Q4 2019 Earnings Call
Ladies and gentlemen, and welcome to the Fibra fourth quarter financial results Conference call. At this time, all participants are in a listen only mode.
Later, we will conduct a question answer session and instructions.
Given at that time.
If anyone should refer offering assistance. Please press Star then zero on her Trust fund telephone as a reminder, this conference maybe recorded I would now like to turn the conference over to Richard Johnson, Chief Financial Officer, you May begin.
Thank you operator, and good morning, everyone and welcome to the earnings call as fibrosis animals out there on our call today, we'll be discussing our fourth quarter and full year ended on June 2019 results.
On the call today are are Jack Bendheim, our chief Executive Officer and myself.
Richard Johnson, Chief Financial Officer will provide an overview of our fourth quarter and annual results.
And we'll also discuss our expectations for the new fiscal year, then we'll open the line for your questions.
Before we begin let me remind you of some standard thing this our earnings press release and financial tables can be found on the investors section of our website at P.A.H.C. Dot 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 statement 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 us GAAP measures are included in the financial tables that accompany the earnings press release.
In addition, before we get into the numbers, we want to 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 non operational or nonrecurring items, including stock based compensation and restructuring cost.
Other income and expense that we report separately in the consolidated CNL and income tax effects related to any pre tax adjustments as well as excluding unusual or nonrecurring income tax items.
And now before I get into the financials I'll, let me introduce Jack Bendheim with some introductory comments.
Jack.
Thank you Dave.
And thank you everyone, who is joining us this morning.
The boat last completed quarter in our guidance for our new fiscal year. There are really two theme when external and one internal that's strongly dictating our financial performance.
Yes, no one's is obviously African swine fever way et cetera.
And the old town, one is our strategic decisions not to pull back the reins about strategic investments.
Despite the financial and operational impact caused by asset.
Let me talk a little about these two themes.
As we detailed in our press release, we expect roughly a $40 million sales decline in our China business due to a et cetera, and the coming fiscal year I'm glass half full point of view I noted I know, they're not project. The impact is roughly the same as that publicly discussed by some of our larger competitors.
And this speaks to the reality that despite the fact that we have a smaller bundle unless geographic scope. When it comes to head to head battles, we are more than able to hold our own.
We as a company take great pride in the business, we have built in China.
And while it's clear the impact will be with us for longer than just this fiscal year, we know that when the dust fully settles, we will be positioned to once again gained significant share of that market.
On the other hand, a $40 million sales headwind is much more significant to our company of our size.
Some of our competitors and we don't have any offsets to fully contracted its impact.
One of the levers that we are doing as it relates to spending.
We have taken some focus measures relating to our headcount.
And our manufacturing base.
So as you saw from our release spending in the coming years expected increase roughly $30 million.
And about half relates to a discretionary project spending.
I am truly excited about several of the projects. We are working on and I expect to begin seeing results of some of them by the end of this fiscal year.
As we have demonstrated in China, when we have the products and services to offer our customers, we can be very competitive and gone or my Fitzgerald Moore and I'm highly confident that the investments we are making will yield such projects.
I'd like to touch on a few of these investments.
At the wheel moved away from using antibiotics for growth motion. It is clear to us that the most logical managed to build a continuing need is to products that benefit the microbiome.
Early this year, we launched it will be a prime.
Vibrio created direct Fred microbiome when [noise].
The poultry.
The early results are already extremely encouraging our acquisition of Osprey allows us to be fully basic in this area and will be the linchpin of a whole wheat micro bio products, we anticipate introducing across multiple species in the coming years.
We know that I see product and processes are extremely productive and competitive because in choosing to work with us we have to be a prime we tested their products against many others in the industry.
A micro bio products are reported as part of our nutritional specialties doing and is within nutritional specialties that we have the bulk buy dairy focus product as well.
For too long, we have watched the economics right dairy customers do road and one note numbers are looking up a bit.
We have concluded that we need to offer even better products and values of these customers I'm excited about the category revamp we will be launching around January .
And believe we have the ingredients were disrupted the suite of products that will not only we turned this category to one I'm sustained growth we're willing in relatively short order eclipse. The peak sales we had in this market a few years ago.
[laughter] on the pet side, we are now in multiple test markets with our initial products for Gen fab supplemental joint cared few that helps support canine joint health.
