Q1 2020 Earnings Call

The conference call.

At this time, all participants are in listen only mode.

The speakers presentation, there will be a question and answer session to ask a question during the session you'll need to press star one on your telephone if you require any first for assistance. Please press star Zero I would now like to hand, the conference over to your Speaker today Richard Johnson. Please go ahead Sir.

Well. Thank you operator, Oh, good morning, everyone and welcome to the fiber animal Health earnings call <unk> first quarter ended September 2019.

On the call today, or Jack Bendheim, our Chief Executive Officer, and myself, Richard Johnson, Chief Financial Officer will provide an overview of our quarterly results and then we'll open the lines for your questions.

So before we begin let me remind you as usual that the earnings press release and financial tables can be found on the Investor section of our web site at P.H.C. Dot Com. We're also providing a simultaneous webcast of this morning's call, which can be accessed on the web site as well today's presentation slides and a replay and transcript for the call.

I'll 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 are 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 are U.S. gap.

I refer you to the non-GAAP financial information section in our earnings press release for a discussion of these measures reconciliations of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures are included in the financial tables that accompany the earnings press release.

And before we get into the numbers, let me remind everyone that we presented results on a GAAP basis and on an adjusted basis. We presented adjusted results that exclude acquisition related items unusual non operational or non recurring items items, such as stock based compensation and restructure.

During cost.

And other income expense items that are separately reported in our consolidated statement of operations, including foreign currency gains and losses and lastly, the income tax effects related to any pre tax adjustments and in addition, any unusual or non recurring income tax items.

So with that out of the way.

As Jack Bendheim with some introductory comments Jack.

Thank you <expletive> and thank you everyone, who is joining us on the call.

Much has happened in fiber on the 10 weeks into last call and I'm pleased to be able to give you an update this morning.

I September quarter, Lucky hit on topline and Bottomline expectations, as we reported declines compared to the PVC here as we guided in August .

We knew that sales impact of the hit to our China business due to African swine fever, coupled with a final full quarter overlap with the exit at U.S. vaccine distribution agreement would be too much to overcome.

The balance right corner animal health business was relatively strong nice growth in the poultry dairy sectors.

Before I nutritional specialty products and despite some continuing macroeconomic headwinds in the key countries growth of approximately 5% and our vaccine product line, excluding the loss of the PBS mentioned distribution agreement.

The only will go up we are seeing a dairy nutritional specialties business includes some very encouraging performance.

Virgin line in the U.S.

Sales around managing the U.S. steadily increase throughout the quarter and that strength has continued into October .

This performance is no doubt benefit from the improving economics for I very customers and I see nicely set the table for us to accelerate our growth with a revamp of the Omnigene franchise be launch early in 2020.

Revamp chronic will deliver it kind of value to the dairy industry. So we have high expectations with industry uptake and financial performance beginning in the second half of this fiscal year.

We have all also seeing strongly positive initial sales rep VF crime direct bed microbiome DFM product the goal.

We believe Privia Prime has the best in class DFM available today, and we'll have an important benefit to our current fiscal year result, as it continues to gain share.

As we discussed in our last column is through our work to develop could be a prime that we got to know the people that osprey biotech Nicks and I'm really pleased with how are we are integrating the osprey business being basic in microbial production create numerous opportunities both in the traditional DVM space.

Well as with novel emerging technologies that rely on microbial backbone. This acquisition that this acquisition will be a strong benefit the driver in the short and the long time.

Turning to our project that we expect to materially affect that business in the years to come over the last two months, we've begun testing a new phitek vaccine injecting device with a number of major poultry integrators across the USA.

The feedback has been exceedingly positive with integrators, recognizing that the device will lead to better flock hell with fewer missed what partial injections as well as enhance worker safety with a devices safeguards against self injection, we have an aggressive rollout plan across the globe with Vidacare product introductions, we plan for five additional.

A major poultry producing countries over the next few months, we anticipate getting our first commercial is shortly in the U.S. and expect that biotech will be a meaningful part of our growth and our next fiscal year and beyond.

Turning to other announced vaccine and this is we continued to be on plan with Arlon vaccine manufacturing facility and continue to anticipate a first sales of product in that facility to occur approximately June 2021.

Obtains African swine fever vaccine, we are working on maybe incremental progress over the last few months. We're one of several companies institutions working to develop a vaccine asset and I truly have no idea, whether I initiative will play a role and coming up with the preventive cure for this devastating disease. However, it is my belief that the.

