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

All right. Thank you for joining us for our next session. My name is Mike Ryskin. I'm on the life science tools and diagnostics team, also covering animal health. Joining me here today from the team is the Senior Analyst, Derik De Bruin. And for health session, we're joined by Phibro Animal Health. With us here, we have Jack Bendheim, Chairman and CEO; and also Danny Bendheim and Damian Finio. Thank you for being with us, gentlemen. Appreciate you taking the time. I think just to get the ball rolling a little bit, you guys reported earnings just this past Thursday, Friday, the fiscal 3Q for you, very strong results. Maybe just a little bit of a quick background. Sort of can you give us a recap of the main points from the earnings front sort of what you thought was the most notable point.

Yes. Let me start. So yes, we had a good third quarter. And we also put out our guide for the fourth quarter and what would be our full year. So we went through a year-to-date basis for our results because we think it gives a better view of the underlying performance of the business. So on a year-to-date basis, although sales are comparable to prior year, the bottom line is up quite a bit. Our Animal Health segment performed pretty well. And you'll see within that segment, we break it down into 3 buckets and nutritional specialties is up year-on-year, about 8% and EBITDA for that segment is up about 1% year-to-date. And then for Mineral Nutrition and Performance Products, both are having a really strong year, especially Performance Products. I'm sure Jack will talk about that a little bit later in our conversation. So overall, really, really strong quarter, good top line and solid bottom line performance. Our guide for Q4 is incremental -- slightly incremental growth, I'd say, over the third quarter, sequentially speaking. Each quarter has gotten a little bit better past -- after the first full quarter of COVID, which was the quarter ending June 2020. Our earnings call will be in August for our year-end or June 30 year-end. And at that time, we hope to be in a position to give full year guidance for our fiscal year '22. So overall, really strong here.

Yes. Okay. I appreciate that, Damian. Maybe just to follow right back off of that. I don't know if this is for you, Jack or for Damian, but as you cited really volatile conditions over the past year with COVID, everything has been disrupted in the U.S. and international markets. As far as restaurant closures, supply chain, things like that, can you give us an update on sort of where we stand today? It seems like we're mostly past the COVID challenges, things have mostly normalized, and obviously, you're now benefiting from those easy comps. Is that a fair assessment? Sort of where are you seeing market conditions in the U.S., where are you seeing market conditions in other developed markets, but then also in developing economies, like parts of Latin America, parts of Asia Pacific region, sort of?

Yes. So listen, we all know about COVID and we don't know how COVID affected everybody in their own businesses and their own lives. Clearly, the wealthier countries, they have both the ability to put money into the marketplace, in the people's pockets as well as vaccines into people's arms, have come out well. We'll be coming out well of COVID. I mean it was a crazy year I believe. But they are quickly coming back to whatever normal would be. And we're seeing that in the U.S. and we're seeing that in other parts of the world. I think in the parts of the world that do not have either the wealth or the vaccine, recovery is going to be much slower. So in parts of Far East and putting India even to the aside, because that's on the -- that's in the headlines. There, the economic recovery is slower, will be slower, and which means people I have less money in their pockets, which means people will be slower to buy protein. I mean they'll revert to what it was 3, 4 years ago or earlier. And I think that's the dynamic we're going to see. So yes, back pretty fast and going well in the U.S. Doing better in Brazil, doing well in Europe, but in the rest of the world, it's going to be slow go. And I would say, at least for another year.

Okay. In some of those developing economies, in the past, and then we talked about was sort of the trade-up or the trade down in protein class, where if you think about people's economic status, I think cattle -- beef is usually the most expensive protein followed by pork, followed by poultry. Are you seeing any dynamics like that? Are you seeing maybe a little bit more demand for poultry, a little less demand for pork or cattle? Or is that sort of too nuance and too short-term to make an appearance here?

