Animal Health International Inc. F4Q09 (Qtr End 06/30/09) Earnings Call Transcript

Sep. 3.09 | About: Animal Health (AHII)

Animal Health International Inc. (NASDAQ:AHII)

F4Q09 Earnings Call

September 3, 2009; 10:00 am ET

Executives

James Robison - Chairman & Chief Executive Officer

Bill Lacey - Senior Vice President & Chief Financial Officer

Analysts

Atif Rahim - JP Morgan

Mark Arnold - Piper Jaffray

John Kreger - William Blair

Jason Bednar - Robert W. Baird

Andrew Cash - Point Clear Value Management

Alan Weber - Robotti & Co.

Greg Edwards - Private Investor

Operator

Greeting and welcome to the Animal Health International fourth quarter 2009 conference call and webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions)

It is now my pleasure to introduce your host James Robison, Chief Executive Officer for Animal Health International. Thank you, Mr. Robison you may begin.

James Robison

Good morning. I’m Jim Robison, Chairman and CEO of Animal Health International. Thanks for joining us this morning. We are here to report our fourth quarter and fiscal year 2009 numbers. With me is Bill Lacey our Senior Vice President and Chief Financial Officer.

I’m going to turn the call over to Bill. So he can review the numbers and then I’ll make some comments and then we’ll take questions. Bill.

Bill Lacey

Good morning and thanks for joining us today earnings release. Before we begin, I would like to point out that today’s conference call is being recorded and will be available for replay on our web page at www.ahii.com under Investor Relations.

In addition, I would like to remind everyone, that some of the information discussed on this call, particularly our guidance for fiscal year 2010, our competitive position, future business prospects, revenue growth, and market opportunities for the coming fiscal year contain forward-looking statements that involve risk and uncertainty. These statements are based on current expectations.

Actual results may differ materially from those set forth in such statements. Additional information concerning risk and other factors that may cause actual results to differ can be found in the company’s filings with the SEC.

Please note that in addition, to reporting financial results in accordance with generally accepted accounting principles or GAAP, AHI reports certain non-GAAP financial results including EBITDA. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the comparable GAAP results, which can be found in the press release.

Finally, AHI has provided in its earnings release and will provide in this conference call forward-looking guidance. We will not provide any further guidance or updates on our performance during the year, unless we do so in a public forum. AHI does not assume any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist after the date on which they are made.

I’ll now provide you with the results of our fourth quarter fiscal year 2009 results. As I’m sure you keenly aware, our stock prices declined over the past year. This decline decreased our market cap and was a key factor that caused the company to record a non-cash pre-tax $25.2 million impairment of goodwill charge in the fourth quarter.

SG&A also includes a $2.7 million bad debt provision resulting from a dispute with a manufacturer regarding a rebate receivable. This rebate was actually recorded in fiscal year 2008, so there is no offset to this in this fiscal year, this is a $2.7 million hit in this year.

Senior management in the company also voluntarily forfeiture over one million options, causing an acceleration of stock option expense of $1.8 million. This was also a non-cash charge. Quarter also included a $0.2 million charge for severance.

Net sales decreased 8.9% or $15.8 million to $162.5 million for the three months ended June 30, 2009, down from a $178.3 million for the same quarter last year. Lower spending by production animal customers, whose profits have been constrained by fluctuating commodity prices are primarily to blame.

Gross margin declined $9.6 million with $3.2 million due to lower sales volume, $6.4 million due to lower rebates from vendors. Gross margin as a percent of sales was 16% compared to 20% in the same period last year. SG&A expenses excluding the accelerated stock option expense and bad debt provision declined $3.6 million from last year as a result of lower variable selling expense and cost reductions.

EBITDA for the quarter was $0.2 million, which was a decrease of $8.9 million from the year earlier quarter of $9.1 million. Adjusting for the bad debt provision and severance would yield in adjusted EBITDA of $3.1 million. Net loss for the third quarter was $29.4 million, down from the third quarter of last year net income of $2.7 million. GAAP diluted loss per share was a $1.21,

I’ll talk for a while, but the fiscal year which ended June 30. Jan results include the $25.2 million goodwill impairment. The $2.7 million bad debt provision in the acceleration in stock option expense of $1.8 million as discussed earlier, it also includes $0.7 million for severance.

Net sales declined $49.6 million or 6.9% to $666.9 million for the fiscal year ended June 30, 2009. Gross margin declined $23.1 million for the fiscal year and was 17.1% of net sales compared to 19.1% for last year. Lower volume reduced gross margin by $9.5 million and reduction in rebate reduced gross margin by $14.3 million.

SG&A expenses, excluding the bad debt forfeiture of options and severance declined at $5.6 million from last year as a result of lower variable expense in cost reductions. EBITDA for the year was $17.5 million, a decrease of $20 million when compared to the same period last year. EBITDA adjusted for the severance and bad debt provision was $20.9 million.