Financial markets have not fully digested the financial impact a successful vaccines or series of accede would have on the animal health industry as though.

This is a multibillion dollar opportunity that than most but didn't exist 18 months ago.

Finally, turning to a new agenda canine joint health products, we continue to run test and several metro areas to determine the best way to reach a customer and are encouraged with the reception from vets and the feedback we're getting from consumers.

National banks, most timely well a sample sizes and while we are seeing we purchased rates significantly better than typical levels through consumer good I anticipate being able to share more battery dental plan later this fiscal year.

I want to thank my colleagues fiber for their hard work, which is seen in the progress in initiatives I just discussed as well as many other areas not covered in the call. Despite the headlines in the headwinds. This is a great time to being the animal health business with that I look forward to answering any questions. You may have at the end of the presentation back to you.

Thanks Jen.

So let me just briefly review our results for the quarter and then we'll get to the.

Given a session. Our consolidated results were about 190, our consolidated sales were about $190 million for the quarter that was a 5% decline versus the same quarter last year.

Animal health sales declined due to African swine fever in China, and the overlap with a U.S. vaccine distribution arrangement, we exited in October last year.

Mineral nutrition saw volume growth, but revenues declined due to lower selling prices driven by lower raw material costs.

Our reported net income of two and a half million was down almost $14 million read due to the reduced sales and increased SGN a expenses, coupled with increased interest expense and unfavorable foreign currency movements.

That resulted in reported diluted EPS of six cents per share for the current quarter and that decline was in line with the change in net income and let me discuss the adjusted results on page six so looking at selected line items for the CNL.

I'll discuss net sales in more detail at the individual segment level.

And in total adjusted gross profit declined $7.6 million or 11% compared to the prior year.

The animal health business accounted for more than the entire declined due to the reduced sales and in addition unfavorable product mix mineral nutrition gross profit contributed almost a million dollars an improvement over the prior year, despite the lower revenues.

Adjusted SGN, eight increased $3.3 million or 8% driven by strategic investments in key development projects to position ourselves for future growth.

Plus the inclusion of the Osprey operate acquisition and our operational results.

All of the year over year increase was recorded in the animal health and corporate segments.

Adjusted net interest increased about half a million dollars over last year due to higher outstanding debt levels.

Going all the way down to adjusted diluted EPS.

It was 19 cents in the quarter compared to 39 cents last year that was a 51% decline quarter over quarter.

So looking in more detail or more closely at the animal health business net sales of about $122 million declined $9.3 million or 7% compared to the prior year.

Net sales of M&A phase on other were 75 million a drop of $12 million or 14% that drop was primarily due to the reduced demand in China due to African swine fever, and also some say unfavorable customer ordering patterns and other international regions.

And nutritional specialties are net sales were $30.4 million, an increase of three and a half million or 13%.

We saw volume growth and our poultry and dairy product lines and coupled with sales from the op boss free acquisition that was what drove the increase.

And the vaccine product group net sales were $16.4 million that was a decline of $800000 or 5% compared with last year.

If we exclude the loss of that domestic distribution arrangement from October of a year ago. All other vaccines sales increased 5%.

For the segment adjusted EBITDA was about $25 million that was down $10.7 million or 30%.

Really due to the sales decline, which drove the gross profit decline. In addition to increased SGN a cost.

Gross profit declined as I said, driven by lower sales volumes and by unfavorable product mix.

With nutritional specialties being a.

Contributor to some gross profit improvement SGN, a increase as we continued to make investments in strategic growth initiatives and product developments.

And now looking at our other segments mineral nutrition saw volume growth in the quarter, although net sales of $52.6 million declined 2.2 million or 4% due to lower average selling prices are selling prices and the minerals business are directly correlated with movement of the underlying raw material.

Costs.

Segment, adjusted EBITDA of three and a half million increased almost a million dollars driven by the increase gross profit in the business.

Performance products net sales were about $15 million on a quarter and that was about 1 million dollar increase over the prior year driven by.

Higher volumes in sales of personal care ingredients corporate expenses were $9.7 million in the quarter that was an increase of $800000 over last year again, primarily due to increase of strategic initiatives as well as increased spending on public company costs.

And now looking at capitalization, our gross leverage ratio of debt to adjusted EBITDA was 3.7 times at the end of the quarter. The the higher leverage ratio reflected the Osprey acquisition, we completed on the quarter.

We had 79 million of cash and short term investments on the balance sheet at quarter end and for the quarter in total we use $66 million of cash before financing activities.

