Richard Johnson - CFO Jack Bendheim - CEO.

Brandon Folkes - Guggenheim Securities Erin Wilson - Credit Suisse Douglas Tsao - Barclays David Risinger - Morgan Stanley Kevin Kedra - Gabelli.

Good day ladies and gentlemen and welcome to the Phibro's Second Quarter Financial Results Conference Call. At this time, all participant lines 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 may be recorded.

I would now like to turn the conference over to Richard Johnson, Chief Financial Officer. You may begin..

Thank you, Operator. Good morning, everyone. Welcome to the Phibro Animal Health earnings call for our December 2015 quarter. On the call today as usual are Jack Bendheim, our CEO and myself the Chief Financial Officer. I will provide an overview by quarterly results and then open the lines for your questions.

Before we begin, just let me remind you that the earnings press release and financial tables can be found in the Investor Sections of our website at pahc.com. We're also providing a simultaneous webcast to this morning's call which can be accessed on the website as well.

Today's presentation slides and a replay and transcripts of the call will also be available on the website later today. Our remarks today will include forward-looking statements and actual results could differ materially from those projections.

For a list and description of certain factors that could cause results to differ I refer you to the forward-looking statements sections in our earnings press release. And our remarks today will also include references to certain fundamental 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 tables that accompany the earnings press release.

So with that introduction, I will turn it over to Jack for some introductory remarks and then come back and talk about the numbers in a bit more detail.

So Jack?.

Thank you Dick, and thank you all for joining us on this call. As you may be able to tell, I’m participating on this call remotely, as I am attending the European Animal Health Investment Forum in London. I'm here as we continue to be actively looking for investments acquisition opportunities.

I am very pleased that this past month we were able to complete the acquisition or MVP. It is a way to find a business and a culture that fits so neatly into what we do. The MVP acquisition is another example of how we have become preferred buyers of businesses that prior to the acquisition we are partnered with.

In the case of MVP, our two companies got to know one another in the manufacturing marketing or the MJPRRS swine vaccine. Let me add a few more comments on the MVP business. MVP was a privately held developer, manufacturer and marketer of livestock vaccines, vaccines adjuvants and other products based in Omaha, Nebraska.

We purchased the assets of this business. Phibro was MVP's largest single customer, the purchase strengthened Phibro's core animal vaccine business and provides more opportunities in a fast growing segment of the Animal Health industry.

MVP has great people and proven manufacturing capabilities and is an excellent fit that supports our growth initiatives, expands our vaccine business and has a platform for future growth. As reflected in our quarterly results, our strengthening position in vaccines and nutritional specialties is importance in all markets especially United States. U.S.

market is rapidly moving toward the elimination of using medically important antibiotics for growth promotion due to consumers driven preferences and compliance for the FDA's December 2016 voluntary guidance timeline.

This shift is leading towards increased reliance on vaccines and nutritional specialties as reflected on our guidance and reported results where we continue to see double digit growth in those categories. Our MFA and other products continue to grow outside the United States.

I'll now turn it back to Dick to review this quarter and I look towards to your questions after that..

Thanks Jack. So looking at our consolidated results, first our consolidated sales of almost $182 million grew about $3million or 2%.

All of the sales growth was volume driven primarily in the Animal Health segment, we also saw volume growth in mineral nutrition business but if - the volume growth was offset by lower pricing driven by the lower commodity markets.

So with that $3 million sales increase we saw a gross profit improve to $62 million or 32.5% of sales, a $6 million improvement or 11%, that's favorable increase of the gross profit line was driven by volumes and mix.

It was driven by improved operating efficiencies that are manufacturing facilities and we also saw favorable cost of goods both from the volume effect, as well as from favorable currencies as some of our manufacturing plants are in international locations.

SG&A operating expenses increased overall by about 10% or $3.5 million driven primarily by increases in the Animal Health segment focused on selling, marketing and development costs. In addition, we're seeing acquisition related purchase accounting of costs drive a bit of that increase.

In addition corporate expenses were higher this quarter on timing and higher - some higher organization cost. Adjusted EBITDA coming down to that line increased 14%.

