Animal Health International, Inc. F3Q08 (Qtr End 03/31/2008) Earnings Call Transcript

| About: Animal Health (AHII)

Animal Health International, Inc. (NASDAQ:AHII)

F3Q08 Earnings Call

May 8, 2008 10:00 am ET

Executives

James C. Robison - Chairman, Chief Executive Officer, and President

William F. Lacey - Senior Vice President and Chief Financial Officer

Analysts

Lisa Gill - J.P. Morgan

John Kreger - William Blair & Company, L.L.C

Reik Read - Robert W. Baird & Co., Inc.

Julie [Dawson] - Piper Jaffray

Chris Sassouni - Eagle Asset Management

Jeff Johnson - Robert W. Baird & Co., Inc.

Operator

Welcome everyone to Animal Health International’s third quarter 2008 conference call. (Operator Instructions) At this time, for opening remarks and introductions, I would like to turn the conference over to Jim Robison.

Jim Robison

I’m Jim Robison, Chairman, and CEO of Animal Health International. Thanks for joining us this morning to report our third quarter fiscal year ’08 results. With me today is Bill Lacey, Senior Vice President and CFO. Bill will discuss our financial results for the quarter as well as the earnings release and then I will make some comments and I’ll open the call to Q&A.

Bill Lacey

Before we begin, I would like to point out that today’s earnings call is being recorded and will be available for replay on our web page at 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 2008, 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 risks 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 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 these forward-looking statements provided to reflect events that occur or some circumstances that exist after the date on which they were made.

Now I’ll provide you with the results of the third quarter of our fiscal year 2008.

Net sales increased 10.9% or $16.8 million to $170.7 million for the three months ended March 31, 2008, up from $153.9 million for the same quarter last year. Acquisitions accounted for $16.4 million of the increase in sales. Organic sales increased 0.2% from the same period last year.

Gross profit as a percentage of sales was 19.2% compared to 18.9% in the same period last year. EBITDA for the quarter was $7.5 million, which was a decrease of $0.2 million from the year earlier quarter of $7.7 million. The change in EBITDA was due to the increase in volume which contributed $1.2 million, an increase in gross margin profitability which added $0.6 million, offset by an increase in SG&A expense of $2 million.

The increase in SG&A was caused by increases in group insurance $0.6 million; stock option expense $0.3; fuel cost $0.3 million; bad debt expense $0.4 million; and the cost of being a public company $0.4 million, which was not incurred last year as a private company. I hope this will be the last time you hear that comment about being a public company, since we went on our offering last year in January at the quarters going forward will all be compared to.

EBITDA adjusted $0.7 million for the stock options and public company expense would have been $8.2 million, or an increase of 6.5% over last year. Net income for the third quarter was $1.9 million, up from the third quarter last year net income of $0.1 million.

The increase in net income was due to the just discussed changed in EBITDA and a reduction in interest expense of $3.4 million or $2 million after tax. GAAP diluted income was $0.8 per share for the quarter. The non-cash amortization of intangibles was $1.1 million for the quarter for those of you who add it back in your models.

Now I’ll discuss the results for the year to date, nine months ended March.

Net sales increased $68.4 million, or 14.6% to $538.2 million for the nine months ended March 31, 2008. Acquisitions accounted for $43.6 million, or 64% of the increase; organic growth was 5.3%. EBITDA for the year-to-date excluding a one-time non-recurring severance charge was $28.4 million, which was a decrease of $1.2 million from the same period last year of $29.6 million.

The change in EBITDA was due to the increase in volume which contributed $5.3 million; gross margin profitability, which declined $4.9 million, offset by an increase in SG&A expense of $1.6 million. The decline in gross margin profitability resulted from a reduction in a rebate program with one of our vendors, which we discussed last quarter.

The increase in SG&A was caused by increases in group insurance $1.1 million; stock option expense $0.9 million; various costs of being a public company of $1.7 million, which was not incurred last year as a private company. These increases were partially offset by lower bonus expense of $1.7 million. EBITDA, adjusted only for the non-recurring severance of $1 million and $2.6 million for the stock option and public company expense, would have been $31 million, or an increase of 4.8% over last year.

Net income for the year-to-date was $8.4 million, up 56% from last year’s net income of $5.4 million. Interest expense declined $7.9 million or $4.7 million after tax and amortization increased $0.5 million. The non-cash amortization of intangibles for the year-to-date was $3.1 million.