No. I mean, it's not a nuance. It's how things are and how things have been. Some of these markets I'm referring to don't have pork as an alternative protein with a strong wisdom and influence. So it's really nothing of a poultry. And then cattle is really expensive. So you need stronger economic growth for people to go ahead and try stake often for the first time in their lifetime. But I think as you see from everyone you speak to, if I look at the results of what we're seeing here in the United States, what I'm seeing in my neighborhood in terms of people who have gotten the vaccine, people who, for the first time, have visited in Louis -- and that maybe they could have done it before, they might have chosen not to. The recovery people are starting to go to restaurants again. So there, it's going to happen. The comeback is going to be really quick. And I think that's people's reactions. I live in the Bronx, so Manhattan is filling up again. Investments are coming up. Definitely, the highways are more crowded today than they were 2 months ago. So people's reactions will be much faster and all the pundits would say, "Oh my god, a very slow recovery and people never will leave their homes." I don't think that's the case. I think once people feel comfortable, once people have vaccines, it's going to come back -- it's going to bounce back. So -- but that's in the U.S., and that's some countries that get lucky that have the vaccines. Many parts of world do not have the vaccine yet. And so dealing with a pandemic, it maybe around 3, it maybe around 4. So those countries it's going to take a bit longer. But eventually, I think everyone want to be vaccinated, and that seems to work, so that's in time.

Okay. And that's very helpful commentary. Yes. We're seeing sort of a similar dynamic in the rest of our coverage universe, in the life science tools and in the diagnostic space. Is there's certainly a little bit of a duality between some of the developed markets and some of the developing economies? One area we haven't really touched on or talked about so far is China, obviously, both from a -- there's a demand perspective, but there's also the supply perspective with pork and the swine industry there. ASF was the big story there over the past year, coming up on 2 years now, I think it was August 2019 when that first really started cropping up. All indications are, they're in the middle of a sort of a massive rebuild and that should be a net positive for you in terms of selling into that market. But we are also hearing some pockets of renewed outbreaks, maybe even different strains of ASF. What are you seeing on the ground? And sort of how have your assumptions for China evolved over the last couple of months?

So China is working very, very hard on trying to rebuild the herd, followed up by the government putting vast amounts of money into the larger farmers to build facilities that could have high levels of biosecurity. But the disappointment is that African swine fever has not gone away. And I don't think will go away until there is successful vaccines. And even though there have been some good attempts in China, so far, there are no successful vaccines. And we all know that knock-off of vaccines, they are causing more harm. So I think it's going to be a long time at this rate until China basically even goes back to its self-sufficiency, which was not self-sufficient back in 2019, 2018-2019. And you have to remember in ensuing time, aside everything else, they've emptied, I don't know empty because no one knows how much was in, but they keep sending out when they need to lots of frozen pork. So besides everything else, besides trying to get the herd back to a side, they need to refill those strategic storage areas for pork. So I think China will be a big importer of pork in the United States and from the rest of the world for the next foreseeable future, for the next 5 years, at least, and that would be good, and that's good for us because we sell -- I mean our products around the world. For us in China, when African swine fever hit, we got a double whammy, a hit and then we lost our registration for virginiamycin. And so we've done -- we turned our sales team there around and we're starting to concentrate more in the dairy industry. And we're starting to build up business and doing okay there, and that's growing every month. And I'm not sure we're hopeful to be able to get our registration back in the foreseeable future. But first, we were delayed by COVID, then we were delayed by various things, which just happened in China. So that's going slower than we'd like to see it. But in the meanwhile, China imported pork from everywhere in the world, which, again, is good for us. So...

So just a following up on your comments there. If we sort of go-forward a couple of years, and this is just -- this is -- I'm not asking for specific numbers, I'm not trying to peg you down to anything, but just sort of thinking hypothetically. One trend we've seen in China is they are trying to become more industrialized with their swine industry. They're getting rid of some of the backyard farms. They're trying to become a little bit more careful with how they do some of these practices to prevent outbreaks like this in the future. Everything we're reading is that those practices tend to include more animal health drugs and they tend to be more reliant on sort of some of the same protocols that are used in the U.S. and Europe. Between that and between the fact that you're investing in the dairy business, do you think that when we come out of this ASF pandemic, however, many years in the future it is, China could suddenly be a much bigger business for you than it has been in the past?

