Ladies and gentlemen, thank you for standing by. And welcome to the Phibro Animal Health Corporation’s Q2 2020 Conference Call [Operator Instructions].I would now like to hand the conference over to your speaker today, Richard Johnson, Chief Financial Officer. Please go ahead..

Thank you, operator. Good morning, everyone. And welcome to the Phibro Animal Health earnings call for our second quarter ended December 2019. On the call today are Jack Bendheim, our Chief Executive Officer and myself Richard Johnson, I’m the 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 Web site at www.pahc.com.

We’re also providing a simultaneous webcast of 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 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 Press Release.Before we get into the numbers, we remind everyone that we present our results on a GAAP basis and on an adjusted basis.

We present adjusted results that exclude acquisition related items, unusual, nonoperational or non-recurring items, including stock-based compensation and restructuring costs.

Other income, expense I separately reported in the consolidated statement of operations, including for example foreign currency gains and losses, and the income tax effects related to any pretax adjustment plus unusual or non-recurring income tax items.So first, here is Jack Bendheim with some introductory comments..

Thank you, Dick and thank you everyone for joining us today. I'm quite pleased that our Core Animal Health segment returned to growth this past quarter.

Time of issue is notwithstanding, I think the nutritional specialties product grew into double-digit growth in the quarter, while as expected our MFA and other performance was down 1% versus last year, driven by timing.I expect our Animal Health segment to continue to show growth for the remainder of this fiscal year.

Just two examples, we are seeing very strong demand for our poultry vaccines in many international regions and the imminent launch of our next generation OmniGen product look to take advantage of the improvement in dairy market.As we have guided, our sales turnaround as a company by increasing as we look to position ourselves for the years ahead.

The strategic growth initiatives we are undertaking are producing results. Just two examples, I just returned from the APP at the Annual Poultry Trade Show in Atlanta, and I can say without an exaggeration that our pHi-Tech vaccinations device is one of the major innovations presented at the show.

We've integrated from around the world signing of the trial. Our initial trials have began a few months ago, have gone exceedingly wells and we have already signed up our first customers.I'm very confident pHi-Tech will meaningfully enhance our revenue and EBITDA beginning in our next fiscal year.

Perhaps even more important, it is clear that producers that are introduced to pHi-Tech have begun to understand that Phibro was one of the market leaders in animal health technology.

This is critical as we rollout our poultry vaccine to additional countries in South America and Asia.I am similarly encouraged by the progress we are making with Rejensa, our first foray into the U.S. pet market. We have begun rolling out Rejensa nation-wide and today we are in more than 500 clinics.

We are working closely with our distribution partner, which are allowing us to limit our fixed expenses as we enter this extremely competitive market.

We are receiving tremendous feedback both directly and indirectly through social media and I'm excited to see our continued enhancement here.Finally, we continue to make headway on our vaccine against African swine fever.

To-date, the coronavirus outbreak has not affected our efforts but this could change if the virus remains unchecked for the months ahead. We expect the trial on our initial candidate agent page later this spring assuming no delay due to the coronavirus.

I will likely not have significant update to provide next quarter on this project, but suddenly expect to have some results to share on this initial candidate later this year. With that, I look forward to your questions at conclusion of the presentation. And I will now hand it back to Dick..

Thanks, Jack [Technical Difficulty] quarter, I'm looking at Page 5 of the presentation. Consolidated sales were $214 million for the quarter that was a 2% decline versus the same quarter last year.

Increased sales in the animal health segment were more than offset by lower average selling prices and minerals nutrition and a slightly decreased volume and performance products. The increase in animal health sales was driven by our nutritional specialties and vaccine products, partially offset by lower sales of MFAs and others.

We'll get into further details regarding segment results later in the presentation.On a reported basis, net income of $11.9 million declined $2.9 million due to increased operating expenses, including increased costs for strategic investments, as well as increased interest expense from higher level of debt outstanding, partially offset by improved gross profit, driven by product mix.

