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

Erin Wilson - Credit Suisse Brandon Folkes - Guggenheim Securities Kevin Kedra - Gabelli & Co..

Good day, ladies and gentlemen. And welcome to the Phibro First Quarter Financial Results Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] I would now like to turn the conference over to Richard Johnson.

You may begin..

Good morning, everyone. Thank you, Operator. Welcome to the Phibro Animal Health earnings call for our first quarter ended September, 2016. On the call today is Jack Bendheim, our Chief Executive Officer; and myself, Richard Johnson, Chief Financial Officer.

We’ll provide an overview of our quarterly results and then we’ll open the line for your questions. 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 section in our earnings press release.

Our remarks today will also include reference 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 on 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 out of the way, let me turn it over to Jack Bendheim for some introductory comments.

Jack?.

Thank you, Dick, and thank you to all for joining us on this call this morning. Our first quarter was a solid quarter financially and in my opinion even stronger operationally. As I noted in the press release, our core Animal Health segment achieved 4% growth in revenue and adjusted EBITDA.

Despite the significant headwinds we face, some of the headwinds are cyclical in nature, the continued weakness in the global diary industry and the struggle of the different ag economy due to a combination of currency, input costs and reduce the massive demand.

Frankly, we view this cycle as opportunities for us to gain share relative other than the marketplace, share that will show itself as gains once these markets rebound as they inevitably will do. The other challenge we are facing is consumer-related transition in the United States way from antibacterial improved production.

As we have discussed -- previously discussed, this transition has been faster and more aggressive than the regulatory led transition that we had anticipated occurring at the end of this calendar year. We view this is a long-term challenge in the U.S.

demand for certain of our MFAs and we have taken -- and we will continue take our [ph] lungs (03:17) in this market. Despite these challenges, the double-digit sales growth of our nutritional specialties and vaccine offering shows that we have products and the people to help our customers’ transition to new solutions for the health of their animal.

While we have managed feed one to one replacement across our U.S. customers, our conversion rate is increasing, and in the coming months and years we are poised to reach new heights in our business. I look forward taking your questions today in this presentation and now I will pass this back to Dick to go over our financial results in greater detail..

Thanks Jack. So let me briefly walk us through the numbers on page four, let’s first review the consolidated results for our September first quarter. Consolidated sales were $188 million for the quarter, approximately a $1 million increase over the same quarter last year. The sales increase was driven by volume growth in the Animal Health segment.

Mineral Nutrition net sales were below last year and lower commodity pricing driven by the underlying reduction in input costs. Gross profit was 32.4% of sales and that was an improvement of 80 basis points compared with last year or a $1.8 million increase, up 3% over last year.

The improvement was due to favorable business and product mix, volume growth, lower raw material costs and improved operating efficiencies as we continue to see the benefits of recent CapEx investments. Selling, general and administrative expenses increased $1.8 million or 5% on a reported basis.

The current year included $1.3 million of costs related to the evaluation and negotiation of a potential acquisition that ultimately was not successful. We have excluded these costs from adjusted EBITDA as an unusual item and consistent with our practice of excluding acquisition related items.

We will not have any further comments on this attempted transaction. SG&A included an adjusted EBITDA grew 2% or $600,000 without the acquisition-related costs. The Animal Health segment accounted for about $400,000 of that growth.

Adjusted EBITDA was $29.8 million, a $2 million or 8% increase over the prior year as all segments of the company contributed to the profit improvement. Adjusted diluted EPS was $0.36 a share, a $0.02 per share increase or 6% growth over last year.

The sales growth and volume improvements which drove improved gross profit was partially offset by SG&A growth, the effective tax rate was $32.4% or approximately 1% basically higher than last year. Looking now more closely at the Animal Health business on page five.

Sales in the segment of $124.5 million grew more than $4 million or 4% over last year. The growth was driven by double-digit increases in nutritional specialties and vaccine product groups, which offset a decline in the MFAs and other category.

Nutritional specialties product sales of $26 million grew almost $4 million or 18% over last year on volume growth of products into or used by dairy and poultry producers. Vaccine sales of almost $15 million grew $2.5 million or 21% over last year on volume growth across the product portfolio and including products acquired from MVP in January 2016.

Sales of MFAs and others were approximately $83 million in the quarter, a $2 million or 2% decrease from last year. We saw reduced sales of medically imported antibacterials in the U.S. However, we did see growth in other domestic products.

We saw international sales decline slightly due to a sales decline in Brazil resulting from challenging economic conditions with growth in other regions providing a partial offset. Adjusted EBITDA for the segment of $32.6 million increased $1 million or 4% over last year.

The gross profit growth was partially offset by a modest increase in operating expenses. And now looking at our other segments on page six, Mineral Nutrition net sales of approximately $51 million, declined $3 million or 5%, from last year, as we saw stable volumes offset by lower commodity prices.