Total EBITDA was $28.4 million, a 14.8% operating ratio I think that's the same ratio that we had in our September quarter better than a $3 million increase over last year and a nice increase in terms of the operating margin expansion.

Just to confirm in our September quarter, we made comparisons with last year that excluded vaccine licensing milestone payments. There were none of those revenue items in the December quarter last year, so there is no need to have an adjusted comparison with last year. So these are just compared reported numbers.

Adjusted diluted EPS was $0.39 in the quarter up $0.04 over last year or 11%. The growth was driven by growth in adjusted EBITDA but tempered somewhat by slightly higher than usual amount of income taxes which we report on an adjusted basis, on a cash basis and just due to timing of certain payments.

Turing over to Animal Health within the Animal Health segment, we talk about three product groups. Overall, total Animal Health Group, we saw good volume growth primarily in the nutritional specialties and vaccine categories.

MFA and other category was down, roughly $2 million or 2% compared to the same quarter last year but we saw 17% growth in nutritional specialties and 10% growth in vaccines. The Nutritional Specialty products continue to be driven by our dairy-focus, but also by the introduction of a poultry product, primarily, in the U.S.

at this point and vaccines were driven by volume growth. For the segment adjusted EBITDA was over $32 million, $4 million better than last year, up 14%.

And the operating margin expanded to 26.6%, almost 280 basis points better than last year really driven by that gross profit expansion coming from the factors I discussed earlier, partially offset by continued investment in operating expenses.

If we look at other segments, the Mineral Nutrition business, although it showed flat revenues at the topline, it did report improved EBITDA over the last year of $400,000 or a 12% EBITDA increase and an expansion of the operating margin to just north of 7%.

So we are seeing underlying that, we are seeing good volume growth in the business, reduced pricing driven by commodities. And in the quarter, we were able to capture good margins on that increased volume. Performance products, not a lot to talk about here. Steady demands sales were roughly the same as last year. EBITDA was down slightly from last year.

And corporate expenses about $8 million versus $7 million last year, or up close to a $1 million. Just briefly to look at the balance sheet on capitalization, capital allocation. Our leverage ratio at December was 2.8 times, total debt 306 million against the trailing 12 EBITDA of 111 million.

Cash on hand about 25 million, just a slightly negative cash flow, 2 million negative cash flow during the quarter before financing. As we continue to invest in business growth primarily, we’ve put some cash into working capital and we're on our CapEx forecast, as we had a heavy CapEx quarter of $10 million.

And then just the routine dividend activity, the same $0.10 per share dividend was paid in December, and we declared the next dividend to be paid in March. So with that, that’s an overview of the financials. So we'll open it up for questions at this point. Operator, if you would please..

[Operator Instructions] Our first question comes from Brandon Folkes of Guggenheim Securities. You line is now open..

Hi, thanks for taking my question. I was wondering if you can just talk about the potential for margin upside following the MVP acquisition? And then, secondly, how are you thinking about business development following MVP? What are your priorities? Thank you..

I think I'll take part of that, anyway. As I sort of mentioned at the start, right now I'm in London. There is a investment conference here today looking at innovative startups in Animal Health and Animal Health and Nutrition businesses. So we keep looking for opportunities. I would say generally they will be bolt-on, as they have been in the past.

And I think the focus areas are in the growth areas, which is nutritional specialties, which is in vaccines and even looking at antibiotics. We continue to see as population grows, as animal numbers grow and animal disease continues. We continue to see opportunities across the three platforms of our animal health and nutrition business.

I think the first part of the question had to do with margin expansion with MVP. What we've always said is that, ultimately we see pretty much the same final EBITDA margins across our Animal Health segments. So we don't expect to see other than the results of the increase sales, increased margin expansion..

And Brandon just to get a closer look on MVP, we have not disclosed the financial parameters of the business. We did say in the press release announcing the acquisition that we fully expect the transaction to be accretive immediately - accretive on an adjusted basis taking up the purchase accounting adjustment and we certainly stand by that..

Great, thanks so much..

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

Great. Thanks for taking my question.