I focus today has been working through an exclusive distributor with a veterinary only product we are carefully seeking to bounce on fixed versus variable spending am I definitely seeking to avoid creating a huge marketing spend on a promise of a product before we were actually able to booz and it meets consumer need.
The initial results are not trial markets have met expectations.
We continue to try to rollout to new markets.
I anticipate being able to provide some additional color later this year.
On the vaccine side, we have a number of impact when back investments.
Some of which we anticipate yielding near term results.
We are as we speak beginning to trial in the U.S. multimarket and automated imagination delivery system known as Phitek.
Our parents Inphi, Texas and brings two advantages to the market breadth and helps ensure a vaccination jets inaccuracy, taking a largely manual process and bringing automation to it.
Secondly, the move to automation allows for the CAFTA of significant amounts of data and enables real time oversight to optimize management of the vaccination process.
We seem to have tapped an unrecognized an unmet need in the industry. Although my solution replaces what appears on the surface to be an extremely inexpensive status quo.
The interest and we stepped the base of the industry has been huge in the U.S. in several international markets.
If we are able to fully execute here the results will be substantial from both an industry and financial point of view.
We also ramping up our pekin commercialization spend and I fly go Arlon vaccine facility, we anticipate having our first product to sell out of slide go mid 2021.
We have strong confidence in our ability to be successful here because while the facility is new we already manufacture the same vaccines and other locations.
Once open slide go will give us an increased access to European and other key markets, where our poultry vaccine.
Finally, circling back to I guess that.
We're spending significant time and resources on developing a vaccine for this devastating virus.
We made a lot of progress in the last few months and believe we have a unique approach.
We are under no illusion here about the likelihood of success. The Vivus is extremely difficult wanted it to be and there were several competitive institutions with greater resources that are also seeking a vaccine.
Still we are cautiously optimistic about the staffing as we believe the solution to a itself is likely not to be a single winner take all.
And therefore, the unique approach we have taken may very well complement other approaches being taken.
Additionally, the value of vaccine alone or in combination tremendous Chinese book industry is about $130 billion annually.
And while obviously only unfortunate this figure will be repaid by the successful against F vaccine manufacturer the potential revenue here is staggering and we believe three what's the risk inherent in our continuing investment it's fairly self evident.
Even with this opportunity I family waste for our customers and for ourselves that asset would that bad of Evercore.
Unfortunately that is not the situation, we find ourselves in and as a result, the underlying progress that company has made and continues to make is somewhat obscured view.
Hopefully some of the reasons why I remain heavily bullish on our future have come across on this call and look forward to discussing any questions. You may have following its review of our fourth quarter and guidance for fiscal 220 26.
Thanks, John .
Well lets start by reviewing the results for our June .
2019 quarter.
Our consolidated sales for the quarter were $204 million that was a 4% decline compared to the same quarter last year.
Our animal health sales declined due to African swine fever in China, and due to lower mineral nutrition sales on reduce selling price and product mix growth and performance products was a partial offset.
Our reported net income was $8.8 million that was a 13.3 million dollar decline due to the lower sales and also increased SGN a expenses, including the pre sac pretax restructuring costs of.
$6.3 million a that we recorded for both the termination of a manufacturing agreement as well as employee separation costs.
For the quarter diluted earnings per share on a GAAP basis was 22 cents.
That was.
33 cents below the same quarter last year, all loved discuss adjusted results on the next page of the web cast so looking at select in line items from the TNL.
I'll get into the detail of net sales in more detail on the it at the individual segment level.
In total adjusted gross profit declined $2.2 million or 3% compared to the prior year gross profit decline was roughly in line with the overall sales decrease animal health gross profit declined in proportion with sales.
Mineral nutrition gross profit was comparable to the prior year. Despite the lower revenues and performance products gross profit improved due to sales growth, but it was partially offset by unfavorable product mix.
On the EPS DNA line, adjusted SGN, a increased $4.6 million or 11% driven by strategic investments in key development projects to position ourselves for future growth.
Our adjusted net interest expense increased six $600000 on a higher variable interest rates and higher debt levels and that all came down to.
Adjusted diluted EPS of.
33 cents, a share compared with 46 cents last year, I, a 13 cents or 28.
Percent decline.
So now looking more closely at the animal health business.
Net sales for the quarter were $132 million, they declined $5.7 million or 4% compared to the prior year. The sales decline was principally due to lower demand in China due to African swine fever sales of Enphase, another were down 5.8 million or 6%.
