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

Okay. Thanks for joining us. My name is Mike Ryskin. I'm one of the Bank of America Life Sciences Tools & Diagnostics team, and we also cover animal health here. So for our next session, we're joined by Phibro Animal Health. The CEO, Jack Bendheim; CFO, Damian Finio; and Danny Bendheim, who will be covering some of the companion animal business for us. So gentlemen, thank you for joining us.

Thank you.

Good to see you.

I think to start, maybe we'll just -- we'll kick things off with you, Jack, if you don't mind. You just reported fiscal 2Q results about a week ago. Can you give us just a quick recap of some of the key points from the earnings print on the call, sort of what were the most notable takeaways? Just sort of get the background in a little bit.

I'm going to say the most notable takeaways in words was that in many of the markets, there's been a fairly complete recovery from the shock of the COVID, which obviously hit everybody, hit us last April, May, June. Recovery in the United States has gone well. Recovery in other markets have gone pretty well. And recovery in the Far East and some of the countries that rely on the U.S. for its economic steam engine, that's still gone pretty slowly. So those are the -- actually fairly the takeaways. So businesses going a little bit better than we expected, and we continue to see that going forward in the next quarter and over the rest of the year.

Okay. That's a great jumping-off point because I think there's a lot there that we want to dig a little bit deeper into. I guess the first one is, I know you commented on sort of the phasing of recovery around the world. What do you think is really driving that? I mean, I think one of the things we expected -- if we could start in the U.S., for example, one of the things we thought about was that the recovery would be tied more to when food service and restaurants opened back up again, and that would sort of drive demand again. And we're not quite there yet from the restaurant front. So what do you think are the key things we need to monitor here? And are you focusing on any particular species? Or is this just a little bit broader that you're seeing things?

So I think if we look at the U.S., look at recovery, earlier today, someone asked me a question about looking at people going back to cruise lines. And that recovery being whatever, 1000% or 1 million percent from 0 up, and what the impact will be in the production animal side. So just what I noted is that when people go on cruise lines, yes, they start eating on the boats, but then they stop needing at home. So I think what's happened in the United States, and people need to recognize, yes, people stop needing a restaurant. And in many parts of the country, that has not come back, and that will come back slowly. But people have more than made up for it by eating the protein in their own houses. And it was disruption when it first happened. And now the producers have sort of worked out, how they get the food to the supermarkets as well as to restaurants. So I think from production side in the U.S. side, we're pretty much back to pre-COVID levels of productions of chickens and pigs, dairy and beef cow. Normally here and there is a little bit. But overall, that is not the concern anymore. Now that's different in different parts of the world. So the example I give is looking at the amount of Amazon boxes, well, what's contained in them in front of my house. So lots of boxes always, but very little clothing. And clothing pretty much in the United States is finished in Malaysia, and Indonesia and Bangladesh. So if we're not buying clothing and Europe is not buying clothing and someone is not working in those countries. And if they're not working, they're not buying protein. So that's going to come back slower. I mean it's going to be tied to how fast we all go about to work and how fast we get back into the groove of shopping again. So that will be a slower part of the recovery. But in the markets -- the western world markets that we're in, that we're active in it, it's the biggest consumption. That will be back. That is back already or will be back very quickly.

Okay. That's very helpful color. Going a little bit deeper there. I mean, you touched on the Far East. What about China in particular? Because China is a little bit of a unique story in that, obviously, very exposed to swine. Had African swine fever outbreak from, let's say, August 2018 through present day, but they're starting to rebuild the herd. I think you took a pretty big hit from China when that first happened because you assume that, that business was sort of stall out for a little bit, but now we've seen rebuilding, and I would say, faster than we expected. Can you give us an update on what's going on there and how that recovery has progressed?

