Phibro Animal Health Corporation (PAHC) Earnings Call Transcript & Summary

Good afternoon, everyone. My name is Erin Wright. I cover Life Sciences tools diagnostics at Crédit Suisse. Happy to have everyone join us for our 2020 virtual health care conference. We are in a virtual format this year. So it's a little bit different. [Operator Instructions] With us today, we have Phibro Animal Health. We actually have the full lineup of the team here. So happy to have you guys. We have Jack Bendheim, Chairman and CEO; as well as Dick Johnson, the current CFO; and incoming CFO, Damian Finio; as well as Daniel Bendheim, who heads up the EVP and Corporate Strategy. With that, I think we have a fireside chat format today, so we'll get started with some Q&A.

I think you more recently kind of reported, and I kind of wanted to get your update on underlying demand trends. Across the varying different markets. What you saw in the quarter, what you're seeing quarter-to-date, especially just given some of the COVID volatility across the market and what your kind of guidance now implies for the next quarter. If you could give us a little bit of an update there, that would be great.

Thanks. So I think what COVID has shown is that historically, when we would talk about our business or everyone in the ag business, we talk about the business is tied to population growth and wealth growth. Well, we've been seeing for a long time that growing. But the disruption of COVID has really hit the industry more on the economic side than anything else. There's obviously disruptions we all know about back in March, April and May. But in the United States and in more developed countries, where we were able to print money and people have money and spending money. I would say the protein business has returned pretty much where it was. There be some pockets, but overall, that's the case. In developing countries, where the economy is still not going well, people literally don't have the money to spend to buy protein. And that will take some time, and that will obviously take -- will only come after the vaccine -- COVID vaccines come out, and all of us will get back and start spending money. So importing more goods from the Far East, et cetera, et cetera. So I think that's where we are. I mean, pretty much in the U.S. returning, Europe returning, South America returning, Far East, except of China, we'll have a while to go.

Okay. And speaking to some of the dynamics, particularly in the U.S. in the most recent quarters, what were some of the headwinds, tailwinds across that business? And how we should be thinking about that quarterly progression?

Well, I think we're still seeing some recovery in some of the markets. We think this coming quarter will be better than the quarter we finished. And we expect that sort of to continue for the rest of our fiscal year. Again, big caveat will be, if there's a big, big outbreak of COVID again before we can all get the vaccine, what does that really mean? Will there be shutdowns? Et cetera, et cetera. But my guess is there won't be any big shutdowns anymore. There might be more school closings, which will affect the liquid milk business. But overall, I think the markets will get stronger as we go forward.

And can you remind us where we were in the dairy market and your strategy their kind of before COVID? And we started to see kind of signs of a recovery, but it wasn't quite there yet? I mean, how do you think dairy market emerges from this?

So talk to me mam, do you remember a time pre-COVID? But pre-COVID, we saw the dairy market recovering, people making money. The new products, our new product entries, those markets, OmniGen Pro, expansion of Animate, more nutritional specialties with being taken well. Then there was a setback, obviously, in COVID. It creates some problems to introduce new products to the market. Still not able to see many, many customers, hard to sell a product over Zoom. But our customers are making money again. And we're starting to see uptake. So again, post-COVID will be a lot easier. But our strategy will be content producing newly and expanded nutritional specialties. [ Briefing ] some of our autogenous vaccines into that market, here I'm talking about U.S. So we're quite optimistic about the dairy business in United States and our participation in it.

Okay. And then I think over the past several quarters, you've kind of shifted gears towards targeting more larger, I guess, dairy farms instead of your kind of isolated smaller facilities. Can you provide some color on how that strategy is progressing? It may be kind of hard to tell in a COVID world, but I'm curious, is that still the strategy in place and how your initial thoughts are on the traction thereon?

