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Animal Health International, Inc. (NASDAQ:AHII)

F3Q10 (Qtr End 03/31/10) Earnings Call Transcript

May 4, 2010 10:00 am ET

Executives

James Robison – Chairman, President and CEO

Bill Lacey – SVP and CFO

Analysts

Mark Arnold – Piper Jaffray

Alfred Raymond [ph] – JP Morgan Chase

Ravi Fadah [ph] – William Blair

Andy Cash – Point Clear Value Management

Jason Bernard – Robert W. Baird

Alan Weber – Robotti & Company

Operator

Greetings and welcome to the Animal Health International third quarter 2010 conference call and webcast. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. James Robison, Chief Executive Officer for Animal Health International. Thank you, Mr. Robison. You may begin.

James Robison

Hi. Good morning. I’m Jim Robison, President and CEO, Animal Health International. With me this morning is Bill Lacey, our Chief Financial Officer. Bill will review the results for Q3 of our fiscal year, also our year-to-date results. I will then make brief comments and then we’ll open up for questions. Bill?

Bill Lacey

Thanks Jim. Before we begin, I'd like to point out that today's conference call is being recorded and will be available for replay on our webpage at ahii.com under Investor Relations. In addition, I'd 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 current 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're made.

I will then provide you with financial results of our third quarter of fiscal year 2010. Net sales compared to last year increased 9.4%. Net sales for the quarter were $165.1 million compared to $150.9 million for the same period last year.

Gross margin increased $2 million, with $2.4 million due to sales volume. Margins in the third quarter were 16.6% of net sales compared to 16.8% in the third quarter last year. SG&A expenses were 13.7% of sales compared to 14.3% last year. SG&A expenses were $22.6 million, compared to $22.2 million last year.

The EBITDA increased 39.4% over the third quarter last year. EBITDA was $5.1 million which is an increase of $1.4 million from the year earlier quarter, $3.7 million. Net income for the third quarter was $0.1 million compared to the third quarter last year, net loss of $0.3 million.

Fully diluted earnings per share were 0, versus $0.01 loss last year. Earnings per share without amortization or cash basis, EPS was $0.05 per share. Net income included a $0.4 million non-recurring non-cash charge, foreign currency exchange due to the early retirement of debt in Canada and a $0.6 million non-charge for the unamortized cost associated with unwinding interest rate swap.

The after tax effect was $0.7 million or $0.03 per share. Earnings per share without amortization over these non-tax non-recurring charges was $0.08 per share. I will discuss we sell it for the year-to-date. Net sales for the year-to-date were $496.9 million compared to $504.4 million for the same period last year.

Gross margin declined $5.2 million with $1.3 million due to lower sales volume and $4.4 million due to reduced profitability with one of our suppliers. Margins for the year to date were 16.6% of net sales, compared to 17.4% last year.

SG&A expenses declined $3.3 million from last year as a result of lower variable selling expense and cost reductions, partially offset by an accrual of $0.4 million for the final settlement and costs associated with a legal dispute. EBITDA for the year-to-date is $14.7 million which was a decrease of $2.6 million from last year, same quarter – excuse me – year-to-date.

Excluding the one-time legal settlement, EBITDA was $15.1 million down $2.2 million from last year. Net income for the year-to-date was $0.6 million compared to last year’s net income of $2.2 million. Fully diluted earnings per share were $0.02 versus $0.09 last year. Earnings per share without amortization or cash basis EPS was $0.16 for the first nine months.

Net income included – for the year-to-date included a $0.4 million non-recurring non-cash charge for foreign currency exchange due to the debt retirement in Canada as we discussed earlier and $1.3 million non-cash charge for the unamortized cost associated with unwinding interest rate swap.

The after-tax effect was $1.1 million or $0.05 per share. Earnings per share without amortization over these non-cash non-recurring charges was $0.21.

At the end of March, there were 47.9 days of working capital. Our average for the last 12 months is 48.6. Capital expenditures were $500,000 for the quarter. The fixed charge ratio was 1.4 times on a trailing 12-month basis. The company is in compliance with its bank covenants.