Can you elaborate on the key drivers behind the medicinal feed additives business, whether it be regulatory or broader demand changes? And are you surprised by the shifts that you're seeing, at least in the latest quarter? And lastly, what kind of key products would you highlight as being particularly stronger in the quarter or weaker within that MFA segment?.

I think we have to sort of segment the world but as an effect to 209 and 213 that we spoken about so often, we are beginning to see a change in the way producers in United States are using antibiotics for growth promotion.

As you know that and as I said earlier, by the end of this year, by December 2016, producers will not be able use antibiotics for growth promotion and that's a label claim. So, some people are getting ahead of the curve, some people are getting ahead of timing, changing formulations. This is nothing new to us. We've been speaking about this for years.

We've anticipated this change, which is why we have invested and have begun marketing nutritional specialties. I mean, the one thing you just need to understand is notwithstanding legislation, and notwithstanding consumer preferences, the bugs remain the same. The bacteria is out there.

The animals need to have - fight off this bacteria to remain healthy, to grow in an economical way, not to be sick and not to cause any problems towards human health. So the growers, the producers need products. And we’ve seen a shift towards more vaccine use and we're seeing shifts towards more nutritional specialties.

But while they don't work as well as antibiotics, they will be placed some of the uses of antibiotics as growth promoters..

Okay.

And then, I guess, how should we think about, then, the quarterly progression of the MFA business and what this world looks like in 2017?.

It's a little crystal ball. I think we will continue to see what we've begun to see. I don't think it's getting any faster. We'll see a progression. We'll see a continuing change in the U.S. towards more people adopting, dropping with use of antibiotics with growth promotion labels.

They'll continue to use antibiotics for treatment, for preventing disease and treatment of disease. We'll continue to see that and we'll continue to see growth in the basic business around the rest of the world.

Again, as the business shifts and as the consumption of meat continues, poultry and meat continues around the world, we continue to see again for our treatment of disease. So we continue to see a growth in MFAs..

Okay, great. And just one last one. Can you speak to the uptake you're seeing in OmniGen in the U.S. and other markets as well? It seems pretty strong..

I think the numbers pointed growing strength in our dairy platform, as well as our new poultry platform. It's a combination of the bunch of products. We have a few - quite a few test farms going right now in China. So we are anticipating this time to make sales there, may be even next quarter.

We’re seeing growth in European expansion that we've spoken about in the past and we continue to see notwithstanding a weaker milk price in United States and Rest of the World. We continue to see strong business in our dairy platform..

Okay, great. Thanks..

Thank you. Our next question comes from Douglas Tsao of Barclays. Your line is now open..

Good morning. Thanks for question. Just maybe talk a little bit about some of the dynamics that are driving some of the MFA growth outside of the United States. And obviously it seemed a little weaker in the U.S. And sort of some of the key drivers in that geography as well, thanks..

As I mentioned to Erin, I think the key drivers for the lack of growth and I'd say is change in regulations and what is that driving and some consumer perceptions of needs and uses.

Around the rest of the world though, it comes back to basic fundamentals that you've written about are the people written about, which is growing population, growing well, growing needs of food security, growing number of animals.

So we’re seeing growth in Latin America, South America, we’ve seen growth in the Far East, seen growth in Africa, we’ve seen growth in all these on the markets in the world there are pretty more animals into more scientific way, higher productive way of producing because at the end, as we know there is water shortages, there is scarcity, there is land not growing.

So the method that we produced in the United States for years of expanding across the world and we're participating in that growth..

And are there any particular products that are doing particularly well that might be different than what we - than in the U.S.? And then, as a follow-up, just sort of a commentary. Obviously there's a lot of concern and volatility around emerging markets.

Just what you're seeing in terms of the macro environment, accepting that's probably more in your term dynamic than sort of a long-term secular trend..

So basically, the bacteria remains pretty much the same and the anti-bacterial and antibiotics will use pretty much the same. There are not many products that are permitted to be used in animals, most of these is as we've said often before older anti-bacterial and antibiotics. So the quiver hasn't grown.