Yes. It's still very much a strategy. I mean COVID has not helped the smaller farmers. They're not isolated. Every 2 miles, you're going to have 3 farms, 4 farms. But it's harder to -- in -- with all disruptions for smaller farmers and for the dairies with less than 1,000 cows to be very profitable. And so we've seen more of a shift, the animals shift. I mean animals don't disappear, but they shift to the larger farms. And our strategy, while slowed because of COVID, is on track. So we're increasingly selling more of our products to the large dairies, which we were hardly selling before. And I would say by the end of this year, and definitely would be faster if COVID solved, it will be a significant part of our business.

Okay. And OmniGen still is seeing traction in the market similar to kind of the market share trends that we've seen in the past?

So we had a higher market share with OmniGen before the dairy industry ran to some trouble. Our new product which is OmniGen Pro, which puts more products into OmniGen, increases the value for the pharma is getting traction. We're on to, as I said, some very large farms, and we're seeing repeat business. So we're on the right track there.

Okay. Good. Good. And can you talk a little bit about what's in the pipeline? I think that, that's sort of an interesting part of the story that seems to be resonating more with investors as well. What are you looking forward to from an innovation standpoint near term, whether it's across like African swine fever vaccine or across the companion animal segment, what should be -- what does the pipeline look like today from an innovation standpoint?

I'll kick to Donny to talk about companion animals. I'll bring back on the production animals.

Erin. On companion animals, I think on our call last week, we actually kind of teased out that there'll be more information to come. So we're planning for in the February to March time frame to give a little bit more color on that. Suffice to say, our pipeline has increased and is continuing to increase. We're in a nice position in the market. And I think we look forward to kind of opening that one a little bit more in that time frame.

We talked about our position. We said it before, but we're in a unique position to take products that have been researched by outsiders, whether it's universities or people in the field or even human pharmaceutical companies. Because we don't have a big research team on our own, maybe we have none to develop these products. And when we have everything else, we have registration people. We have scientists. We have formulations. We have production. And we think we're seeing a lot of input, and as Donny said, we'll talk more about it in the next few weeks and months. But just for the one product with Rejensa that we started marketing, which has been held back by COVID because we can't call on. We can't see a lot of the vets. I mean that sort of has right now like a $2 million run rate from nothing. And we're seeing a lot of repeat business. So we think we're on to something. We know we can find this niche. And we see a lot of opportunity on the companion animal side. On the other side, we continue to invest in vaccines. We spoke a lot about, we are -- we've spent a fair amount of money developing a new facility in Sligo, Ireland. We are starting to apply to registrations in markets that desperately need the products because they all exist. They exist really around the state of Israel, but they won't buy from Israel, where we do development of our poultry vaccines. So we'll be able to make the same vaccines there. People know their work. We have to go through the registrations. But that will be a very interesting growth in that business. We're expanding our autogenous vaccines, both in the U.S., looking to get into Brazil, looking at other markets, which will bring us into aqua vaccines who will bring us into more poultry vaccines, let's say, in the U.S., which we can't sell right now. We're spending money in vaccines, African swine fever is still aligned we're working on. COVID completely shut us down because we can't get our scientists into China. I mean China will spend all this time really worried about COVID. So they put African swine for you into the side. They're starting to get back in. So when travel opens up, we'll be able to get back into it more, but we're still working to develop one. And there is no African swine fever vaccine on the market. And that has a very big effect on the swine business in China. We've spent money expanding on our interesting vaccine device, which also gets us into big data. And again, we can't call on customers, but people have seen it. I mean, the last time, we introduced it a year ago, February and the big poultry so. And that [ pulse ] poultry we showed the talk was about what's happening in China with the COVID. And so since then, we saw a lot of interest in, but people we couldn't follow up. Can't travel, can't see new customers. But that will pick up as this comes to an end. We're working on a whole microbial line of products. And we have launched a new direct-fed microbial in poultry, which was the reason we acquired that company down in Florida. That's growing. We have a nice business, and that will grow again, held back by not being able to call on customers, but that will open up. And we're seeing even now more and more business there. So I don't know. And there are a few other endeavors that we're expanding our Animate business, et cetera, et cetera. So there are a lot of areas that we think will pop when COVID is over, but we continue to invest in those areas.