On the positive side, we saw continued volume growth in Latin America, and increase penetration in other Asia Pacific countries Perama phase another.
Nutritional specialties net sales were $28.6 million, an increase of $300000 or 1%.
Uh huh.
Encouraging volume growth in international dairy offset a continued negative domestic dairy conditions and continued reduced demand from some poultry customers.
Our vaccines that sales of $17.2 million declined $200000 or 1% compared to last year.
Good growth in Asia Pacific and Eastern European regions was largely offset by the October 2018 loss of the domestic distribution arrangement and they continue that turbulent economic conditions in certain international countries.
At the bottom line adjusted EBITDA of 31.2 million decreased $5.7 million or 15%.
Due to a decline in gross profit and increased SGN a cost.
Gross profit declined driven by the lower sales volume and partially offset by favorable manufacturing cost for our vaccines.
SGN eight increased as we continued to make strategic investments in product research and development.
And now turning to our other segments mineral nutrition net sales were $56 million in the quarter that was a decrease of $4.3 million or 7%.
The decrease was due to product mix and lower average selling prices as a reminder, our selling prices are correlated with movement of underlying raw material costs. We did see a increased unit volumes, which were partial offset.
Mineral nutrition, adjusted EBITDA was $3.8 million, which was even with the prior year. Despite reduced sales we continue to see progress in returning to improve levels of profitability. Despite a highly competitive pricing environment.
Performance products net sales of $15.9 million increase.
$2.1 million on growth in personal care ingredients and adjusted EBITDA increased $200000, our corporate or unallocated expenses were $9.8 million in the quarter that was a $1.1 million increase over last year. The increase was primarily due to increased business development costs.
Other factors included increased public company costs.
And we did see a benefit from reduced.
Reduce cost of variable compensation.
And now because it's the end of our full fiscal year.
I'll do well one page on our full year financial results just talking through those briefly net sales for the full year were 100 800.
And start over net sales of $828 million for the full year increased $8 million or 1%.
Animal health sales were comparable with the prior year.
Mineral nutrition has declined slightly well performance products grew almost $9 million.
In animal health, we saw sales growth in the MSC is another category driven by international volume growth, particularly in the Asia Pacific and Latin America regions, partially offset by lower domestic demand.
Well the Asia Pacific Region reported strong sales growth for the full year sales in the region declined in the fourth quarter due to reduced demand related to African swine fever.
In the nutritional specialty categories their sales declined 8% year on year, primarily due to the continued negative dairy industry and some reduced demand from poultry customers.
The vaccine product group declined 5% year on year due to the turbulent economic conditions in certain international countries and the loss of the domestic distribution arrangement, we did see volume growth in other international markets that partially offset those reductions as I said earlier mineral sales mineral nutrition sales were down just slightly from the prior year and.
On the positive side performance product sales grew 17%, albeit off of a smaller base on a sales growth of personal care ingredients and other industrial products.
Our adjusted gross profit for the full year was $270 million that was.
A decline of $3.8 million or 1%.
Driven by declines in the animal health and mineral nutrition businesses.
And adjusted SGN, a increase seven and a half million dollars or 5% as we continued to increase investments in our business and product development, but position ourselves for future growth as I said earlier. Other factors included increased public company costs offset in part by a reduction in variable compensation.
For the full year adjusted EBITDA totaled $118 million that was an $11 million or 8% decline from the year earlier and adjusted EPS came in at $1.53 cents per share down 21 cents or 12% compared to the prior year.
Looking briefly at our at our capitalization on page 10, our gross leverage ratio, which is.
Gross debt to adjusted EBITDA, our gross leverage ratio was 2.8 times at June Thirtyth.
We had 82 million of cash and short term investments on the balance sheet at year end.
And for the year, we reported a $7 million source of cash before changes in short term investments and financing activities.
And now turning to guidance on page 11.
On page 11, we've shown you just the highlighted line items of our guidance for.
Our fiscal 2020.
We.
I'll I'll get into more detail on.
On each of these line items in the next few pages.
But just to review them briefly we expect consolidated sales of between 833 and $863 million, that's 1% to 4% overall sales growth.
The animal health business will drive the sales growth of the total company where sales in that business are expected to be between 537 and $557 million and that's an increase of 1% to 5%.