At March 31, 2009, the company's availability under its revolver totaled $24.8 million. I’ll talk a minute about our guidance for the rest of this fiscal year ending June. The recovery which we have forecasted to start at the beginning of the calendar year did not materially begin until March.

As result of this delay, management forecasted our results for the fiscal year will be on the low end of our previously issued guidance and should adjust the EBITDA range to $21 to $23 million.

Net income is expected to be $1.1 million to $2.4 million or $0.05 to $0.10 per share. Cash EPS – cash basis EPS should be between $0.23 and $0.28. Earnings per share without amortization over the previously mentioned non-cash non-recurring charges, foreign currency and interest rate swap should be between $0.28 and $0.33. With that, I’ll turn it back over to Jim for his final comments.

James Robison

Thanks Bill. The quarter was encouraging as I believe the market – shift in our markets and our company’s prospects in our sales growth of 9.4% and our EBITDA improvement of just under 40%. Our beef business was particularly strong, driven mostly by strengthening in prices that happened about midway through the quarter and as you probably know the supply of beef is fairly low.

So any improvement in demand is going to push prices rather drastically. Beef prices were in a low-to-mid 90s – excuse me – 80s until about halfway through February and when there was a spike up into 90s and it really support the great overall activity.

Our dairies while operating – our dairy customers were operating around breakeven or slightly better on a cash basis. They did not recover during the quarter as we’ve anticipated. Milk prices actually decreased.

During the quarter, we believe that trend will reverse itself during this quarter. Our vet sales were up very nicely and we’re profitable in all parts of our vet business. The economy is proving not only, improving not only among the perking [ph] producers but also among the companion animal vets.

We continue to see focus in this area – we continue to focus on this area. We believe that margins will continue to trend favorably. We’re encouraged by our expenses, as a percent of net sales, they were favorable to last year.

We’ll continue to realize positive operating leverage and drop through in our core business, given the expenses that we take out of our business for the last 18 months.

Our focus remains on pricing competitively while intelligently and we think that given our improvement in our pricing intelligence initiatives along with our efforts to shift the sales of low-margin products to higher-margin products, it will start to see positive trends in transaction gross profit margins.

In summary, our business is improving, our results are improving, our sales are growing nicely. Our management team is executing very well against our key objectives and we are optimistic about prospects of our company.

I’ll now open it up to questions.

Question-and-Answer Session

Operator

Thank you, gentlemen. (Operator Instructions) Our first question is coming from Mark Arnold of Piper Jaffray.

Mark Arnold – Piper Jaffray

Good morning, guys.

James Robison

Hey Mark.

Mark Arnold – Piper Jaffray

I guess, to start with a couple question for you, Bill. When you talk about the non-cash charges in the quarter, specifically the 400,000 due to the early retirement of debt in Canada, where does that show up on the income statement.

Bill Lacey

It's reflected in net income. It is not in the – it's our side of the EBITDA calculation. It's properly reflected in the EBITDA without it.

Mark Arnold – Piper Jaffray

I guess that was the question is why – maybe I'm just not thinking about the expense rate, why would you not have that pack?

Bill Lacey

It's not included in the charges at the EBITDA line.

Mark Arnold – Piper Jaffray

Okay.

Bill Lacey

Or we would have.

Mark Arnold – Piper Jaffray

Okay. So it's below the line therefore, it's not coming out, okay, I understand. And same thing is true with other 600,000 related to unwinding interest swap.

Bill Lacey

That is absolutely correct.

Mark Arnold – Piper Jaffray

Okay. Just, I guess on the comments, Jim, on the beef market in particular, you talked about the improvement there in the quarter and you made some comments about the relatively tight supply, today and what that means for beef prices in the future, again we see some uptick in demand. What – can you maybe just give us a sense as to, as we look forward, particularly through the fall, how that dynamic kind of work supply is today and within – hopefully continue to improvement in pricing, what that means for how, what producers activities are likely to look like over the next 9 or 12 months?

