Phibro Animal Health Corp (PAHC) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Phibro Second Quarter Financial Results. (Operator Instructions) As a reminder, this conference call may be 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 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 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 Investors section of our website 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 for 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 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.

So with that, here is Jack Bendheim with some introductory comments. Jack?

Thank you, Dick, and thank you, everyone for joining us on 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 were intended on reducing antibiotics usage, particularly in poultry, a major sector for us. We made the strategic decision at that time not to retrench, but rather to increase our investments in people, product and infrastructure, recognizing that unchanged bacterial and disease pressures were going to continue to drive the need for innovative solutions.

We were convinced our customers more than ever would need the people, technology and processes that 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. For as we enter 2018, we have never been better positioned with the solutions and expertise needed by our customers around the world.

We anticipate the second half of our fiscal year, we'll see each of our Animal Health product categories grow at/or above market rates. The MFAs and other 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 offerings as we focus on selling more products to more markets around the world. Our balance sheet continues to strengthen, and we remain active in 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 bear fruit.

As you can tell, I'm quite excited about the opportunities ahead of us, and I'm looking forward to answering your questions following Dick's 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 a GAAP basis and an adjusted basis. To explain a little bit more, our adjusted results 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 nonoperational or nonrecurring items. And on income taxes, we exclude unusual or onetime items. For example, this quarter we had all of the items around the effects of the tax reform bill. We also adjust income tax expense for the effects related to any pretax income adjustments we make.

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.

Reported net income, that's 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 onetime or unusual charges from tax reform and some other items that were recorded in the quarter.

Our reported income before income taxes improved over last year for several factors, including the growth in gross profit, which was driven by sales growth. Gross profit increased despite a $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. The comparison to last year benefited because last year included a charge for pension settlement costs.

In addition, benefiting our P&L both on a GAAP reported and an adjusted P&L, we reported a 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 last year. We'll get to more color on EBITDA as we look at the individual segment performance. And adjusted net income increased $2.3 million or 15% over 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 last year. The growth in adjusted diluted EPS was 13%, just slightly less than the same -- than the percentage growth in 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'll take that 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 a -- an increase of the same amount, $3.8 million, in the Animal Health segment. To position ourselves for future growth, we increased spending on product development in order to support organization capabilities. A 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 benefited from adjusting the year-to-date rate to the new lower level. Because we are a fiscal year taxpayer, our statutory rate for our fiscal year ending June 2018, is the weighted average of the old rate and the new rate. So our rate for this fiscal year is about 28%. We'll get the full benefit of the new 21% rate when we start our new fiscal year, beginning July 1, 2018.

Now if we look a little more closely at the Animal Health business on Page 7, we had sales of almost $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.

Vaccine sales of $18.2 million grew $1.3 million or 7% over last year, on volume growth in international markets. Our domestic vaccines growth was moderate due to reduced disease pressure in the quarter.

The largest product category within the Animal Health segment is MFAs 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 declined as we have seen in recent quarters. It declined $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 in a number of geographic regions. A recent acquisition also contributed to that sales growth. Gross profit for the 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 an 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% increase, 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 were 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 of debt to adjusted EBITDA was 2.6x 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 in investing activities, excluding the cash used to purchase short-term investments and to complete a business acquisition.

Our operating assets and liabilities, the changes in 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 an Argentine Animal Health business, and we 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 is included in the press release. I've summarized some of the lines here. We now expect the Animal Health sales to be between $520 million and $535 million. That will give us annual growth of 4.27%, and we -- that's an increase in the guidance of $20 million compared with the previous guidance.

Our consolidated sales now expected to be between $800 million and $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 had said previously.

And finally, adjusted diluted earnings per share now expected to be between $1.66 and $1.71 per share. That's annual growth of 10% to 13%. And the -- this revised EPS guidance does include the benefit of tax reform.

So that's the conclusion of our prepared remarks. Operator, if you'd please open the line for questions. Thank you.

