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

Ladies and gentlemen, the program is about to begin. At this time, it is my pleasure to turn the program over to your host, Michael Ryskin. You may begin.

Great. Thanks for joining us, everyone. My name is Mike Ryskin. I'm on the BofA Life Science Tools and Diagnostics team, also covering Animal Health. For our next session, we're excited to host Phibro Animal health and we're joined by a number of members of the team. We've got Dani Bendheim with us, Chief Strategy Officer and soon to be CEO as of later this year. We've got Glenn David, Chief Financial Officer and Larry Miller, Chief Operating Officer. Dani, Glenn, Larry, thank you so much for being with us, taking the time.

Thank you.

Thank you.

Maybe just to kick things off, we'll start with sort of a recap and to help set the table for the conversation. We're a couple of weeks past your fiscal 2Q calendar 4Q print. The market had another positive reaction to your results. Can you give us a recap of the quarter, what really stood out for you? What kind of drove the results and what investor feedback has really been focused on?

Yes. Thanks, Mike, and thanks for having us. So as you mentioned, we had a really strong second quarter. Very positive revenue growth with 21% growth in revenue. We had 60% growth in adjusted net income. And also, we continue to execute really well with the integration of the Zoetis Medicaid feed adder portfolio. We had $94 million in revenue in the quarter, which was a very strong performance, very strong profitability as well. When you look at our MF -- legacy MFA business, we did decline in the quarter about 5%. But as we mentioned, that was due to the timing of an order from a large customer that we produce API for. Once you normalize for that, our legacy MFA grew as well. That was around 3%. And then we continue to have sort of outpaced or strong growth in our vaccine portfolio with growth of 13% and our nutritional specialty for the quarter grew 9%. So really strong performance across the business from both the revenue perspective as well as an EBITDA and margin perspective. And that strong second quarter, combined with a strong first quarter and the strong first half, really gave us confidence to raise the guidance, both at a revenue, EBITDA and adjusted net income perspective. So really pleased with the start to the year and the performance that we expect for the rest of the year. And based on this positive performance, based on the raise to the guidance, the feedback from investors has been very positive.

Okay. In terms of that timing in the legacy MFA business, is it fair to say you're kind of -- are you catching that up in the fiscal third quarter? Is the timing adjusted for that? No change to underlying conditions. And as you said, you've got major customers, these types of shifts are not unusual. It was sort of outsized in fiscal 2Q?

Yes. It was just sort of outsized in fiscal 2Q. As you say, with this particular customer, we have good visibility to orders for Q3 and Q4, and we do expect a recovery in the second half of the year. It's not an underlying demand issue.

Okay. And maybe I'll start with sort of a big picture question, following up on the Zoetis MFA deal. I mean I don't think it's overstatement to call that a transformative transaction in terms of what it's done to Phibro if you look at over the past 12 months and obviously going forward. So first of all, congrats again on pulling that off and completing that. If we look forward from where you are now, it's certainly, again, a different business than it looked like 18 months ago. How would you characterize new Phibro going forward in terms of what your expectations are from MFAs going forward? Maybe if you want to touch on nutritional specialties and vaccines as well on the mix, on the strategy, just sort of on the portfolio as you sit today?

Yes. So I'll start with that in terms of the mix and what we see going forward. So obviously, with the acquisition, we'll be lapping as we move into fiscal year '27, we'll have a full 12 months to a full 12 months and the MFAs will be a larger portion of our overall business. As we move into fiscal year '27, we are excited about the opportunity to continue to build on momentum with the Medicaid Feed Additive portfolio, particularly the ones that we acquired. We built a field force in the U.S. for U.S. cattle. We expect them to continue to penetrate the market as well as some of the field force that we built in Western Europe as well. When you look at the overall MFA portfolio, sort of in the long-term cycle, we expect that to grow sort of flat to low mid-single digits. It's a relatively mature portfolio. But as I said, for fiscal year '27, as we build on that momentum, we expect to do better than that. Vaccines with the investments that we're making from an R&D perspective as well, we expect that to grow more mid- to high single digits over a longer period of time and similar for nutritional specialty, right? We expect that to be in mid- to high single-digit growth based on new innovation, but also based on geographic expansions. As we look at Mineral and Performance, that's somewhat cyclical and dependent more on market dynamics. So it's hard to give sort of a long-term projection on that. But from a margin perspective, we expect to continue to be able to grow income faster than revenue and grow margins obviously better. And that's driven by mix, continuing having the vaccines and traditional specialty, which are higher margin than the MFAs continue to make up a bigger portion of the business over time. And we think that will help overall. From a strategy perspective, Dani, I don't know if you want to comment.