James Robison

Yeah. These are – it's very difficult. I understand your support gas prices and the effective prices, but I'll speculate around that question if you will. The cow numbers are as always as they been in roughly 45 years and so anytime get an uptick in demand that's going to affect prices fairly dramatically. I think what's happening and I haven't seen, I only have – any build evidence of this, but I think what's happening is that Corporate America is again spending money on entertainment, their traveling and so there seemly is going to be an impact now in deep demand that high end demand for final choice cuts.

The – what it does to our industry is when our customers are doing well they are much more active and spending money on our animal because investment and animal health products generate yields, higher outcomes and there's an applied economic return to the investment in animal health. So there's a somewhat of a swing around the profitability that's more dramatic than just a peer number demand by head. So an animal that's anticipated to be profitable are going to – they're going to push it, so we're going to pull it to corn [ph] and probably sooner. They don't want to try to finish it sooner so they're more likely to use animal health products.

When the market is not healthy, they leave the animals out. They live on grass longer, but it was viable to use for higher-end medication or less viable to use therapeutic treatments that are expensive so they just spend less across the board generally. So we think that what will happen is that the market will start to recover to somewhat of a normal cycle between the stages of one animal and a compliant environment and when they go to, when they go to grass.

So we think that generally markets will improve. As far as the dairy business is concerned, I know you didn’t ask but there's quite a bit of supply. The biggest factor right now is the stabilization of beef prices and things look pretty good right now regarding grain prices. So we're anticipating our dairy customers will recover over the next 60 to 90 days nicely as thing, as key essentially lower supply and thus prices go up somewhat.

Mark Arnold – Piper Jaffray

Okay. And just maybe to summarize so that on the beef side, I think what's you're saying is, we may actually see if trends continue as they're going now, we may actually see a fall run in this fall?

Bill Lacey

Yes. That's right.

Mark Arnold – Piper Jaffray

Okay, which we haven't really seen in the last two years.

Bill Lacey

That's right.

Mark Arnold – Piper Jaffray

Okay. And then just one more comment on the dairy side, you talked about the dairy prices declining a bit in Q1. It looks like we have seen them recover in quite a bit here in the last month. So as we think about your last, your June quarter here, how should we think about the impact even kind of a dollar improvement maybe in milk prices, what can that – how should we think about that having an impact on the two quarter results?

Bill Lacey

We really have not drawn any correlation between the milk price and our topline and bottomline on a quarterly basis. We had a historically, just going back to beef business, our historical growth rate in the beef business has been in mid-to-low single digit range, with fiscal year as being 1% or 2% off, obviously over the last couple of years we have seen numbers widely lower than that. So we think that the beef will normalize and we'll see mid-single digit growth for its net business.

Our dairy business driven mostly by an increase in her account as well as consolidation in larger areas, has had a compound annual growth rate, historically in the high single digit range. We're not anticipating the dairy business coming back to that over the next several quarters, but we think it will come in the mid single digit range, so again we'll see growth in the dairy business.

Mark Arnold – Piper Jaffray

One last question from me. Just strengthening the dollar here recently, when we think about your business, you didn't have a lot of business overseas just Canada, but as you think about what that means to the beef and dairy market in the U.S with import. How should we think about that strengthening dollar and what it's going to mean for those market here in U.S.?

James Robison

I think the conventional was from right now was that, if the dollar kind of stays where it is, that experts will build, there has been some news regarding trends and what has historically been key export markets, be that poultry to, while I should chicken to Russia or pork to Asia or beef to Japan. So I think the trends are generally positive. Now, we're standing some kind of wild swing in currency markets.

Mark Arnold – Piper Jaffray

Okay. Thank you guys.

Operator

Thank you. Our next question is coming from Lisa Gayle of JP Morgan Chase.

Alfred Raymond – JP Morgan Chase

Hey, it’s Alfred Raymond [ph] for Lisa. I had a good question for you on the debts. So would Canadian debt get down, what should be the interest levels going forward 9, interest expense?

Bill Lacey

I say that's a good question. It's always right is – our actual interest we've got a Libor plus 200 and Libor plus 375 or 400 on the ABL. We will – we're working to refinance that term note, don’t have an answer for it right now but the credit market seem to be getting better. So I don't really have an answer for you going forward. In fact, I don't know when we'll get that term note retired.