On an earnings per share basis, diluted EPS was $0.29 per share for the current quarter and that was $0.07 cents per share below the same quarter last year.So now let's look at adjusted results on the following page. Net sales, overall, as I said, declined about $4 million.

I'll discuss the change in net sales in more detail at the individual segment level. Overall, adjusted gross profit increased almost a million dollars or 1% compared to the prior year. Animal health volume growth and nutritional specialties and vaccines was partially offset by reduced volumes in MFAs and others.

Mineral nutrition gross profit decreased as average selling prices and unfavorable product mix more than offset lower raw material costs.

And in performance products, gross profit decreased due to reduced volumes, partially offset by favorable product mix.Operating expenses overall or as we refer to them as selling, general and administrative, SG&A, increased $4.4 million or 10%, driven by spending on strategic investments in key development projects to position ourselves for future growth and in addition, the effects of the recent acquisition of the Osprey business.

Our adjusted net interest expense increased about $300,000 on higher debt level quarter-over-quarter and from an adjusted income tax perspective, our effective tax rate for the current quarter was 28% as compared to 29% last year.Looking more closely at the animal health business, net sales of almost $144 million increased about $4 million or 3% compared to the prior year.

MFAs and other sales declined $1 million or 1%. Increased U. S. demand was more than offset by lower volumes in China due to the effects of African swine fever.

In the quarter, our customers in China did make some purchases at the end of the current quarter in advance of regulatory changes that became effective January 01, 2020.In the nutritional specialties area, net sales were $33 million in the quarter, an increase of $3.6 million or 12%.

The recent Osprey acquisition accounted for approximately two thirds of the sales growth in that category. We also experienced organic volume growth in our U. S. dairy and poultry businesses, which was partially offset by timing of the sales in certain international markets.

The increase in the domestic poultry segment was driven by the introduction of a new product Provia Prime, a direct fed microbial product that helps optimize the gut microbiome in poultry for improved health, immunity and productivity.Vaccine net sales of $18.7 million increased $1.6 million or 10% from last year, driven by strong international demand and increased market penetration.

For the segment, adjusted EBITDA was $33.8 million and that was a decrease of about $2 million or 6%, primarily due to increased SG&A costs, partially offset by the sales growth and increased gross profit.

The SG&A increase was due to the investment in strategic growth initiatives and also the effect of the Osprey acquisition.And now looking at our other segments, mineral nutrition net sales were $55.7 million in the quarter and that was a decline on the top line of $6.6 million or 11%.

The decline was fundamentally due to lower average selling prices as related to correlated with the movement of underlying raw material costs. We also saw slightly lower volumes this year compared with last year.From a gross profit perspective, the decline in -- sorry.

So overall at the bottom line, mineral nutrition reported $3.7 million of adjusted EBITDA that was $400,000 decline compared to the same quarter last year. Performance products net sales of $14.6 million declined $1.7 million or 10%.

We saw some volume declines in copper based products with a partial offset from continued growth in ingredients for personal care products. Segment EBITDA declined -- decreased slightly by about $100,000. Corporate expenses were $10.5 million, that was a increase of $600,000 over the last year.

Again, primarily due to increased cost of strategic initiatives and in addition, increased investment in public company costs.Looking at our capitalization, our gross leverage ratio of debt to adjusted EBITDA was 3.6 times at the end of December with $374 million of total debt on a trailing 12 months basis, $105 million of adjusted EBITDA.

We had $75 million of cash and short term investments on hand on the balance sheet at quarter end. So on a net leverage basis, that gave us a net leverage of just under 3 times. We had a strong cash flow month in the quarter.

We generated $23 million source of cash in the quarter before financing and excluding changes in short term investments.And we updated our guidance for our full fiscal year, really just not major changes to our guidance. At the key adjusted EBITDA line, we kept that level unchanged at $103 million to $107 million of EBITDA for the full year.

