Hello and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Phibro Animal Health Corporation First Quarter 2023 Conference Call. All lines have been placed on mute to prevent any background noise.

After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Damian Finio, Chief Financial Officer. Please go ahead..

Thank you, Regina. Good morning. And welcome to the Phibro Animal Health Corporation earnings call for our fiscal first quarter ended September 30, 2022. My name is Damian Finio, and I am the Chief Financial Officer of Phibro Animal Health Corporation.

I am joined on today’s call by Jack Bendheim, Phibro’s Chairman, President and Chief Executive Officer; and Daniel Bendheim, Director and Executive Vice President of Corporate Strategy. Today, we will cover financial performance for our first quarter and provide an update on financial guidance for our fiscal year ending June 30, 2023.

At the conclusion of our opening remarks, we will open the lines for questions. I’d like to remind you that we are providing a simultaneous webcast of this call on our website, pahc.com.

Also on the Investors section of our website, you will find copies of the earnings press release and first quarter Form 10-Q filed with the SEC yesterday, as well as the transcript and slides discussed and presented on this call.

Our remarks today will include forward-looking statements and actual results could differ materially from those projections. For a list and description of certain factors that could cause results to differ, I refer you to the Forward-Looking Statements section in our earnings press release.

Our remarks include references to certain financial measures which were not prepared in accordance with generally accepted accounting principles or U.S. GAAP. I refer you to the non-GAAP financial information section in our earnings press release for a discussion of these measures.

Reconciliations of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures are included in the financial tables that accompany the earnings press release. We present our results on a GAAP basis and on an adjusted basis.

Our adjusted results exclude acquisition-related items, unusual, non-operational or non-recurring items, including stock-based compensation and restructuring costs. Other income expense is separately reported in the consolidated statements of operations, including foreign currency gains, losses net.

And lastly, income tax effects related to pre-tax adjustments and unusual or nonrecurring income tax items. Now let me introduce our Chairman, President and Chief Executive Officer, Jack Bendheim, to share his opening remarks, which will include his perspective on Phibro’s first quarter financial performance and guidance for our fiscal year 2023.

Jack?.

Thank you, Damian, and good morning, everyone. Our first quarter net sales reflect year-over-year growth of 8% driven by 10% sales growth in both our Animal Health and Mineral Nutrition segments, underpinned by strong growth in our largest regions in the United States, Latin America and Canada.

Our business is strong, but macroeconomic and operational challenges persist. Supply chain disruptions are less common but still occur. As we previously discussed, we have experienced COVID-related labor and logistical challenges with a key supplier, which internally led to delayed sales and costlier shipments.

We were successfully resolving these challenges before quarter end, although not before they had an unfavorable impact on the adjusted EBITDA contributed by our Animal Health segment. In addition, sustained inflation is keeping our input cost high, which presents itself in our financial results as lower margins and higher inventory carrying values.

To mitigate the risks these challenges present, we will continue raising prices subject to normal competitive conditions, managing discretionary spending and carrying inventory required to support sales growth. We are overall bullish on our business and our ability to grow sales with both our current portfolio and the pipeline we are developing.

Looking beyond these challenges, we are anticipating further benefits from our strategic investments. Our vaccines and nutritional specialties product line fuel current growth with our vaccines new registrations, which will open new markets for our products.

And in the second half of our fiscal year, we expect to bring another [inaudible] vaccine facility online in Brazil similar to our facility we have today in Omaha, Nebraska.

With our nutritional specialty products, we are just received approval in Brazil to manufacture some of the products we have historically produced only at our Osprey plant in Florida, which allows us to leverage our production capabilities more fully at both locations.

Lastly, on companion animals, we have licensed a pain product for dogs that’s in development. While our companion animal projects continue to progress as plan, at this point, with active and net opportunities in the pipeline, we reached our goal of having a meaningful portfolio of companion animal development projects.

Finally, we are reiterating our full year 2023 net sales guidance of $960 million to $1 billion with adjusted EBITDA guidance of $113 million to $118 million.

However, due to revise in interest rates and total debt, as well as unfavorable changes in tax regulations, we are revising guidance on net income, diluted EPS, adjusted net income, adjusted diluted EPS and the adjusted effective tax rate.