At the end of March there were 54 days of working capital: our average for the last 12 months was 42 days; that increased during the three-month period by $13.9 million driven by inventory purchases and tax payments.

Capital expenditures were $0.6 million and availability in our asset-based loan at the end of March was $25 million.

With the benefit of recent acquisitions the company affirms its net sales guidance to be in the range of $700 to $730 million. Economic conditions in the production animal markets, due in part to rising corn and grain prices, resulted in lower than anticipated organic sales growth in the third quarter; as a result of these conditions, together with higher than expected health care and fuel costs, the company is lowering its EBITDA guidance to be in the range of $37 to $39 million and its net income guidance for the fiscal year 2008 ending June, to be in the range of $11 to $13 million. This guidance excludes the effect of future acquisitions and excludes the one-time severance charge of $ 1 million pre-tax, or $0.6 million after tax.

Jim Robison

Our team performed well in the third quarter of the year, given the difficult circumstances that continue to impact our customers and our economy. In spite of our team’s efforts, we were short of our expectations.

In the production animal market many of our customers continued to lose money in the quarter due to high feed prices. Feed prices have been 20% to 30% higher than we anticipated and have become a significant stress factor on the production animal market, with protein prices trending down during the quarter.

We believe that this pressure will likely be reduced in the form of increasing protein prices as supply is reduced and global demand for animal proteins grows due to reestablishment of export markets.

Even under these circumstances, our sales increased by 10% to $171 million. Our business continues to build momentum during the quarter with the successful launch of several new products, including a new flea and tick product made by Fort Dodge Animal Health ProMeris.

In addition to our sales efforts, our integrations of our company’s acquisitions over the last 18 months continue to go well. Except for fuel and health care related costs, costs were favorable to plan; although anticipated continued challenges in the production animal market and overall challenging business climate generally for the next several quarters, we have never been more enthusiastic about the prospects for Animal Health International.

We believe our business will return to historical organic growth rates as production animal markets recover and we continue to build momentum in our companion animal business. The opportunities that we have with differentiated high margin ;products have never been better; our key vendor relationships are universally positive and building; our operations are running well; our service levels are high; and we’re getting good operating leverage. Then finally, our acquisition pipeline continues to be strong.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Lisa Gill - J.P. Morgan.

Lisa Gill - J.P. Morgan

I was just wondering if perhaps you can just comment on the fact that you had $0.2% organic growth rate. You’re looking at 10% + overall, but most of that came from acquisitions. Can you just give us a little bit more color as to what you’re seeing out there? You talked a little bit on the production side, but what are you seeing on the companion side?

Secondly, last quarter we were all waiting for you to renew your agreement with Pfizer or the largest manufacturer. Maybe you can just give us some updated thoughts around what that new relationship looks like now that it’s been signed.

Then lastly, when you talked about your inventory, are you carrying additional inventory because of the acquisitions or are you carrying additional inventory because there’s some purchasing opportunities?

Jim Robison

I’m going to comment on organic growth rates both in the production and companion animal markets and then the agreements with our key vendors, then Bill will comment on inventory.

In the production animal market, we saw corn prices and beef prices generally go to record highs during the quarter and what this causes our customers to do is to purge inventories. I think with releases from companies like Tyson over the last couple of weeks, we’ve seen losses and we’ve seen plans to reduce output.

When this happens, it pushes protein prices down. We saw that occur in the beef market, the poultry market, and the swine market during the quarter. That ultimately ends up in a reduction in supply and it’s a relatively short term phenomenon, given the high amount of input costs associated with feed, our customers also contract their use of animal health products.

So, with grain prices, feed prices, being 20% to 30% higher than we anticipated during the quarter, we had anticipated corn would be in the high $4.00 to $5.00 range and it actually was over $6.00 for the quarter. Our customers get very skittish about their businesses and they start to contract inputs wherever they can. So, the production animal market was weak.

Wheat was at historical highs at around $12.00 a bushel and people that grow winter wheat historically have used that wheat to feed calves. A lot of them chose not to use the wheat to feed calves, so they didn’t turn animals out to wheat. When they do this we generally get a sales revenue estimated to be in the $5 to $10 million range; we lost that market as well. It was just a generally tough late winter, early spring for us and the production animal market was the most impacted.

As you know, we’ve been taking a hard look at our companion animal business. About a year ago we decided to recast the business and expand facilities. In the fall we opened our [basilica] facility which is in Central California, it is open and running very nicely.