Net loss for the year was $27.1 million down from last year’s net income of $11.1 million. GAAP diluted loss was $1.12 million per share for the year. At the end of June, there were 40.6 days of working capital. Our average for the last 12 months was 46.7 days. Debt was retired by $16.5 million in the last 12 months, net of a $2.9 million paid in earn outs to selling shareholders of prior acquisitions.

Capital expenditures were $0.8 million and $2.9 million for the quarter and year-to-date respectively and the fixed charge ratio was 1.7 times on a trailing 12 month basis. At June 30, 2009, the company’s availability under its revolver totaled $31.7 million. The company is in compliance with all of its financial covenants.

Now we talk about guidance for the fiscal year 2010. The company believes that economic factors affecting our industry will improve in the next 12 months. Although, the exact timing of recoveries difficult to predict. The company’s currently projecting that conditions will improve in the third quarter of fiscal year 2010. Revenue for the fiscal year June, 2010 is expected to be $650 million to $685 million.

EBITDA is estimated to be $22 million to $27 million and net income is expected to be $2.3 million to $5.3 million or $0.09 to $0.22 per share. The company does not expect a significant improvement in its end markets in the first quarter. Revenue for the first quarter ending September 30 is expected to be $150 million to $155 million, EBITDA is estimated to be $2.5 million to $3.5 million and the net loss is expected to be $1 million to $2 million or $0.04 to $0.08 per share.

Jim, I’ll turn it back over to you for final comments.

James Robison

Thanks, Bill. Both the quarter and the year were obviously very difficult. We are disappointed in the results. I want to give you a little bit of inside into some of the causes for the results that we had and what our responses been. Our sales decline was mostly caused by reduction in purchases by our customers, mostly concentrated in the very markets. Other factors were substantial deflation in a couple of key products such as milk replacers and copper sulfate. We actually had an increase in unit volume and a decrease in revenue, because of the deflation in these products.

We also feel that we lost some high volume, low margin business ranging between $10 million and $20 million due to our lack of participation in discounting around a couple of key vendors and some compensation policy decisions we made during the year and they are also coming into the fall of last year, as we saw the markets decline. We did very carefully managed our terms and start to tighten terms such that we would not inherit other peoples problems.

The reduction in gross profit percentage is almost entirely caused by reduction in rebates, mostly due to the change of policies of our largest vendor. So we’re still operating in a very difficult environment, but we do believe that later on the year, as Bill indicated, when our customers businesses starts to recover we should see a pretty nice up-tick in results.

An anticipation of the downturn in the markets, which we really began to see at about this time last year, we began reducing expenses and to-date on an annualized basis we’ve reduced our SG&A expenses by almost $10 million. We’ve also been very active in assisting our customers and making optimal price product purchasing decisions.

Our industry has a tendency to stock up accessibly, when there offered channel deals, if you will and we’ve been active and helping our customers to make good buying decision around the products they buy, because our customers business is very strained. To that end, we are seeing some recovery in the beef market, there are many situations today where you can place a calf and hedge your inputs and get a slight profit.

Having said that, the beef industry is estimated to have loosed $5 billion last year at the [feeder] level, so it was a tough year and there was a drain of capital in that business. Losses in the dairy industry have narrowed given a pretty nice reduction in inputs and also a very slight up tick over the last 120 days in milk prices, but we are doing everything we can to help our customers stay the course and so far they’ve been great.

Our credit quality is good and as Bill mentioned, our working capital is in a good shape. So we feel like, we’ve been able to help our customers at the same time be responsible with our resources. We’ve installed business intelligence systems at a pretty good expense. These systems are installed completely and they enable our management team, our sales people to make better decisions in their business.

We’ve also shifted our sales and marketing efforts to vendors that are more supportive of us and generally distribution and in seven of our key vendors our sales are up year-to-date. The challenge that we have is that with our largest vendor, sales are down approximately 34%. Our largest vendor peaked out at almost 25% of revenue and we’re anticipating this year that vendor will be at about 15% of our revenue.

Things we’re currently doing, we’ll continue to build our proprietary products. We’ve launched two products just this month. We are also expanding our production animal technology offering. We continue to invest in Walco Environmental Services, which we think could be very exciting to this long term.

We continue to invest in our vet business and we’re putting plans in place to expand our sales territories and our distribution reach, once the production animal business turns around. By the way our vet business could perform relatively well last year to the rest of our business.

In conclusion, as Bill mentioned, we still see a great deal of unstuck in the marketplace. The next couple of quarters are going to be very tough. I think our dairy customer’s balance sheets are significantly strained. However, we do have complete confidence that the imbalance of demand and supply will mitigate, so the customers will become profitable again and when that happens we believe that we are well position to regain a lot of the ground that we lost over the last year.

With that, I’ll open it up the questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Atif Rahim - JP Morgan.