Adjusted EBITDA is expected to be between 103 and $107 million. That's a decline from the prior year will discuss in more detail our spending on future growth initiatives that are weighing down profitability.
And adjusted diluted EPS as well.
Well decline.
Somewhat in line with EBITDA in those couple of other factors will discuss in a few minutes.
It's expected to be between a dollar and eight cents in a dollar and 15 cents per share also a decline from the prior year.
[noise].
So looking at page 12, there are two major initiatives were really focused on in our our new fiscal year. One is animal health sales growth we're looking for.
Substantial sales growth out of our current portfolio as well as growth from new product introductions, we're looking for the benefit of the recent.
Osprey biotech next acquisition.
And that will we expect offset the significant decline we're going to see from.
Reduced sales in China due to African swine fever.
And second we are we are expecting and planning to increase operating expenses as we continue to spend four strategic growth initiatives and in addition, there will be a reset of variable compensation in other words.
We're just putting the the bonus plan back too.
More normal levels and that.
Would be expected to also increase expense.
So if we look at page 13. This this chart shows you the the breakdown of where we expect to animal health sales growth to come from we expect our current and new product sales to grow between five and 8%.
We expect the the acquisition and related activities to contribute $20 million to $22 million of sales to our two to our sales in 2020, that's 4% growth on the other hand, we see a $40 million hit to our sales from the decline in business in China doing to do to African swine fever, that's all in the MFS category. So net net all of those pluses and minuses we expect.
Growth between 5 million and $25 million in sales that so 1% to.
5% growth overall.
Giving you a little more color on on animal health sales growth looking at page 14 in the nutritional specialties area in our dairy focus as as Jack talked about we are repositioning key products with a with a launch planned for mid year. In addition, we're seeing accelerated international growth of this portfolio of products and that will be a.
Significant contributor to our to our growth overall.
In the poultry segment, we see ongoing growth of our current products as well as the recent launch of Prolia Prime for via five Prime is a direct fed microbial the and it's one of the major reasons, we got to know Osprey biotech Nixon and.
Eventually.
Came to the point of acquiring that business its a.
It's a got health product for poultry.
Our spray Biotechnica will add to our sales growth for the year Osprey as a developer manufacturer and marketer of microbial products and bio products that serves a variety of applications, we see it fitting very.
Nicely into our overall business.
On the vaccine side.
Most of our vaccines are for poultry and swine. The recent launch of a new product poultry vaccine that is used in the hatchery MB one.
<unk> is expected to give us.
Good sales growth. In addition, we will be moving beyond some negative overlaps both on the loss of a distribution distribution arrangement, which happened in October of last year as well as.
Some downturns in certain areas in certain international countries.
In the MSP category, excluding China, we expect volume growth, we expect volume growth in in both swine and poultry.
And in part, reflecting our expectations for increased global protein production driven by a supply shortfall in China.
In China, we expect volumes to be negligible as our customers consume their existing purchases and they will be cautious in placing new orders due to recent regulatory developments.
On page 16, turning to our operating expenses, our SGN, a selling general and administrative we expect those expenses to increase by 28 million to $33 million, that's a 16% to 19% increase.
As Jack said approximately half of that increase is investment in major strategic and in initiatives to support future growth.
Just briefly touching on on many of the same points.
Building out our our vaccine production facility in Ireland.
Investing in development of potential vaccine for African swine fever.
The commercial introduction of our innovative automated vaccinate back vaccination delivery system.
All of these will require.
Significant spending in fiscal 20.
And continuing on we will continue.
To invest and support in additional data to support the introduction and penetration of.
Current and newly launched nutritional specialty products.
And on the companion animal side.
We have ongoing product development and market investigation for.
Various products, including our.
First product launch regions, a supplemental joint care Chew that helps support canine joint health.
So.
The cost of our base organization are stable in the guidance reflects the effects of recent and anticipated restructuring actions.
A reset of variable compensation is expected to contribute approximately three percentage points of the overall SGN a increase and the recent acquisition will also contribute an additional approximately.
Three percentage points of the overall SGN a increase.
Adjusted EBITDA as as we talked earlier is expected to be between 103 million and $107 million.
And adjusted net income is expected to be between 44 million and $46 million. The decline year on year is due to the decline in adjusted EBITDA. In addition.
There is increased depreciation expense and increased interest expense in the current year compared to the prior year.