Yes. I think our strategy remains the same. We're heavily focused on growing our vaccines and our nutritional specialties business and see a lot of runway there and opportunity. And then I think as a lower level, our companion animal business as well. So those really are the key focuses of the management team.

Okay. Yes, I mean that's been a part of your strategy for a while. I mean, for years, and you sort of emphasized the growth opportunities in vaccines and nutritional specialties and in companion. So that sounds very consistent with what you said in the past. I want to go back to kind of the way you broke it down, Glenn, in terms of the subsegment growth within Animal Health or the line item growth. You've done meaningfully better than that in the last couple of years. If you look at nutritional specialties, if you look at vaccines over the last 3, 4 years, I mean, nutritional specialties has been effectively a 10% CAGR. Vaccines has been in the low teens, low to mid-teens even. So -- and even the MFA business and even the legacy MFA, you say flat to low to mid-single. It's been pretty solidly low to mid-single, if not mid-single. So really strong performance across all of Animal Health for you the last couple of years. Can you dive into that a little bit more. Is that -- how much of that is the market is doing a little bit better? I mean I think we've seen livestock markets be pretty robust the last couple of years, and I'm going to expand on that later in terms of why. How much of it is portfolio, new product introductions, commercial execution, just sort of walk us through what's led to these results?

Yes, Larry, do you want to talk to the market dynamics a little bit and then our position there?

Yes. So as you mentioned, we've had -- the industry has had nice growth in protein -- animal-based protein consumption has been doing very well. And we can talk more about that, as you said, in a moment about some of the trends driving that. But more specifically, your question by segment, -- we really do -- the livestock business is our main business today, and we do focus on really working with our customers and having meaningful relationships. And so when you look by segment, the medicated feed additives, it's been some geographic expansion and reminding customers of the claims that these products have. And our customers are always facing new disease challenges, new market dynamic challenges and making sure they understand not only what those indications are, what that means practically on their farms. And so we've had nice, I think, continued growth there with the MFAs. In the case of nutrition specialties, we bring -- it's a lot of different types of products that are sold in nutrition specialties, and we really bring different approaches to our customers, I think, in this regard. And so that's been a mix of some launching some different products, some life cycle management products, but also some geographic expansion. In the area of vaccines, I think really, it's about bringing different things to the market. So you tend to follow where surveillance where maybe new disease or new disease strains are popping up and spreading across the globe. So there's been some geographic expansion in particularly vaccines that we have strains that are very effective against those emerging pathogens there. And yes, so I think, again, bringing different innovation to meet the market needs and growing with the spread of some of these diseases and has been a key part of our growth.

And Larry, you kind of hinted at it yourself there. There's also been an end market animal protein consumption driver there as well. We would love to dig into that more. I mean, how much of that is -- when we think about the livestock markets as being -- from a demand perspective as being cyclical, but sort of on a multiyear basis cyclical, 2-, 3-, 5-year cycles, maybe even 5- to 10-year cycles. Is that what we're experiencing? Is this just sort of typical seasonality, and we're just going through a really good time. Is this something that's a little bit different? Just sort of what the underlying drivers of that are? And where are we in that cycle? Are we in first inning, ninth inning over time?

So I think, again, the underlying factors here. First of all, it all is about consumer demand, right? And our consumers consuming product, meat-based products, whether that's beef, whether that's pork, whether that's chicken meat, turkey meat or eggs or dairy products. And demand for those has been strong. And despite inflation and increased costs, particularly in the case of beef, consumers have continued to gravitate towards those products and put more in their diets. One of the things that's been interesting in this, and we look at some of the demographic trends that are happening in the U.S. and expanding and I think beyond that is the whole attitude, I think, around animal-based proteins has changed. I think that's diet. I think it's things such as the GLP weight loss products, where people that are on those have really -- they seek out high-quality simple proteins. And clearly, meat-based proteins are key to that. So they tend to eat more and consume more of meat-based proteins, but also calcium is really important. So in addition to the protein calcium. So a lot of the dairy products, I think it's a favorable trend for them as well. So I think we will continue to see strong demand for these proteins. The first phase of GLPs is strictly about weight loss, but a lot of the sponsors of these drugs are investing in things such as fatty liver and cholesterol and prediabetes, et cetera. So I think the use of those products will continue as -- and probably insurance coverage will change as well as some of these other broader label claims happen, we'll continue to drive that. And I think we expect that you'll probably see more of that, not only just in the U.S. but spreading to other countries as well.

