, depending on other factors, but we don’t -- I don’t see anything in terms of anomalies, or an inflection point one way or the other looking into the March quarter as we will get this final $2 million milestone payment either in the March quarter or the June quarters, but that will be a discrete item that will be set out.

You will see that separately..

All right. Great. Well congrats on a strong performance. Thank you very much..

Thank you..

Thank you. The next question is from Irina Koffler of Cantor Fitzgerald. Your line is open..

Hi thanks for taking my question.

You mentioned that there was international product registration delays in your vaccine business, could these delays persist into third quarter as in this quarter and how much additional revenue can be generated once these agreements come through?.

So when you're doing registrations, it's impossible to predict when they’ll come through. So we can't say what is going to happen in this quarter or next quarter, but we fully expect to get the registrations and again once you get the registrations, you have to hope the disease pressure is there and if you go back in the market.

So it's hard to put a dollar amount on it as well. So just overall, it was down at somewhere of an explanation of why we were flat to slightly down year-on-year and then something else is generally in our business. Our vaccine business is pretty much a non-U.S., with a point I mentioned before a non-U.S.

business to the effect where our sales in this country is dollar based and the currencies have devalued around the world, it will put some pressure on us as Dick said earlier, making our products maybe a bit more expensive than our locally produced products..

And these delays are not impacting your guidance because you're still maintaining that right?.

Correct, that's right..

Okay. Thanks..

[Operator Instructions] The next question is from Douglas Tsao of Barclays. Your line is open..

Hi. Good afternoon.

Hello?.

Yes go ahead..

Sorry about that.

Going back to the MJ Biologics, how do we think about the initial opportunity first in swine, is there an expansion of the portfolio over time that you anticipate either sort of contributing?.

So I think what we bring to the mix is a larger sales force calling on the U.S. swine industry than MJ Biologics currently has. So as I said earlier, as we train our sales people and we get out there, I think we will see some increased market innovation.

As we work with their development people and our development people, we're going to look for opportunities to take some of this technology, move it overseas into markets where there is a big swine population and where these products, these vaccines can be effective. And then we will continue to look in developing new vaccines.

Currently they're in a section called [Pearls] [ph]. We spoke about the article in the Times where they're working on a paired vaccine and we'll continue looking at other vaccine opportunities, both in the U.S. and around the world..

Okay. Great. Thank you..

Thank you. There are no further questions in queue at this time. I'll turn the call back over for closing remarks..

All right. Well we'll just say thank you to everyone and look forward to talking to you again in 90 days. So that's it and have a good day..

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day..