We had a couple of reps out west, we’re growing that sales group to 11 by the end of this quarter, and we will continue to grow it throughout the year.

We launched the ProMeris product. The flea and tick category in the US for the companion animal market is about $1.6 billion, making up over 50% of the sales into the vet market. All of those products have historically gone into market or through channel with agency relationships. Fort Dodge, a division of Wyeth, launched ProMeris in late ’07, we picked it up January of ’08, and it’s going very, very well.

We are now transactional with this project, we had pretty good success in the first quarter, and we’re building momentum with them. At the same time, given our new distribution strategy in the companion market and the fact that we’re within the same day, or I should say next day freight, we call UPS on one with a vast majority of our customers, we’re seeing that market become not only profitable, but it’s starting to grow again very nicely, so we’re gaining momentum there.

Relating to vendor agreements, all of our key vendor agreements have been signed for ’08. They are all generally, as they were last year, our relationship with the vendor that has caused so much stress over the last year or so has been signed and it is an improvement to the prior year. Our relationship with that vendor is also improving very nicely and we’re again building momentum with that vendor. We’re anticipation good outcomes with that vendor this year.

Lisa Gill - J.P. Morgan

What’s the length of that agreement, have you disclosed that?

Jim Robison

They are all one-year agreements.

Lisa Gill - J.P. Morgan

Will we have to go through this again next year?

Jim Robison

I think that we will, but I think that they put a new management team in place last summer and we’re very pleased with the management team. We’ve got a history with them, before they were put into place, with a couple of the individuals. I just think there’s less contention and more collaboration and I think we’re going to get some good stuff done in the market.

Lisa Gill - J.P. Morgan

When we think about on the production side, are you starting to see now that people drew down the inventories are they starting to come back to you again? Should we start to see that improvement as we move forward?

Jim Robison

We still have concerns in the market, because all of the politics and the global demand issues around food and grains have caused tremendous volatility. We saw encouraging signs during the beginning of the quarter with protein prices trending up: for example beef prices were in the mid-80s for live cattle, their in the low-90s right now and the October contracts are $1.04.

So, we’re anticipating protein prices to be up 10% to 15% to maybe even 20% over the next year and we’re seeing that in the futures market. That allows customers to go out and start to place animals again and that’s why we think we still have reasonable hopes that these markets will straighten up pretty quickly.

Having said that, there’s a lot of volatility around grain prices and it may be a couple, up to three quarters, until this thing fully straightens out.

Lisa Gill - J.P. Morgan

Then Bill, any comments on the inventory?

Bill Lacey

Our inventories are up about $2 million of for that ProMeris product Jim mentioned from Fort Dodge, which is a new product we didn’t carry last year. Last year we were in an agency agreement for flea and tick products. So that’s about $2 million. The remainder of the increase is due to some programs we bought into early to avoid price increases and just the mist in our organic sales number.

Operator

Your next question comes from John Kreger - William Blair.

John Kreger - William Blair & Company, L.L.C

Jim, just to clarify one comment that you made on your companion business, is that business now profitable?

Jim Robison

John, we had a model that we had one division in Memphis, Tennessee that we ran most of our companion animal reps out of and we’ve recast it to run the companion on the west of five divisions: one in Austin, one up on the sea, one serving the upper Midwest, Memphis and central California and then we’re going to expand into southeast and hopefully the northeast.

Those divisions are profitable with the exception of that legacy division, which has improved substantially. We’re anticipating that it will become profitable in the next quarter or so. It was losing, as we’ve said earlier, substantial money early on, given both investment and freight rates, but it has improved significantly.

The other divisions serve both the production animal market and the companion market, fill rates are very good, and they are profitable.

John Kreger - William Blair & Company, L.L.C

If I’m hearing you correctly would it be fair to say all in companion probably isn’t profitable, but improving and hopefully all in profitable next quarter? Would that be fair?

Jim Robison

The problem with it, John, is that we’re adding reps again. I think our companion business right now on a transactional basis is profitable due to our ability to reduce freight rates, gross profit margins and average sales dollars per order, but that original division in Memphis is still marginally unprofitable.

John Kreger - William Blair & Company, L.L.C

Then I have another question relating to your production business. The slower organic growth, should we think about that as a timing issue and those sales are just pushed into later quarters of this calendar year, or just sales that do not occur period because of the pressure on your customers?