As I am sure you are aware, everyone is navigating through a dynamic and complex operating environment and we are facing an economic period that many suspect will more than likely worsen before it improves. Despite these short-term uncertainties, we as I said, we remain bullish on our business and our ability to drive profitable growth.

Now I will ask Damian to review our financial performances and fiscal year 2023 guidance in more detail before opening the line for questions.

Damian?.

Thank you, Jack. And let’s go to slide four. I will start with consolidated financial performance and then cover segment level performance, capitalization metrics and conclude with a review of our revised financial guidance for the full fiscal year 2023.

Consolidated net sales for the quarter ended September 30, 2022 were $232.5 million, reflecting a $17.9 million or 8% increase over the same quarter one year ago.

This increase was driven by improvement in both the Animal Health and Mineral Nutrition segment, offset by a slight decline in Performance Products in comparison to a very strong performance in the same quarter last year.

GAAP-based net income and diluted EPS decreased 41% driven by higher SG&A expenses, interest expense and foreign exchange losses, offset by favorable gross profit and lower income tax expense.

After making our standard adjustments to GAAP results, including acquisition-related items, foreign currency movements and one-offs, first quarter adjusted EBITDA was comparable to the prior year’s quarter driven by higher adjusted EBITDA in both the Mineral Nutrition and Performance Products segments, offset by lower Animal Health adjusted EBITDA and an increase in corporate expenses.

Adjusted net income and adjusted diluted EPS declined 18%, respectively, driven by higher SG&A expenses and taxes, offset by higher gross profit.

Moving to segment level financial performance on slide five, I will start with first quarter financial performance for our largest segment, Animal Health, which includes three product lines, namely MFAs and other, nutritional specialties and vaccines.

The Animal Health segment posted $154.9 million of net sales for the quarter, which represents an increase of $13.9 million or 10% versus the same quarter prior year.

Within the Animal Health segment, we reported a $9 million or 11% increase in MFAs and other versus the same quarter prior year, driven by increased sales of processing aids used in the ethanol fermentation industry; $3.1 million or 8% growth in nutritional specialties, which was driven by higher demand for dairy products; and lastly, a $1.8 million or 8% improvement in vaccine net sales driven by increased domestic demand.

In terms of profitability for the segment, Animal Health adjusted EBITDA was $27 million, a 2% decline from the same quarter prior year and a 220-basis-point decline in adjusted EBITDA margin due to higher SG&A expenses, partially offset by an increase in gross profit.

Moving on to first quarter financial performance for our other business segments on slide six, let’s start with Mineral Nutrition.

Net sales for the third quarter were $59.6 million, an increase of $5.2 million or 10% versus the same quarter prior year driven by higher average selling prices of trace minerals correlated with the movement of the underlying raw material costs.

Mineral Nutrition adjusted EBITDA was $5.3 million, reflecting year-on-year growth of $0.8 million or 17% and reflects an improvement in adjusted EBITDA margin of 60 basis points driven by increased gross profit derived from the higher average selling prices.

Looking at our Performance Products segment, net sales of $18 million for the three months ended September 30, 2022, reflects a $1.2 million or 6% decline versus a strong first quarter in the prior year.

Comparatively speaking, this year, we realized lower demand for copper-based products but at higher prices, partially offset by higher volumes of ingredients for personal care products. Adjusted EBITDA was $2.4 million, an 11% increase and reflective of a 200-basis-point improvement in adjusted EBITDA margin.

Lastly, corporate adjusted EBITDA declined 5%, or said a different way, corporate expenses increased 5% year-on-year, driven by net changes in costs related to but not limited to employees, professional fees, technology and strategic investments. Turning to our key capitalization-related metrics on slide seven.

Free cash flow for the 12-month period ending September 30, 2022 was a negative $21 million and was comprised of operating cash flow of $17 million, less $38 million of capital expenditures.

In the first quarter, we had a significant and planned seasonal inventory build, which is typical and driven primarily by our Mineral Nutrition business based in Quincy, Illinois, where an adequate level of inventory is needed to minimize logistical issues presented when the Mississippi River freezes.

I wanted to note that the $38 million of capital expenditures excludes a $15 million purchase of property related to our Performance Products segment in California. We have been leasing this land and office building, which is adjacent to our site for several years, but decided to purchase the property in Q1 when it went on the market for sale.