Including the $55 million purchase price for the Osprey acquisition.

Looking at our guidance, we've reaffirmed our financial guidance for the fiscal year ending June Thirtyth 2020. It was initially included in our August 27, 2019 press release.

And the guidance included full your expectations for items like net sales adjusted EBITDA adjusted net income and adjusted net income per share.

We repeated those that guidance here in this presentation for your convenience.

So that's the conclusion of my prepared remarks, operator, if you. Please open the lines for questions. Thanks.

At this time I'd like to remind everyone in order to ask a question. Please press star and the number one on your telephone keypad.

Your first question comes from line of Aaron right from Credit Suisse. Your line is open.

Hi, Thanks for the question. This is haley on for Aaron This morning.

First I was wondering how would you characterize the current fade demand trends in the U.S. and are you often see the impact your offsets from asked US in terms of increased demand from other geography is like in the U.S. or Brazil.

Thank you.

Thank you for that I think we're seeing and as we said now for a long time.

The shortage of protein in China is affecting protein production around the world, including the wet.

I mean, a lots of choices.

That people can do to keep their animals healthy and see.

Okay and help them animal obviously puts on more weight.

So we're seeing stronger demand I think across the world both for him at phase as well as nutritional specialties.

And we're seeing strong demand in some markets for vaccines for the same purpose. So I think overall, it's good time to be in their protein business out of China.

Great. Thank you and also could you characterize a little bit the current trends across the dairy market.

Are you seeing some stabilization.

So I think as I said in the presentation a few minutes ago.

We are seeing stabilization of prices.

Dairy prices across the world and in the U.S. we've seen.

All right just specifically on the gym business and our other businesses that we sell the dairy market increasing.

By increases at least the declines have stopped.

We're seeing.

You are closing.

Moreland dairy producers in the U.S. and.

And I think that stabilizing.

And a lot.

It's hard to say directly China, but again.

Milk is a protein as well and.

So indirectly has been affected by that so we are seeing stabilization and some growth in our business in the states.

For that sector.

Okay. That's helpful. Thank you so much.

Your next question comes from the line of dairy David My answer from Morgan Stanley . Your line is open.

Thanks very much.

So I have.

Two quick questions. Please.

Were you Jack in the first is could you talk about African swine fever at a higher level is that spreading beyond China to any notable degree.

And then second with respect to the M.S.A. issues that you touched on for Fibrocell outside of China.

Could you just provide a little bit more color on the customer ordering issues.

And.

Whether that will continue and to the December quarter or not.

Thanks, so much.

Yes, Hi, David.

So.

We will read and you've read as well that in the far east.

And to find Fedramp has jumped to boarded and it.

It's sort of what I would get prevalent in Vietnam. It's been reported in South Korea, It's important in some of the other countries in that part of the world.

Yeah it.

Very very hard to contain African swine fever, but the responses and most of the world using good by security has always been effective way.

For limiting the damage of African swine fever, I mean, it's been in Spain years ago.

But in eastern Europe , but you don't see the crisis that we've seen in China. So yes, while it's moving I don't think we are going to see effect that it had it that it had in China.

Well this week, so far have not seen the effect.

I think Chinese unique but China is also the biggest country in the world in China is also the biggest consumer of.

Talk in the world and et cetera, et cetera in that and the managed paid them have gone missing in China.

Because of the feet of the African swine fever, and then the fact that people just in one or raise pay has had this unbelievable.

Economic effect. It was an article I believe it wasn't the journal yesterday.

You bet, Smithfield and talking about how they've changed.

Well smiling and how they're exporting has gone up a lot to China. So I think it's true for a lot of us companies instantly to for lot of animal health companies.

I think exactly in San Jose Basic question business again, as you know from how long are many discussions over these many is.

Animals get sick animals get sick, when you wait and together.

And now in a time when you are getting more money per hiload more money per pound you want to keep your animals as healthy as possible and in many ways of doing it. Some of them is use antibiotics somebody is going to use that to treat with antibiotics. We have preventative antibiotics have pre that's about it.

It's going to be nutritional specialties and cements give me a vaccine so there's a whole range of solutions.

If you want to keep your animals healthy and if you are produces a you want to get that most of our out of your animal so it's not necessarily just EMD phase.

To add seasons. It does your little more specifically on your question David No. We wouldn't expect us to carry forward our forecast and.

Don't show this carrying forward and the rest of argue this this was as Jack described it.

So this quarter.

Great. Thank you.

You're welcome.

