Richard Johnson – Chief Financial Officer Jack Bendheim – Chief Executive Officer.

Brandon Folkes – Guggenheim Securities Erin Wilson – Credit Suisse Matthew Brooks – Macquarie.

Good day ladies and gentlemen and welcome to the Phibro Third Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I’d now like to introduce your host for today’s conference Mr.

Richard Johnson. Sir, you may begin..

Thank you, operator, and good morning everybody. Welcome to our earnings call for our fiscal third quarter, which ended March 31, 2016. As usual on the call today are Jack Bendheim, Chief Executive Officer; and myself Richard Johnson, the Chief Financial Officer.

We’ll provide an overview of our quarterly results, walk through the updated guidance we’ve provided, and then we’ll open the lines for your questions. So just the standard 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 to this morning’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.

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.

Our remarks today will also include references to certain financial measures, which were not prepared in accordance with Generally Accepted Accounting Principles, or U.S. GAAP. I refer you to the non-GAAP financial information section in our earnings press release for a discussion of these measures.

Reconciliations of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures are included in the financial tables that accompany the earnings press release. And with that, I’ll turn it over to Jack for some introductory comments..

Thank you, Dick, and thank you all for joining us on this call. Our adjusted EBITDA, which was up 16% over the last year, was on plan for our third quarter, but we were disappointed with our sales performance. Our core Animal Health segment showed a 3% sales increase, which is lower than we have been experiencing and expecting.

As mentioned in our press release last night, some of our U.S. customers are reducing usage of antibacterials that are classified as medically important by the FDA, in anticipation of upcoming regulatory changes and in response to consumer preferences for the reduction or elimination of antibacterials in protein production. Still while our U.S.

MFAs and other declined in the quarter, our overall volumes in this segment grew, led by our international volumes. This volume growth, however, was tempered by pricing pressures from the strong U.S. dollar. We believe international volume increases will continue to be a substantial offset to potential U.S. declines.

Nutritional specialties grew even in the phase of a difficult dairy environment and our vaccine segment reported growth as producers seem to look for alternatives to maintain the health of their animals.

We closed on our acquisition of MVP Laboratories in late January, and I’ve been very pleased with the smooth transition that’s taken place and impressed with the caliber of our new colleague. Finally, we were disappointed in the FDA’s actions regarding our Mecadox product that occurred in early April.

Dick will provide a bit more color with regard to the next steps and the process initiated by the FDA, but I want to reiterate a strong belief in Mecadox safety and our commitment to work with the FDA and seeking to address any concerns they may have.

I’ll will now turn this back to Dick and look forward to answering any questions you may have following his more detailed review of the quarter’s financial..

Thanks, Jack. Well, just looking at Page 4 for a moment of our webcast, Jack talked through most of those factors, just to highlight the point that we brought out in the press release. We are getting additional granularity that our current annual U.S.

sales of medically important antibacterials that are used in animal health are approximately $40 million. And as we said some of these sales could be at risk going forward due to the both the regulatory factors and the consumer preferences as we move forward.

On the other hand, we do believe the international growth and the same product groups are a substantial offset or a growth opportunity as we’re not seeing those same sorts of pressures internationally.

And turning to Page 5 on the carbadox or Mecadox issue with the FDA; as we said, safety, first of all, is our highest priority, and we do intend to – continue to collaborate fully with the FDA. The next step is for us to deliver all of our scientific information, data analyses, information, et cetera.

By an early July deadline, we will deliver all of that information to the FDA with the intention that that will be the basis to address the FDA’s concerns. And at that point forward then the timeline for further action by the FDA is undefined, so we can’t speculate or speak to how the process may play out from that point forward.

Important to note is we continue to market the product. And as we’ve disclosed previously, our annual U.S. sales of carbadox are in the $15 million range. So, turning to our consolidated results for the March quarter, we reported $183 million of sales that was down $2 million or 1% from last year.