Atif Rahim - JP Morgan

I guess going back to your comments from last quarter. You had mentioned, you were seeing signs of some bottoming out and perhaps that may have happened based on your comments, but you’re expecting revenues to be down sequentially next quarter. So is that a change from which you had seen, or do you think things have actually gone better, but you just had some revenues perhaps pull through to the fourth quarter of this year?

Bill Lacey

The markets are pretty much as we anticipated from next quarter, when we look at them earlier. We do see in the future milk markets improvement. It is down, but it’s not down to where we thought we would be in first quarter.

James Robison

I think the credit issue is that losses are reducing, but they are still losses and the operators still have very strained balance sheets. Every month as the futures market roles into the stock market, the prices slide.

They are up from around $10 [hundredweight] for milk to just over $12. Breakevens are down from the high teens to the $13 range generally speaking. The reality is, our customers continue to loss money though and given the severe strength they had over the last 10 months or so until they start to make money, I think they are going to be restrained in the purchases.

Atif Rahim - JP Morgan

Do you think the breakeven is still around $12 to $12.50, you mentioned and as we look out, I haven’t seen the futures lately, but do those get better around the third quarter and then why you think there’s a turnaround for you guys around that time?

Bill Lacey

If you look at the December futures right now they’re about $13, $15 and they get up to $14 in April. So certainly, that’s above the breakeven level, we believe right now. That’s all predicated on what the efficiency of dairy. A very large dairy is going to be above breakeven, some of the smaller one below it.

Operator

Your next question comes from Mark Arnold - Piper Jaffray.

Mark Arnold - Piper Jaffray

Can you comment on just the bad debt provision? Is that rebate still something that you might collect, or what’s the progress there?

James Robison

We believe that it’s unlikely, that’s when we setup a provision for it. We have not written it off yet. We will continue to pursue that, but it’s not likely reserve, that’s a 100% reserve for that rebate.

Mark Arnold - Piper Jaffray

Then just another clarification, what is the adjusted EBITDA numbers as declined by your credit agreement in the quarter?

James Robison

The rolling 12 is a little over $21 million and we’re allowed to add back forward. If you take the management number, which is $20,905 million I believe, you add back forward these, but $400,000, $500,000 I believe. It’s probably 21.4 or so for the bank number.

Mark Arnold - Piper Jaffray

As I look at the quarter, the $3.1 million number kind of adjusted for the different provisions, are you able to add back all those provisions in the quarter under your credit agreement.

James Robison

Yes, we are.

Mark Arnold - Piper Jaffray

Then just moving to guidance, I guess you guys have noted that you expect fiscal year 2010 to look at that different from seasonality perspectives, and you talked a little bit about at here already.

Can you just give us a little bit more color on the expectation you kind a build into that guidance, are using futures is kind of your guide towards to expect that. I guess Q3 and Q4 are going to be maybe stronger than, and these are in a relative terms inside the year going to be stronger versus what they normally are for you and just kind of talk about the change in seasonality that we should expect here?

Bill Lacey

Mark, the way business plan is expected to go right now is that, we would see a decline in revenue year-over-year in the first half being the September and December quarters and then we will start to see improvement in the margin June quarters. This is a very difficult point to determine, where these guys are going to break at.

We’re hearing some indication in the market that we will have a weak market this year and some these animals will be moved into the stocker program and into the feedlots and when these cattle move that’s good for us. We’ve really hadn’t had much of a stocker program for the last two year we market.

So, if this occurs, that would be a good thing and that’s a final program, but we really didn’t project much of a pickup this year. It is really tough on the dairy guys right now, but I think if anything the feed markets are starting to solidify a little bit and they’ll probably slowly improve overtime. I think the dairy markets when they get above their breakeven numbers will get better much quicker.

Mark Arnold - Piper Jaffray

Maybe this is question for Jim. As we think about all of these factors that are moving around in different directions, but I think we started to see feedlot placements look a little bit better. Pricing as you guys mentioned has gone up, futures pricing for both beef and dairy input costs are down, but at the same time you’ve got the herd being called, which in the short term probably heart you in the long term is a good thing in terms of supply demand in the industry.

How do we think about all these things happening? I guess you can really look at one of these directional inputs on their own, I mean how can we look at the confluence of all these things happening and how do you guys expect that to play out here over the next three to six months?

James Robison

In our forecast, we don’t really have anything reflecting substantial improvement in the markets over the next six months. If you think about the policies that we are putting in place in 2007 and what input prices were just a year ago, there’s still a residual effect on the industry. Within the beef industry mostly around, there’s still a lot of heavy cattle coming to replaced in feedlots, which means that their stay there in shorter.

That’s been the biggest factor on affecting capacity and they also use less meds, that’s a factor of the expenses of fattening an animal with corn as opposed to grass. So that will normalize in time, depending on what grains do, but that is a huge factor.