On the net sales level, we brought down overall consolidated net sales expectations, reflecting lower pricing in the mineral nutrition business primarily which was correlated related to the underlying raw material costs.

We also tightened the range on our Animal Health segment.On an earnings per share basis, adjusted earnings per share we now expect $1.15 to $1.22 for the full year, a decline from the prior year, but an improvement from our previous expectations.

We have -- our expectations now is for less interest expense than we had originally projected and guided to, so the improvement in earnings per share is really all related to improved interest expense.And with that, that's the end of my prepared remarks. So operator, if you would open it up for questions, please..

Thank you [Operator Instructions]. Your first question comes from the line of David Risinger from Morgan Stanley. Your line is open..

I have a couple of questions. First, maybe it'd be helpful, Jack, if you could just help us to better understand the competitive marketplace that OmniGen competes in? Who the key competitors are? How much of an inflection for OmniGen this is going to be that you're launching at next generation. So that would be very helpful.

And then, Dick, if you could comment please on the MFA growth excluding China, so we have a better sense for the growth ex-China in the quarter and also, if you could comment on the outlook for MFA growth prospects ex-China going forward. Thanks very much..

So I think as we've talked in the past, OmniGen was an extremely successful product where most of our customers were smaller dairies, dairies of say 500 cows or less, which was predominant dairies in the United States 10 years ago, but that has shifted very, very dramatically in these last 10 years.

So the total amount of dairy count in United States is about the same as it’s been 10 years ago, about 9.2 million cows. But it shifted from smaller diaries to larger diaries. So we needed to do something with OmniGen, because it is a very successful product on these smaller dairies.

It was an successful product where the dairy man got out.And so basically physically saw the health of the animal, and was able to see the results of OmniGen, which had a lot to do with immune strength and immune health.

So we reformulated the product to add some other components to it, and really re-manufactured amount of blending and content a bit more now on milk production, which becomes more important when you have 5,000 head -- 10,000 head and some of these on United States that goes live, there’s 20,000.

So for us it is taking the product relatively to new markets.

Some of the same producers we saw we knew when they ran 500 to dairies, what's going on now was with the bigger dairies their needs are slightly different.So they know the product works and help, and now we're introducing it as well with this new added function, which is going to increase milk production.

So it's so simple wide open field, there is always competition. There's no end of competition in United States every level, so we have a good history. We have a great sales team and we're very confident we are going to grow this business and grow the segment..

David to your second question sort of other numbers around MSAs and in the second quarter just to reiterate, we saw overall MFAs down about a million dollars or 1% if we ex the China MFA effect, we did see growth. We saw growth in the probably 3% range year over year.

On a full year basis, we are expecting MFAs ex China to be somewhere around, I'll call it breakeven to a slightly positive number. We will continue to overlap the effect of not having much if any China VM sales for really all of the year..

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

A follow up on China. How big was that docking dynamic in terms of the purchasing ahead of the regulatory changes? And can you just describe what that's all related to in terms of that purchasing dynamic and to be anticipate in a pullback kind of in the next period here in terms of these stocks? I guess any color you can give there would be helpful.

Thanks..

As we sort of had forecasted, we didn’t expect to do any business in China this fiscal year. Our distributors, our customers really in China add inventory, which we expected them to sell them with the old registration.

The old registration was a growth mode registration and we have been for last many years, two, three years, as we've done in most markets in world map to change the registration from growth mode and to a therapeutic claim and we've been successful.Part of the problem with African swine fever in China was obviously, well, the pigs aren’t there so the market was declining and just a little long to answer your question but give me – bear with me, so the pigs aren't there.

But it's also the government was not allowing us or anybody to move pigs around for testing. So our ability to test and on farms and to show either we need to go for the therapeutic claim would slow down.

So that's really where we want going forward on a therapeutic claim.But in the meanwhile, the price that pays China rose so high that people felt even though some pigs were going to die rather than swine fever, but it still pays to grow pigs, because even with you only had a 30%, 40% yield, you can make more than enough money to cover the loss.