By the way in all of our comparisons we’re doing here, we’ve set aside the final milestone payment of $2 million, which was both in revenue and falls all the way to the bottom line and EBITDA. We’ve set that aside from the comparisons of it. It’s more of an apples-to-apples comparison.

Driving sales for the quarter was volume growth in animal health, particularly in the nutritional specialties and vaccine categories. Also we had volume growth in mineral nutrition, but we saw revenues pull down by the pass through of lower commodity prices.

At the gross profit line on an adjusted basis, we had an adjustment to cost of goods sold typical thing for the acquisition of MVP have to step-up the cost of the inventory you acquire, so adjusting that our gross profit was up 8% in quarter-over-quarter driven by for the same thing as we’ve been speaking to for some time now, volumes and mix.

Improved operating efficiencies and manufacturing getting the benefit of some of the CapEx we’ve been investing in manufacturing and also a favorable benefit from currencies as some of our products are manufactured in outside the U.S. where the strong dollar has helped our cost of goods.

At the SG&A line on a consolidated basis, again on an adjusted basis, SG&A was up modestly. It was up 2% year-over-year or about $0.5 million. All of the increase essentially was in the Animal Health segment as we continued to invest selectively in sales, marketing, and development.

That brings us to adjusted EBITDA, which was up 16% year-over-year, improved our operating margin to better than 16%, 250 basis point jump over last year.

And then when we go to adjusted diluted EPS up only 6%, the EBITDA increase drove that, but in part a slight increase in interest expense due to the cost of the borrowing for the financing of the MVP acquisition, but more substantially, a higher effective income tax rate in the quarter as we saw a shift in the mix of our pre-tax income from domestic to international and we saw our taxes increase as a result.

And you’ve seen that – just anticipate going forward, you’ve seen that in the guidance for the full-year or so. Moving down to Animal Health, our sales overall up 3% driven by continued double-digit growth in nutritional specialties $3 million of sales or 15% growth, and vaccines again setting aside that milestone item from last year.

Vaccines grew almost $1 million, or 8%. The vaccine growth was driven by the MVP acquisition, but we did have an offset with some reduced sales in international due to some production upgrades we did for GMP, good manufacturing practices, reasons.

Those upgrades have been completed and that was a fairly momentary issue as far as affecting sales levels. In the MFA side, U.S. volumes were down year-on-year, however, we saw good growth in international that offset most of the U.S. volume decline similar – the March quarter was similar to what we talked about in our December quarter.

Dropping down to EBITDA, EBITDA over $32 million better than 27% of sales, $4.5 million increase over last year and continued to see that operating margin improved nicely over time. Turning to other segments; mineral nutrition.

Revenue dollars pipeline were off as we talked about it, it’s basically commodity pricing and this is a pass-through type of business. We saw good volumes, good volume growth in the business.

And you see that on the bottom line as EBITDA did grow to $4 million, about $300,000 increase over the last year or a 7% growth at EBITDA despite the revenue shortfall. Performance products, not a lot to say, it’s fairly steady performance on a run rate basis, $12 million of sales and $0.5 million of EBITDA.

And corporate expenses basically unchanged from last year at about $7 million. Just looking at our balance sheet and cash flow for a moment, our leverage ratio on a reported basis was up to 3.3 times at March 31st. And this reflects the $46 million plus that we invested in the MVP acquisition and that we funded by increasing our revolver sales.

At the end of the March, $367 million total debt, $113 million of trailing adjusted EBITDA, gives you that 3.3; $32 million of cash on hand. And during the quarter, net cash flow before financing, we used $53 million of cash, obviously $47 million of that was for the MVP acquisition. Working capital used about $15 million.

As the timing of payables and other liabilities used cash, in addition, we saw some increase in inventories, also using cash during the quarter. And then, finally, we spent about $11 million of CapEx in the quarter.