Within the dairy market, exports are off by 50% roughly, it’s estimated the domestic demand is down by 1% to 2%. Milk productions, there were about 9.6 million cows at the peak; there’s about 9.2 million cows now. So it implies a reduction in production of maybe rough cuts 4%. So there’s still too much supply.

So we anticipate the next couple of quarter, we’ll still be difficult, but ultimately as the economy starts to turn, as people go out and spend more money in restaurants and certainly in the steak houses, there’s going to be a bigger spread on the yield, that’s creating more profit in the beef business.

We think numbers are low and so as export markets start to pickup and demand starts to increase, we think that the profitability will return, but we just don’t know when that’s going to happen. It’s very, very hard to look at all of the dynamics of our industry and come up with any predictable conclusion about timing is almost impossible. I wish I could give you more, but we are relatively optimistic for the entire year and we think it’s going to be tough couple of quarters.

Mark Arnold - Piper Jaffray

Just one last question from me, you guys mentioned earlier, the impact of one of your large vendors and the reduction in rebates. What is your guidance assume for vendor rebates going forward here in calendar year 2010? Does that assume that they basically remain the same or are you expecting some further changes, either positively or negatively in your guidance?

Bill Lacey

We have assumed in our guidance for next fiscal year that the rebate programs that are in place in this calendar year and rebate program almost entirely run on a calendar year basis, that the programs in place today will be in placed for the entirety of next fiscal year. So we’re forecasting no improvement in any of the rebate programs right now.

Operator

Your next question comes from John Kreger - William Blair.

John Kreger - William Blair

Just a follow-up on the rebate question, the $2.7 million of write-off, was that relating to rebate that you had recognized in our prior period?

Bill Lacey

Yes, it was. That was recognized, about $100,000 of that or $2.6 million of that recognized in fiscal year ’08.

John Kreger - William Blair

Bill, can you tell us, would that be the same large vendor, where you’ve had a pretty significant decline in sales in the last year or would that be a different vendor?

Bill Lacey

I’d rather not say anything more about that.

John Kreger - William Blair

Looking beyond that, at your bad debt provisions, how comfortable are you that you are appropriately reserved given the tough economic environment?

Bill Lacey

Thanks a great question. Given the financial stability of the dairy markets right now, we are very closely monitoring those customers as well as the beef guys, but mostly the dairy guys and we have seen nothing to indicate any kind of capital problems. I mean, we hear that they’re certainly tight right now, but we’ve seen nothing in our receivables to indicate our problem.

John Kreger - William Blair

A question about your guidance, it seems like you’re expecting EBITDA to sort of stabilize in the mid 20s. Can you just refresh our memory, what’s the point which you’d have any sort of a covenant problem. What’s the EBITDA level, where the banks have some covenant could be trigged?

Bill Lacey

That’s the difficult question, because there are a lot of factors we go into that. We go into this year with the tax credit, so that will help us because it involves cash taxes paid and I believe we’ve got about $1.7 million or $1.8 million tax credit going into the year that will help. Our capital expenditure is a function of the equation and will certainly make sure we are very prudent in where we spend our capital expenditures.

Having said that, my guess is probably around $16 million something of the EBITDA, somewhere in that range and that’s includes -- we have a excess cash flow payment we’ll make this year, because we generated a significant amount of cash for the term note. It’s not significant; it’s something $2.2 million or $2.3 million of excess cash flow paid down on the term note this year.

John Kreger - William Blair

So that $16 million on a rolling trailing basis?

Bill Lacey

Yes.

John Kreger - William Blair

Another question, can you give us a sense about your revenue mix beef versus dairy? Are those roughly comparable at this point?

James Robison

Yes, they are. We’re a little bit higher in dairy and dairy coming back, they’re pretty close.

John Kreger - William Blair

Then my final question on margins, it seem like if you look at your March quarter versus June. You had a nice improvement in top line, but gross profit decline. Can you just give us a better handle on what drove that? Was that purely rebates?

James Robison

Yes. There is just not much rebates in this market right now and given the decline in year-over-year sales, that also impacts. The change in the program, as well as the decline in sales impacts the rebate.

John Kreger - William Blair

So is the rebate issues sort of washed out at this point or could rebate fall further?

Bill Lacey

No. I think we’re at the bottom. There is not much out there to get.

John Kreger - William Blair

So we think about the margin improvement in the second half of your guidance. That’s not rebate driven, that’s just a top line improvement?

Bill Lacey

That’s correct.

Operator

Your next question comes from Jason Bednar - Robert W. Baird.

Jason Bednar - Robert W. Baird

First, just wondering if you could provide any color on the equine business within companion and then companion as a whole?

James Robison

The equine business is off substantially, given the economic downturn and given that’s really a discretionary spend market. So we’ve seen that decline really for the first time since buying the business years ago. Companion business is in healthier shape. I think people still view that as a less discretionary business.