I'm not sure we're seeing rebuilding faster than we expected. There definitely is rebuilding. It's expensive rebuilding because the producers have gone and built big facilities with not a big population of pigs in order to have good biosecurity. And if there is a breakout to be able to segment the pigs that got sick and to take them away and cut them out of the herd. So yes, they are rebuilding the herd. The price of pigs in China are 3, 4x what they are in the United States. So there's a lot of incentive for people to grow pigs. And I would say, for some of our competitors, they are regaining markets because that market disappeared in '18 and '19. We have a somewhat different story is that, yes, our business just appeared in '18/'19 without pigs. But we were also ready to reregister our products. And because of COVID, there were no Chinese government agencies that were open and everything was shut down throughout the country. So we were delayed in getting our registration package in, which now is in, and we don't expect to be back in the market for another 1.5 years. And then when we come back, we will be doing about $40 million. When we come back, I think we expect it to start at about $20 million annually and then sort of build up from there. But that's sort of our story in China having to deal with the change in the marketplace.

Okay. I appreciate that color there. Pivoting a little bit back to the United States, I mean you talked through a lot of the major markets. The one, I would say that we sort of had the biggest question on that we've discussed the most back and forth in the past has been the dairy markets and sort of -- again, that was some place that was challenged before COVID even happened. Went through its ups and downs, a couple of times, looked like it was in recovery, but then didn't really quite make it. And obviously, dairy has its own challenges with COVID. So what are your thoughts on dairy in 2021? What do we need to see there to sort of feel confident in that end market again?

So I think in the U.S., we're -- '21 is going to be a great year for all protein producers. I think everyone is making money, some more, some a little less, some poultries, depending where you are, might be a little bit less. But the markets are strong, demand is strong. Exports are good in many of these markets in the world. So even the dairy market, which again, we've spoken about that often, those guys are making money as well. And the big challenge all of them will be facing going forward is a higher cost of input cost, right? The grain prices, corn, soybeans are prices that people haven't seen in 10, 15 years. So that is a challenge. A challenge to pass that on. But I think what has also happened doing with last year of COVID, some people sort of got used of seeing higher prices in the supermarket. So that may be -- that was made by the distributors because it was difficult to change how products will move. I think some of that money will shift to the producer's pockets. But I think from most of what we're hearing, the producers we're talking to are optimistic.

I mean, you touched on something there that I want to discuss in a little bit more detail, and that's the input cost side of the equation, the feed cost. We've definitely seen that in corn over the last couple of months. Have gotten relatively different feedback in terms of when it will matter, how much it will matter. On the one hand, as you said, as long as the end product is selling, producers are still going to produce and they're still going to buy your products. But is there any consideration on your part in terms of profitability for the producers, sort of -- is there a threshold where the price is so high that they really do have to cutdown maybe on some of the products they buy from you? Or is that really not in consideration? And then as long as there's end market demand, you guys are in a good position?

Last time we saw high prices, which was a long time ago, the way animals, not chickens, but the way hog to produce in the United States were a lot smaller farms. In that situation when the hog prices didn't keep up with the input costs, the grain prices, there were problems. And people stop feeding and people cut out products. I think now definitely chickens, pigs, cattle are all raised by large producers. Many of them have hedged their input costs. So we're not going to see the effect maybe for the next 6 months, maybe for a year. But they all know that the products that they buy from us and our competitors, enhances the value, right? So if you have a -- you're feeding a cow and you're a month away from Florida and the cow get sick, you're not going to give it a drug. You want the cow to die. I mean there's no economic sense there, right? The other products where that they're using our products and our competitors' products enhances the animal's ability to stay well. And if it stays well, it's going to convert more of that high-cost grain to meet, right, on the bone. So there's -- effectively, there's no reason for them to cut back. And they see that they can't get prices in the supermarket, then they'll lower production. And they won't keep producing. And you know so well, the protein cycle is 4 or 6 weeks, hog cycle is 6 months. So fairly quickly, you can fix it as a problem. And as long as exports are strong and they will be strong for this year, I think our business will be good.