In our opinion, now owning the property maximizes the value of our site both from an operational and land value perspective. Our gross leverage ratio calculated by dividing total debt of $468 million by trailing 12-month adjusted EBITDA of $111 million was 4.2 times at the end of the first quarter.

It’s worth noting that for covenant purposes, we use net leverage as defined in our credit agreement. In terms of liquidity, we had $163 million available at quarter end. This includes cash and short-term investments of $86 million plus $77 million of unused and available revolving credit.

After quarter end, we executed a credit agreement amendment, which increased our unused and available revolving credit facility by $60 million, subject to the same leverage ratio limitations as contained in the initial credit agreement.

While we have no specific plans to access this incremental credit availability today, we believe that this was a prudent action to take given current uncertainty in the financial markets. Turning to dividends, consistent with the past several quarters, we paid a quarterly dividend of $0.12 per share or $4.9 million in aggregate.

And lastly, I wanted to highlight the $300 million of our $468 million of gross debt is not exposed to rising interest rates, because in early calendar year 2020 we secured an interest rate swap at a fixed LIBOR rate of 0.62%.

The variable interest expense paid on the remaining $160 million of total debt is subject to rising interest rates, although offset somewhat by interest income earned on short-term investments.

I also want to make mention that with the amendment to the credit agreement executed after quarter end, we began the process of transferring our credit agreement and interest rate swap agreement from LIBOR to SOFR or the secured overnight financing rate. As I am sure many of you are aware, LIBOR settings on U.S.

debt facilities are scheduled to cease at the end of June 2023. To summarize, our goal is to end our fiscal year with less debt and improved gross and net leverage ratios in comparison to what we reported at the end of our first quarter.

Now let’s turn to slide eight, which lays out the revisions we made to our guidance for fiscal year ending June 30, 2023.

As Jack mentioned earlier, we are reiterating guidance for net sales of $960 million to $1 billion and adjusted EBITDA guidance of $113 million to $118 million, while revising guidance for net income, diluted EPS, adjusted net income, adjusted diluted EPS and our adjusted effective tax rate.

The adjustments reflect increased interest expense net due to higher interest rates and debt outstanding and the projected impact of recently released final tax regulations that eliminate U.S. creditability of the Brazil income tax beginning with our current fiscal year, which in turn will increase our U.S. Federal GILTI tax liability.

The financials we are revising are as follows; net income, lowering from a range of $45 million to $49 million to a range of $39 million to $43 million; diluted EPS, lowering from a range of $1.11 to $1.21 to a range of $0.96 to $1.06; adjusted net income, lowering from a range of $52 million to $56 million to a range of $49 million to $53 million; adjusted diluted EPS, lowering from a range of $1.28 to $1.38 to a range of $1.21 to $1.31; and lastly, given the changes in tax regulations, we are raising our fiscal year 2023 adjusted effective tax rate from 30% to 33%.

Guidance for GAAP measures assumes actual foreign exchange losses for the quarter ending September 30, 2022 and the company’s projected foreign exchange rates for the nine months ending June 30, 2023. In closing, this is a challenging environment for both an operating and an economic perspective.

We are very confident in the demand for our products around the world and we look forward to seeing some of the other opportunities that Jack highlighted in his opening remarks coming to fruition this fiscal year.

With that, Regina, could you please open the line for questions?.

[Operator Instructions] Our first question will come from the line of Erin Wright with Morgan Stanley. Please go ahead..

Great. Thanks. Thanks for taking the question.

So I would like to know what’s embedded in your fiscal 2023 guidance now as it relates to price and your ability to take price in the coming quarters and how are you thinking about that dynamic?.

I will start and then hand it over to Jack. As I mentioned, we reiterated our guidance for sales. We continue to take pricing actions in markets when and where we can as competitive conditions allow.

We started that process last fall about the same time last year and this will continue this year, and we will continue to do that, because we are seeing higher input costs which is reflected in our tighter margins and higher inventory carrying values..

And I am going to add to that is, we are in a competitive environment around the world and -- but there are opportunities as everyone else is facing inflationary costs as well. So we will -- we have -- there’s no set number, but as they -- as Damian has said, we will opportunistically raise prices where we can..