Our vet business generally out performed other parts of our business for the year. So the most impacted business by the economic downturn from the dairy business, I should say pork, but we are not using the pork business, secondly dairy, third beef, fourth will be equine and then Canine and Feline.

Jason Bednar - Robert W. Baird

I know you mentioned the breakeven right now on milk averaged out maybe around $13, but if corn prices stay at their current levels, where do beef and dairy prices both need to get to and kind of stay you thin where you are going to get your production customers to actually spend more on healthcare products?

James Robison

People that feed calves; can place a calf right now for a period of four to 5.5 months, hedge their inputs, hedge corn primarily and sell the animal on the board and make a $20 return. You’re got some risk factors in there. You’ve got whether mortality, but generally you can place a herd of calves right now and make a very small profit. In the dairy market, given where inputs are right now, prices are going to have to get into the $13 to $15 range.

Grains and silages have comedown really nicely, and at least in the foreseeable future indications are that’s not going to change. This volatility in grain over the last two years is never, really since fall of those fixtures has never been seen before in the history of the production business and so if we get more predictability around grain and prices get into the normal range to say $13 to $14 hundredweight, our customers will be making money again.

Jason Bednar - Robert W. Baird

Then I guess just based on some of your previous answers and some of your commentary. Is it fair to say that beef revenues saw a small decline in the quarter and if you kind of expecting for the first half of ’10 was beef closer to flat or maybe slightly positive and dairy is just much weaker in the quarter obviously, but also much weaker going forward in ‘10 as well?

Bill Lacey

The beef market, I would say that overall our dairy business has been in a bigger decline in the last three to six months than our beef market has. Beef market has been consistently down from a longer period of time. We’d really that we’ll see pretty much flat, beef market is pretty much at the bottom as well as the dairy market and it’s just hard to tell when these things are going to ramp up.

Even though, we feel like the breakevens get pretty nice or the futures market indicates pretty good growth in price, it’s still hard to tell when these guys are going to start spending money.

Jason Bednar - Robert W. Baird

Then just, I guess one final small modeling one. Could you provide maybe an adjusted ESP, if we exclude all the non-recurring items, the bad debt, the severance, the goodwill and the write-off?

Bill Lacey

Yes, I think for the year, it was about $0.06 per share. Don’t hold me to that because there’s a lot of tax and non-tax implications in some of these charges. I think it was about $0.06. There was only about 5% of that impairment charge is tax deductible as well as some of the stock option is non-deductible.

Jason Bednar - Robert W. Baird

That’s what we’re trying to flush out. What about for the quarter on an adjusted basis?

Bill Lacey

I think it’s about $0.04 a share in loss for the quarter.

Operator

Your next question comes from Andrew Cash - Point Clear Value Management.

Andrew Cash - Point Clear Value Management

Just assuming that your bearish outlook holds true for the first half, I going to calculate that sort of on a breakeven earnings per share basis, your fixed coverage ratio would be around $1.2. If that’s correct, I mean are you guys comfortable with that sort of level and if not, there’s something as you can do, some self-help measure you can do to build a cushion around that.

James Robison

Yes, there are. There’s basically three things: It’s obviously cutting cost, some of the discretionary accruals that we put during the year for thing such as bonuses. We can control capital expenditures which will control very tightly until we get more of a cushion in this process. We can look at also unwinding our interest rate swap, which would give us $300,000 number for each month.

Those are the primary things that we could do to avoid any kind of fixed charge coverage breach.

Andrew Cash - Point Clear Value Management

So as you think beyond the first half, let’s assume that there’s not a strong recovery. Although, based on the depths of this downturn, there is going to be a real strong recovery in the next couple of years for sure, but if we don’t get the strong recovery and based on your guidance, you’re going to have to move your EBIT margins up a couple 100 basis points either through, cost cutting or an increase in gross profit.

I mean you can walk through the dynamics of how you will increase your EBIT margins over the fourth quarter level.

Bill Lacey

There are a couple of things, obviously as Jim mentioned, we have got about annualized $10 million cost reductions that are in the system right now.

Andrew Cash - Point Clear Value Management

That’s already done through, right.

Bill Lacey

That’s correct. There are obviously, if we don’t see a recovery more cost that we could take out of the business and we are fully implemented in our pricing discipline program right now and we have seen results pretty much as we expected so far in that program which just went live on July 1 company wide.

So we think that will generate more margin, we are very helpful that it will realize all of the cost cutting measures that we have implemented, and hopefully get some better programs out of some of the manufacture maybe in the future as well.

Andrew Cash - Point Clear Value Management

So you’re pretty comfortable with your guidance for the full year, it sounds like…

Bill Lacey

Andy, I don’t know if that’s a fair thing to say. We just not real clear about when this thing is going to turn. In the first six months lets say that we very conservative look at the first six months and the upside to that could be pasture markets for the beef business, which could get in the cattle move at that point and cattle move they’re treated, so that helps us a little bit.