Okay. That makes sense. And just a follow-up on the companion animal segment, just one second. Do you have an update on the Lyme disease project and what we should expect in terms of timeline or magnitude from that particular product line?

I hate to hit the COVID button. But the fact is that we're working with a partner who is themselves working with the university, and the university has completely shut down their lab due to regulations of not having -- being allowing 2 technicians in the room at the same time. So that is something -- there's no financial cost to us as far as the delays themselves other than the opportunity cost and the delaying of the product. So we're still -- we still have a ways to go on that product. And that will obviously, as with everything else, we'll have a chance to accelerate hopefully in the coming months once...

and with Rejensa, are you leveraging third party distribution? Is that kind of going to be your strategy going forward across the companion animal segment, most likely?

Well, so before Rejensa, yes, we are leveraging third-party distribution where -- what we've seen is the fact that distributors are really hungry for other entrants. Right? You have the big 4 out there who are taking from the distribution point of view, some liberties as far as the commissions, things of that nature, they need to balance their business. So we are getting some very interesting propositions from the distribution world. And with Rejensa, which is our joint supplement, it's over-the-counter product, but we're selling it exclusively through the vet channel, we are working at this point exclusively with one distributor. And it's been a good relationship. But as my father noted, we are seeing that we have difficulty accessing the clinic presently. But our -- the business itself is actually doing better than our budget. Insofar as the reorder rate has been higher than we expected, but our ability to get new clinics has been more challenged. So we think that speaks very, very well of the product. Overall, though, I think one of the advantages that we have today is, yes, distribution is definitely an opportunity for us. But we don't have a 300 person sales force that we have to feed, and we have different opportunities for different products. And there's not one way to get to the market. Obviously, today, there's multiple ways to get to the market. And in certain instances, you could argue that having, let's say, a very strong sales force, which, to be honest, we'd love to have but there are some -- if you decide to go to a new route, you are at risk of being punished at the vet clinic or by distributors or whatever it is. So we do look at it as an opportunity. The products that we're working on, some of them would go through distribution or we probably look to build up some of our own sales force over time. But some of them have other routes into the market as well.

Yes. That makes sense. And then on African swine fever, can we just get an update on what's going on in China right now in terms of repopulation of the herd, what you're seeing and hearing across that market and how that's influencing import export trends out of other countries?

So African swine fever still exists in China. It exists in the Far East, exist in Vietnam and some of the other markets. Obviously, for China, it's the most impactful. And there is no vaccine, and people are working on vaccines as we are. But there has been no vaccine, which is -- vaccines, which have been successful. Notwithstanding that, prices of pig meat, or pork, are very, very high in China, maybe twice what they were pre-ASF people are spending money for better biosecurity, less density doing what they can to take advantage of the high prices. With all that, China is a huge importer of pork meat, especially for United States. I mean, they use the fact that the African swine fever was found in wild boar in Germany. To knock at the German -- the imports in Germany to China, which the shop the German produce it because they don't have ASF in the flock, but it comes to -- was helpful for the U.S. producers. So I think this has gone on for a while. They'll try, they will rebuild slowly. But until -- it's very similar to COVID until there's a vaccine that solves this problem, ASF is going to be with us and with the Chinese for a very long time.

And is this still an incremental headwind for you? Or is -- or should we think about you lapping it and it being sort of a tailwind from a financial perspective?

So we had a double whammy. At first, I mean, our business in China, which is around $40 million a year, was pretty much a major antibiotic, and it was sold with a -- we call a growth promotion label it was sold -- it wasn't over-the-counter, or effectively, it might have even been. So when the decline of the herd, the market went away, and then China put out some new regulations as said that they want every want to have therapeutic claims. So we lost the market because of no pigs. And then we had an inability because of COVID. We registered the product because all the Chinese, like Donny mentioned about the lab, all the Chinese offices were closed. So we've now put the product into registration like a week ago. We think it'll take about a year, maybe a little bit more to get registration. And then under the therapeutic claim, we're still negotiating, but our guess is that the opportunity for us will be down in half. So we'll see the market potential for us around $20 million and around $40 million. But we will still be out of that market on those products for the course of the next year.