(Operator Instructions) And our first question comes from David Risinger from Morgan Stanley.

Zhu Shen 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?

It's Jack Bendheim.

So we continue to see, as we have seen and we've discussed many, many times the last 2 years, a continued increase in the level of business, both the U.S. and around the world. We just came back from the poultry show last week, and we're quite encouraged by most of our customers talking about increasing their flocks and increasing the level of production. And what will not be taken up in the U.S. will 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 products, I think we're seeing some slight increases. There's lots of gyrations in the marketplace. But generally, I think we think prices are on 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 will come from volume and not from prices.

Our next question comes from Erin Wright from Crédit Suisse.

This is Charlie on for Erin. How would you plan to utilize your savings from tax reform? What sort of areas are you targeting?

Charlie, this is Dick. I think we're going to keep on doing what we've been doing. We'll look at business developments. We'll look at debt paydowns. 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.

I'm interested to hear how you view 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, the -- when we spoke that our U.S. vaccine business was down, it really came from a healthier swine population. There was less disease pressure this year.

I mean, from what we see, our swine business and our swine customers remain quite strong. And again, as I've said earlier in our poultry business, exports from the U.S. to many markets is -- remains quite strong. I mean, U.S. is a low-cost producer. Unless there is some regulatory changes in terms of sort of -- impacts more markets, we think that business will continue strong. So we -- from what we see from our position, we feel the swine industry is quite strong.

And then I'm sure you're seeing the same thing in -- with other -- as you look across the industry, the production levels of the U.S. swine producers are increasing production levels substantially. There's a number of new processing plants, either just put into operation or coming online in the next 12 to 18 months. And there's going to be -- there's 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's going to be more animals out there. There's no question about that.

And on MFAs, we keep talking about the MFA business is 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?

Yes, basically what we're saying is 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 over time, where you're a little bit further away from the MFA and the medically important antimicrobials, what's the opportunity for that segment to grow in the U.S. -- to not just be flat but actually start seeing some grow in the single-digit growth over the next couple of years, especially now that you have the low-base and the MIA as part of that?

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

Domestic MFAs.

Domestic side across the entire MFA and other business segment.

So I think what we're seeing is sort of flattish business. I think there has been -- I mean, as you can see in the -- as you sort of go shopping for food in the supermarket, I think there's a trend -- a strong consumer trend to raising animals by antibiotics is sort of, as we said earlier, that hasn't affected the amount of bacteria and the challenges these animals face. So while we see in the U.S. a flattish on the antibiotic side, MFA and other, we are seeing and we continue to see a strong growth in both our vaccines and our nutritional specialties. And we think our nutritional specialties sort of -- we've been in it. We said earlier, we were, said it like in the last year a few times, we saw how fast the market shifted. The market has shifted, and the take-up of new product takes a while.

These customers need to be shown these products work. We've had millions of animals under test and have been tested and gathering 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 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 keep seeing increases, other countries as they get from noncommercial production to commercial production. We have different registrations around the world for different products, and we are seeing a very, very nice uptake, specifically and especially in our cattle business. So we expect that trend to continue. So we expect the MFAs to grow around the world. Expect it's going to be flattish in the U.S. but strong growth in nutritional specialties here.

And changing topics real quick. You talked a couple of times about opportunities for business development, and we've got you down, gross debt -- gross leverage at 2.6, net debt at closer to low 2s, essentially 2.1. Can you talk a little bit about the deals you're pursuing? What are the opportunities there, both by product class, geography? And how big are you looking and how high are you willing to get that leverage up for the right asset?

The quick answer is no. But I think for the right asset, we're willing to pay up as long as we would see sort of a very rapid paydown of the debt we would accumulate. So we're looking at different assets, both in the U.S. and the rest of the world. I would say, we're not targeting any single sector. And as you said, we acquired that company in Argentina, and we continue to look both in South and Central America as well as in Asia for assets.

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.