That would be the upside of the first six months that we didn’t put in there and we are very conservative with our margin estimates and our volume estimates as well I think.

Andrew Cash - Point Clear Value Management

Just a couple other things, it sounds like your inventory management, you got the inventory sort where you want it, is there any upside potential in terms of lowering your inventory even further as far as cash conservation?

Bill Lacey

No, our inventories ended June at around $86 million I think. $89 million which is $9 million down from a year ago. I think they were pretty tight in June and you will see an increase in the September number certain period we are going to a pretty heavy part of our seasonality.

James Robison

We’ve not initiated any action to constrict inventory to produce cash in the business.

Andrew Cash - Point Clear Value Management

Well just a final question to you Jim. You gave an update last conference call about your views about the supplier consolidation and I was wondering if you could give us your latest thoughts on that and what kind of impact do you think that might have either way on AHI’s success in the future?

James Robison

Sanofi bought Merck share of Merial. Merck announced a new work structure this week that had a discrete animal health division in it and we hear that Merck’s fairly seasonally committed the animal health business, so we don’t know that. So the Intervet/Schering business looks like in good hand and they’ll continue, they’re a key vendor because and they’ve grown very nicely with us this year.

So that’s good news. It is good to have Sanofi focused on animal health. We hope they bring more resources to Merial. Merial was set up in such way that it was primarily cash generated for Sanofi and the legacy animals business as well as more. So now that it’s wholly-owned by Sanofi, we’re hoping that it’s going to be a business put resources into.

It looks like Pfizer is going to end up with, a lot of the equine line from Fort Dodge, which we refined with the implants some of the pharmaceuticals, but the largest part of the business the vaccines, the mastitis tubes and the Endectocides will be spun off. We hear they are couple of significant players that are in the auction still.

Andrew Cash - Point Clear Value Management

You’re friendly with them?

James Robison

We’re friendly with them. So, that’s going to be a happy outcome.

Andrew Cash - Point Clear Value Management

If you look structurally at how the Fort Dodge, Pfizer mix shakes down from a structural perspective. You think you’ll be still in about as good a position. Or you could say as better position as you have been in the past? You don’t really see a big game changer as far as the structural supplier outlook between Fort Dodge and Pfizer is that seem fare--?

Bill Lacey

We got one meaning issue, we do at $6 million implants and that business has gone over to Pfizer, but we’ve got two alternatives that are very, very good one of which is within that and we’re going it extreme very, very rapidly.

So, we have a great ability to shift share there, which we’re going to do it currently. So, we feel fine about the outcome regarding vendor consolidation. We’re still going to have six or so major suppliers competing over products in the marketplace. The FDC has done and real good job with this thing.

Andrew Cash - Point Clear Value Management

I just have one final question. I’ve been out on the filed, I’ve talked to a lot of your customers and lot of your suppliers and it sounds like, it feels to me like and I’ve got good evidence, things are turning. We’re through the bottom of it.

Is it fair to say that, because you’re seeing some of the same things although I understand you got to be very conservative in your comments?

But if you didn’t see that sort of thing, I would expect you to be announcing major cost cutting programs now, I guess the reason why you’re not making those big announcements now is because, you really do believe there’s some evidence that you want to keep all your sales guys out there, your good sales guys, you want to keep your assets in place because that turn is starting to come.

James Robison

I’d love to tell you that with any degree of certainty tell you that right now, but there is uncertainty in the market today than there’s been in quite sometime, because of the fact that the balance sheets of our customers are pretty thin. An agricultural business owner will write his balance into the ground. They’ll hold their breath until they break the good news about them is that they are generally extremely ethical and they’ll do everything within their power to pay their bill.

We’ve had customers go out on us, in other words close operations liquidate and be current on their payables. So we’re participating in an American Heartland business, where people are extraordinarily ethical, that I can tell you, Andy they’re extremely strained right now.

We’re doing everything we can to stay within the next couple of quarters from a support standpoint, but until the supply/demand problem mitigates, there’s going to be uncertainty in the business.

Operator

Your next question comes from Mark Arnold - Piper Jaffray.

Mark Arnold - Piper Jaffray

Just a couple of quick follow-ups; Bill, somebody asked a question about that the trailing 12 month EBITDA level that would bring you down where you’re kind at that fixed charge coverage ratio that would cause some heartburn? There were a couple of things you said there that I just wanted to clarify. So the excess cash flow payment that you have to make, with that go count against the denominator in terms of principal payment?

Bill Lacey

Yes.

Mark Arnold - Piper Jaffray

That’s a payment you have make relative to your cash flows in fiscal year ’09, or is that the assumption based your expected cash flows for fiscal 2010?

Bill Lacey

That’s measured. Once a year, based on the June results.

Mark Arnold - Piper Jaffray

Then paid in the first quarter of the following year?