So China will always be a big part of our business. And if they can solve the problem, yes, there'll be a huge producer of pork and we'll have our products in there. My hope is truthfully that the vaccine, the ASF vaccine that we're working on, will be part of the solution. That will be bigger than anything we've ever seen before. And in our efforts on that end,have been slowed down by COVID because China, effectively, they took all the laboratories in all the testing centers, and they put everything into working on COVID. And it's amazing to see how authoritarian regime can work because on Monday, you thought you were working on ASF. But by Wednesday, you're said, "ASF, we don't do that here." It's all COVID, and that's what happens. So listen, they've counted COVID in many different ways, not by -- like we've done in the United States, not through vaccines, they've counted in a way that maybe we would have liked to, which is they shut everything down. And they basically do not give COVID a chance to really grow. And the economy in China is strong. People on the streets, people do whatever they want to do, people are going back to you. But the same nature in China makes it almost very difficult to control a virus like African swine fever. Because even though what happens, in order to be -- have really good biosecurity, [ Aptalis ] Pharma, that has grown now successfully 1,000 pigs without facing the virus, you can't get any bigger. And that doesn't happen in China. I mean the economic incentive in China is such, it's like with our farmers, but worse, right? If I'm making money in 1,000 things, I got to maybe I make twice as much money in 2,000 things. And how am I going to do that? Next thing you know the virus is introduced. They're going out and they're buying pigs from backyard farms, even though the idea was a shut back that farms down. You can always pick up a pig front backyard farm and put it in your system. So it's going to be forever. But it's going to be a long time to manage on African swine fever. And again, as long the time in China stays strong, it's still positive for rest of the world.

Yes. I want to really appreciate that context. I want to follow up on a couple of points you touched on there. First, you mentioned your own ASF vaccine. I know it's something that you first brought up a couple of months ago -- a couple of quarters ago. I haven't had too much follow-up since then. I think at the time, I kind of said that it was still in a relatively early stage. Do you have any updates on that? Is it still sort of ways down the road or anything you can say on your ASF vaccine progress?

So as I was saying, COVID, I mean, the fact that everything shut down in China. We've been unable to get our people into China to follow up in some of the developments. And I think till China opens up, which my guess will be sometime around the end of this year, November, December, we'll not be able to sort of restart. We've been doing some testing, working with our Chinese partners, but it's at a much slower pace. So it's a great question, obviously. Hopefully, you'll have a good answer to you sometime in next year.

And from what we've seen, it's actually difficult to work on a vaccine outside of China because most countries won't allow you to import the ASF virus into them because of biosecurity issues. They don't want you to bring it in even sort of research lab, right?

Exactly. And the ASF in China is slightly different than everywhere else. So this is something you got to work on in China because at the end of the day, even you've done some work, wherever you've done some work, the fact it means you need permission from the Chinese government to bring in the vaccine. And they're going to be very careful by bringing a vaccine, which is based on a virus, which might not be circulating giant. So it's -- obviously, it's very complicated. And it is China. So it's -- we're still in the game. We're still in the mix. We get -- we have cooperation from the government in trying to help us to get the kind of time necessary with the sick pigs and time necessary in the laboratories that can handle this very, very virulent virus. And only 4, maybe 5 locations in all China that has permission from the Chinese government to do that. And you can imagine, they're all booked up all the time. So we're in one now, and we're working on saying, getting -- moving the work we've done along, but it's slow going. And it won't be faster going again till we're able to get our scientists back into China.

Okay. Okay. That makes sense. The other point I want to follow up on is some of the other ramifications of sort of how China is dealing with what -- the ASF you talked about a lot of all the imports they're making in pork to offset the lost local supply. I think one of the dynamics we've seen there is we're seeing a really sharp spike in corn and other feed costs and other input costs for a lot of these producers. Any thoughts on how that's impacting sort of the end market demand for your products? There's some debate whether it'll get a limited ability for a lot of producers to expand their herd. I think poultry is where we've seen the biggest impact there. But if this persists, it probably could extend into swine and even to cattle down the road. Just curious what your thoughts are on feed costs and other input costs in the industry?

