Good day and thank you for standing by. Welcome to the Phibro Animal Health Corporation Q3 2021 Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to Damian Finio, Chief Financial Officer. Please go ahead..

Thank you, Tabitha. Good morning and welcome to the Phibro Animal Health earnings call for our third quarter ended March 31, 2021. I am Damian Finio, Chief Financial Officer of Phibro.

And I'm joined on today's call by Jack Bendheim, Phibro's Chairman President and Chief Executive Officer; as well as Donny Bendheim, Director and Executive Vice President of Corporate Strategy..

Thank you, Damian, and good morning, everyone. Let me share what I see as our four key themes for the third quarter. First, we posted solid financial performance. In the third quarter, consolidated net sales and adjusted diluted EPS were both ahead of guidance and sales were comparable to the same quarter of the prior year.

While it's difficult to quantify, the comparable performance relative to last year has masked a little bit of year-over-year growth as our industry saw some customer stocking in those crazy last days of March 2020, where the world was just beginning to grapple in earnest with COVID..

Thanks, Jack. Turning to slide 4. The amended and restated credit agreement represents an upsizing of $50 million and includes a $300 million Term Loan A and $250 million revolver. We're most pleased with the terms conditions and pricing of the new credit facilities that are substantially the same if not just slightly better than our previous terms.

And the new facilities mature in April 2026, which provides us with operational flexibility for years to come enabling us to focus on driving the business forward. We remain committed to continued debt and leverage reduction.

Closing this agreement on such competitive terms during these challenging times reflects both the company's and lenders' confidence in the future of our business. Moving on to our financial performance on slide 5.

I'll start by reviewing consolidated and segment-level financial performance for the third quarter ended March 31, 2021, but I'd also like to spend a few minutes today reviewing our year-to-date comparative results. The year-to-date performance tends to help put in perspective some of the volatility in year-on-year quarterly comparisons.

I'll close out my portion of the call with our projections for the fourth quarter and full year. Looking at the consolidated view, third quarter financial performance was ahead of guidance while profits reflect a decline in comparison to the same quarter prior year.

Net sales of $211.7 million were up slightly, $1 million or less than 1%, while both GAAP and adjusted profitability metrics lag on a comparative basis. Net sales for the third quarter were driven by increases in Mineral Nutrition and Performance Products, partially offset by a decline in our Animal Health segment.

Declines in GAAP based net income and diluted EPS were driven by a lower gross profit related to unfavorable changes in product mix as well as increases in SG&A costs and provision for income taxes, offset partially by lower interest expense.

After making our standard adjustments to GAAP results including one-offs acquisition-related items and foreign currency movement, third quarter adjusted EBITDA, adjusted net income and adjusted diluted EPS were down 7%, 11% and 11% respectively, due to unfavorable product mix and an increase in certain corporate costs and incremental investments in our future..

The first question comes from the line of David Westenberg. David, your line is open..

Thank you for taking the question. This is David from Guggenheim. Can you talk about the long-term outlook for MFAs? Any kind of commentary on when we expect to see -- maybe give us a five-year kind of outlook or maybe 10-year and I realize that no one's crystal ball is perfect here.

It's just -- obviously, with the percentage of revenues that is MFAs would be just great to get your updated thoughts there..

Well, number one, MFA sort of the text for me we have MFA and others. So, there are a lot of products that come into the MFAs. But typically, MFAs would be products that are regulated that we sell to the feed. We see a growth in that business. We see a growth around the world.

Obviously, after COVID is over, well people will go back to eating protein and sort of enjoying the trend line that we had until year and a half ago. So, it's hard to put numbers on it, but it's a product line that we keep investing in and we see again growth across the world in various markets..

Okay. Yes. I realize it's pretty but a little bit more abstractive question. Can you kind of maybe talk about the reopening of the US economy whether it be schools restaurants et cetera and kind of maybe the impact on the overall business? And I guess more outside the US too as well with reopening? And I have just one more. Thank you..