Segment adjusted EBITDA $4 million was a solid increase of $800,000 over the prior year, on the benefits of lower raw material costs and reduced operating expenses compared with last year. Performance Products net sales are approximately $12 million or slightly below last year.

But favorable product mix and input costs drove a $700,000 improvement in adjusted EBITDA. Corporate expenses $7.5 million increased $0.5 million year-over-year on increased compensation and benefit costs.

Turning to page seven and capitalization and capital allocation, our leverage ratio of debt to trailing 12 adjusted EBITDA was 3.0 times at the end of the quarter. That’s a sequential improvement from the June 2016 level of 3.1 times as we generated our cash and reduced debt in the quarter.

We had $37 million of cash on the balance sheet at quarter end. For the quarter we generated $16 million approximately net cash flow before financing. Our working capital needs were neutral in the quarter, a substantial improvement compared with last year.

CapEx used approximately $6 million of cash in the quarter and we maintain our full year CapEx guidance of $30 million. We paid a routine quarterly dividend in the quarter and have declared the same amount per share to be paid in December.

And finally on page eight, we have repeated our guidance, for your convenience we have reaffirmed our annual guidance that we presented in our late August press release. There have been no changes to these numbers from what we discussed at that time. So that’s the conclusion of my prepared remarks.

Operator if you would please open the line for questions. Thank you..

Thank you. [Operator Instructions] And our first question comes from Erin Wilson with Credit Suisse. Your line is open..

Great. Thanks for taking my questions.

What would say the underlying organic growth rate across your Animal Health segment and in the latest quarter excluding MVP? And also more broadly how should we think about the organic profile over the next three years to five years? And can you also speak to the acquisition you were referring to, I think, in your prepared remarks, and does this have an impact on the quarter or what was the timing and magnitude in terms of material contribution for that? Thanks..

Well, I take a first crack at the acquisition, which is what we said in our prepared, so we are not going to comment on an acquisition that we were unsuccessful in doing. We did state in our numbers that we took an SG&A hit in the quarter..

Right..

And beyond that it didn’t contribute anything positively other than expenses and time for that..

I would say our organic growth rate is not significantly affected by the MVP acquisition, Erin.

And I would point you to our guidance just to we think the Animal Health segment sales and our guidance, sorry, we are calling for 2% to 5% growth in the -- sales growth in the Animal Health segment and I think that’s the -- that’s the -- that’s fundamentally an organic growth rate as it reflects the mix of double digit growth, and nutritional specialties and vaccines with weakness in the MFA category..

Okay. Great. And then can you just comment on current fundamental utilization trends across the Animal Health segment, across poultry, swine and the diary market broadly speaking? Thanks..

Broadly speaking as we are saying, I think is, everyone is seeing the diary market remain weak, pricing has not recovered and we are pretty much, it’s been in fact 18 months already, when we have been in the bottom of that cycle. And I think, the other seem fairly healthy, I don’t think a lot of our customer making a ton of money on the pork side.

But on the poultry side, I think that they seem to be doing well and volumes remain strong. And again, we answer the question here the on east coast of United States, we are talking about our global business and across the market as we have said earlier is weak across all segments and China is in add-on some segments and it’s a quite dynamic world.

But, overall, I’ll tie to the general theme we see growth across the world..

Okay. Great. Thanks so much..

And our next question comes from Brandon Folkes with Guggenheim Securities. Your line is open..

Hi. Thanks for taking my questions.

And just following on from that last point, could you give us a bit more detail on the international regions that are converting and where you see opportunity for growth going forward, I know, there has been a lot coming out of swine in China recently and help us leading to more sophistic market? And then, secondly, just an update on the vaccines front, just in fact now complete? And then, lastly, just any color on the erosion in the MFA business? I think, just kind of has slowed, do you think we through the erosion and not just consumer erosion? And then, lastly, I see you invested behind there were some salesforce expansion, just any color on sort of what segment that is in? Thank you..

Regarding pricing is in my hand. So exactly -- remember correctly, and I am just taking in any order. We continue to invest in salesforce expansion in [inaudible] (15:33). So we have continued to invest in the Far East and talking about that that is the region where we are seeing growth.

Generally, speaking we are seeing in the sub-continent, in Asia we are seeing growth, seeing to hit markets growth in poultry and even growth in dairy industry in those sort of sub-markets. Regarding MFAs, I think, it’s now, we are in November, we past the elections, so any effect of the regulatory changes in MFA, I think, we have seen that effect.

I think what we don’t see is both Jack and I mentioned, we continue to see is the consumer effect, and I think, that will continue for awhile, it will continue until that market is satisfied, it will continue until we see customers having the inability to raise animals without the admission of anti-biotics because as we get into more difficult weather conditions, these animals do get sick.