I think the Chinese have been the best traders in the world for the last 2,000 years. So I think it's just a trade. I mean the input cost is high in China, but equally high in Iowa. We got the price of corn is set, right, will be set by the U.S. or by the Brazilians, plus the freight. So it's for them to decide if they're going to want to import the corn and soybean and raise the animals there or let the farmers in the U.S. and Brazil raise animals. Ultimately, the price differential won't be that great. And I think the Chinese are at court between obligations they took with the past U.S. administration in terms of what they need to buy in the United States from our farmers. I don't think that came to an end with the change in administration. I'm not sure. But you have that agreement that was signed. And whatever those -- whatever agreements were under that, that we haven't -- none of us have seen. So they might be just buying that because they made a commitment to import $70 billion worth of whatever. And clearly, it's easy when corn is $8 and when it's $5 and what less product, left shipped. I think all these things are dynamic. At the end of the day, pretty much these things even out around the world. China is a huge importer of grains, has always been and will continue to be as they raise their own animals. But it will also be a huge importer of the finished animals. They'll do what's in their best interest.

Okay. Going back to, I think, one of the only sort of markets and business segments we haven't touched on yet is the nutritional specialties business. And it's something -- obviously, I think there's a lot of exposure to dairy in that part of the company. You've had some really strong growth there. For a number of years, in 2019, or fiscal year '19 was a little bit of a hiccup, but since then you've rebounded strong year last year. Another 3 quarters this fiscal year have strong results. I just want to talk about how much is that some recovery you're seeing in dairy? How much of that is maybe the Osprey business contributing and doing really well? Omnicell, sort of what are the key drivers there? And how sustainable is that, that strength in nutritional specialties?

I think when we -- in a strong way into the animal health business, when we acquired from Pfizer, their Medicaid feed added business back in 2000. It was predominantly an antibiotic business. And we've all gone over it, and we've seen the shift most heavily in poultry, I mean, also in swine, but less so in cattle, of a change in dynamics in the market, sort of driven by consumers. And we're in the middle of it. We've seen it coming, and we've been working hard and developing nutritional specialties to replace antibiotics across all species. So the one we had for a while has been dairy, and that's visible, and we do really well, mainly because dairy cows can't use antibiotics. They get sick and you give them penicillin, you have to throw the milk away. So that's not a good place where the dairyman want to be. I mean it happens and that happens. So we came up with some interesting products. But we've grown our business on nutritional specialties, in poultry, in swine. And maybe Donny want to talk a little bit about what we saw on DFMs and the acquisition of Osprey.

Yes. So Michael, as you touched on, some of it has been driven by Osprey. And I think, actually, the first year when we bought the business, there was a little bit of a dip, but it's recovered really strongly for us. And the reason we bought Osprey or acquired Osprey to start with us, we were working on our own direct-fed microbial, DFM, for the poultry business where we were using them to supply 2 of the 4 strains. And that led to conversations which ultimately led to the acquisition. That business, that product that we launched has done really well. We're #2 now in the DFM space in poultry. And we think there's room to grow. And we're being basic in this technology, we see is just a really strong place to be. We have a library of strains within Osprey. We're looking at other strains as well. We are, as my father mentioned, across species. It allows us to come up with products that either target, I'll call it, commercial products that target an entire range of species or to be more bespoke and to actually go from farm to farm and to offer them specific strains for the issues that they're facing. And that's something that is similar to the approach we've taken on the vaccine side of autogenous vaccines. And it's an approach that we'll see play out across different species in the United States for us with nutritional specialties. So a lot of really good stuff there. A lot of our innovation, I'd say, over the coming years will be driven by that acquisition and by the people and technologies we have in place there.

How big is the -- I don't know if want to disclose this, how big is the Osprey business for you now? Is it sort of fully integrated in the rational specialties, you can't really break it out anymore?

I think it's difficult to break it out because a lot of it has to do with -- we're producing in one place, but we're selling to a different part of the business. I mean suffice it to say that our nutritional specialty business, I would say, is going to outpace and -- I mean, forget percentage growth. In terms of dollar sales in 2, 3 years will be a lot larger than our whole MFA business. There's just more opportunities. It's fast as a market. And it's where the customers, where the consumers want to go. And it's obviously dairy, but we're seeing a lot of -- Donny spoke about some products from poultry. We've seen a lot more opportunities. And we're the same thing in swine. Everyone talks on the human side, a lot about gut health. The same thing in the animals. And if we can figure out gut health, we can make the animals farm more productive by staying healthier. And that's exactly what these direct-fed microbials, the right ones, will do.