Bill Lacey

Yes, I think we’ll make that payment in around the middle of September.

Mark Arnold - Piper Jaffray

That’s really the change there as it’s driving up your principle payment because of that excess cash flow.

Bill Lacey

That is exactly correct.

Mark Arnold - Piper Jaffray

Then cash interest expenses, I guess it depends a little bit on interest rates, although you have got your swap in place. So we are still looking, absent you making a change to that in the $9 million range is that about right?

Bill Lacey

That’s about right.

Mark Arnold - Piper Jaffray

Then you made a comment about the tax credits, but you really shouldn’t have much at least based on your guidance, much of the cash taxes paid here in fiscal 2010 is that correct.

Bill Lacey

Certainly in the first six months.

Mark Arnold - Piper Jaffray

Then just one separate question, what is the timing of I guess the Pfizer rebate discussion for 2010. When are you going to start to see details of any program as they might implement for next calendar year. At what point are we likely to have a resolution as to what their vendor program they will have for calendar 2010?

Bill Lacey

I will speak to all of them and not to Pfizer, but we start in the October timeframe meeting with the all of our significant vendors and discussing programs for next year. Those meeting are already set and they will be ongoing, again I think Pfizer in particular has set their direction, I don’t expect any big change in course next year from where they are present.

James Robison

In our budgets, we have no improvement in rebates from Pfizer planned. We do believe that given all of the change in the industry there is going to be big jump for share in 2010, market share and that will create an opportunity for us to assist people that value our relationship, and that will be able to do well from those relationships, but we have not back to that into our budgets anyway yet because we just don’t know.

Mark Arnold - Piper Jaffray

Maybe just to follow-up on that without mentioning names, it would seem evidence that there has been a decent market share shift and shake up this year, I guess I would view that as a positive in a way for you guys and that it does demonstrate the importance of the channel and it also bring to your comment here a second ago, might be even more of a battle from market share in 2010. Is that the right way to think about it?

Bill Lacey

I wouldn’t characterize it as a battle. We’ve got a whole host of programs in place with vendors that what to work with us at every level of our organization and we’ve been successful even in tough markets. Working with vendors to affect their sales in the channel, we currently have a logistics agreement with Pfizer, we’re honoring that agreement.

Seemingly, they’re happy with it and so, we just don’t believe that heightening conflict to an extreme level is really going to do a lot. They’ve taken one path other vendors have taken other paths. We’re going to adjust accordingly and I think overtime, things will normalize a bit will be fine, but I don’t think we’re going to see any deciding movement in the next couple of quarters that will shift bullish over the last year.

Operator

Your next question comes from Alan Weber - Robotti & Co.

Alan Weber - Robotti & Co.

Jim, you made a comment that, I believe 17 vendors revenues were up, was that for the quarter or for the year?

James Robison

That’s year-to-date.

Alan Weber - Robotti & Co.

Did you give what the decline was? I missed that.

James Robison

Our largest in the livestock business, in the production animal area was down approximately 34%.

Alan Weber - Robotti & Co.

I think you said your business went from 30% to 15% with them?

James Robison

We had peaked out with that particular vendor being approximately 25% of our revenue and we’re forecasting that on a run rate basis there at or below 15% of our revenue today.

Alan Weber - Robotti & Co.

I mean, how should we view that? Is that a positive, a negative? How do you do that for the company?

James Robison

I think it’s a negative. We don’t agree with obviously the policy of that vendor. We’ve tried to accommodate them and adapt to it, but we had a five year compound annual growth rate of almost 20%. They had an internal growth rate of about 10%, which was about two and half times the industry growth rates. We think the whole shift has been somewhat destructive, but it is what it is.

So the challenge with it is, given a relative importance to us, it’s affected our earnings substantially. It’s been the biggest driver of the retrenchment from almost $38 million in EBITDA to $21 million in EBITDA.

Alan Weber - Robotti & Co.

I just can’t quite figure out if you get more business from some of the smaller vendors, but kind of makeup some of that close to EBITDA.

James Robison

Well those things generally happen overtime. It’s just hard to adjust in a short period to something of that magnitude.

Alan Weber - Robotti & Co.

If you meet the projections in 2010 that you forecasted, what does that mean in terms of debt reduction, give me on the working capital changes?

Bill Lacey

Alan, in this fiscal year net of the $3 million we paid, our final payment on one of our acquisitions, we generated about $18 million worth of cash pay down of our debt and I think next year certainly be less next year because this was a bit of an adjustment for volume going through our working capital. Working capital in past year was a generator of cash or source of cash as opposed to a use of cash.

As we grow out of this it will again become a use of cash, so I think next years cash flow will be something certainly less than this years, and I could go back into my forecasting I hadn’t thought about what range I would like to put on, but its probably going to be, if I had gets in the $6 million to $10 million range.

Alan Weber - Robotti & Co.

$6 million to $10 million of what you would call free cash flow after CapEx and interest?

