Richard Johnson - CFO Jack Bendheim - CEO.

Onusa Chantanapongwanij - Morgan Stanley Erin Wright - Credit Suisse Tyler Etten - Piper Jaffray Michael Ryskin - Bank of America Merrill Lynch.

Good day, ladies and gentlemen, and welcome to the Phibro Second Quarter Financial Results. 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 maybe recorded.

I would now like to introduce your host for today’s conference Mr. Richard Johnson, Chief Financial Officer. Please go ahead..

Thank you, operator. Good morning, everyone. Welcome to the Phibro Animal Health’s earnings call for our second quarter ended December 2017. 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 our updated guidance for our fiscal year. Then, we’ll open the line up for your questions. Before we begin, let me remind you that the earnings press release and financial tables can be found in the Investor section of our website at www.pahc.com.

We’re also providing a simultaneous webcast for this morning’s call, which can be accessed on the website as well. Today’s presentation slides and 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 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 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 press release. So with that, here is Jack Bendheim with some introductory comments.

Jack?.

Thank you, Dick, and thank you everyone for joining us in today’s call. More than a year ago, we knew our domestic business was going to face near-term challenges due to the regulatory and consumer driven changes that [indiscernible] on reduced antibiotic uses, particularly in poultry major sector for us.

We made the strategic decision at that time not to retain but rather to increase our investments in people, products and infrastructure, recognizing that unchanged bacteria on disease pressures will go in continued to drive in the innovative solutions.

We were commenced our customers more than ever would need people technology and processes embody Phibro. We were convinced that in the medium-to long-term, we would be rewarded for making these investments.

I am thrilled we made the decisions we did towards we entered 2018 we have never been better positioned with the solutions and expertise needed by our customers around the world. We anticipate the second half on fiscal year will see each of our Animal Health product categories grow at or above market rate.

The MFAs another category, our largest segment benefits from a stabilized U.S. environment and continuous strong growth internationally especially from the recovery -- continued recovery in Brazil and opportunities throughout South America and Asia.

We continue to see double-digit growth from our nutritional specialties and vaccines offering as we focus on selling more products to more markets around the world. Our balance sheet continues to strengthen and we remain active and looking at business development opportunities.

At the same time, we remain committed to the path of strengthening our internal capabilities a strategy that we believe is only beginning to barefoot.

As you can tell, I am quite excited about the opportunities ahead of us and I’m looking forward to answer your questions following the further detailing of our performance for the quarter and our revised guidance. Thank you.

Dick?.

Thanks, Jack. Before we get into the numbers just as I said a minute ago, I want to remind everyone that we present results on both the GAAP basis and on adjusted basis.

To explain a little bit more our adjusted results to exclude items such as acquisition related items that would include intangible amortization, inventory step-up or cost of goods sold costs, accrued compensation costs related to acquisitions, other costs, other related costs like transactions or accrued interest.

We also exclude any unusual non-operational or non-recurring items. And on income taxes, we exclude unusual or one-time items. For example, this quarter we had all of the items around the affects of the tax reform build. We also adjust income tax expense for the affects related to any pre-tax income adjustments we made.

So with that, let’s look at Page 5 and start by reviewing the highlights of our December quarter. Our consolidated sales were almost $206 million for the quarter that was a 7% increase against the same quarter last year.

The increase was driven by volume growth in the Animal Health segment and favorable product mix and higher average selling prices that resulted from commodity pricing in the Mineral Nutrition segment.

Our reported net income that on a GAAP basis of 7 million and diluted EPS of $0.17 for the current quarter declined from the prior year, essentially due to the income tax related one-time or unusual charges from tax reform and some other items that were recorded in the quarter.

Our reported income before income taxes improved over the last year for several factors including the growth in gross profit which was driven by sales growth. Gross profit increase despite $1.4 million charge for the cost of the inventory step-up cost or additional cost of goods in the quarter.