Trending, I think, we now have $28 million or $29 million of CapEx for the nine months, still tracking toward our guidance of $35 million plus or minus CapEx for the year. And finally, dividends routine, we paid $0.10 a share dividend in March and declared and we’ll pay the next one in June, no change there. Turning to updated guidance.

We have tightened our guidance for the year. We’re now nine months into our fiscal year. We’ve brought our revenue guidance down to $745 million to $750 million and that’s just slightly above last year.

Adjusted EBITDA now is expected to be between $114 million and $115 million, still a nice increase over last year, 12% to 13% increase over last year and 150 basis point improvement in the operating margin.

And adjusted EPS now $1.58 to $1.60, up 4% to 5% over the prior year as that higher effective tax rate due to our mix of international taxes is one of the – is the primary factor as well as slightly lower EBITDA guidance also a factor of pulling down the adjusted EBITDA guidance for the year.

The other guidance point here is that we expect our Animal Health segment, revenues to be between $477 million and $482 million for the year, so 3% to 4% growth. And within that I think you’ll see that we would expect full-year growth to be quite the same as what we’ve seen through the first nine months.

Some other guidance on interest expense and income taxes, I’ve commented out earlier. So that’s the end of an overview of our numbers and our guidance. So with that operator, let’s open it up for questions please..

[Operator Instructions] And our first question comes from the line of Brandon Folkes from Guggenheim Securities. Your line is now open..

Hi, guys. Thanks for the additional color.

Could you please just talk about the headwinds you’re seeing within MFA segment? How these limited to medically important antibiotic? So are you seeing produces curtails some use of non-medically important antibiotics? And then secondly, perhaps, if you can just talk a bit more in detail, I mean it looks there are a lot of segments that are doing well.

So as you can just talk about the international markets where you’re seeing the growth and then in nutritional specialties and vaccines. If you can just give us some color, are you taking market share or these new products? And then finally, how important are performance products and mineral nutrition businesses to you strategically? Thank you..

Jack, I’ll take most of those. So, let me sort of start by saying that the overall premise of the business, which is tied to population wealth growth around the world and the increased demand for protein is absolutely continuing and is the same. Now having said that, there are bumps all right. There are bumps in Brazil.

There are bumps going on in China. There are stronger and weaker economies around the world. But, fundamentally, we are continuing to see more production and more consumption of poultry, swine, cattle, and dairy products around the world. And that’s the market we serve. And we serve those markets with a range of products.

So, we will continue to see demand for our antibiotics, anticoccidials, vaccines, and nutritional specialties around the world and that’s the fundamental business.

Overlaid on top of that is some consumer driven demand in the United States, which is reacting to an unusual time because you have these FDA guidance is that we’ve been working on for the last four, five years, which created a new category. It’s a category limited to the United States called medically important antibiotics, MIAs.

And the producers are trying to react to a regulatory change that’s going to happen on January 1, 2017.

Overlaid on top of that are call it demands from a certain segment of the population, let’s call it I won’t give it a name, but certain segment of the population, who think the best way to have chickens is to grow it or eggs to grow it in your Backyard in Brooklyn.

And there is just a general demand of people wanting or thinking they want more healthy foods and I think that’s use less antibiotics. The reason producers use antibiotics is because they’re treating bad bacteria, bacteria which causes the animal to be sick, animals not to grow well, animals to die.

The bacteria remains the same, the bacteria is out there. So what does the producer do when the consumer says I want to buy a product that has not been raised with antibiotics and yet the animal gets sick. So, the producers in the United States are looking for what they can use. And this is a very usual time.

So, some of the responses will be only find more vaccines, some of the responses, which we believe we’re going to see and we’ve seen growth is nutritional specialties. And ultimately, everyone will be able to use a range of antibiotics. No one is saying none of these antibiotics that we produce or our competitors produce are being banned.