I think -- thank you. I think what we've seen here -- I mean this is really a tale of two cities. This is going to be a tale of wealthier countries and let's start with the United States. This is obviously the wealthiest country.

So, what we've done number one in putting money into people's pockets; and number two in getting vaccination across the country, but we see sort of a return. I mean I would say the protein business in the United States today different outlets it's less restaurants and more supermarkets, but pretty much has returned to where it was pre-COVID.

I mean there's some pockets some anomalies, but overall business is solid and will continue to grow. If I look at the rest of the world and the miracle is as I've said in my opening remarks, we sell in 75 countries. And literally every country has a story.

And some countries have done better with COVID and the economies are coming out as passive and some have not. And some -- the effect of COVID is not just people being sick but the effect on the overall economy.

And our business as we've said over and over again it's very much tied to the abilities of people to have money to buy protein which is -- the whole -- and the breadbasket so to speak is into one of the more expensive parts of that. So, I think we're seeing some recovery. In some countries, it's going to take a year at least.

But in the major markets like the US being a major market for us and South America, we see a faster recovery. And we're quite optimistic that -- basically when we talk again in August, we talk about our plans projections for next year I think COVID will not play a major role in the discussion..

Got it. I think you brought up an interesting point and I was wondering maybe for my last question you talked about the kind of the inflating of the economy here. We've been seeing a lot of increases in commodity prices across the board.

I mean can you talk about maybe just the correlation between commodity prices and then agricultural and prices of meat and dairy? And then finally the kind of effect on your business as we kind of see assets being a little bit more inflated than we've seen in the past? And then I'll just hop off queue after that. Thank you..

So, in the production animal business the key driver is the cost of feed, right? The underlying feed cost is mostly corn and soybean. So -- and that is the biggest cost in raising a chicken or a pig dairy cattle and cow. So, as those prices go up it costs the grower more money to raise those animals.

They're going to raise prices and those prices are going to go up. We've `started to see it already and we will continue to see it. Because right now there's no abatement in the increase in cost of the underlying feed components. So that's number one. Directly to the business, there were other effects as well.

We all read every day about the -- what's going on in the world in terms of shipping and have -- a stuck ship in Suez Canal affects the world. But we've seen higher freight costs even before that because of the imbalance produced by people buying different things that everyone thought they were going to buy. So the ports in California are clogged.

The ports around the country are backed up. And it's not just in the United States it's also true in other parts of the world. I can tell you crazy stories about trying to get a ship to some markets of ours. And because the need of getting that container back to China the products offering that we -- maybe be transshipped but still needs to board.

So it's much more difficult and costs are going up. So yes costs are going up. So like anybody else we will endeavor to what we can to raise our prices as well to cover these increased costs that we are seeing sort of on a daily basis..

Thank you, very much..

Your next question comes from the line of Erin Wright with Credit Suisse..

Thanks.

Can you speak a little bit more specifically on the drivers and your competitive positioning across the nutritional specialties business at this point? And on an annualized basis will this be more consistently a double-digit grower for you kind of going forward on a longer-term basis?.

So, thank you for that. What we see nutritional -- our nutritional products growing on a double-digit basis across our markets. I mean that doesn't mean that every one of the products we have in that group of products will grow. I mean obviously there's competition. There's change in what we're seeing in the market.

And it also depends on the change of the underlying feed. But overall, we are -- we've invested a lot. We continue to invest in nutritional specialties and we fully expect that to grow double digit. And clearly, you have to remember that COVID has played a major role last year. But as we get out of it, we will see that double-digit growth..

Okay. Perfect.

And then, could you give us an update on your companion animal initiatives where that stands what your expectations are for that business over the next few years?.

I'm going to pass this to Donny..

Okay. So we continue to execute well with Rejensa which is our product on the market right now. We had talked about last quarter that it had doubled in the six months over the previous six months and we're expecting that trajectory to continue throughout the fiscal year. And then we are steadily building up our pipeline.