It's also, I mean, not only is growing fast on demand higher, you're also getting probably stronger margins there than you are in MFAs and some of the older product lines in that, right?

What we like to say in its -- in changes, it's pretty much -- we're in the same -- our 3 businesses, vaccines, MFAs and nutritional specialties all have approximately the same margins. And which is very, very respectable margins. And it's why we invest. I mean it's last year -- I mean, it grew now these last 9 months. We must invest in just in our nutritional specialties, $15 million in capital to expand the production units that we use to sell. So we're seeing good growth across species and across geometries.

Okay. We've got about 3, 4 minutes left, and I want to touch on the companion animal business because that's been a bit focused on investors. So Damian, maybe jumping back to you. Obviously, Rejensa, you've talked about for a number of quarters now, but now there's a couple of other products, you started to talk about, how do you think about that portfolio expanding over time? And sort of what's your long-term vision for all that investment? How do you -- 5 years from now, where are we going to be in terms of companion animal for Phibro?

So sure. So I think internally and externally, what we talk about with our companion animal business is we'd like it to be the fourth leg of the stool. And right now, vaccines, MFA and other and nutritional specialty, those are the 3-legged stool that makes up animal health. Companion animal right now is reported as part of MFA and other. But eventually, we've broken out. And our hope is it's at least as large as the smallest of those 3. And so our target is $100 million in the time range that you talked about on the top line. And we think that we can get there. We can say, itself on its own is not going to get there, but it continues to grow really, really nicely and it's got a lot of room ahead of it. And then as you mentioned, we have a pipeline here that we're developing. We've got a couple of oral care products, one for cats, one for dogs. We have the derma care product for atopic dermatitis and then we actually -- we have -- our first product, which we announced years ago, it's kind of been on the back burner because of COVID is our differentiated line vaccine product, the delivery system that would allow for a consumer to actually use it on their -- without having to go through the vet. And that's a product that has been stalled by COVID. Still -- all these products are relatively away staged, but we look forward to continuing to hopefully have our partner progress that beginning later this summer.

Okay. Okay. One last one came in from an investor as we're going through this. If you could provide an update on carbadox. I know it's an area that's sort of been back and forth for a couple of quarters now and you sort of -- I've to spend a little bit more to support the continued use of it. I was just wondering if you have an update on that.

So I mean, carbadox has been a product within the portfolio we acquired from Pfizer. So including the Pfizer, sales of that product was back in the market about 40 years. It's the key product in the nurseries in baby pigs in fighting off swine dysentery. It's used by over 80% of all the pig producers in ISAs. It's been safe. It's been effective and useful all these years. And then seemingly, every once in a while, the FDA, I guess, the same concentrating on COVID, they spent some time on Mecadox and carbadox. We are spending money to fight it, fight the FDA. And our lawyers are confident as they stay employed. And we're confident because, again, this product is safe and effective. And it would be a major blow to the U.S. pork industry. Again, this is a product that they've been using to all these years, and it's really an important product to them. So we're guardedly optimistic, and you never know with the FDA, but I think we're guardedly optimistic so we will win this current foray and continue to keep marketing this product.

Any idea on timelines there? Or is it completely unpredictable up to whatever the FDA decides to say something?

Again, it's the FDA. And as you know, they've now gone 3, 4 months without a commission. I mean, I don't know -- none of us know what's happening there.

Okay. That's fair. That's fair, Jack. All right. I think we're at the bottom of our hour. We have a lot more things we could discuss. But unfortunately, that's all the time we have. Jack, Danny, Damian, thank you so much for joining us. Really appreciate you taking the time to shot through this investors. I want to say thank you for joining us as well. And good luck for the rest of the conference and the rest of this week.

Thank you. Thanks, Michael.

Thanks, Michael.