They are all allowed to be used and it’s going to be diminished – sort of pushed by one consumer preferences, but under that is a concern about the welfare of the animal. And you don’t want to see an animal in pain suffering because they were not – you withheld drugs from them. So this is a confusing time.

I think it will be sort of worked out pretty much as we get into 2017, but 2016 remains call it a moving target and there are lots of targets moving around. We think we have the answers to most of these problems. It is changing. So, we expect again growth on the overall business, because the overall demand for protein continues to grow.

And within that we’re going to see changes in those various markets we’re in. I don’t know if I answered most of your questions, but hopefully I did..

Yes, just a couple of things on your – on the growth drivers, I think you were asking on Brandon. I think internationally, we’re seeing growth in most of the markets we’re in.

We tend to be in developing markets and where the demand for protein production continues to grow and also we’re in a number of the big export producers, for example, Brazil, where that that continues. Each market has its own set of circumstances and maybe doing better or doing worse, but the underlying fundamentals remain the same.

Nutritional specialties, I think, were largely – some of our products are an alternative to some of the….

Products currently used..

Right, the products currently used. And on the vaccines, I think we’re taking – we’ve got a good set of products that are competitive out there..

And I would sort of add on top of all of this that we continue to drive the business to make money. So, yes, sales is a big disappointing, a lot of it is driven by the commodity prices drop and the fact that we have sales drop in the mineral nutrition business.

But at the end of the day, our earnings are up 16% quarter-to-quarter and that’s ultimately what we all get paid for and how we look to drive the business. Then I remembered your last question, mineral nutrition remains a fundamental part of our business.

It’s how we see the customers, how we have faced with the customers and how we will – and that’s enabled us to be as successful as we are and continue to be in our nutritional specialty. Performance products, we said before, is not a core business and the business today is smaller than it has been and I think that will be the case over time..

Great, thanks very much..

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

Great, thanks. Just a kind of follow up on the MFAs and thanks for the clarity on the $40 million, but can you speak to those specific offsets to the product where you’re seeing the pressure.

And is that $40 million a global number? Does it include the treatment and prevention purposes or indications as well? And I assume it includes that $10 million to $15 million that you pulled out before where you’ve seen pressure..

The $40 million is the U.S. number. It’s our U.S. sales of medically important antibacterials and we tell you what the three molecules are. Yes, the $40 million is the total number. The $10 million to $15 million and the risk factor is a subset of the $40 million.

And I guess the other part was, are there any product offsets?.

Yes, so it’s Jack, Erin. I think we are growing and we’ve seen the growth in our nutritional specialties. There will be some of these offsets. But as I said earlier, the customers are sort of wrestling with the problem because again the bacterias there, they have to raise now to meet the demand of the marketplace and they’re not exactly sure.

So they’re trying lots of different things. We think we have really good solution for some of these problems that they’re going to see. And we have a lot of customers testing. We have a lot of customers buying, but it’s a big market and it’s going to take a while for this all to sort through.

Having said all that, we don’t look at our MFAs in the U.S., MIA, MFAs being going to zero. I mean that’s – we put it out there as a number, but ultimately drugs treat sick animals – I am trying to think you know it’s like one or two weather comparison.

Sometimes when I – Airborne, when I go on a plane with my wife, she always often takes Airborne because she thinks this Acehnese and the other sub is really going to help her to prevent diseases and to some people it works, but when you get sick, you want to use an antibiotic, or you want to use the vaccine and I think the same thing to the animals.

We’re going to try to do a lot of things to make the animals stronger and healthier and to try to push off the diseases.

But ultimately, when the animal gets sick and often these animals get sick because they’re subject to weather changes and other kinds of pressures like humans are, you will need to treat the animals and we have products that have been on the market for 35 or 40 years that are very, very safe, very, very effective, and very cost effective.

So that’s the basis of the business. One, as I said earlier, this all will sort out in the course of the next six to twelve months. And right now, we’re sort of smacked in the middle of it..