So we had foreshadowed last quarter, that we were working on an oral care deal and we successfully completed that an early-stage product. What excites us about these two products actually is that, we believe that they will fall under the medical device standard as far as the regulatory is concerned. So that is a more streamlined process.

So that would allow us to get to market a little faster than if we went through different processes within the FDA. So, our pipeline is fairly early stage still with all the products that we have, but we are seeing that we've filled some gaps as far as the time line.

And we are pretty excited about where the next number of years will bring us as far as the products just assuming we can bring them to completion..

Okay. Perfect. Thank you so much..

Your next question comes from the line of Michael Ryskin with Bank of America..

Thanks for taking the question. Jack, first one for you. Apologies if I missed it during the prepared remarks, but I don't think you necessarily mentioned China or gave an update on that market. And I've always welcomed your candor and your thoughts on the ASF recovery sort of what you're seeing in those trends there.

We've seen some -- a lot of conflicting reports in terms of herd rebuild flare-ups or new outbreaks of ASF.

Could you give us your thoughts on sort of what you're seeing in China? How is that market rebounding for you? And sort of how are you thinking about it for the next quarter?.

So, I mean China is rebounding. I mean, you can see both the products we're currently selling in which are not MFAs and the products that our competitors are selling in. I mean that business is getting better. So China has incentivized many of the high growers to do a better job in biosecurity.

And they're putting -- they're definitely putting more pigs on the ground. In the same time and what we're all reading what we're seeing is ASF is now under control. As there are upsets -- while they can have the facilities they might not be able to fill the facilities. So I think, it's going to be sort of an up and down over the next couple of years.

Clearly, the trend line is the Chinese government has invested and will continue to invest a lot of money to become independent. But for the rest of the world it's still China every day. So, I mean exports from the US, from Mexico, from Brazil have been strong to China or to that part of the world and that will continue for the next couple of years.

I mean when you can think about you don't follow it like we follow it, but every other month in China they were releasing pigs from their frozen storage to keep enough pigs on the market. So that has to be rebuilt and that's millions of times. So overall, I think what's happening in China as they rebuild their herd it has to happen quickly.

And overall for all the hard producers around the world, it's going to be a good business for two, three years at least..

Okay. Appreciate that. And then just a quick follow-up on the fiscal 4Q guide. Again, really impressive showing some nice sequential and obviously a really strong year-over-year growth.

Is this mostly on the sort of -- on the comps in the MFA segment? I know over the last year you guys had some really unusual onetime hits in fiscal 4Q that sort of depressed that number. I'm trying to get a sense of sort of the underlying and a sequential progression.

Is it fair to interpret that guide that you're sort of -- you're beyond all the headwinds you saw earlier and the recoveries continuing to proceed?.

Yes. I can take that question. So yes keep in mind that the fourth quarter of 2020 was our first full quarter in the pandemic and we were hit hardest then and have since then quarter-on-quarter grown topline and seen a return to profitability and as we mentioned ahead of our expectations.

So our fourth quarter guide sequentially compared to the first, second, third quarter of this fiscal year we continue with the same profitability and top line perhaps at or slightly above. I think our biggest risk between now and year-end as Jack sort of alluded to is the timing of shipments and some of the backlog at some of the ports.

But we feel pretty confident that the fourth quarter guide is a good number and reflects growth much of the same that we've seen in the last couple of quarters since that low point last year. .

Great. Thanks gentlemen. Appreciate it..

Our next question comes from the line of Kevin Kedra with G. Research. .

Thanks for taking the question. Maybe to build off on the Q4 guide.

Anything in there in that outlook that you have any reason to believe, wouldn't be continuing into your fiscal '22? Are there any kind of pockets of the performance you expect in Q4 that may be -- might be seasonal or kind of short duration-related that we shouldn't be expecting as we start looking into next fiscal year?.