Net interest expense is expected to increase due to higher borrowing levels. We funded the osprey acquisition $55 million by borrowings from our credit facilities, we expect approximately 45 million of capital expenditures.
During the current fiscal year, and we expect working capital to grow somewhat to support the sales growth and in route in total we would expect net debt to increase between 70 and $80 million over the course of our current fiscal year.
This other technical items.
On page 19, we'd expect the effective income tax rate to be similar to the prior year and on an earnings per and on an adjusted earnings per share basis.
We expect shares outstanding to be essentially unchanged from the prior year importantly, our quarterly trends, we expect the full year decline in adjusted EBITDA will incur.
Entirely in the first half of our fiscal year as as we will see the the declines in some of the business happen earlier in our year, while the new sales initiatives will become meaningful in the second half of our year.
So with that operator that concludes our prepared remarks, so you would open it up for <unk>.
For questions. Please. Thank you. Thank you ladies and gentlemen, if you have a question at this time. Please press Star then one on your touched on telephone.
If your question has been answered or you wish me yourself from the queue. Please press the pound key prevent any background noise. Please place your line I mean whats your question hasn't stated.
First question comes from David Risinger of Morgan Stanley . Your line is now open.
Great. Thank you.
In fact, thanks, Jack and <expletive> for the detailed slide presentation I have a couple of questions first for Jack and then I'll follow up.
With a few questions for Dick's so.
I heard a little bit above that.
Asset may be spreading somewhat to eastern Europe .
But im not sure if that is true can you talk about fab, including.
Any potential risk to your European business.
And then second.
With respect to your vaccine business.
Obviously, it face some pressures, including some different dynamics.
But.
Could you just help us understand the competitive landscape to your vaccine business and whether there are any.
New competitors that are pressuring sales or is it other factors that have driven the recent declines. Thank you.
Thank you David.
So the first question I mean African swine fever has been out there for over 100 years.
And.
It has been in Europe , a longtime epic a lot longer I mean, they've been outbreaks in Spain and had been outbreaks in eastern Europe .
And Chinese claim that the spread.
To China from.
Because that is done I mean from way Eastern Europe .
So it's been out there the difference is.
That's the way it's been handled up to now is with very very good buyer security and pretty much for Western Europe Eastern Europe has managed.
This disease with very good buys security.
And for that matter, just it's also spread through Vietnam and now in the Philippines and other markets in Eastern Europe again, it's still somewhat contained.
In China for whatever reasons at.
The it's quite it's much more difficult to have good buys security and subsequently we've seen the devastating effect. It's had there. So we're talking in China about over 50% of the pigs, having disappeared and you understand something David which is it's not like every pay has gotten sick.
All right, but what happens is if it is such a virulent disease that have hit the bottom.
Over 90, 98% of the pigs died.
And then in that same pharma is quite reluctant to put new pay back on.
Back on the bonds because the vaccine the fee the virus sorry stays around.
So once that happens no one is putting new pigs back on so I mean, Chinese say that they've killed around a few million pay but the reality. The reality is that we're talking about a standing.
For population between 316 $400 million that over 200 million have disappeared.
So it's so much more devastating in China than we see in the rest of the world plus China itself accounts, but again, all that paves cancer over 50% of all the pigs in the whole world.
And that's why when everyone talks about Africans might be when they took mostly about China.
To your second question, we don't sell.
Mm phase in Europe , So the fact that that.
It is popping up here and there and Europe has no effect on our business and finally.
We see the same competitive we've seen in our poultry vaccine business and as you recall, we've said it a few times.
The reason for the drop in our sales that we lost distribution of Cummins product the United States last October and.
On an annual basis, we will have annualized that in a few months.
That's that's extremely helpful.
And then could you just add a little bit more color.
On China. So what were trying to total sales last fiscal year that just ended fiscal 19 and.
Could you just explain a little bit more.
You know what the.
Mm Fey risk is.
You, obviously quantified I believe the total sales decline of 40 million in China in 2020, but how much of that is.
Due to the new regulatory initiative relative to so.
So Matt sales in China have been about $40 million and we expect.
Basically the business too.
For the coming fiscal year, which we're not it's not in our numbers because we do have inventory in the market and because of the great decline in the amount of pigs available to consume that inventory. We think it is matches that matches up and it dovetails into two was what is surprising that the Chinese and still looking to.