Alfred Raymond – JP Morgan Chase

Okay. But I guess, actually if you look at the interest this year about this quarter you had 2.7 as you told and that include, I guess, the fixed charge and float [ph] charge. That will be good.

Bill Lacey

That's correct.

Alfred Raymond – JP Morgan Chase

Okay. It should be lower than 2 million radically?

Bill Lacey

Yes.

Alfred Raymond – JP Morgan Chase

Okay.

Bill Lacey

Yes.

Alfred Raymond – JP Morgan Chase

Okay. Got it. And then finally on the gross margin side, anything going on with rebate this quarter is down sequentially a little bit or was there just something else, that came in to play there?

James Robison

Yes. We saw the very tail-end of the rebate in logistic from our large supplier as they had some logistic rebates that we picked up in the pulling back two calendar years and they amortized down with the inventory a year ago in the March quarter. So if you look at the – for the quarter that had a $400,000 impact and if you take that rebate were actually up during the quarter, if you take away those logistic rebates from a year ago from our vendor. So I think, we saw some vendors coming to market was there some rebate program that we hadn't seen, but we're in this past quarter and I think we should see gradual improvement in the programs going forward.

Alfred Raymond – JP Morgan Chase

Understood. That's fair. Thank you.

Operator

Thank you. Our next question is coming from Andy Cash from Point Clear Value Management. My apologies, our next question is coming from John Kreger of William Blair.

Ravi Fadah – William Blair

Hi. Good morning, guys. Thanks for the questions. This is Ravi Fadah [ph] in for John. Just a follow up on the gross margin question. I realized that you didn't give 2011 yet but, what are your longer term expectations for the gross margin? Can I get back to historical level and what would need to happened in order to get back there?

Bill Lacey

Ravi. When you think of historical levels, you are talking probably in the 19% range.

Ravi Fadah – William Blair

Exactly.

Bill Lacey

And I don't see that happening in the – for the near future. I think it will improve over the – we had 16.6 and we had year-to-date gross margins. Excuse me, there are 16.6 for the quarter and the year-to-date.

I think we'll see those improve. I think we'll get into the 17 plus range, but I think it will be a while before we see 18% and 19% margins again.

Ravi Fadah – William Blair

Got it. Okay. Thanks. And then in terms of the contracts – the vendor contracts for this year, at this point I assume most of those have been signed. How do you feel about those that you have diversified here?

Bill Lacey

They are essentially like they were last year from an opportunity standpoint. No material changes.

Ravi Fadah – William Blair

Great. Okay. Thanks very much.

Operator

Thank you. The next question is coming from Andy Cash of Point Clear Value Management.

Andy Cash – Point Clear Value Management

Hi, Bill. Hi, Jim. How're you doing?

Bill Lacey

Great, Andy.

Andy Cash – Point Clear Value Management

Bill. Like you said, couple of short-term questions and then one longer term question. Looking at this theory, the price of speed ratio, looking at the consultants, the ratio in the first quarter was better than last year, was better in 2008. Is there some sort of lag between what the numbers are saying, and what actually happens that on the farm?

Bill Lacey

It depends on how you divide the range. How full they buy, most people there – recently have been running, really tight and those are not finding ahead of themselves. The lag is individually determined by what the operator does from the hedging standpoint.

Andy Cash – Point Clear Value Management

From your perspective, I mean we enable – do you think is this, just trying to feel a little bit better about themselves and trying to pick up the pace a little bit already or?

Bill Lacey

I think – German had a really good run. And then they just – absolutely horrible run. And we all talk about historical, the most recent losses. I think that they are breathing a sigh of relief, given that they are still operating. But they still had relatively constrained balance sheets and I think they are still cautious.

Andy Cash – Point Clear Value Management

Okay. This might play out over the next 12 months, where they – so they'll practice. They are buying (inaudible) essentially, not just the numbers.

Jim Robison

I think most German are anticipating some kinds of spike in prices, or were anticipating spike in prices that obviously they've not seen and I think that when they do a degree of comfort that the business will be profitable, even within not as substantial as they were 24 or 30 months ago, but just to need more than a reasonable range, they'll felt good pretty quickly.