We did increase our selling, general and administrative expenses as we continue to invest in product and organizational development. In comparison to last year's benefitted because last year included a charge for pension settlement cost.

In addition benefitting our P&L, both on a GAAP reported and adjusted P&L, we reported our reduced net interest expense due to lower borrowing rates from our recent refinancing and new credit facilities. Adjusted EBITDA was $32.5 million that was up $1.3 million or 4% over the last year.

We'll get to a more color on EBITDA as we look at the individual segment performance, and adjusted net income increased $2.3 million or 15% over the last year. The adjusted net income increase was driven by improvement in adjusted EBITDA by reduced net interest expense and by the benefits of tax reform.

So, adjusted diluted earnings per share was $0.44 that was a $0.05 per share or 13% increase over the last year. The growth in adjusted diluted EPS was 13% just likely less than a same -- in the percentage growth and adjusted net income as diluted shares outstanding increased slightly compared to last year.

On Page 6, we present selected line items from the P&L. Net sales increased 7%, we will take number apart as we look at the segments on the following slides.

Adjusted gross profit increased in line with the sales growth or 7% also, adjusted selling, general and administrative increased 3.8 million in total, due to an increase of the same amounts $3.8 million in the Animal Health segment.

To position ourselves for future growth, we increased spending on product development and audit organization capabilities. Our recent acquisition also contributed to the SG&A increase.

Our adjusted net interest expense was favorable on lower borrowing rates and the adjusted effective income tax rate was favorable to last year due to the reduced statutory federal income tax rate from tax reform. In addition, the rate in the quarter benefitted from adjusting the year-to-date rate to the new lower level.

Because we are a fiscal year tax payer, our statutory rate for our fiscal year ending June 2018 is the weighted average of the older rate and the new rate. So our rate for this fiscal year is above 28%. We will get the full benefit of the new 21% rate when we start our new fiscal year beginning July 1, 2018.

Now, if you look a little more closely at the Animal Health business on Page 7, we had sales of almost a $133 million in the quarter and that was growth of $9.2 million or 7% over last year. The growth was driven by volume increases across all product groups within the segment.

Nutritional Specialty product sales of 32.6 million grew 3.4 million or 12% over last year. On volume growth of products for the poultry and dairy industries in the United States and by penetration into various international markets, vaccines sales of $18.2 million grew $1.3 million, or 7% over last year.

On volume growth in international markets, our domestic vaccine growth was moderate due to reduced disease pressure in the quarter. The largest product category within the Animal Health segment is and other. Sales there were $82 million in the quarter, a $4.5 million or 6% increase from last year. Our U.S.

sales of MFAs and others decline as we have seen in recent quarters, a decline $4.2 million, $2.1 million of that decline was due to lower sales of medically important antimicrobials. We also saw some decline due to unfavorable timing of certain customer orders.

We do believe domestic sales of medically important antimicrobials have stabilized at current levels. Our international sales of MFAs and others increased $8.7 million in the quarter due to growth across most regions, notably due to additional penetration into the cattle sector and a number of geographic regions.

Our recent acquisition also contributed to that sales growth. Gross profit for this segment increased $3.9 million on the volume growth, on favorable product mix, on higher average selling prices, on a few selected products and on improved operating efficiencies in our manufacturing processes.

We increased our segment SG&A spending in Animal Health by $3.8 million. As I said earlier investing for in increased product and organizational development, costs and a recent acquisition also contributed to the increase.

And as a result, adjusted EBITDA was $35 million for the quarter that was a $400,000 or 1% increased and it was due to all of the factors I just talked about above. Looking at our other segments, Mineral Nutrition had a good quarter net sales of almost $60 million, increased $2.9 million or 5% from last year.

Due to favorable product mix and higher commodity pricing, the adjusted EBITDA for that segment was $5.6 million in the quarter. That was an increase of $900,000 over last year on the favorable product mix. Performance products net sales of 13.4 million or ahead of last year, but adjusted EBITDA was even with last year on higher product costs.