No. We think as Damian just said, it's mostly a more normal year compared to the shock of the pandemic in the fourth quarter of last year. And as we said earlier, we're seeing recovery around the world. Some countries are going to be growing a lot better as you know reading whatever you read every day.

But as the vaccine is spread around the world I mean it's -- say kudos to Pfizer and Moderna for doing an amazing job as -- we've been -- many of us sitting here back in the office on this call and up to now we've all taken it from our home. So this is definitely progress and it's progress around the world.

And I think our expectations will for the fourth quarter are good and then we'll see continued growth coming past that. .

Great. Appreciate that. So I was wondering if you could talk a bit about what you're seeing in poultry. One of your peers have noted that they've been seeing some trade down within the US poultry market in particular.

Just wondering what you're seeing there and expectations for that market?.

It's -- I think it's - our poultry customers are a bit more reticent to put on a lot of birds than they have in the past. They faced a lot of different headwinds -- some economic headwinds. So it's slower growth in the US poultry. Again, they are suffering from higher input costs.

And when that happens always – everyone always wants to say, Well what can I do different? What can I do cheaper? At the end of the day, we will rotate our products because all our products perform a function. And again, as I've often said I think -- no one buys our products because they don't think it helps them.

They buy our products because they think it helps them grow the animals whether it's chickens or pigs, cattle. So, we'll take our turn. So I think it's nothing major. And I think overall in the United States all of our customers are doing okay. .

Great. Appreciate the color. Maybe two more. First, maybe this is for Donny. Can you say a bit more about those companion animal products that you brought in? It sounds a little bit interesting from the standpoint of potentially going down the medical device pathway.

So, any sense you can give us on kind of time lines when we might be able to see those come to market? And then secondly on the Ireland facility that should open up some new markets for you in vaccines.

What can we expect from vaccines as we start heading into fiscal '22? Can we get back to that sort of targeted realm of double-digit growth for that business?.

Okay. So again, I'll start with the oral care products. We're really not giving guidance as far as how long it will take other than to say that medical device is a more streamlined process. So, it is early stage. So, I think you can take from that that it will not be in the next fiscal year for sure.

And I think what we will add is a product there's one product that's all grooming products for cats in what we've licensed here. So -- which will be our first cat product as well. So -- but again slowly but surely we're building out this portfolio. I think we're doing it pretty methodically and we are pleased with how it's proceeding.

And we're pleased with kind of the inbounds we're seeing all the time of people pitching interesting idea to us and we're definitely on the map now as far as -- if someone does have an idea of whom to speak to. So overall we think we'll see some really good stuff from here. .

And on the vaccine side it's -- like everyone has asked today, it's a great question. I think the vaccine business we're seeing the slow -- sort of the slowdown really depends country by country. And in some of the markets where we saw vaccines have been more affected by the pandemic than other markets. It's just the nature of our customer base.

It's the nature of sort of -- of all of our competitors. We're the last entry into the vaccine business in most of these markets and where we have our registrations. So that combination has made the pandemic more painful, I think for us than many of our competitors. Having said that, I think it's really tied to the recovery from the pandemic.

We're on our track to the recovery. And I'm not sure if that'll take a quarter or two quarters or a year, but in the course of the next year all of our markets will have recovered. And our vaccine business will grow at a very fast clip like it grew before the pandemic. .

Sure. Thanks..

At this time there are no further questions. I'll turn it back over to Damian Finio for closing remarks. .

All right. Thank you, Tabitha and thank you everybody. That was a great round of questions as always and we appreciate your attendance on today's call. Our next call will be towards the back half of August, when we will be discussing financial performance for our full fiscal year 2021, as well as forward-looking projections of financial performance.

Until then let's all continue to keep ourselves and one another safe and have a great rest of your day. Thank you. .

Thank you. Ladies and gentlemen that concludes today's conference call. You may now disconnect..