Andy Cash – Point Clear Value Management

Okay. We are on the customer – I guess.

Jim Robison

It sure feels that way.

Andy Cash – Point Clear Value Management

Okay. As far as your guidance, you are running at $15 million EBITDA under your belt. If you have sort of a normal seasonal increase to sales, not, the last year was nowhere. If you go back to years before that, you normally have somewhere in the range of 3 to 6%, increase to sales from third to fourth quarter.

Margin is very strong. My little birds are telling me things will get little bit better. And I believe that they are trying to improve in April. Are you guys really kind of putting yourself up here for – potentially a positive supplies for the full year? I mean you've got down a little bit. But maybe that's little premature.

Bill Lacey

That's a very good observation, Andy. I have – can go on and say, we've send back any number. In fact, I won't go on say that given our last six quarters or seven quarters of history – he got it. So for us there's no such thing, as send back, we were very encouraged about the way this March quarter ended.

We actually started the – January month was actually down, to prior year. February was urban and March finished really strong. So we were very encouraged by the trend. We've had so many, so long expectations that didn't prove out, that were just very hesitant right now, to show sudden 90 day recovery here.

Andy Cash – Point Clear Value Management

So you’re being conservative now. How has April – as I'm hearing over April is still pretty good?

Bill Lacey

I think that's the first option. I don't really want to go there.

Andy Cash – Point Clear Value Management

All right. Okay. Longer term, given something to dream about here. Can you talk about sort of your sales goals – you must have some sales goals two or three years down the road? What kind of EBITDA goals that you have? What do you think about the balance sheet? How do you want that to look, three years down the road?

Bill Lacey

We'll publish our guidance from next year, on your next call. So I don't want to really go down, looking to foreign expansion. And I really like want to see how this year ends up, before we talk about two years down the path there.

Certainly, from a debt standpoint we had about $145,000 of total debt at the end of March which reflects our increase in activities, mostly used in there for working capital.

Andy Cash – Point Clear Value Management

Seasonal working capital.

Bill Lacey

Yeah. That's right. And we did have $5 million. We had an earn out, we paid almost $2 million to the owners of one of the businesses we acquired. And we had that onetime payment for the – payout the interest rates swap to $3.3 million. So that's about $5.3 million of kind of one time deals. And then the rest is mostly working capital increases, which like you said, will turn around.

Andy Cash – Point Clear Value Management

They are really trying to get a picture. You really have bolstering earnings power since the last two years, is that they were critical downtimes. I'm trying to see you get your earnings power back because the cycles come back, but then you got new deals with suppliers. You got new products. You don't have to do something.

I'm trying to get a handle on – even if you are an $800 million sales company. In three or four years, you are going to have EBITDA 35 to 45. What are your aspirations?

Bill Lacey

Absolutely, we got real close to 40 one time, on an adjusted basis we were $38.5 million. And that adds about stock comp and all the other normal factors for EBITDA. We got pretty close to that 40 number. We want to get back there and exceed that number, as fast as we can.

I would – when you look at this year versus last year, I think last year – fiscal year '09 was ever decreasing, disappointments each quarter. I think when you look at the fiscal year 2010 numbers, you are going to see a tale of two adds. I think you are going to see – we were down considerably in the first half and we see considerable improvement in the second half. But as you can tell, we are going to end up at about the same place where we were last year.

Last year, we were at about 21 on an adjusted EBITDA basis. And I'm feeling this year, obviously given our range, I'm thinking it's 22 this year. So not a great improvement year-over-year, as the ending numbers, but a lot of movement in between there in these two halves. So I'm feeling much better about this business than we were feeling, even in a quarter ago.

If you recall, we expected this business to take off around the first of the year.

Andy Cash – Point Clear Value Management

So did I?

Bill Lacey

Yeah. And I apologize for that. It is certainly – ended – came in the end. And I think we have a different story to tell here with – I had seen this pick up happen 60 days sooner.