Bill Lacey

Correct

Alan Weber - Robotti & Co.

I guess my final question was when you talked about this pricing system put in place July 1, I think Jim you alluded in your comments. Can you just explain what you see long term the impact from that?

James Robison

We have a 35,000 stock keeping units from about 17,000 manufactures and about half that business the manufacture has a suggested sell or contract sell price that we have some impact on, but generally we don’t set the pricing on it. Our customers base is very is not homogeneous its very broad customer base.

So in the absence of some intelligence around how to price in the marketplace the pricing outcomes are fairly random and don’t reflect the economics of our business and the markets, the competitiveness of the markets. So pricing this intelligence produce is really design to price intelligently and to move way from a random pricing so that we can retain in growth share same time optimize gross profit margins.

So it’s a pretty neat product, we have if fully implemented it. The results of been encouraging, we can talk a little bit more about them next quarter, but we are hoping that we will see some the results from it.

Alan Weber - Robotti & Co.

That would be pricing where the vendor does not basically mandate a price is that correct?

James Robison

That’s right. Vendors by law generally mandate price unless they contract with the customer and assign that contract to us. That happens on occasion, but yes, it’s in those areas, about half of our business we can affect price.

Operator

Your next question comes from Greg Edwards - Private Investor.

Greg Edwards - Private Investor

I’m wondering if you guys can explain the option forfeiture, and the details around that and kind of specifically did you guys get any replacement options?

James Robison

The rationale was to replenish the pool. There’s a general acceptable rule that the option pool should remain at less than 15% of total capitalization and we want stay within that range. So the impact was simply to provide replenishment. We’ve not reached any agreement with the board about the replenishment of that pool.

We do anticipate that as what we have in the past that we’ll be eligible for some kind of equity consideration on an annualized basis. I think that comes up over the next several months, but we’re not certain with that will be and we’ve not have any grieve with the board.

Greg Edwards - Private Investor

I guess on a different tone, I look at where your stock is trading and I guess that it’s rough out there, but you got a company like Midwest trading at two times less quarter’s revenue. At this point, you guys we’re at roughly 0.25 times.

They could swallow you guys in a multiple very easily and it would make a lot of sense. I was just curious, at this point with the stock where it is, and the economy where it is and your business where it is? Why do you guys need to be public?

James Robison

I don’t think that it probably wouldn’t really serve the purpose of this call to speculate about that. We’re not the entity that would take the action to initiate something. We reached a pretty significant low point both in equity evaluation and performance. We think it’s caused by almost entirely by two driving factors that the policy changes for the key supplier, which we can adjust overtime and unprecedented downturn in the protein markets.

I don’t think there’s a lot of sellers on our side right now, and let me just leave it at that.

Operator

Your final question comes from Andrew Cash - Point Clear Value Management.

Andrew Cash - Point Clear Value Management

You guys were talking about a big vendor and how it hurt your profitability, but the stand point of your competition and the distributors that you compete against. They treated the other distributors the same way as far as I know. So that, you’re not at a competitive disadvantage are you because of the financial relationship that has changed with your big vendor, is that correct or not?

James Robison

That’s correct.

Andrew Cash - Point Clear Value Management

So, you are not at a competitive disadvantage. Okay just speaking of competition it looks like one of your competitors is gaining some share especially in the dairy area, and perhaps its their relationship with vets that’s slightly that I am not sure, but assuming they are gaining some share in dairy, why can’t you guys limit what they are doing so you can either whole share or increase your share.

James Robison

I think Andy, we have lost a little bit of share as I mentioned in my comments in the low margin, high volume markets and we loss that share for couple reasons, one we wanted our sales force closed focus on more profitable activity and two, over the last year we have been very concerned about receivable risk.

Andrew Cash - Point Clear Value Management

So there is an intelligent mix change.

James Robison

I don’t see it necessarily the victory, but I think from a timing standpoint it was probably the responsible thing to do.

Andrew Cash - Point Clear Value Management

Then just final follow-up, one thing I don’t understand about your reflection of the asset-backed loan, the availability on the revolver increased $7 million in the third and fourth quarter, it appears to me that the value of inventory and accounts receivable declined by about $8 million, so how did that happened.

Bill Lacey

The loan went down, the balance of the revolver certainly down. There was only three categories in this think, it’s a receivables that we borrow on at about 85% inventory which we borrow at 61% or 62% is the balance in the revolver itself.

Andrew Cash - Point Clear Value Management

I was looking at the wrong way, because inventory and accounts receivable decline I would have thought the availability would have declined as well.

Bill Lacey

Not the revolver went down faster.

Operator

Gentlemen, we have no further questions at this time. I would like to turn the floor back over to Mr. Robison for closing remarks.

James Robison

Great, thank you we appreciate your questions and have a nice Labor Day Holiday. Thank you.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and we thank you for your participation.

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