So our customers there saw a big increase and with their calculation they had made to have enough inventory to get through the first six months of 2020, they felt they were wrong and they know they had to get material on before the end of the year by Chinese regulations. So that was a spur. It was not a huge bump.

It was a bump, a couple of million dollars and that's done..

And then can you give us an update on just the U.S. market across the species groups here at U.S. poultry, swine and dairy markets? I guess in particular, I'd be curious around if you're seeing really stabilization across dairy markets as well. But yes, if you could give us some color on where we stand today in the industry that’d be great. Thanks..

I think generally, we are seeing stabilization at least what we hear feedback from our customers. It depends where you are in the market. I think if you're still out there with a farm of 100, 150 cows, you're under pressure, you're in trouble and you will most likely be out of the business.

But I think for the larger dairies, they are making money at these levels. And again, part of it is because China is looking for all sorts of protein and so somehow that affects directly, indirectly all the big producers around the world of any protein..

Your next question comes from the line of Balaji Prasad from Barclays. Your line is open..

So I had, coming back to the subject on ASF, I had a couple of questions on there. Firstly on the, as you may have seen from the recent years report of global pork exports have increased by 10%. And of course you mentioned that you have some restoration changes underway to be able to sell more.

I wanted to understand, which of the export markets would you able to target and what are the timelines that you can see net recovery here? And secondly, specifically also from a re-herding prospect, how would that play into your Animal Health growth? The second comment of my question was on the ASF vaccines.

I'd love to hear your thoughts on the various development programs currently ongoing, including the progress at USDA, and specifically from Phibro's perspective.

Can you help me understand how your epitope based development compares to the vaccine targeting the IEU 177 of gene that the USDA is working on? Does this make any difference from a commercial or a timeline perspective? Thank you..

So let's just talk first about you know overall dynamics of protein and sort of quality proteins versus the effect of African swine fever in China. So I mean as we sit here right now, there is no vaccine that will control African swine fever and the effect of it as we've seen it sort of played out slowly.

It is in excess of 50%, maybe even up to 70% of pigs have gone missing. That doesn't mean pigs necessarily have got the virus and die, people see they put pigs down, they get the virus, they die. So I'm not going to put new pigs on the market.

It doesn't pay overall.So that has affected a huge shortage of protein, new protein in China and they're out there all over the world looking to buy all sorts of protein from every market.

So yes, we are seeing our sales into customers raising again, all proteins specifically, yes pig protein but chicken protein, fish, protein, cattle protein around the world, all those customers are doing better. Now in the U.

S., it's a little bit of ex, I don't want to get into it because of the continuation on the trade and the tariffs it’s not clear, but I think that will get clear.

But the business around the world, our business is getting better.Can you make up for the loss of, I don't know, 500 million pigs in a world that only is currently raising 250 million pigs, the answer is no.

It could take the long time if ever, but I think at some point where there will be that come to your second question, where there will be a vaccine developed that will be able to slow or to control some of the ASF where there'll be a meeting point where the Chinese will be able to stop growing pigs again at decent prices, good price, economic prices and the world will grow producing more pig meat and it will all be at meat somewhere happily in the middle.We've taken approach on our vaccine.

We've taken an approach different than what we see and what the USDA we see coming out of Home Island, we're working mostly with the proteins that are found in the virus and we're not working to attenuate a virus. So to that extent often I'll say it again, we don't know yet if our vaccine is going to work.

I mean we're doing a lot of work and there are some positive indications, but you don't want anyone to listen to this and think we're saying that it works.

We have work to do and we will have a better indication as I said earlier in my remarks by late spring, but it's a different approach.So what there is an update start to making vaccines is you basically attenuate a virus you make the virus sort of softer, you can vaccinate the virus, the pigs own immune system starts acting and it will protect the pig against whatever the diseases is in this African swine fewer.

The initial work on the virus was not successful. They were unable to do it. And now with the USDA out of plum Island, it looks like they have a candidate that could be very effective.