So do you think that maybe -- I mean, it might be too early to tell, but do you think maybe the we're seeing a structural change in livestock markets where there'll be 50 basis points, 100 basis points stronger than they've been historically? Or is it still too early to tell?

I think it's too early to tell. Again, you're seeing -- I think the good thing is that we're diversified across all basically key livestock production markets. So sometimes you do see some shifts between countries saying we're going to produce more ourselves and be less reliant on imports. Sometimes you have disease outbreaks that countries will say, "Well, if you have an outbreak of this, we won't import from you." So you always see a little bit of churn, if you will, a little bit in the pattern of import and export of meats. But I guess I would just say that we see certainly, as we sit here today, a very promising outlook for protein production.

Okay. Okay. Going back to the Zoetis MFA transaction and the assets you brought over, Glenn, I think you pretty much just annualized them in this past quarter. So it's been 12 months. It's has been sort of wholly owned from now on. You're not going to have an outsized M&A contribution per se. It's all going to be organic from this point on. How has the integration of that business gone? How has that slotted in alongside your legacy MFA portfolio? Just sort of can you talk through the integration of the business, both from a product lens and also from a people lens, from a culture lens, from a facility operations perspective?

Larry, do you want to start with that?

Sure. So first of all, we are really pleased with the acquisition and the integration. One of the key things that we have to do is get the marketing authorizations transferred from the previous owner over to us. And we are nicely on track with that. A vast majority of the markets, it's been completed. And so that is moving along really nicely. As far as our teams, one of the key things that this integration brought was it brought strength in a couple of species areas where we were not as strong or not present even. And so if we start in the U.S., we were not in the U.S. cattle segment, the fed cattle segment at all. We didn't have really products that had strong presence there or strong application. So we got a tremendous group of portfolio of products during -- through this acquisition that really put us in a very nice position to serve the U.S. beef segment. We hired a specialized team of professionals, people that had a franchise with customers, most of them from production side somewhere in their history, but we really have a wonderful opportunity to hire a great team of beef specialists that are out there, brought in relationships that they've had, existing relationships with customers and being able to support these products. So -- and also in the U.S., the swine segment, we certainly have had products there, MFAs, some nutrition and vaccines, but a really nice portfolio of products in the swine as well that allow us to bring more customized solutions, more different approaches to our customers there. And the same is true in poultry in the U.S. where we -- particularly in the area of the Medicated Feed Additives, anticoccidials, to be able to bring more different types of solutions to our customers. From a geographic standpoint, there were a few other geographic areas where we weren't as strong in. And one of those was Asia, particularly in China, but even some Southeast Asian countries, some of the Northwestern South American countries as well as Western Europe. And this acquisition gave us a much stronger foundation from which to build organizations and ultimately to put resources in the market and focus on demand creation. So not just pushing product through, but being able to have people out there in touch with the end-use customers on farm with them, working on farm with them, bringing solutions. From a plant standpoint. So there were 6 locations that came with it, 4 in the U.S., 1 in China and 1 in Italy. And those were pretty much dedicated to these products. And so the transition of those was pretty direct and clean, straightforward. And we've integrated those, I would say, very, very rapidly as part of our business. It's mostly the same type of products, same type of distribution and that kind of thing. So...

Okay. On those integration activities and what you were talking about earlier in terms of maybe hiring some specialists balancing out the commercial organization. Is that pretty much done? I know it's sort of -- you're never done, done. You're always continuing to evolve and continue to integrate. But have the major steps been completed? And is it pretty integrated, pretty seamless in terms of the legacy business and the Zoetis business?

Yes, I'd say, go ahead...