Next question comes from line of Kevin Kundera from GE Research. Your line is open.

Hi, Thanks for taking the questions.

First you talked about how your excitement with probably a prime and osprey and how that's going can you give us any other.

Insight onto onto what the pipeline looks like for the Osprey products and when we could start to see.

Hi, Thanks coming out of that acquisition and then secondly, you kind of alluded to it on region. So that it's off to a.

Very good starting these initial trials.

Should we really be thinking about that as kind of.

Opportunity.

Next year or could we see something in the back half a year with that product starts to.

Become a contributor to revenue.

I'll take we Genset for us So I think we should see rich density contributor next year.

We are.

Slowly building out because I'd say, we're trialing.

I would introducing the product.

It was to the bad and we're trying to discover or find the best panels to get to that so.

I think successes small successes and will you know what what bringing along with this journey next quarter. The following quarter by I think this could be a product that will have some sort of a meaningful numbers next fiscal year.

On on down in Australia.

Hey, what it's going be a little bit little bit too early.

We just sort of gotten involved with their business.

What I can tell you is we're busy installing.

Almost a doubling of capacity there, but we did produce so our feelings about the growth of that business is very strong.

Sort of when we took them over there was sort of running full out.

And you got to have the but the product before you can sell it but we're working on both sales growth doesn't initiatives as well as reduction initiatives.

Hey, thanks.

Your next question comes from line of Michael Raskin from Bank of America. Your line is open.

Thanks, Thanks for taking the question Huh.

I want to start on.

Some of the new product to you highlighted where do you talked a pause for a few of these but I won't ask about the next generation omni John .

For the dairy industry, you talked about a.

Second the school half starting in January contribution.

How meaningful already looking a roofing here just thinking that.

There's a lot of moving pieces in the guide.

This year versus last year between China, and I say reduction and the distribution agreement you talked about.

As we look to the second half of the year as the often mostly coming from these new products coming on line or is there something also built and in terms of the pacing as you move through the year.

Yeah, I think the.

New products are going to be at a major contributor to that to that accelerating sales growth on the second half of our year Mike.

And I wouldnt limit it to.

Just the refreshed homage in product that we've got.

Areas vaccines.

No we've got the of the DSMB, we've got and even in our more traditional M&A category, where.

We're expanding geographically and we've got.

We've got products that are.

The that are having good acceptance and some other geographies so work.

You know it's.

There's a lot of things at the the reposition refreshed omnigen will definitely be a contributor in the second half I think it'll.

Like all.

Products ago, it'll it'll ramp over time, it's not going to be up.

It's not going to be the.

The next generation iPhone or something like that but.

But [laughter]. So we're telling you that don't buy a bag and hold a two year [laughter].

I would adopt.

As you kind of mine thanks.

And the other advantage of it it will it will definitely won't hit your kids won't have a lot screen time on it either.

I think we know the space is very well, we know dairy business very well the market has changed substantially we spoken about as often over the last couple of years.

We were base accessible damaging with a smaller dairies.

And the economics of dairy basis has closed allows us more varied the cows happen disappeared as have moved number cast and I'd say to stay pretty steady over the last five years like hasn't moved to these larger dairy and we need to come up so people know the product, but we need to come up with a product that would be.

The more meaningful these larger dairies and I think that's what we've done now so it's not like we're taking a brand new concept for a brand new product and trying to get into a market. We knows market. We are well we know these cost them as people have gone from the small form for the launch of long. So we are giving them more value and.

No we took us a while to be formulate took a while do the test to get the background to get University tests behind us, we're very comfortable and the launch time is.

As we said is going to be early 2020.

Great that's helpful and actually right along those lines around some of the shifts in the dairy industry United States.

And perhaps more broader than that to the NFL internationally as well.

Well the gross margin declined you saw in the quarter lot of it was tied to volumes, but then also some product mix as you have these new products coming out over the course of the year and going forward are you gonna be able to offset some of that.

Volume pressure with being able to take a little bit more price potentially.

Yes, definitely RV, our guidance for the year and our expectations for the rest of year is to see.

Margins improve.

From where they were in Q1.

I think the that margin improvement will come from.

New product introductions product mix, it's not it's not about.

Taking price in the sense of of just going out and raising prices, but it's it's providing more value to your tier customer with with these differentiated products.

Yes, correct on margins joint Great Yeah, right now right.

Okay, and one last one if I may.

On a on the leverage and sort of the balance sheet, you highlighted slightly higher data level from the acquisition could you talk about your leverage going forward, how high would you view on a lever up as you know some assets.