So that’s great, I think we're in the business of making sure people have protein and are successful and live long time so that we are 100% behind that.Our approach is a different approach and there is some logic to say since we're not absolutely injecting, vaccinating the virus that our approach might be safer and with safer than it might get to markets faster than the approach which attenuates the virus.

So that's a different approach and again remember, there were 800 million pigs in China, it’s a huge market. Hopefully everyone will be..

Your next question comes from the line of Michael Ryskin with Bank of America. Your line is open..

I want to follow up on a couple of things. I think you people walk through a lot of the market implications, all sort of dig in up guidance comments, first on the revenue guide.

It looks like, you know, I can see that most of the update did come from mineral nutrition and you talked about how that sort of flows through from the underlying commodity prices, but also you did trim the top line for Animal Health the high end of the guide by about 10 million from 557 to 547.

So I'm curious if that had anything to do with nutritional specialties in vaccines and more specifically with Osprey, because I think by my prior notes I had, Osprey is about $20 million contribution for the year. By my math for the quarter, it was only about $2.5 million.

And so first question is, is that where the delta is coming in, is that Osprey is not contributing quite as much as you thought or sort of where's that in the numbers?.

You know, all your numbers make sense, Mike? This is Dick. I think we trimmed the top end of the Animal Health number for a variety of factors. I would say, just in terms of expectations, we continue you know, I think our strongest growth expectations are going to be in the vaccine product area then followed by nutritional specialties.

Yes, we're seeing some customer order patterns in Osprey where those may reverse themselves later in the year. We'll have to see. But nutritional specialties otherwise you know, we've talked a lot about dairy. We've talked about products that are going into poultry and those are all doing well. And MFAs really outside of China are holding their own.

So you know, not a huge modification I think to the sales guidance overall. But you know, that gives you a little more color..

And then follow up sort of similar line on the P&L. The Delta in the SG&A I mean, you talked consistently about 2020, or fiscal year is an investment year both on sales force and R&D, you know the companion animal product, a lot of the investment in R&D for that as well including the ASF vaccine.

You still trim the SG&A guidance pretty meaningfully by 7 to 10 million. Just curious where is that extra spend coming from, is that flexible spend you can take out of mineral nutrition, because the lowered expectations there or sort of sales force is on R&D line. Just trying to get a better sense of where the Delta comes in there..

I think the trimming comes in two places. Some of these strategic investments are, the timing of the spend is driven by a lot of factors that we can't necessarily control exactly the timing. So some of these fanned these strategic initiatives has been is extended out a little longer than we initially expected.

We've also just reduced our expectation for the base spend on operating expenses, it’s maybe specifically it’s really not around minerals. This spend is, the bulk of the business is the animal they'll segment. And so when you're talking about changes in spending, you're really fundamentally talking about changes in the animal health business..

And then sort of one last one along the lines for me, you talk about ASF vaccine, you talk about OmniGen expansion. I would say the third product that, in terms of innovation that's gotten a lot of attention, a lot of focus is the companion animal, sort of direction you're moving into.

Can you give us an update there, how that's trending, sort of continued feedback and how you see that progression in the next couple of years?.

Yes, I will give you two answers. I'll give you a number answer. The numbers in the P&L are still small, we don't break them out and they're not at this point really meaningful to trends and you know, I think where this go is still open to question. We're optimistic to what we're saying. And with that, I'll turn it over to Jack for more of the color..

So there are 25,000 vet clinics in United States. And we have successfully gotten Rejensa, one product into 500 clinics. We are adding more clinics every week. So we're still spending money. We are very optimistic. I mean the product is a great product. I mean the feedback we see sort of unpaid for from customers on social media is really exciting.

So if anyone listening to this call has a dog, which is a little bit old has some trouble, arthritic trouble. I think go to the sight and go buy some product.So we're still spending money and we might be, if this continues on the trend continues that it continues that it’s on, we'll spend more money next year. I think that's generally a choice.