I think we're pretty much done at this point, right? There are some regulatory things that still remain. But in terms of integrating the colleagues, building the field force in the U.S. and Western Europe, we're definitely in the later stages of that. It's just more stuff from a regulatory perspective. Systems are all integrated at this point as well. And to Larry's point, right, we basically -- we mostly acquired the plants and the colleagues in the plants. And from a cultural perspective, I think it's gone extremely well, right? I think they're very excited to be part of Phibro. These products are a priority for us in probably a different way than they experienced in the past. And so they're very excited to be part of the team.

Okay. And then what about from a customer perspective? I mean, I imagine you probably had relatively high overlap on customers between the 2 businesses, but still is going to bring in some new ones. What's been the reception? What's been the -- has it helped you strengthen any relationships, build new relationships sort of for those part of the portfolio, I mean seeing some pretty transformative difference. So can you talk about the reception you've seen in the market?

Yes, I would say it's been really positive. I've had a chance to get out a lot in the field and particularly in the last few weeks with some of the big trade shows that happened where we're meeting the end users, right, and getting the chance to talk to them. And I think they're really pleased that we have these products as part of our portfolio because this is a high priority for us. And they appreciate the support that we're going to give these products in terms of product supply, in terms of support, field support, and, in many cases, reminding and promoting the products and reminding our customers how these products are indicated, but really how they can practically be used on farm to address some of the unique challenges that health challenges, those types of things. And so I think our customers have been really positive on this. As you said, in primary markets, the overlap of customers has been pretty large. Most of the industries are fairly integrated. With the exception, as I mentioned earlier, beef is a new segment for us. And in some of the secondary markets where perhaps either Phibro and/or the Zoetis had distributors here, we're able to really look at demand creation here and dedicate resources to open new relationships with some of the livestock producers. And we're also seeing not only within the combined MFA portfolios, but also good complementary between the combined MFAs, but also with our nutrition specialties in our vaccines. And our vision is to bring comprehensive health solutions to our customers that really makes sense on their farm. And in many cases that involves a vaccine for preventions. It involves nutrition specialty products for gut health or general health as well as medicated products for prevention control and treatment of diseases.

Okay. That kind of brings me to the next topic I wanted to touch on, which would be sort of competitive landscape and the position of the portfolio relative to some of your peers. When you think about animal health market, a lot of people think about Elanco and Zoetis you guys don't necessarily compete with them as much or overlap with them as much, especially now that you acquired of business. Some of your competitors are more along the lines of Huvepharma, some of these specialty livestock feed producers. Could you walk us through how you're positioned relative to your actual competitors in the livestock markets, how that changes post deal? And just sort of what -- how it's enhanced your competitive positioning in go-to-market?

Yes, sure. Yes. So Michael, as you pointed out, in our different segments, there's different competitors. You alluded to the MFA market. So there, the global competition is chiefly Elanco and Huvepharma, as you said. Some markets like the U.S. are fairly highly regulated with fairly high barriers to entry. So there's fewer local generic players. Other markets have lots of generic, lots of local players. Though I will note that most of our legacy products and even some of our purchase products, the Zoetis portfolio do not have generic competition despite being around for a decade. So we are the pioneer drug owner. And in certain cases, we remain the only the only person providing those drugs. So I think on -- specifically on MFA place spot, we probably are #2 globally. And we do see a strengthening dynamics as far as our ability to kind of complete a rotation for our customer and have them with products that they never have to leave -- with a situation when they never have to leave our products despite the fact that they want to rotate. Within vaccines, a lot more competition out there, Zoetis, Elanco, Merck, BI, Ceva is a company that's not public, but it's a large player in the vaccine business. There, as I think as Larry had talked about, margins are higher, and it really comes down to the strain sometimes. And we have a couple of strains out -- we have a couple of products for trains out there that are really emerging diseases that we've seen a lot of our growth in South America over the last few years. And while we expect more competition on those trains going forward, we also see those diseases heading towards more geographies and expanding the use case. So I think we also feel pretty confident about our ability to continue with our double-digit growth in the vaccines. And then finally, nutritional specialties. Here, you see a little bit of Elanco. You don't really see Zoetis. You see other companies, though other public companies like Novonesis, which is the old Novozymes and Chris Hansen, Church & Dwight has an animal nutrition group that we compete with, a company called Balchem, which a public company. So these are all kind of nutritional specialty business companies. It's a little bit different there. It is more about -- it's fragmented, it's rational. Your success there is driven less by price, but more by formulation quality, efficacy and technical support. And I think we offer a lot in those areas, as you've seen from more historical growth. It's also one of those areas that you will see and as we -- as our innovation pipeline as we put products out there, because there's no label claims, a lot of it is just based on history and your ability to grow and to get market data as far as use cases. And so there is a constant build on successful products there, and we're pretty excited about our portfolio and our ability to grow there going forward as well.