Change their their regulatory status and to go as well to therapeutic claims and not leave and what they had to make it more difficult to raise pigs, and wherever they have where ever they still have the ability to raise base but.
In our distributors in China.
I want to wait for new regulations come out and want to make sure that they have the right label on the product. So we're drilling inventory change regulations and as we said in a statement.
Because it's difficult to get pigs to be tested to move pigs are and have been tested it's going to take us now maybe year, maybe up to two years to get the new therapeutic claims. So it all it's all runs around the same numbers. So we've lost we have no anticipation of sales to that market.
We think it's going to take I just saw something this morning in some of the press the people think it can take.
Four to five years for the Chinese to restock and that is with some assumption on good by security and some some potential vaccine, which right now no one has.
So this is going to be a long time, but.
What the reality is in terms of.
From our bases point of view and I think even your youre looking out around the world is there is still demand for protein in China and its going to ship.
Around the world and might not be satisfied by plug, but be satisfied by chicken grown in China, and chicken imported and pork imported and cattle imported and increase in finished industry in China. So this is going to affect the whole world with some big and small ramifications.
Thats extremely helpful.
And if I may.
Just pivoting to <expletive> <expletive> .
Could you just talk about the outlook for cash flow from operations in fiscal 20 relative to the 47 million in cash flow from operations that you.
Booked in fiscal 19, and then if you have any comment on dividend prospects. Thanks, so much.
Dividend prospects are unchanged, we expect a the dividend to continue at its current level.
No.
Discussions of any change in the dividend.
I have to do.
I have to do some quick.
Back calculating.
Yes, if you want to circle back on the cash flow, let me come back down that I, just don't have that schedule in front of me.
Okay no problem. Thanks again.
Thank you Dave.
Thank you and our next question comes from an array of credit Suisse. Your line is now open.
Great. Thank you foresee any kind of turnaround or stabilization in the dairy market at this point, particularly in.
Can you ask your domestic market and have there been any sort of major shifts in the competitive landscape. There when it comes to your I will turn product. Thanks.
Well, what we're seeing and is that.
And what we've seen is the approximately.
9.3 million.
Dairy cows that exist.
Still exist and they were there for five years ago and they have today and the big shift has been in the dairy economics on the farm. So there are very very few small 100 200 dairy.
Bonds left the United States, and Theyve been an increase and fill increasing farms over 5000.
And that had to post.
It's going to Pat some challenges to us because our business and bids on Amazon was really built on the small farms.
And.
The projects that I mentioned sort of at the opening of this conversation as we readjusted and reformulated Almond Jim.
Two.
Where we feel we will have increased the value.
Two way this is presented to some of the larger pharma, so and we're very optimistic that with those changes.
We will get back market share and even grow the business.
Okay. Thanks, Thats helpful. And then can you quantify a little bit more I think the microbiome market for you over time, how big that could be and how a product that is probably a prime position the next market in which a contribution.
The more material and in what Osprey also adds for you there. Thanks.
I mean that is a great question.
So.
You know the microbiome have been around for very very long time and.
And but not use that much in the animal industry and the reason why we use them much. So we had some really very effective product will antibiotics.
But antibiotic now we're out as as we all know I mean the added.
As the produces look around for products that make sense, a product that will affect.
Sort of the guts of the animal at reasonable cost.
And still fit into the company, which we call natural there is nothing better than taking.
Product that sort of originated from the dirt and.
And attracting and developing ranges.
Microbial product microbial products.
And that's where most of the potential is huge in the potential when the markets are in the near term tens of millions long terms greater than that.
And as we said earlier operates very well position they have great technicians.
Great plans domestically located in pits.
All all the various points.
One of the things we attracted to west the fact it.
It was owned by us by a woman that was important to us as we.
Branch out and look at what we should be doing.
Domestically so Andrew hit all the points and we think we're going to do great with the problem with the company.
Okay. That's great and then just one last one I guess I was just curious just given some of the further consolidation that will flow across a larger animal health manufacturers do you think that you could benefit from any sort of disruption salesforce. This action with our product line divestitures at all thanks.
So.
And this is something that is going to depend on how the FCC looked at this acquisition coming up.
And you know if there's any fourth directed to divest is obviously, we will look.
And beyond that there is always opportunity and disruptions and I think.
If if there will be opportunities, we will surely look and see if we can we can gain by them.