Andy Cash – Point Clear Value Management

Right. I'm not so concerned about – I mean looks like out of the woods, may that two quarters of fairly 12 EBITDA, you turned the corner. They've been positive. Are you guys – most of you are running now. It looks like – maybe they were, I don’t know if they were or not?

But your fixed cost ratio looks right now. So I'm just wondering, now you can look toward the future. I mean are you going to play a little bit closer, to the events here in terms of the balance sheet, you are going to pay down since that have a little bit strong growth financials, in the future. I mean perhaps that is going to limit your sales growth. I'm just trying to get a sense of – how the whole things are going to look in a few years?

Bill Lacey

That's almost impossible to look at, Andy. And so what the balance sheet will look like – I can tell you, let me talk near-term about the balance sheet.

Andy Cash – Point Clear Value Management

Okay.

Bill Lacey

We'll certainly pay that down during this quarter. And we've got to do something with that term loan. That term loan is due on May 30 or 31 of next year. And we've got to find home for that.

Credit markets are loosening up. My options are expanding, on what we do with it right now. But we are not ready to pull the trigger on any option, as far as these things continue to get better and I believe they are. I don't know what the answer is, I couldn’t tell you which option we'll ultimately pursue right now.

But as we've stated before, we are getting that Libor plus 200 on that term note of $41 million. They try to walk away from that and find the solution, just to keep it from going current in June. So for you guys, modeling is stuff I wouldn't – modeling that this is – that we are going to have the solutions than go current.

Libor plus 200, I led that thing go current and we'll find a home for that – end of the fiscal year.

Andy Cash – Point Clear Value Management

Right. Well, keep up the good work. I really appreciate it, guys.

Bill Lacey

Thanks, Andy.

Operator

Thank you. Our next question is coming from Jason Bernard from Robert W. Baird.

Jason Bernard – Robert W. Baird

Good morning. Just a question on deep markets, you are guys wanting to start. Obviously the improved economics was undoubtedly helped here but – wonder, if you could comment on puts and takes and how an increased spending ahead of capital maybe offset by – what looks like to be a decline (inaudible) size and so continuation of all our placements?

Bill Lacey

I think – it's obviously given cap numbers. We are going to see lot of placements. The bigger factor is this, when corner one [ph] went up to almost eight box, people left calves on grass were projected three upon. It made much more economic sense to feed an animal on porridge or leaves, when it did to put them and find an environment is important.

So that's phenomenon many believe will start to reverse, as profit margins build and indeed. You can imagine that if they feed the animal on grass and it's gaining 1.5 to 2 tons a day versus feed lots is gaining 3 to 3.5 pounds a day, the rate at which the finish the animal is considerably less when they can find it earlier, so is the cost – it coins to 350 then they are going to spend and finish crisis. They are going to stop that process sooner, assuming the caps are priced reasonably.

So there is a lot of factors that go into it, but essentially the beef plant will get started up and running more actively. And in a few more economic activity in the industry, all of that movement of that causes movement of the animals, ownership changes in the animals and all of that drives all of the animal health product business, exponential to numbers.

So as profitability in these animals get better, economic activity heats up slighter ages comes down slightly, you're going to see an increasing rate it was practice utilized spend on these animals.

Jason Bernard – Robert W. Baird

Okay. Great. And then just on the dairy. Andy, you said that it's not very promise just to operating breakeven; we have taken still for the 14 bucks is breakeven to them or is that came down as well?

James Robinson

That’s probably close, it may be coming down slight flow. They operate a pretty broadband around breakeven. I think that for the quarter people knocking cows probably on average breakeven on cash basis. In other words, adding back depreciation on animals. I think on a forward basis giving grain prices and the slight improvement we’ve seen and no prices built low start on average to make just a bit of money on a cash basis.

Jason Bernard – Robert W. Baird

Okay. And then any uptick you can provide on the (inaudible) business?

James Robinson

Not really, we’ve got a bit offering and we think to that market for, really the first time – in quite some time, only single we know the business which is – I should have been involved was 97, the economy really not spending back on any current market and so as the economy comes back within that spending will pick back up.