And our corporate expenses of 8.4 million were level with last year. Looking briefly at capitalization and capital allocation, our gross leverage ratio continues to improve. The gross ratio to debt to adjusted EBITDA was 2.6 times at December and we had 67 million of cash and short-term investments on the balance sheet at quarter end.

For the quarter, we reported solid positive cash flow. We reported 28 million of cash provided from operating and investing activities excluding the cash used to purchase short-term investments and to complete the business acquisition.

Our operating assets and liabilities the changes on those assets and liabilities provided 8.4 million of cash in the quarter primarily from the timing of sales and collections in our international business. We did purchase 27 million of short-term investments during the quarter utilizing cash that was previously included in cash and cash equivalents.

During the quarter, we paid the remaining 3.4 million purchase price related to the acquisition of the Argentine Animal Health business and we've paid the routine quarterly dividend in the quarter and have declared the same amount again to be paid in March.

Looking at our updated guidance, we have updated our annual guidance based on our expectations for the remainder of our fiscal year. A full table of our updated guidance has included in the press release. I've summarized some of the alliance here.

We now expect Animal Health sales to be between $520 million and $535 million that will give us annual growth of 4.27% and we beat as an increase in the guidance of $20 million compared with the previous guidance. Our consolidated sales now expected to be between $800 million to $825 million that would be annual growth of between 5% and 8%.

Again an improvement of $35 million compared to our previous guidance. And we're now calling for adjusted EBITDA in the range of 127 million to 130 million. Annual growth of 6% to 8% and this is an increase in the guidance of $4 million compared with what we have said previously.

And finally, adjusted diluted earnings per share now expected to be between $1.66 to $1.71 per share that's annual growth of 10% to 13%, and this provides EPS guidance does include the benefit of tax reform. So that’s the conclusion of our prepared remarks. Operator, if you can please open the line for questions. Thank you..

[Operator Instructions] And our first question comes from David Risinger from Morgan Stanley..

Onusa here for David Risinger. I have a couple of questions.

Firstly, could you please provide some high level color on Animal Health revenue growth prospects beyond fiscal year 2018? And secondly, what are the current pricing trends in Animal Health and how do they compare with pricing trends a year ago?.

Hi, it's Jack Bendheim. So we continue to see as we have seen and we've discussed many, many times in last three years, continued increase in level of business both in U.S. and around the world.

We just came back from the poultry last week and we’re quite encouraged by most of our customers talking about increasing their flocks and increasing their level of deduction. And what we’ll not be taken up U.S., we’ll end up in the export markets which are quite strong.

So we’re seeing strong growth both poultry and in other proteins, again both in the U.S. and around the world. Pricing is for the Animal Health product, I think we’re seeing some slight increases.

There is a lot of gyrations in the marketplace, but generally, I think, we think prices around the increase, again both domestically and in the international market. It's hard to put a percentage on it. But most of the growth, we are seeing and we are projecting, we think can come from volume and not in pricing..

Our next question comes from Erin Wright from Credit Suisse. Your line is open..

This is Charlie on for Erin.

How would you plan to utilize your savings from tax reform? What sort of areas are your targeting?.

This is Dick. I think we’re going to keep on doing what we’ve been doing. We’ll look at business development. We’ll look at debt pay down. We’ll look at investing internally for developing new sources of growth. So basically continuing on the same path, we’ve been on with a little more firepower to finance that..

Our next question comes from Tyler Etten from Piper Jaffray. Your line is open..

I missed, I asked to here, how you build the swine industry and any recent pressure there? Do you see the slight downturn in swine impacting the business?.