Do you think you're able to -- do you think you're able to take share or you have been taking share from some of your competitors over the past year? Or is that a little bit tougher in these markets?

Larry, do you want to take that?

Yes. So having precise market data is a challenge here because many -- some of the companies don't report and particularly in cases where you have local competitors that don't report. So it's hard to judge that. I would say when you look at our sales growth, obviously, if we're growing faster than market growth, then certainly, we're expanding share. But a lot of what we do is to expand the market. And so -- and Dani used an example about a vaccination, right? So the vaccine market may be worth x amount today, but all of a sudden, if you have an emerging disease come and it's a problem, then you have a new use, if you will. And a lot of the things that we've brought, I think the innovations we brought in vaccines in nutrition specialties, et cetera, really do create market expansion opportunities, which is really exciting. And as we grow our sales, I guess, our share of the animal health market grows.

Okay. Okay. Sort of along the same lines, I think you've been talking a little bit more about pricing power in recent quarters. I think you called out being able to take some price last quarter. That's not typically something that you see a lot of in animal health. So could you just speak about what's giving you confidence there, how durable that is and your thoughts on price as part of the long-term algorithm?

Larry, do you want to start?

Yes. So I guess we saw opportunities in some of the larger markets here. We saw opportunities to look at the price, particularly of the acquired products and see maybe they were undervalued a little bit. We do try and practice value-based pricing in our products. So we saw an opportunity there to adjust that. In many cases, there were use of rebates and particularly end-use rebates. And as we looked at that, we -- basically, I guess, we saw opportunities where maybe those programs were not as effective. And we've really simplified our approach in pricing and eliminated many of those end-use rebates with large users. And by doing that, obviously, you affect the net price and can really help with integration -- with the gross margin of the products. In some of the other markets, secondary markets, in some cases, we did benchmarking versus the other markets where -- how these products sold and versus some of the local competitors, and we saw opportunities where some of the products really had low or even negative margins. And so we were able to take more significant price reset, I would say, to get these products where they should be where we felt they should be versus the value they provide. And so we really have not seen that our volume drops to this point anyway, at least that would be significant on a global basis as a result of that.

Okay. Okay. But it sounds like best way to characterize some of price gains were sort of big in areas where you're miss-pricing previously, just sort of more like a onetime adjustment true-up correction across the portfolio versus something you're going to be doing regularly going forward?

Yes, I think that's a good summary, Mike, right. The outsized price opportunities as sort of part of the integration sort of resetting with the new Zoetis portfolio. On an ongoing basis, like we said, particularly in the MFAs, these are more mature products, we'd expect low single-digit price increase opportunities on this moving forward.

Okay. I want to -- we've got about 5 minutes left, still a bunch of topics I want to talk about. Maybe let's pivot to companion. It's something that's been a major focus area in the past. But obviously, over the last year, we've had to dedicate a lot of time to Zoetis MFA as we did today. So can you give us an update on how that portfolio is doing? I mean, I think we've certainly seen a lot more ads and a much bigger presence for some of the companion animal assets like Restoris. I know you guys were at VMX earlier this year in January, which I don't believe you've ever been there before or at least I haven't seen there before. So can you talk about companion, what you're seeing over the last couple of years, just how to think about that business going forward?

Go ahead Daniel.