Bill Lacey

John, please understand I’m speculation on this, we missed the spring wheat pasture market. That’s not going to come back. Those animals didn’t turn. They either stayed out on pasture or they went into some kind of conditioning yard, so that market will not return. I think animals are being held back on pasture right now and I think to an extent we could get a bit of a bounce, but that’s speculative, I don’t know. I do believe that the market will return to historical growth rates.

Also, and I know you don’t follow these things like we do, but milk break evens right now for most mechanized large dairies are in the $16.00 per 100 weight range and milk came down to about $16.20 during the quarter. It’s now back up to almost $19.00 and the June contracts are almost $20.00. So, I think our dairy business which is about the same size as our beef businesses is going to be doing well on a forward basis.

John Kreger - William Blair & Company, L.L.C

Are you seeing these pressures cause your bad debt expenses and write offs to go up, number one? Number two, is this environment affecting the pricing environment that you see both in terms of pricing to your customers, but also pricing on the acquisition market?

Jim Robison

We’ve seen new entrants in the acquisition market or in the companion animal business. We saw [Lestron] buy a company during the quarter, but the companion animal acquisitions have always been pricing. As far as the general environment, I think that the competitive dynamics have not changed significantly during the quarter.

John Kreger - William Blair & Company, L.L.C

Then bad debt write offs, any change there?

Jim Robison

Yes, those kind of go without saying, but over the ten-year history bad debts have been very little in our business and we watch it extremely closely. Our receivables are extremely clean. You can see stresses in our business that caused slight increases, but not substantial.

Bill Lacey

We had an increase in the quarter-over-quarter number of about $300 to $400,000.00 and it was not actual bad debt write-off, it was a little bit of stagnant IRA agings gotten to look slightly worse than they were last quarter. We don’t see any real issues there yet. Our typical write-off is right around $1 million or less each year.

Operator

Your next question comes from Reik Read - Robert W. Baird.

Reik Read - Robert W. Baird & Co., Inc.

Jim, on your comments on the dairy side, did that actually turn down during the quarter and do you expect that to improve going forward?

Jim Robison

What happened is that down in California the creameries put some caps on production and prices came down to close to break even. The quarter wasn’t terrible in the dairy business, but it did just draw back a little bit. That business has a historical growth rate for us. It’s pretty healthy and it just didn’t show that during the quarter, but dairies continue to consolidate.

I think we shared with you that over the then years that we’ve owned the business, dairies have contracted from $110,000 to about $60,000 and the large diaries continue to attract capital and that’s our target market, so I think the dairy business will do well.

We did launch a new product in that market that we’re extremely excited about and we think it’s going to add good top-line and bottom-line growth to that business over the next few quarters, so we’re real excited about the dairy business.

Reik Read - Robert W. Baird & Co., Inc.

Bill, maybe a little more clarity on the SG&A line? I guess if I X out all of the items you called out it would have been just a little bit above the year ago period. In coming quarters do you expect it to come down to, say a more normalized 13% level of sales, just based on top-line trends improving, or is there anything else?

Bill Lacey

I think a couple of things we have peaked and we’ll be on the downhill side of one being our soft 404 testing has been a big expense for us and we’re on the downhill side of that and we still have, obviously, this quarter to go before our first audit of those tests. I think we’re on the downhill side of that. That should subside a little bit.

Our healthcare cost was a result of a few large claims, almost catastrophic. We have a large deductible program and we had several large claims which are unpredictable. The demographics of our employee and dependent population are slightly better than the national average, so every now and then you just get these kinds of hits.

We’re up $1 million 1 for the year to date and we’re up $600,000 in the third quarter. I hope that is not a trend. I don’t expect it to be a trend, but it could be. When you have these large claims you could have one or two quarters in a row where they don’t subside.

Other issues, I really don’t see the bad debt, which was an issue in the quarter, continuing. I’m trying to think what other issues that we had in there for the quarter. Our fuel costs were up about $300,000 over last year, that’s probably not going to get better; it in fact could get worse.

As far as going forward, I think we’ve also flattened out on our cost of being public. As I mentioned in the call we went public last year at the end of January, so our first quarter we didn’t spend a lot on being a public company and we had one month where we were not public at all. So, going forward that should flat line and again, as we get through some of these major issues like the sox implementation, it should decline.

Reik Read - Robert W. Baird & Co., Inc.