But.
On the on the face of it it's I think it's a great acquisition for Elanco and.
It doesn't do that much for us.
Okay, great. Thank you so much.
Just before the next call this was circling back to.
David's question are the numbers, we put out would imply cash flow from operations of between 40 and $50 million next year, David That's that's roughly.
Right in the same range as we had this year.
Thank you and our next question comes from Kevin Kedra of Gene Research. Your line is now open.
Great. Thanks for taking the questions maybe first one for Dave.
For the clarification on the comments about the EBITDA.
Decline being.
Charlie capture within the first half of the year.
It sounded like a lot of that was a function of the movement of revenues, but given the increase in M&A is that going to be.
Kind of stable throughout the year are we going to see that SGN. A increase also front loaded in the first half of year, and thus leading to that EBITDA decline.
Well, we'll we'll do these these spending we talked about on all of the various initiatives that that's.
That's give or take going to happen evenly across the fiscal year. So we will have we will have higher operating expenses sort of coming right out of the gate.
At the beginning of this new fiscal year, and then you're right the.
The revenue.
We'll see more of a more of a hit to revenue in the first half of our year and that's that's why we're going to see the.
Most other really all of the year over year decline.
Hitting us in the first half of the year.
All right thanks for that and then.
I was hoping you might be able to to quantify a bit more about.
How much you're spending on the DF can swine fever vaccine.
And the spending on that program and talked about it being maybe a three to five year.
Program is that something we should expect to be.
That spending to be consistent over the next several years, there's a lumpiness there.
Just wanted to kind of think big picture about that program.
So.
We sort of put a bunch of things together I think the spending will be heavily this year, possibly into next year. It. If we are successful in developing.
A vaccine.
What takes so long as in the testing.
You know to the approval of lab testing, what's unusual about our approach to this vaccine is that it is always to things that putting any product out into the marketplace and one is safety. We see safety is the most important and efficacy historically was done by the market, but now it's also regulators wants to the efficacy of a product what the news about our approach to this this this vaccine is we're not incorporating the African swine fever virus into it so.
Operating on a vaccine won't spread the virus. So it's not a safety issue is obviously the efficacy because our approach is sort of different we're just looking to the protein side.
So we take three to five years, because everyone said three to five years, and then Novak seen especially when the great demand.
I don't know it could be faster if we.
So the regulated that we have a product that can work that can slow down.
This virus and having an effect and as I said earlier.
It's such a huge market and basically one out to vaccinate every pay because you want to.
Basically protect every paid from the potential so if we just see initially that this thing on it looks like it's going to work or 50%.
We don't 50% of a $135 billion is when our own 50 65 billion dollar market you're saving so the potential is huge especially with our approach because again, we are working looking so little bit different maverick is very different.
But we made some very very interesting successful step so far.
Great. Thanks.
Thank you and our next question comes from Michael Ryskin of Bank of America Merrill Lynch. Your line is now open.
Hi, guys. Thanks for taking the questions.
First I want to start with something we've talked about a lot in the past and its the expectation that.
As for the sort of ravaging on China, and all of Southeast Asia.
And the supply in those markets comes down you expect a little bit of a rebound in the Latin America and Brazil.
In terms of production of swine another.
Some of your revenue off of in China, specifically.
In spend as much time it on the call. Although you kind of hinted at it I want to get a better sense. If you have any update expectations on that in terms of timing or magnitude.
Probably not the next couple of months, but is this something that could factor into your rebound in the second half of the year in terms of fiscal Threeq you fiscal Fourq you pickup.
So.
As I said and so I think the Aaron's question.
There is a protein shortage in China, and I think it will be filled obviously, if there is talk available that would be number one.
The the places you can add.
Relatively easily poor production is in South America, mostly Brazil.
You can do some growth in the United States for US is caught up in the trade was in that side is difficult, but none of this will get anywhere close to map, hoping to talk protein that missing. So we do expect to see in our business around the world both in the us and in South America, because it tends to be in fungible.
Everywhere anyone's raising protein, so whether it's whether you're fishing or you're doing poultry or.
Poor or cat on all these things or the prices are moving up.
Rapidly.
It's one of the articles I read this morning. It said in the last three days of Pride to book in China is up 9%. So all these things will have an effect.
And.
Yes, and that has the fact that people put on.