Sure. So I guess we missed you in Orlando, but yes, we were there. We're also in Las Vegas last week, if you were at the Western Metro. So yes, so we've launched Restoris. We took our second product, our first product with Rejensa, continue to do nicely with Rejensa. We're really pleased with the reception though to Restoris. We see a really nice strong growth trajectory in front of us. . Though I'll note, obviously, in fiscal '26, it's a small contributor. It should be larger in the years to come, but we are -- I think our philosophy is to take the profits from the revenue and -- or from a margin there and to reinvest it into the companion animal space, but at the same time, not to get ahead of it and not to spend too much ahead of it. So I think we're rather fiscally conservative when it comes to the pet side. We are kind of slowly building to where we reach scale where we can do something larger perhaps at that stage, but we're definitely not there yet. And I think what we've been consistent in talking about our overall strategy in the long term, and I stress the long term is to turn this into kind of a fourth leg to our stool where along with our MFAs, nutritional specialties and our vaccines, we'll be able to talk in meaningful revenue about our companion animals.

Okay. Okay. Looking forward to that, for sure. Glenn, I want to touch on margins briefly. When you were talking about the LRP earlier and sort of how you see about -- how you see margins going forward, you talked about opportunities for margin expansion. Can you talk about what's driving that? How much of that is mix versus execution versus maybe some components of fibro forward? And just any way to quantify the opportunity there?

Yes. I think there are a number of things driving it, Mike, like you said. So mix certainly is a factor. And particularly in the first half of this year and in the second quarter, we had positive mix dynamics: a, within the MFA portfolio, there are certain products that have higher margins and that benefits as well in the first half of the year, we saw a good mix within the MFA portfolio. Also though vaccine is growing rapidly, nutritional specialty, those are also higher-margin products that helps us from a margin perspective. Another big contributor, though, has been the Phibro Forward growth initiative. As we mentioned, we're looking across the portfolio for where we can drive growth at both the revenue and an income level. One of the big areas has been also, as we talked about within procurement, trying to drive efficiencies in terms of how we work with our suppliers, leverage the broader scale that we also have right now from a Zoetis perspective, adding those MFAs to our portfolio. So there are a number of initiatives across Phibro Forward, which are helping us drive margin expansion as well. So it's a combination of the mix. It's a combination of new portfolio, but it's also these initiatives that we have, which cut across every area of the business, every market, every species that we're looking to be more efficient and that are helping to drive greater EBITDA margin for the company.

Okay. And any way you want to stab at quantifying how to think about that relative to revenue growth going forward or just too early?

Yes. So we haven't quantified the specific dollar amount from Phibro Forward. Obviously, we have targets internally that we track on a weekly, daily basis sort of. What we shared externally is we do expect that Phibro Forward will hit its peak in fiscal year '27, but it's something that we're going to embed in the company to continue to drive growth. And we do believe that is going to help us really deliver on our value proposition of driving income growth faster than revenue, and that's really going to be our focus moving forward.

Okay. I think we can grow faster than -- all right. We've got only a couple of minutes left. So I guess I'll just jump to my last one. Dani, again, congrats on stepping in as the CEO later this year. Obviously, send my best regards and congratulations to Jack. I mean I hope to speak with him. I mean I know he'll be sticking around beyond that. But just at a high level, your thoughts as you're going to be walking into the role, how you see the strategy going forward, if there's any changes you're going to make or any things that you're not going to change? Just if you could give us some high-level thoughts.

Yes. So thank you, first, for the congratulations. As you know, my father is not going away. He's staying as Executive Chairman, keeping the office with the bathroom. And, yes, so I would, overall, I'd characterize the transition as one of continuity, not really of change, right? The strategy we're executing today, it's the same strategy I'll be responsible for as CEO. I've been deeply involved in shaping it and the key capital allocation to date and the operating decisions well ahead of July 1, frankly, for the last few years. And Larry, Glenn, our management team is staying put. And then from a decision-making standpoint, there's no reset. The operating model, strategic framework, they all remain firmly in place. As Glenn just talked about, a good examples is Phibro Forward, which I've actually been leading, and it's translating strategy into the [ bauma ] plan, clear ownership, discipline and just execution throughout the organization. So I see more of the same on that, maybe more paying attention to claw code or something of that nature. But then overall, I think it is really just more of the same and looking to continue kind of on the street that we're on.

Okay. Okay. Yes. I mean it's hard to have a transition with more continuity than what you guys are doing. So I don't doubt that it will be smooth and seamless. So all right. With that, we're out of time. Thanks so much for joining us, everyone. Glenn, Daniel, Larry, thanks so much for taking the time for being with us, and we'll be staying in touch.

Thanks, Mike.

Thank you.

Thank you.

Appreciate it.