Jason Bernard – Robert W. Baird

Okay. And then just a couple of other final things here. I'm just, wonder if you can remind us the current EBITDA cushioning your covenants – on your covenants and then just wonder we have expectation like free cash flow for the year?

James Robinson

The covenant is 1.1 to 1 on the fixed charge coverage. We ended at 1.4 which is – I think we will ride out 1.1 something in December, so we – I think we clear that up and that will improve overtime now. And I don’t have the coverage difference they're calculated Jason but I'll try to do between questions here. What was your other question?

Jason Bernard – Robert W. Baird

I’m sorry. Just your free cash flow expectation for the year?

James Robinson

Free cash flow is opposed to EBITDA where you call just a net of the difference there may be in CapEx.

Jason Bernard – Robert W. Baird

Sure.

James Robinson

Okay.

Bill Lacey

We're about $1.7 year-to-date in CapEx we had spent about $0.5 million in the last quarter. I expect we'll probably be in the $2.2 million or something like that, so I will say that somewhere in the $20 million free cash would be a fair number a few definition of free cash is just basically EBITDA less CapEx.

Jason Bernard – Robert W. Baird

Okay. And then you have the EBITDA cushion or it was a (inaudible)?

Bill Lacey

I'll calculate it and point it out, just a minute.

Jason Bernard – Robert W. Baird

Okay.

Bill Lacey

Call us back on that number between to finish up the call.

Jason Bernard – Robert W. Baird

Yeah. Not a problem. (inaudible).

Bill Lacey

Sure. Any other questions.

Operator

Thank you. Our next question coming from Mark Arnold with Piper Jaffray.

Mark Arnold – Piper Jaffray

Just one follow-up question. As it relates the growth margin, can you just talk about how much – as it relates to the value chain and Jim as you talked about the piece of animal kind of moving through the value change, kind of may be returning hopefully to more normal piece. What does that mean in terms of your mix of product – the mix of product that you sale and what does that mean to your growth margin. If we do see this animals moving into big box they way we have historically?

James Robinson

It’s a good question. Our strength is really in the mid and smaller size yards. We believe we're gaining share in the beef business that's based on the accounts that we're gaining and our general attrition, we think we're getting share in a larger lots, but the lots – the order lots, the corporate lots generally don’t received in their levels of animals as the mid and smaller lots do during this downturn. So we think that our relative decrease in business has been greater because of our market position. So as the stockers get healthy people start loosing lan and placing cabs on the lan as banks are lending again and as the mid to small (inaudible) start to have a economic prospect are attractive to their customer, release there relatively well. And that’s good for sales and its goods for margin and it’s also good for profitability.

Mark Arnold – Piper Jaffray

But as just as we think with the mix of the product that you sell. I mean is it intend to be that we'll see higher gross margin product being sold by you guys into those – in different stages of that value change, so if we see more animal moving into the fee losses that kind of imply that we're going to see higher margin products with the mix of product it’s going to change as well?

James Robinson

I think the margin dollars go up. And the more expensive items are used in the animal goes into a feed lot, placement ways are been heavy, both trending towards being heavier over the last three years, because of the – because of grain prices. And so as placement ways goes down the yacht use more implants that used to more likely to repeat a vaccination, they're more likely to use, the more expensive treatment product on the animal. So I think this will suggest that the gross profit margin dollars go up is reasonable gross profit percent I can't really say because feeds lots generally have lower margins than some of our part of our business.

Mark Arnold – Piper Jaffray

Great. Thank you.

Bill Lacey

Hey, Jason, if you're still on the line. The cushion in the fixed charge coverage is about $3.1 million.

Operator

Thank you. Our next question is coming from Alan Weber of Robotti & Company.

Alan Weber – Robotti & Company

Good morning, Jim. Earlier in March I guess you filed the 8-k regarding the agreement with Pfizer? Was there anything that changed from I don’t know, I think the previous conference call?

James Robinson

Not really. No.

Alan Weber – Robotti & Company

Okay. And then I guess my other question was kind of, related to an earlier question. You know, again a few years ago EBITDA was in the mid 30s, recently decline, when you look at the business today, the pluses and the minuses is something structurally change that over few year period, the company I did it today. Can you get back to doing EBITDA in the mid-30s or is the company structurally changed?