Were there any new acquisitions in the quarter or is anything been completed since Cane?

Bill Lacey

No.

Reik Read - Robert W. Baird & Co., Inc.

I think Pfizer acquired sharing. Is there any change in the relationship there or any kind of change from your perspective?

Bill Lacey

You’ve got that half right, Reik. Sharing acquired early on which owned [Innerbet] and their now Mariel, probably it goes Pfizer Mariel, sharing organized top three in the globe, followed by Ford Dodge, no changes there: solid relationships there.

Operator

Your next question comes from Julie [Dawson] - Piper Jaffray.

Julie [Dawson] - Piper Jaffray

My first question would be on the goodwill, if you could give us a little bit of color why that jumped in the quarter?

Bill Lacey

Julie that had to do with our final valuations. As we’ve acquired these companies including Cane and the other six that we’ve done, we have had valuations done by third parties and some of the estimates that we put in originally a lot went to goodwill and as we have had evaluations some of that is moving into customer relationships and non-compete amounts.

The non-compete and customer relation intangible items amortize as opposed to goodwill, so it’s just a rearrangement of those costs. I think those costs are up about $0.5 million over last year, amortization is.

Julie [Dawson] - Piper Jaffray

My second question would be what your final count of sales reps was through the quarter and what your hiring plans look like moving through the rest of ’08.

Bill Lacey

Outside sales reps were essentially flat, up one. They’re 239 this year and 238 last year at March 31.

Julie [Dawson] - Piper Jaffray

And hiring plans through the rest of the year?

Jim Robison

We’re continuing to expand our companion market. We’re finalizing our plans for our fiscal year, which begins July 1. We’ve not done that, but we will be adding sales people. We contracted that sales force this time last year as we recast our model in the companion market. We contracted to buy on about 11 and we’ll be building that back up on a forward basis.

Julie [Dawson] - Piper Jaffray

In terms of fuel costs do you have any plans in place to start combating rising fuel costs, or what are your thoughts there?

Jim Robison

We’re trying to coach our sales people, or the primary consumers of fuel to be more thoughtful about how they run their territories. I was visiting with one the other day that was driving 60,000 miles a year. He’s got that down to about 35 simply by doing more phone work and continuing to call on his customers, but reducing the frequency.

We’re also pushing to use more e-commerce and we’ve got some exciting initiatives around that. That business is growing very nicely, by the way. There are things that we can do, but fuel costs will still be problematic.

Operator

Your next question comes from Chris Sassouni - Eagle Asset Management.

Chris Sassouni - Eagle Asset Management

I’m still not clear whether this rise in input prices and the apparent increase in supply. You were saying kind of two things at the same time: one is that your customers might be withholding cattle in pasture; and at the same time you were saying that there was an increase in supplies and presumably there was a certain volume of cattle that were pushed , essentially, prematurely without really necessarily fattening them up off to slaughter, leaving the ranchers, as I understand it, with some excess supply of feed that they could have given to the cattle but decided not to and maybe they sold off the corn and wheat themselves, given the prices that they’re at.

I’m still confused as to how this whole thing sorts itself out and is there in fact an increased supply, or is there at the same time somehow an increased inventory of cattle that are sitting out in pastures that theoretically should go through the feed lots, create a bump in demand for your products and then have that normalize over a couple of quarters.

Jim Robison

The predictability around these factors aren’t great because we don’t have tremendous information, most of it’s anecdotal, but let me give it a shot.

Think about it from a production cycle standpoint, with the three stages of production being relevant to the beef cattle market: first stage being the cow calf. When feed prices go up if causes the value of those calves to go down; so someone that owns land and owns calves may decide to hold those calves until they think they can get more money. We make money when they sell those calves, generally to what we refer to as stockers. Stockers lease forage, pasture, or they put animals out on grasses or wheat in the spring.

Given the high wheat costs, we saw very little of that wheat pasture market materialize this year; so those animals were either pushed forward into growing yards, which was probably not tremendous this year because we didn’t have the drought situation we’ve had historically, or they were held back on pasture.

The animals that were further in the production cycle, particularly at the third stage, that’s the confined stage, the owners immediately purge them, because it’s more profitable to get rid of them than to feed them. In regards to the type of protein, whether they’re beef cattle, pigs, or chickens, you’re going to push those animals forward and you’re going to contract replacements.