Okay. Okay. That's really helpful. Maybe sort of sticking on the livestock side of things a little bit longer. Can we talk about some of the particular products that you've launched recently? I mean, for example, Omnicell? Any updates you can give us there? Sort of what's been the uptake? Have these launches and introductions of new products been disrupted in any way in 2020 because of COVID? What's been the market reception there?

I think the disruption of COVID across many industries has been the inability to get out in front of the customer and sell. So if you're launching a new product, you can't just do it with a website. You need to get in front of the customer and that has been impossible. The customers don't want to see salespeople because they're concerned about keeping themselves healthy, keeping their factories healthy their plants healthy. So that's slowed down the ability to move out new products. Nonetheless, we've invested, and we've done a pretty good job with web conferences like this, where we call on customers. And I would say we're not -- the launches have gone okay, not as well as we wanted them to go because of COVID, but we're gaining speed. And the newer products that we put out there, definitely are selling more this year than it sold last year. So it's going to be a slower incline than we would have liked, than we expected, than we invested. But we're seeing as the level of vaccination across the country increases and across the world, we'll get back to whatever we were hoping to get back to.

And once those -- once the vaccinations do come in and when sort of business gradually returns back to normal, how quickly are you going to revert back to your sort of historic ways of travel, of T&E, sales and marketing? Is it going to be -- are you looking to go back to exactly the way before? Is there going to be some sort of hybrid approach where you do lean a little bit more on technology? Sort of what's the business approach there?

I think from an economic point of view, I hope would be some sort of a hybrid. We've all been educated at the power of Webex, Zoom. So why give that up quickly? I mean, it really does work, and we can get people. We're not Zoomed out to come back on and spend another 20 minutes with you, right? But on the other hand, they also want to see salespeople. They want to see the technology people. They want to hear what's going on. So I think it's going to be a balance. It will be a ramp-up. So I'm not sure how high the ramp will go. But we will definitely start spending money again on T&E and getting in front of the customers, but we also will continue spending on technology.

Maybe -- great. Maybe this will be a good time to sort of switch over to Danny and talk a little bit more about the companion animal business and the investments there, especially because it is a little bit of a new area where you have to start-up from scratch. So could you talk about Rejensa, how that's trended? Maybe give a little bit of an introduction to the product for people that aren't as familiar with it? And sort of how that feeds into your longer-term strategy on the companion animal side?

Sure. So thank you. Rejensa is a butylated glucosamine. Glucosamine is a well-known product for joint health, aimed at the K9 market, the dog market. We introduced it nationwide a bit before the pandemic hit. We are selling -- it's an over-the-counter product, but we're selling it exclusively through to the vet channel. And what we've seen is, a, from a product point of view, it works really well. There are a number of glucosamine products out there. We've done some nice head-to-head tests, and we feel very confident in our positioning of this as a premium product within the space. We have seen, though, that the distribution within the pet industry is really, really hungry. I know you follow some of our bigger competitors, and they have squeezed the distributors. And what has created is an opportunity to work with them on unique propositions and to find a niche, or not even necessarily a niche, but to find opportunities where they will partner with us more than the traditional level of detailing that they would get into. So we have gone with Rejensa, exclusively with one of the national distributors. We are a major product in their portfolio as far as their focus. It's a major focus for us as well and when we tag team it. And the growth has been, as we mentioned on the last call, the last 6 months was double the previous 6 months. Now it's obviously starting from a low base but we're continuing to see some really strong growth there. Growth is continuing through February despite the weather, and we are excited because we know the category is a pretty large category, and so high is pretty high there. And we are confident that touching on the themes that we just talked about being able to get in front of the customer. So obviously, the last year, it's been next to impossible to get in front of the vet, even a pet parent can't get in front of the vet, they might have to leave the dog or cat at the door. So it's been a slower slog, but the reorder rate has been much higher than we expected. So we know that once we get the product in front of the customer, the customer loves it, and we've seen that through the reorders and through social media. So we are very confident in the success of this product. And this is the first of a number of products that we are looking to come out with. We are making it very clear to the innovators within the pet space that we are here. And that as someone looks to a new product and they survey the landscape, which has gotten more and more consolidated, there's very few people out there that you can be confident are committed to the space and at the same time, don't have a conflict within the product category that you're looking for. So Rejensa is our first product. We've announced previously that we had announced a differentiated delivery system for a Lyme vaccine. That's still in development, that has been slowed. And I apologize for hitting the broken record of COVID, but the work on that based on the state that the work is in was limited during this period. And we hope to restart that later this spring or early summer. And then we also announced a new license deal for a derma care product for atopic dermatitis that we are extremely excited about and that market is huge. We have a unique compound, which we're not getting into the details of at this stage. And it's obviously very early stage. So I don't want to overstate or understate the risks evolved. But if it does what we think it can do, it will be a significant product in this market.