More increased production as people raised the heavier weight as people look to get.
Better yields all these things will benefit our business and yet it somewhat factored in it's hard to take a big plug number but it is factored in.
To west and I am sure of all our competitors as well.
Okay. Thanks, and then on the comments on the Shannay increase year over year.
The reinvestment back into the business you highlighted that about half or 50 million is discretionary.
Going beyond the comments on the assets vaccine can you just talk through is this sort of the new spend going forward.
Or is this a little bit of.
Fiscal year 2020, we have to adjust to the market. So we're going to ramp up of then but then in the out years, you can see that number.
Sort of returned back to fiscal year 18 square 19 level.
I think the answer that if we have now is how wisely, we spend our money.
Alan and.
And you are trusting us and we're trusting ourselves spender wisely. So we think.
These various projects we're working on will give us great returns every single one of them.
If we do that then hopefully we'll bring those products to market will make more money and we'll find new things to spend money on that will be a great way to grow this business and you will be very happy with us and we will be happy with us. So.
So on the other hand, we're completely on sex unsuccessful, and we don't know what the Hell are doing and then we're going to stop.
All right. Thanks, I appreciate that one one last one if I could squeeze it in.
I got a follow up on the earlier comment on the.
Banco Bayer acquisition.
And I want to focus on your balance sheet and your Optionality to do some tuck in M&A.
Can you talk through your your leverage and we know about the Osprey deal, but still I know you were very active when you try to get involved when boehringer ingelheim and Merial, we're doing they're off a flop and some assets came up for sale.
What's your ability to sort of leverage up now and is that still a focus for you going into this year or is the focus more on the internal operations and getting getting there the initiatives youve outlined executed on.
Yes, I have my attorney at this table the frowns M-, but someone told me I could take a look at the we worked IPO.
To look at leverage.
[laughter].
So I don't know today, we're dealing in a crazy world out there that put up on the screen that I think we are.
Well with us very well be a little north of three three times leverage right now.
So normally if you if I was sitting on opposite you would ask me why sleep well at night with such high leverage, but the fact remains that has a lot of money out there and one can do it for the right acquisition I think money is available.
Great. Thanks, so much.
Thank you and again, ladies and gentlemen, if you do have a question at this time.
Please press Star then one on your touched on telephone. Our next question comes from David Westenberg Guggenheim Securities. Your line is now open.
Hi, Thanks for taking the question. So can you remind us again on your companion animal strategy.
If you're going to maybe the adding any head count there if theres any in companion animal that it accounts for some of that 30 million additional SDMA spend and then if.
Companion animal opportunities to become successful is there opportunities to maybe change that thought in terms of.
Investment there.
And so.
Good question, our approach to companion animals.
Is that we've said from the beginning we started with a clean slate, we're not looking to add sales force we're not looking.
To work in that direction I think we're looking to bring products unique products to the market that may be a NAV to be as large in the stack is as what some of these giant companies are doing and as they consolidate obviously the interest of them carrying smaller product reduces so we think these are common net met needs and right now our strategy as we said was to work work at foods globally exclusively with.
With one distributor.
And then using that distributors sale for us as we go ahead and we.
You know target and try to grow these products. So right now we've launched one.
We're looking to do more.
But we're not looking to spend alternative money, there and as DNA. The money. We're spending on is on research and on.
Development development.
Right.
It's not a.
It's not an organization, it's not the sales force.
Okay, and then just a quick.
Bookkeeping question can you give us a little bit on the accretion on on Osprey, I know, we can do a little bit of the math with $20 million net 3% increase in industry and due to that but.
Can you maybe run us through maybe on an EPS level or maybe give us the cogs kind to kind of work our way through that math. Thanks.
Yeah, I think we've.
Now what we've told you what we are going to tell you guys that they.
But the pieces.
It's a it's a nicely profitable business it it more than covers the.
Increased.
Interest expense from.
From making the acquisition so it it's accretive.
After after covering all.
All incremental cost.
Okay. Thank you very much.
Thank you and this does conclude our question and answer session I would now like to turn the call back over to Richard Johnson for closing remarks.
All right everyone well, we thank you for your interest in and the discussion this morning.
We will talk to you again, when we put out our first quarter results.
Until then thanks and take care Bye now.
Ladies and gentlemen, thanks for participating in today's conference. This concludes today's program you may all disconnect everyone have a great day.