It’s that confined stage reduction in inventory that has caused protein prices to come up from the mid-80s. It’s the purge that caused them to come down from the mid-90s and it’s the lack of supply that’s causing them to come back into the low-90s in the last three weeks.

How that works itself out in the future we really can’t predict, but generally the business returns to this normal cycle of a calf being born, it’s weaned, it’s put out to pasture by a stocker, or put onto grass, and then it’s taken into a feed yard and slaughtered. Every time it’s moved we make money, because it’s grouped together. They’ve got to be vaccinated, they’ve got to be mass treated for infectious diseases, and then when they’re received they are usually treated prior to being fed.

It’s the disruption in the movement that caused our sales not to be what they normally are during the quarter.

Chris Sassouni - Eagle Asset Management

So what you’re in effect saying is that despite calling on all these customers, either they’re not going to tell you, or you have no means of essentially counting or estimating what their inventories look like?

Jim Robison

We can estimate, but it’s anecdotally. The cow, calf markets, there are about 850,000 people that own cows that calve every year and there is no point of sale system on these animals, there is no connection automation, they’re just out there; so, there’s no real, absolute knowledge about what’s happening with that market. The belief right now is that getting all the drought in the southeast and the historical droughts that we came out of a couple years ago, that the cow market is fairly low given anticipated demand.

What we can measure are placements. Placements aren’t a perfect measure and we kind of discourage analysts from looking at placements because it’s only one measure. This particular year we were hurt by the lack of a wheat market and then the purge of the animals because of a lack of profitability. Placements were down in March by almost12%, so placements did correlate to the tough economics and were a part of the tough quarter.

Chris Sassouni - Eagle Asset Management

If right now your business was in a state of equilibrium, meaning just kind of back to a normalized rate, I want to understand just from your internal planning purposes: other than just this supply and demand, if you look at the growth rate of each of the segments, production, diary and companion, what would you say are the growth rates? If you could also give us an idea of the margins for each of those segments of your business.

Jim Robison

That’s extremely speculative and I’ve really got to avoid the question. I think I’d get into stuff that would be misleading and confusing to people.

Chris Sassouni - Eagle Asset Management

All right then can we do it on a relative basis?

Jim Robison

All of our production animal businesses were relatively weak during the quarter.

Chris Sassouni - Eagle Asset Management

No, no, no, I’m not talking about the quarter. I’m saying if things were normalized right now. If you just kind of look at what your budgets were going into the beginning of this fiscal year or going out into some [indiscernible] you must have an idea. I mean I know that at one time, I think you had said that the internal growth rate of the businesses, a business that grows at call it 5% if I recall correctly. The rest comes from acquisitions.

Jim Robison

That’s right Chris, core legacy business 5% to 6% and again, I’ll underscore this is highly speculative, but really the only problem we have in the business right now is this very high, unanticipated grain prices and the disconnects that we’ve gone through. Other than that, the business is running extraordinarily well.

Chris Sassouni - Eagle Asset Management

Okay so then let’s take it one more step. If we assume that corn prices are likely not to go down and that wheat prices are not likely to go down and the demand for protein both in the US and internationally isn’t likely to change a lot unless there’s going to be some sort of global economic decline where people stop eating meat, it would seem to me that prices have no choice but to go up, which is what I think we’re seeing in the futures prices.

I think you had said to me that, “we bought them down in the mid-80s when all this supply must have hit the market”, and now if I look at the futures prices I’m looking at numbers as high as 104, 105 and the break even point, if I recall correctly, was around 98. Is that still the case?

Jim Robison

Yes I was with some cattlemen the other day and break evens right now are about a buck on the deferred market, which means that they buy an animal in the 600 to 800 pound range, that they ought to be able to feed that animal to maturity for about $1.00 per pound. Depending on what they’re timing is they can hedge, but when they hedge they’ve got to think about what they’re going to do about the grain prices, whether they hedge grain prices or not.

But yes, you are correct. All of your statements over the last minute or so have been accurate. You’re thinking about it correctly.

Chris Sassouni - Eagle Asset Management

I take it that we’re sort of in a weird place, because on the one hand global wells is increasing, therefore the demand for protein is increasing, yet at the same time we’ve had this unprecedented rise in input prices, so it almost implies that the price of beef on a global basis is probably going to hit new higher levels than they’ve ever been before and they’re probably going to stay there.

I mean, we may have some ups and downs in terms volume, but I can’t imagine that the demand is going to wane at all.