Great. Thanks, Danny. Covered a lot of ground there. But again, I want to go a little bit deeper in. Going back to Rejensa sort of starting at the top. Could you give us a little bit more of an idea on what the competitive landscape for that product looks like? How many sort of entrenched players are there? Have you been able to -- do you have any statistics on taking share or sort of market penetration in terms of the number of vets that are ordering, anything like that?

So we're in at about 1,000 vets right now. The market for this type of product is omnichannel. The #1 player is a company called Nutrimax. And they have a significant share. At this stage, we're in the low single digits. So we have tremendous amount of runway ahead of us there. It's a well understood, well -- the space is probably around $400 million to $500 million. It's hard to get complete statistics on that. And as I said, we are -- we have a premium product, and we'll be competing in the upper echelons of the space as far as pricing and positioning.

That's helpful. And then in terms of the go-to-market strategy, could you walk us through the rationale for -- even though it's over-the-counter, you're selling it exclusively via the vet's office. Why not explore some of the retail or alternate channels with that? Sort of what's the argument there?

Yes. So we obviously are a new company within the space, and it is important that we get the emptor of the vet recognizing the quality of the product that we're bringing. And so we thought that it's the first product we go out with. This is actually -- vets do sell glucosamine products. And historically, the higher-end products will be sold through the vet and the lower-end products we sold to through retail channel. This is obviously a higher-end product. But I think one of the things that we bring to the table is that we are a blank slate at this point. So we are going through this approach. We're seeing success in this approach. If we stall out or if we see a better opportunity someplace else, we have the ability to switch quickly. As I said before, there is a lot of compelling -- there's a -- the vets want unique products. And so this is a unique product for the vets. The distributors want unique products. So there is a benefit right now to selling exclusively through the vet, not being on chewy, not having the customer of the vet be able to price shop and things of that nature. So we're happy with -- we obviously would like the pace to have been faster, and it would have been had COVID not hit. But overall, the trajectory is very strong, and we have a lot of confidence in our strategy at this stage.

Got it. No, that makes a lot of sense. That makes a lot of sense, certainly. If we think about sort of using this as a stepping stone in building out the rest of the companion animal portfolio. I mean, I know you guys have in the past, gone after some assets that were up for sale in the animal health industry. And obviously, you talked about the in-licensing of the atopic dermatitis compound. Is there an opportunity for inorganic bolt-ons of either specific brands or maybe small pockets of portfolios out there? Sort of how are you thinking about building out the rest of the companion animal business in balancing organic investment versus taking something that's already on the market that's already established?

I think we're open to everything. The reality is that the multiples in this industry are very, very strong. And force you kind of go earlier in the life cycle to sometimes take bigger -- take a bet on a product that hasn't necessarily proven itself in order for the economics to really work. So I think ideally, we would like to gain bulk in multiple ways. Obviously, starting out, we don't necessarily have the synergies that our competitors do in looking at bolt-ons. But as we do build up Rejensa and other products and as we build up our sales forces as a result, working with the distributors in the case of Rejensa, the economics then start to get stronger. So I think over time, we'll look to grow in multiple ways.