James Robinson

We have a three things that cause it to fall off. One was unprecedented volatility and prices in the grain markets. Two was a change in policy by one of our key manufactures. And three was the general downturn in the economy. Obviously, I think most people feel the economy is flat and they're starting heal up, so that's helpful. Certainly, as it relates to the consumption, proteins and more importantly high-end proteins, cheeses choice.

And then regarding corn prices, they have mitigated look at the – if our industry healing up, there's somewhat profitable. We produce 13.1 billion bushels of pound last year. So it seems like markets of, sort of themselves out and the stability and the board flexible there is going stability not withstanding someone anticipated, shipping policy out of Washington in grain prices.

So that’s positive. Regarding policies by the key manufacture that pulls back on our heels, we have mutual relationship with that manufacture, we're still on agree that their policy make sense given our ability to reflect share and drive sales outcomes. Then we demonstrated with them for seven years part of their policy change. So we're still having dialogs with them we have the healthy relationship, but we're not anticipating any changes in their policies in the coming year or this calendar year that we think we'll realize any policy changes from them.

Things that are change within our business specifically is that, we’ve launch in campaigning business number of years ago and we're not in successful with it our campaigning business is growing nicely and it’s profitable and we're beginning to add roughs again, as previously stated our plan was to add for a rest for year in the (inaudible) business. And most of those dedicated to the mix practice market. So the secondary treasury enroll to that markets, so that’s very good news. The other thing is that we're getting a lot of traction on proprietary products, products that we actually spend in effort in branding and developing, co-developing with manufactures or through exclusivity.

And I think to response to several questions regarding the possibility of our business getting back into the mid-to-high 30s EBITDA and beyond. We really had to do well with proprietary products and given too many opportunities that we have right now. We're seeing those lines grow very nicely and we're not trying to invest distinctly generic to actually proprietary products.

So I think we'll see good growth there. We're saying that year-over-year and we think that continue on forward basis and actually accelerate. And then finally, our balance sheet obviously is – we're very leverage, it’s mostly caused by our current EBITDA levels, but as our earnings improved, our leverage rates going to comes down and as we seen opportunities debt acquisition we're still going to go after all.

We have people that don't position in our stock that are interested in investing in the prospect of the company and if needed we'll catch into those sources of capital. So we're encouraged by the shift in the core business mostly during this quarter, the growth in proprietary products and the improvement in our campaigning business. And we still feel that over time my mystery has consolidation in quite of bit.

So we are very encouraged about our prospects. And we think, that Bill point earlier we do believe that we can get our earnings back to where they pick at $38.4 million a couple years back and beyond, but it’s going to take a period of time, it’s not going to happen, it's not going to snap back if you will.

Alan Weber – Robotti & Company

Okay. And I think the question on the proprietary products, as you do that, I mean what’s the kind of balance sheet or risk that you run kind of (inaudible) some of the manufacture, some of your current vendors?

James Robinson

They really or not in the – they really don’t compete with the co-positions of our key vendors. About 45% to 50% has been that we sell is made by a main recognized national supplier. So the price that I am speaking to really do not – they're really not a point to those manufacture in any way.

Alan Weber – Robotti & Company

Okay. And then finally, interacting to what you're saying is the growth percentage proprietary products can reasonably low fit the cline from what was the core-supplier?

James Robinson

So I think the key word is reasonably, it’s hard to drive absolute correlation right now, but this price generally has high margins in them. And the niche products, so they have relatively low top line sales but very strong earnings potentials. The doctors very good, so I think the answer is yes.

Alan Weber – Robotti & Company

Okay. Great. Thank you very much.

Operator

Gentlemen, there are no questions at this time.

James Robinson

Great. Again, we're very encouraged by the quarter, we appreciate though interesting and your support. And thanks for joining us this morning. Have a good day.

Operator

Thank you. Ladies and gentlemen, that concludes today’s teleconference. You may disconnect your lines at this time.

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Source: Animal Health International, Inc. F3Q10 (Qtr End 03/31/10) Earnings Call Transcript
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