So the same products who have been improving I'd say it's improved in Europe. Different markets are sold around the world. So we have our suite of products and we continue to present the same products depending on applications, depending on disease pressure, et cetera, et cetera.

The emerging markets, I mean there is dynamics today obviously with the strong dollar to currencies. But I think quite fundamental to the countries in the world that are growing is the ability - let's call it just food security. The ability to continue to deliver quality wholesome protein is as important in China today is as it was three years ago.

So no matter what's happening with the rest of their business and other things we read about everyday could be changing. So it's important to the Government of China, the Government of Brazil and coming to all these markets in world, which again which is headline in the news that the availability of wholesome quality, inexpensive food continues.

And RevPar of that chain the part what we provide our product. No one reimburses our customers. They do this in order to produce this quality food we’re talking about. So it's not thick and thin, but clearly it will be better if the currencies are stronger but the business continues to grow..

Okay, great. Thank you..

Our next question comes from David Risinger of Morgan Stanley. Your line is now open..

Thanks very much. I have, I guess, a couple of questions. First, with respect to the high-level outlook, I think it would be helpful for you to comment on the political noise that's occurred and the reality that you see. It seems like the political noise is overblown, as it typically is.

And the reality is that MFAs are safe, because the antibiotics are not used in humans. But I was hoping that you could comment on that.

And then in terms of the financial outlook, I was just hoping for a little bit more color on the outlook for operating cash flow and CapEx going forward; and also how we should think about the March quarter results - whether there were any anomalies to be aware of with respect to the March quarter results. Thanks very much..

Let me take the -.

Yes, that's what I was saying, Dick. You get the first part and then I'll answer it afterwards..

So we are not updating our guidance this quarter. So our guidance simply stands as it is out there. And I think all of the elements that you called out, David, are in that existing guidance.

For the March quarter, I'm not aware of any anomalies, we did have – when we do the comparison with last year, our March quarter of last year, had 2 million of, the one-off milestone revenue and EBITDA in it. So in terms of comparisons, we'll have that against in last year, as to compare against but no other anomalies.

Jack, you want to take the political versus reality?.

I'll say that politics is overblown, we’re a little deep into it. But the reality is that animals are going to get sick. And can you raise an animal without using any drugs? The answer is “yes”. It’s very expensive and people have the money, they want to spend that money. There is a market for that.

But if I look at the politics, if I look at what’s going on, take the United States, most people in United States are not earning fortunes, and their salaries haven't gone up and I think it’s important for them to be able to continue to buy healthy wholesome protein and not get sick.

If they go to some fancy restaurants and stuffs like that, and who knows what happens. So I think there’s room for all these decks and definitely room for a combination of antibiotics, antibacterial, nutritional vaccines to keep all the animals healthy. And as I said earlier, we’ll get our fair share of that..

Got it. Thank you, Jack and Dick..

[Operator Instructions] Our next question comes from Kevin Kedra of Gabelli. Your line is now open..

in the U.S.

or globally, are you seeing any movement from competitors, given some of the pressures we're seeing on the MFA business? Are there people looking to actively exit that business or divest certain assets? And could that be an opportunity for you guys?.

Yes, on the first part, the breakdown, we haven’t given any breakdown. We basically just said that net MFAs were down, whatever, couple of million dollars, $2 million. And net in there, there was international growth offset by contraction in the U.S. So that’s really the – that's what we talked about.

I think the second part of the question was competitors and what competitors are doing, Jack do you want to take that?.

There has been some movement in the MFA space. I think we feel we have a grown up product lines so we are not looking to add to that product line and the acquisitions we’re looking to do is expanding in the vaccines and nutritional specialties where we see growth both in the U.S. and in other markets around the world chances are getting to Europe.

And as I said, again I think we will see over the next few years a stabilizing or stabilization of where antibiotics are in the U.S. and continued growth as a number of animals continue to grow across the world..

Thank you. And I am showing no further questions at this time. I would now like to turn the call back over to Richard Johnson, for any further remarks..

All right. We will just say thank you then to everyone. And we’ll talk to you again in 90 days. Thanks. Bye now..

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..