We haven't got -- no one asked that question, but I want to get ahead of it.

So that companion animal product is looking good and I think we'll expand and will be a proper product and will be a significant number in our numbers next year when we get to over 1,000 or 1,500 or 2,000 clinics.The vaccines that Dick spoke earlier about is we're doing really well where our products are well-accepted in multiple markets and we're spending money, we’re spending money to get new facility in Sligo up and running, it's still 18 months away, which will give us the capacity to sell more, because right now we're budding up against the capacity at our Beit Shemesh facility.

I think OmniGen Pro we just launched, we had a big launch meeting last month and looking good. We expect big growth there.

And why people were spending money don't know, the crazy thing about spending money is looking to this thing from an analyst numbers is you won't spend money if the product is not a success or whenever, then EBITDA goes up.But in reality, if it is successful it's a great potential and we'll continue spending money.

So we're around that and all these products where, many of you know me we're not wasting any money here. These are -- none of these products are boondoggles where all, these are all serious products and serious opportunities for the company. So we remain excited about the opportunity of the new product and I would say about the company..

[Operator Instructions] Your next question comes from the line of David Westenberg from Guggenheim Securities. Your line is open..

So most of mine have already been answered, so mine will be pretty short. So first on the Mineral Nutrition business, I know it's very susceptible to input prices. Now, can you remind us if you're maintaining gross margin or if you're maintaining gross profit? I'm just trying to figure out the distinction between the two as prices go up and down.

What the objective is in terms of maintaining?.

David, we have two objectives. One is on the traditional sort of base business, we are looking to make a profit for every unit we handle, and we talk in terms of tons in the mineral business. So you know we're looking to make ex-dollars per ton.

So whether, the selling prices is higher or lower, we want to make a certain amount of money on every tone we handle, and get paid for the value we add, which is blending, sourcing, warehousing, logistics, et cetera.

We are also adding over time and continue to add more differentiated, higher value-added and therefore higher margin products into the minerals business, and we're seeing some early success in that.We've frankly, against our expectations, not so much against last year but against our expectation, we've been seeing the bite of some of the tariffs because some of these raw materials, many of the raw materials come from China and have been subject to 25% tariff.

So depending on the competitive situation in some cases, we've not been able to pass those costs through. So that's been something we've been dealing with lately..

So back onto the pHi-Tech vaccination device, it looks like kind of one of those products that could have maybe a portfolio effect.

So is that be the case? And could you see this contribute to better sales of the overall portfolio and not just vaccines, but kind of one of those things where it could have a halo effect on other sorts of businesses? And then just generally and speaking on that pHi-Tech device.

Are there any maybe comps for us to look at it in terms of peak sales and sales ramp? I mean is it Embrex from Zoetis? I mean, how can we look at that, and that's all my questions. Thank you..

I think we're the first in the market with this type of machine, and it's not so much the fact that, you know, we replace finger power on a vaccine device to battery powered machine that just pull and your finger is protecting so on and so forth. The main thing is the amount of information the grower, the producer will get from what's going on.

In other words, not just in terms of human resources, who is doing the right job, but at what temperature are the vaccines be put in, what percentage of the birds are getting back to what not.

That makes it very powerful that's why this was a very, very exciting addition at the poultry show last week.So we don't have the full range of vaccines that grow as used to go through this thing. So right now it's probably neutral. I mean it started many, many years ago they try to control the vaccines.

They went through it, they made lease the equipment but you had to use the vaccine that is no longer the case. They have competition. So we’re not even starting there, I don't think that's important.

But at the end you know, we are building solid relationships with poultry producers around the world and you build those kinds of relationships then eventually you know enhances our relationships and then they will look at our vaccines like they will look in anyone else's vaccine..

There are no further questions at this time. Mr. Johnson, I turn to call back over to you..

We appreciate everyone listening and thank you for your questions. We'll talk again next quarter. Thank you and bye now..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..