Okay. Got it.

And then could you just give us a general update on fundamentals across your key livestock categories, including dairy, ruminant kind of swine, poultry and aqua and how those are trending, what you are most optimistic about in the coming quarters in terms of fundamental demand trends and areas where we will kind of keep an eye on? Thanks..

Overall, the animal protein business, notwithstanding growing recession is doing well. In the markets we are in, we are seeing strong demand as reflected in our sales sort of across the Board. And I wouldn’t point out any single segment, the segment, I would say, that everyone knows is doing sort of worse is U.S.

cattle business, which is a part of the business where we are not active in. But our cattle business in Brazil is doing quite well and that seems -- and that’s growing.

So I wouldn’t point out any one segment, but again, overall, as we have often said, for a long time, people tend to eat the last thing you give up and that’s sort of reflected in our business..

Got it. Thank you so much..

Our next question will come from the line of Michael Ryskin with Bank of America. Please go ahead..

Hi. This is Wolf on for Mike. Thanks for taking questions. I am wondering if you can give a bit more color on how sales of Rejensa trended in the context of your target of doubling sales year-over-year. We are hearing a lot from others in our animal health coverage about that’s having pretty severe labor shortages and staffing challenges.

So I am just wondering if you can talk to your experience in launching a new product for the vet channel against that backdrop..

I will take it. It’s Donny. Good morning. So you mentioned the guidance we gave was a double year-over-year. In Q1 we were from a sales perspective a little bit short of that. We were very high-double digits. Not enough that makes us in we won’t hit our full year goal.

But I think, just anecdotally, we did see a little bit of a slowdown relative to the pace that we were going on so which very well may be reflected. We obviously don’t have the same level of exposure as some of the competitors that you are mentioning talked about the vet challenges.

So still, obviously, a strong high double-digit growth, perhaps, sequentially a little bit of a slowdown quarter-over-quarter..

Got it. Thank you.

And then one slightly more technical one, can you give us a little more color on the Brazilian income tax law change you flagged? Should we be assuming 33% is a fair baseline going forward for your tax rate or are there ways that you can offset this over time?.

Yeah. I will take that one. So as I mentioned, the adjusted effective tax rate in our guidance increased from 30% to 33% and that’s driven on the heels of changes in actual U.S.

federal tax legislation, which now disallows the income tax that we pay on Brazilian earnings in the high tax exception category and without that country included in that category, that translates into a higher calculation of GILTI tax in our federal U.S.

tax liability, which overall has a net impact of 3 percentage points on tax, because we have pretty sizable operations in Brazil and generate a pretty decent portion of our taxable income globally in the Brazil market.

But we are looking for ways not just to decrease tax in Brazil or the U.S., but really around the world and continue to try to find opportunities where we can do so..

Got it. Much appreciate it. Thanks for the questions..

[Operator Instructions] Our next question will come from the line of Balaji Prasad with Barclays. Please go ahead..

Hi. Good morning. This is Shao [ph] for Balaji. Thanks for taking our questions. Actually, could you add any additional colors and updates on the deal with Rejuvenate Bio? Thank you so much..

Good morning. It’s Donny again. We have nothing new to add from last quarter. Still believe that they could file -- they are anticipating filing for additional license by the end of next calendar year..

Got it. Thank you so much. Any addition, could you add some color and your thoughts on the livestock trend? Thank you..

Sorry, I didn’t….

Livestock..

On innovation….

On livestock trend..

Yeah. But….

U.S. livestock business. We don’t have much exposure..

We don’t have much exposure to that business. But it’s all tied into a lot less rain, a lot less passion, higher cost with feed generated by the conflict there in Europe. So, overall, it’s a lot of money to put -- take out our passion in terms of feed line.

So there is a quickening of taking these categories further, which means less cattle, which means we less products being sold..

Got it. That’s very helpful. Thank you..

We have no further questions at this time. I will turn the conference back over to Damian for any closing remarks..

Okay. Thank you, Regina, and thank you everyone for listening in on today’s call. We appreciate your time, attention, interest and support of Phibro Animal Health Corporation and please have a great rest of your day and enjoy the upcoming holiday season. Thank you..

Ladies and gentlemen, that will conclude today’s call. We thank you all for joining. You may….