Okay. And then I was noticing in some of the reports from some of the other animal health industry constituents like Zoetis, like Elanco. We're highlighting poultry as the -- international poultry as being an area that was under pressure more recently. Is that what you were seeing -- I mean, I know you spoke a little bit about it earlier, but like is that were you seeing the same kind of dynamic? Or do you think that they're seeing something different? I'm curious what your thoughts are there.

I think the dynamic they're seeing is what we're seeing. I mean, again, the U.S. and Europe have this great ability to print money. And that works. People take the money and you can buy whatever you want in the supermarket. If you're living in Bangladesh, they don't have that ability. They -- so if you look at markets like Indonesia, take Thailand. Thailand is a country which half their income is generated through tourism. So there is no tourism. And people are out of work, people literally don't have the money to buy whatever meat they were buying before. And that affects the poultry because literally entry -- that's an entry-level protein. So poultry has been affected in all of those markets through the Far East, whether it's because of tourism in Thailand, whether it's because of the sowing of clothing that we consume in the United States and Bangladesh, et cetera, so you can go around the markets that way. So that's what I'm sure they were referring to. That's what we were referring to in our call the other day. And that will only come back. One -- it will come back in terms of travel. They'll come back in terms of economy. So literally, it's all tied to COVID vaccine. Until there's a vaccine, which is used by most -- a lot of people, we're not going to see those markets come back.

Okay. And where do we stand now in terms of the mix within your MFA category? What would be MFAs that are used more for -- I know you've kind of ratcheted down what's used for like prophylactic use versus in growth promotion versus what's sort of preventative. And obviously, there's been regulatory dynamics around that. Where does the mix stand today in terms of that MFA category?

So I would say on the antibiotics, that sort of fall into what's called medically important antibiotics. We have moved -- we're maybe 90% there around the world, moved our registration from growth promotion to therapeutic. So we're far along the road to doing that. And I think that will be successful. So I don't think we see the big decline that we once saw before. So now it just becomes consumer preferences and things like that, which is why we spend a lot of time and money developing a whole range of nutritional specialties because as I've said often, you heard me often, that we all can change, we want to feed them, but the bug doesn't change. The bacteria is still there. And you have to help the animals fight the bacteria. Otherwise, they won't live. And well, they -- ultimately, they don't live, but they won't live to get to the position where they won't live. So that's part of the reason for our growth in nutritional specialties, Weight and dairy catalysts in the poultry area, in the swine area.

And just to clarify one thing. Our MFA and other category is not 90% antibiotics. It's a much lower percentage than that. Within those products that -- and we don't break that out. But within the antibiotics category, the point is that 90% of the antibiotics are close to it, we've transitioned from production claims to therapeutic claims.

Would anticoccidials be about half of your MFA segment? Or more?

It will be about half but most of those anticoccidial we sell are not antibiotics, they're mostly chemicals. But they fit into the MFA category as Donny was saying same. So -- and then if you add that and on top of the for us at least some, which are in antibiotic, they are not considered to be medically important. So the part of our business, which is MIA antibiotics becomes a smaller, smaller part. And over time, will become a smaller and smaller part. And as Donny was saying, as I was saying before, those were moving toward therapeutic, were 10 years ago, it was all growth promotion.

Okay. And then we got a few questions kind of from email. One of them is, can you give some more specificity around the favorable timing orders by certain customers? I guess, obviously, they're referring to the most recent quarter, specifically which products in which geographies.

I don't know, Dick?

Yes. That -- we just had some it was mostly in the MFA category. It was in several different geographies. It wasn't -- in the aggregate, it wasn't a huge number. We called it out because it helped to trend a little bit, but we don't see it being a big negative to, say, the next quarter, for example. So it was probably in the 2 -- the low single digits of millions in terms of a benefit, a couple of million dollars.