Sorry, I now, my memory have gone on the last two..

One of them was the Beit Shemesh plant, which is our vaccine production plant, and yeah, it is backup fully in production as than or several months now. So we are -- if we are still recovering some business with certain customers where we had out of stock situations before. But on a production side, we are running fine, no problems there.

And I said this only other one I had down, Brandon, what else was there?.

Yeah. I think that’s it. You covered it all. And just, perhaps, maybe just elaborating on that vaccines and then how much does the vaccine growth in a quarter was the redirection to Europe compared to sort of lower margin region we hear in the past and that’s it for me? Thank you.

So and again, our sales in Europe remain very, very small. We have some regulatory permission -- the regulatory changes we had done at that plant in Israel was to comply with European regulations, but mostly for our sales in Turkey and in Poland.

So, those where our sales are and clearly those markets have launched in the market in start here and so the growth is coming from rest of the world and going from our sales of vaccines in the United States..

Great. Thanks so much..

Thank you..

[Operator Instructions] And we do have a follow-up from Erin Wilson with Credit Suisse. Your line is open..

Hi. Thanks. In the prepared remarks you mentioned, I guess, a better conversion rate or conversation rate increasing for you, can you elaborate on the dynamics there? Thanks..

Well, what we are saying is, as our customers would stop using MFA, they stop using antibacterials in particular Mediclaim for antibacterials. They are looking for other products to help them maintain the health of their animals and so we think of it has sort of a share of -- a share of what they are spending on their animals health spending.

So as we see a dollar of sales go way from those antibacterials, we are looking to convert that business over to either our nutrition specialty product or vaccines or combination of the two, that’s what we are talking about..

Okay.

And then, if I think about, are there other MFAs that they are switching to as well?.

So, there is, Erin, there is whole host of solutions and I think as we have said so often, we -- no one uses antibiotics because that’s the cheapest feed out there, people use antibiotics, it is the most effective product and gives them the best return.

So when the market is shifting away, when the consumer trend is, they want to buy a piece of chicken that was never ate antibiotic.

So they knew how to use different kinds of combinations and it’s still early in those days, people are trying different products, I think, we have a couple of products that are working well and we’ll continue to add to that portfolio over time. But there’s no one specific product..

Okay.

And then just going back to acquisition, it sounds like you are at least trying to be active there, what is the pipeline look like right now?.

I don’t think the pipeline is that fold right now, we are out there as you can tell and by the numbers we are reporting in this past quarter of an unsuccessful attempt. There are not that many sizable acquisitions in the Animal Health space available.

So we will continue to look, obviously, for bigger deals, they seem to be best, but we will continue to look at smaller deals as well in various geographies..

And I….

Yeah. We are -- I think we are looking either in and so for geographical expansion we would be more looking for, probably, a business, but we are also looking for individual product opportunities and that -- those product opportunities fall mostly either into those two fast growing categories nutritional specialties or vaccines.

We are looking for to add additional products to those portfolios..

And for those few like licensing deals, partnership [inaudible] (22:34) right acquisition?.

Yes. And I think, there are -- these are not products that people have created typically for animals. So we are looking across the spectrum, there are successful products that work, mean, as we have always said in the past, it’s -- one has to do a lot of testing on lots of animal to convince our customers that these products work.

So it’s not like feeding couple of chickens in backyard and then going to the marketplace. So it takes time, it takes investments, but we are continuing looking to expand our portfolio..

Okay. Great. Thank you so much..

Thanks Erin..

Our next question comes from Kevin Kedra with Gabelli & Co. Your line is open..

Hi. Thanks for taking the question.

Just wanted to know you can talk a bit about pricing whether you are seeing any opportunities in the pricing environment, especially on products that are being used as kind of a substitution for MFAs and antibiotics and for animals that are meant to be antibiotic free?.

That’s a great question, Kevin.

And many of these products are new to the market, so it’s not like -- it’s not that we have had a history in pricing, it’s really as we bring these products to the market and as we rate them, its finding the right market price in order to introduce these products, because our customers demand we drew it right as we do the safety testing, we continue testing on that animals, so it’s been -- it’s a learning experience for us, so far I think we are getting it right, but these are lots of new products and which we are looking at.

So it’s not as simple as we’ve had these products in our portfolio unless it’s rated and priced 2% in the same year and it’s say -- the right price to get the right return to our customers and the right return to our shareholders..

All right. Thank you..

I am showing no further questions. I would now like to turn the call back to Richard Johnson for any further remarks..

Thank you. All right, everyone. Well, we will just say thank you and have a Happy Thanks Giving, and we’ll be talking to you again in February. So take care until then. Bye..

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