Jim Robison

In the near term that’s how we view it. Who knows what’s going to happen in commodity markets. I don’t think any of us thought we would see a $124.00 barrel of oil this year and I don’t think any of us thought we would see $12.00, $13.00 a bushel of wheat or $6.50 corn. Not withstanding some change in commodity prices and there is a lot of speculation about what the driver is behind price of commodities today, but not withstanding that change, yes.

We’ve got to keep in mind that we just opened up Korea to export beef. Just yesterday Russia passed legislation to import livestock in the US, which they haven’t done in a long time. Everyone agreed to build their herds and we have the best genetics in the world here, so yes, that’s the way we view it, just as you articulated.

Chris Sassouni - Eagle Asset Management

The last question I have is over the dairy side. Again, if I look at the global demand for milk, it’s whether in liquid form or powder form I can’t imagine that it’s doing anything but going up.

Jim Robison

In the developing nations the estimates are that the populous will spend 35% of their marginal disposable income on proteins. They’re tired of eating grains and corns and they want more proteins, so I think so.

Chris Sassouni - Eagle Asset Management

If I just think about the business overall, it sounds like okay it’s probably going to take into the fall if the futures prices are correct and hold, and that’s when we will start to get a more normalized, we theoretically should get a more normalized rate of supply and demand.

Jim Robison

I think that we may get contracted supplies and pretty good demand and I think that’s what will drive prices. I was at a convention last weekend with three cattlemen for dinner and all of them were placing animals right now for October to February finish.

Operator

Your next question comes from Jeff Johnson - Robert W. Baird.

Jeff Johnson - Robert W. Baird & Co., Inc.

I want to go back to two different things if I could. One bigger picture conceptually just so I understand, was the softening in organic growth, was it mainly the volume issues of number of animals going through the system, or how much of it was price push back at the feedlot level or elsewhere, just given the $600+ corn?

Jim Robison

There was no change in the competitive dynamics of the industry from a pricing standpoint. All of the reduction was around a lack of movement of animals.

Jeff Johnson - Robert W. Baird & Co., Inc.

The last question just a follow up from the last caller’s question. Talking about beef prices having moved back up recently, maybe above break even and that, what is the risk of kind of a trade down in protein from beef to broilers or cows and chickens, I’m sorry pigs and chickens, versus beef and how do we think about the risk potentially here with high corn that we get culling of the beef cattle herd size over the next year?

Jim Robison

I didn’t understand the last question, but the first question I’ve got.

The integrated market, the swine market, and the poultry market, they contract very quickly. You may have seen the announcements out this week by the large grower producers and they’re reducing output by single-digit margins. They’re cutting back [indiscernible] increased in those markets as well, particularly in the [inaudible] market, proteins to go up over the next several quarters.

Operator

Your last question comes from John Kreger - William Blair.

John Kreger - William Blair & Company, L.L.C

Given the uncertainty that you’ve been talking about on the call, Jim what’s your thinking about guidance for fiscal ’09, when might we get that from you, and will your approach differ in the coming year to how you set that budget versus past years?

Bill Lacey

John, we will do our guidance for next fiscal year when we release earnings for the fourth quarter. As far as the way we think about it next year, the next several months will be key to how we think about next year.

If you recall our earnings call after the second quarter, the grain prices and protein prices really had not affected our business any. We’ve certainly had an affect and missed our internal forecast for this third quarter and as we go through this fourth quarter it’ll firm up our beliefs about the future more, one way or the other, and we’ll release those when we do our fourth quarter earnings.

Bill Lacey

We had a real success event for the company last quarter, you’ll see the filings, but we had a gentlemen by the name of Jerry Pinkerton join us. Jerry’s joined us a board director. Jerry’s got a background with Deloitte & Touche as a partner, then [Spence Crew] then ultimately TXU as an executive. He is on the board of High Energy and he has joined our audit committee. We’re real happy to have Jerry join us.

Then also, Tom Corcoran, who recently retired from Fort Dodge Animal Health a division of Wyeth, retired December 31. He joined our board as well. Tom is probably the most respected executive in our industry, spending over 20 years with Wyeth, building that company from about $25 million to over a billion. He’s got tremendous insight on the market domestically and internationally. He’s a great guy, he’s very accomplished.

We’re real excited about having those two gentlemen join our board. I just wanted to share that with you as well. Thanks for joining us on the call and we’ll look forward to your follow up calls.

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