Any there the companion animal or livestock markets came up.

There's opportunity to bolt on to the business.

Through inorganic means.

So I think you know we we are in them in the market and we look at assets as they come onto the market I think we're not that comfortable at very high leverage, but we will lever Rob if there's an opportunity and we can buy right. So we're not going.

Overpay and just use the available I'm available debt capacity, but we will add debt if we could buy a.

And asset as a REIT crisis.

Right.

Great. Thanks, so much.

Again, if you look to ask a question. Please press star and the number one I know telephone keypad. Your next question comes from line of David why servers from Guy.

Mannheim Securities Your line is open.

Hi, Thanks for taking the question. So I'm a question on on the African swine fever vaccine.

Interesting to hear a multibillion dollar market. So can you talk about some of that but sizing that market in terms of yeah, maybe price versus the average the average vaccine kind of the reach of other vaccine like that and how comedy and do you think regulators would be to ticketing that product out.

Sooner rather than later.

So and that is a great great question I'm not.

The only that out as I want everyone always does.

So in China.

People are talking.

That enhances the 50% of the pigs are gone and that's I mean that they all had gotten an African swine fever, if you haven't heard.

Yeah, we haven't thousand paid and a store gets it they will it's very very very blunt and they will die within 10 days and then basically authorities comment and you you call you killed all the other pace and you've got an active growing and then if you that happens view and I can go back and spend money rates beings again. So subsequently.

Of.

China It grows and consumed approximately 800 million takes a year, which more lets me and as a standing heard about 400 million big.

So.

If you didn't pick that up to 50% because I can't do advance, Matt that 400 million pigs that is missing.

The rest of the well altogether races about 400 million picks up this is something that cannot be solved by China, just importing pigs, they have to solve it on their own so and.

Peaks book is the the protein in China, it's the basics.

Let me food and it's extremely important so.

If we are successful and coming up with a vaccine.

And approaches I think is quite unusual because.

I posted not using the virus as a source so.

I think I product, if we are successful and again at the big if we're successful would be a very safe.

Vaccine.

That even if you can help and control and protect the pace at 20% was something like that there would be a market in the Chinese government will be very cooperative because this is such a catastrophe for them.

And no different than the United States would be co-operative if there was a catastrophe hear something going on with it within these animals that you with da would be all over it and when.

With sort of give the greenline greenlight and.

Not forced you to go through many of their hurdles you don't we have to do with a vaccine.

The market and is great look at the market pricing.

Historically, if you ever we have a vaccine that would control the disease that was killing an animal.

People come you price it at 20% of the value of the animal.

I won't go into the current value in China, which is much higher than its historically been but if if the if you take a value of a pig and $100 Disti NDC, Matt 20% would be $20.

Yes, so simple $10 to pay and you have actually to be peak in China.

That 800 million times $10, it's like $8 billion here so.

At this kind of all these things and everything out it is a huge market and it's obviously why as I said earlier a lot of companies and we are working on this thing a lot of companies in China. This is not simple. This is a virus has been around 100 years is very complicated finds a lot more sophisticated data it's been.

We continue to make some progress again that ultimately approved is going to be.

Afraid and the eating of the pay but until we get there I think we're optimistic but it's I.

I don't know, it's still very much up in the year.

Really appreciate that and that's really great color. So then maybe can you just on a high level with poultry I feel we're all talking about dairy and we're trying to put assets I can you give us maybe a high level, what's going on with the poultry part of your portfolio. It was.

Slightly down last year, how confident are you in terms of of rebounding there.

And that up.

Species. Thank you.

Yeah. So again, you know multi for US is a question of markets, but our biggest markets in the U.S. in Brazil.

In the far east in Russia is oil quite strong this year.

Again, we have some new vaccines that we're introducing in markets that seem to be quite successful.

AH Yes, you are in your in some hurt your RASM heard the it rotates but overall.

Poultry business is strong and our business is strong within that.

And then we have this unusual nutrition product, which is quite.

Strong when people go as people go antibiotic free in poultry.

And the increase of vaccines and poultry, we haven't usually have a very successful nutritional product we call the magnified, which.

As a very very good acceptance in the U.S. and we're now introducing in Brazil into other markets as well so.

I know, we never talk about it we should it so thank you for raising it.

Thank you have a habit. Thank you.

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

All right everyone. We thank you for your time and for listening and we'll talk again on our next quarterly call and by now.

This concludes today's conference call you may now disconnect.

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