And are you so influenced by more recently some of the other animal health industry constituents have noted a rotation in some of the use in medicinal feed additives and I know that that always happens in that and particularly the poultry business.

Are you seeing a major shift in your customer base, just given that natural rotation that always happens in the business? Is there some sort of unique phenomenon going on? Thanks..

There’s nothing unique going on. We always see rotations. We read your piece as well. We see rotations going on that could be – that could account to some dips in one quarter then you pick it up to the next quarter or six months later.

So that that always happens in ever sort of time it never the same every year, but ultimately, as we’ve discussed often the producers, let’s say the chicken producers, the pig producers only have certain products available to them to treat diseases. No one is adding new products into this field, right.

These are the products that have been around for a very, very long time, and they’re effective, and they’re safe, and they’re relatively inexpensive. And that’s what the whole things about. You cannot give up products.

There are only three, four products and everyone gets its share on the docket because the other products don’t work as well and [indiscernible]. So we might be seeing in this quarter a bit on rotation, we might be seeing a bit of people trying different ways to raise animals, I mean everything is a mix and everything is going on.

And the overlay here as well is that customers have the benefit of today relatively cheap input costs. I mean soybean and corn prices are low that changes we know as well and then everything moves at the same time. So it’s a big mix.

I think our guys have done, as I said earlier, a great job in pushing our products where we’re making money and not just banging out sales, but looking to continue to doing that.

And this business is a mix of a big shift, but as I said earlier the shift will be a combination of not just MSAs, but a big combination of MFAs, the combination of different vaccines and as well as these nutritional specialties, which is growing.

It’s a business that didn’t exists five years ago, but it’s a business that will exist now and will continue to exist and will grow and I think we are at the forefront here in the ability to find the right products and market the right products..

Okay, great, and just one quick one. Can you just quantify how much MVP contributed in the quarter and what is the deal pipeline looks like near-term? Thanks..

Erin, you’re always so good about this, no we’re not. But what I can say is that, our original view of the business has been exceeded. We’re very, very satisfied with MVP, with its people and its product line and that will continue to grow with us as we go forward..

Thank you. And our next question comes from line of David Risinger from Morgan Stanley. Your line is now open..

Hi, good morning. This is [indiscernible] on the call for Dave. Thank you for taking our questions. I have two questions please.

First, regarding the MFA business, could you please comment on the cadence of the headwinds as we move towards December 2016, do you expect it to be more loaded in the back half of the calendar year? And second, could you please discuss that mineral business outlook and how investors should consider modeling that? Thank you..

So, do you want to take that Dick?.

If we’re going to restate your question, you’re saying, will we see – is this sort of activity we’re going to see as we move along through calendar 2016 or are we going to see more pronounced erosion in our sales? And we’ve given you guidance through June.

I think that June guidance will pretty much tells you that – I think we see similar trends through June. And I think we’re – as Jack said this is a point where many of our customers are in transition and they’re trying a lot of different things, so really not going to speculate beyond that.

And then the second part of your question, if you could say that again..

Yes. So the second part of the question is that, can you discuss the mineral business outlook and how we should think about modeling that going forward? Thank you..

Yes, I think, the minerals, it’s difficult to model the top-line. So, there is no sense trying to model what commodity prices are going to do. But the bottom line is we expect that business to be a solid steady growing contributor. We’ve said before that it’s tied to animal numbers in the U.S. And so, it’s a low single-digit type of growth business.

And we would expect our EBITDA to continue to grow in that kind of a range with maybe a little bit of upside as we get efficiencies and some leverage on some of our expenses. So, I think that’s how you think about that and from a modeling point of view..

Okay, thank you..

You’re welcome..

And our next question comes from the line of Matthew Brooks from Macquarie. Your line is now open..

Hi, Jack. Hi, Richard. Just a follow-up question on the MFAs.

Firstly, can you say how much of your MFA sales are in the USA specifically and how much of that goes to the poultry segment?.