So I mean, as we said earlier, when we spoke that our U.S. vaccine business was down, it really came from a healthiest swine population. There was less disease pressure this year. I mean, what we see swine business and our swine customers remain quite strong. And again as I said early in the poultry business, exports from the U.S.

to many market remains quite strong. I mean the U.S. is a low cost producer, and unless there is some regulatory changes in terms of sort of impact for market, we think that business will continue strong. So we -- what we see from opposition, we feel is modestly quite strong..

And I’m sure you’re seeing the same thing and with other. As you look across the industry, the production levels of the U.S. swine producers are increasing production levels substantially.

There is a number of new process plants either just put in the operation or coming online in the next 12 to 18 months, and this is going to be -- there is going to be a lot more throughput.

So basically that means more potential business for us because the grower has to keep that animal healthy and there is going to be more animals out there, there is no question about that..

On MFAs, we keep talking about the MFA business has stabilized on the U.S. side, but we're still seeing impacts. Do you have any idea on where we will start to see more flattish downturns in the U.S.

MFA business?.

Basically what we're seeing was this December quarter was the last significant major negative comparable, and we should -- as we go forward now with the March quarter and after, we should see neutral plus or minus comps..

[Operator Instructions] And our next question comes from Michael Ryskin from Bank of America Merrill Lynch..

Following up on the last question, a little bit talking about the stabilization of the medically important antimicrobials in the U.S., given that your mix in the MFA and other segment has shifted overtime where a little bit further way from the MFAs in the medically important antimicrobials.

What's the opportunities for that segment have grown in the U.S.

or not just be flat but to actually start seeing some growth in the mid-single digit growth over the next couple of years, and especially now that you have the low base in the MIA part of that?.

So to understand the question, are you talking about growth on the MFAs side or growth domestic side?.

Domestic side across the entire MFA and other business segment?.

So, I think what we are seeing is sort of flattish business. I think there has been mainly as you can see in as you go shopping for food in supermarket. I think there is a trend of consumer trend to raising animals to antibiotic is sort of as we said earlier that has an affected the amount of bacteria and the challenges these animal face.

So while we see in the U.S. flattish and on antibiotic side, MFA and other, we are seeing and as we continue to see a strong growth in both our vaccine and on nutritional specialties, and we think our nutritional specialties sort of we've been in it.

We've said earlier we would typically like last year few times, we are shocked how fast the market shifting. The market has shifted and the take up of new products takes awhile. The customers need to be shown these products where and we've had millions of animals onto test and then tested and grabbing that data.

So, we think when we see an increase in the nutritional specialties, which is obviously becoming -- will become the bigger and bigger part of the animal health space. But as far as U.S. goes, we're seeing a flattish on the MFA side. Around the rest of the world as we’ve seen this quarter, we'll keep seeing increases.

Other countries as they get from non-commercial production to commercial production, we had different registrations around the world for different products, and we are seeing a very, very nice update considerably and especially in our cattle business, so we expect that trend to continue.

So, we expect the MFAs to grow around the world, we expect it'd sort of be flattish in the U.S., but strong growth in Nutritional Specialty this year..

And changing topics, real quick. You’ve talked a couple of times about opportunities for business development and we got you down gross levers at 2.6, net debt at closer to low 2 essentially 2.1.

Can you talk a little bit about the deals you’re pursing? What are the opportunities there both by product class, geography? And how big are you looking and how higher are you willing to get that leverage up for the right asset?.

The quick answer is no. But I think for the right answer is, we’re willing to pay up as long as we would see sort of a very rapid pay down of the debt we would accumulate. So we’re looking at different assets both in the U.S. and the rest of the world.

And I would say, we’re not targeting any single sector and as we said, we acquired that company in Argentina. We’ll continue to look both in South and Central Americas as well as an Asia for asset..

Thank you. And I am showing no further questions from our phone lines. I would now like to turn the conference back over to Richard Johnson for any closing remarks..

All right, everyone. Thank you for taking the time to listen to the call this morning and we’ll talk again in another 90 days. So, take care. Bye now..

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