Well, yes, you can – I don’t even have the number off the top of my head. But it’s I think we say our animal health segment is about 45% in the U.S. and it’s probably something – I’m sorry, yes, 45% across the entire segment and the U.S. is – MFA is probably a similar to a slightly less percentage. I’m stumbling around.

Okay, what was the second part of your question, Matt?.

What share of that goes to poultry like a most of the MFA is going to poultry segment?.

Yes, poultry and swine, but predominantly poultry, yes..

And in the USA, you said that you’re seeing some lower demand for MFAs.

Is it only the medically important MFAs that are affected?.

Yes..

Because if you look at it from the consumers’ point of view, they’re going to a restaurant, they’re not saying I want antibiotic free, but I don’t want only the medically important MFAs, they say I want antibiotic free..

Right and so there is a whole range of products that go into chicken, which might not be – call it defined as antibiotic, but are off bed – putting them animal to feed. And these products are not affected by people saying their requests for antibiotic. Antibiotic is a defined term, right.

And most of the industry, if you read through most of the producers, I would say the trend is to try to focus on what’s medically important and yet to use a range of other products including some antibiotics in order treat coccidiosis disease and all other disease that these animals have and there is no other way to do that.

And I mean ultimately the consumer when they order chicken want chicken delivered, and not some other something else because the chicken is not available..

Right. As a sort of follow up to that you’re seeing some substitution towards nutritional specialties and you’ve got your back in the five product.

Are you doing any R&D to try and find other ways to find some cheap products for those medically important MFAs?.

So that’s how we got to the magnified product line and we continue to look.

Again, this is not a – that was not a simple task at all where we’re dealing with lots of conditions anticoccidials bacteria, viruses, a whole range of things that go on in an animal that that need to be dealt with and remembering that the chicken lives for four to five weeks and they don’t have a long-time to treat the animal before it gets slotted.

So, we’re not going to see a huge, huge shift away from what’s necessary to raise animals. Again, I saw an article on the other day, there is some segment of the market, can say we’ll I spend $20 for a chicken. That might be true, but that’s not most of us.

So, I think that overall there’s – again it’s a [indiscernible] right now we’re right in the mix of everything, a lots of stuffs going on, but I think we should not forget at the end of the day the U.S.

produces thehealthiestmost awesome andleast expensive protein a pretty much any country in the world and some people expect and some people demand, while we can adjust some of that and we should adjust some of that the market willing to pay for it.

Overall, there are lots and lots of people out there that don’t want to see their choice is limited, because they can’t afford it..

Right, on a separate topic, I’m looking at the inventories, it seems like there’s a pretty big bump compared to the last year. It looks higher relative to sales.

Is that partly due to the MVP acquisition or is the jump in inventories related to slightly weaker sales?.

It’s primarily the latter. So, we did build some inventories in the anticipation of higher sales and now we’ll pull those back down. We’ve begun – we’ve recognized that some time ago, but a lot of these supply chains are pretty long between initial sourcing, our productions, and finished good products. So, we’re adjusting that as we go.

MVP was a small part of the dollar increase..

Okay. And on a potentially more positive question, the U.S. dollars weakened a bit this year.

What sort of down still pull up year-on-year? Are you seeing any benefits on the weaker currency, particularly in Brazil perhaps?.

Yes. Well, we talked about is pricing pressure in some international markets and Brazil is an important market for us. And so with the Brazil currency strengthening back a bit from where it had been that takes a little bit of the pricing pressure off and makes it a little easier for us to – for our customer to make the sale and take some volumes..

Okay. Thanks, Jack. Thanks, Richard..

[Operator Instructions] And I’m showing no further questions over the phone line..

All right, everyone, well, we’ll comeback to you and we’ll be talking about our full-year results when we release them probably in – we haven’t announced it yet, but it will either be late August or early September we’ll be putting out our fiscal year results. So until then bye everybody..

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