Good morning. My name is Shantel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Phibro Animal Health Corporation First Quarter 2022 Conference Call. Damian Finio, CFO, you may begin your conference.

Thank you, Shantel. Good morning, and welcome to the Phibro Animal Health Earnings Call for the quarter ended September 30, 2021, which is the first quarter of our fiscal year 2022. My name is Damian Finio, and I'm the Chief Financial Officer of the Phibro Animal Health Corporation. I'm joined on today's call by Jack Bendheim, Phibro's Chairman, President and Chief Executive Officer; and Daniel Benhaim, Director and Executive Vice President of Corporate Strategy. On today's call, we will cover financial performance for our first fiscal quarter as well as revised financial guidance for our fiscal year ending June 30, 2022. At the conclusion of our opening remarks, we will open the lines for questions. I'd like to remind you that we are providing a simultaneous webcast of this call on our website, pahc.com. Also, on the Investors section of our website, you will find copies of the earnings press release and first quarter Form 10-Q, filed with the SEC yesterday, as well as the transcript and slides, discussed and presented on this call this morning. Our remarks today will include forward-looking statements, and actual results could differ materially from these projections. For a list and description of certain factors that could cause results to differ, I refer you to the Forward-Looking Statements section in our earnings press release. Our remarks include references to certain financial measures, which were not prepared in accordance with generally accepted accounting principles or U.S. GAAP. I refer you to the Non-GAAP Financial Information section in our earnings press release for a discussion of these measures. Reconciliations of these non-GAAP financial measures to the most-directly comparable U.S. GAAP measures are included in the financial tables that accompany the earnings press release. We present our results on a GAAP basis and on an adjusted basis. Our adjusted results excluded acquisition-related items, unusual, nonoperational or nonrecurring items, including stock-based compensation and restructuring costs. Other income and expenses are separately reported in the consolidated statements of operations, including foreign currency gains and loss net. And lastly, income tax effects related to pre-tax adjustments and unusual or nonrecurring income tax items. Now, let me introduce our Chairman, President and Chief Executive Officer, Jack Bendheim, to share his opening remarks, which will include his perspective on Phibro's first quarter financial performance and revised financial guidance for our fiscal year 2022. Jack

Thank you, Damian, and good morning, everyone. Let me start by saying that we are most encouraged by the 10% growth in both our consolidated net sales as well as in our Animal Health segment. Growth in the Animal Health segment was driven by 6% growth in the MFAs and other -- and even stronger growth in the nutritional specialties and vaccine product lines, which grew 10% and 25%, respectively. Overall, our first quarter financial performance was in line with our internal expectations. While we were encouraged by our sales growth, our adjusted EBITDA reflected a decline of 8%. Our SG&A costs were up because, as we discussed on our last call, we're committed to increasing our incremental investments and strategic initiatives to fuel future growth, but also driven by an increase in compensation-related costs, including travel. I have to say it's good to see our sales team getting back out there to bid the customers, attend conferences face-to-face. But with Phibro and other companies are really feeling, the pressure is on gross margin. Before I speak more to pressure on gross margin, I was also very pleased to see the start of return on one of our key strategic investments. The vaccine facility in Sligo, Ireland. As I said earlier, our vaccine sales grew 25% in the first quarter, drove this impressive growth, is the fact that we recorded our first sales from slide up. A very important and much-anticipated milestone that we reached ahead of schedule. I look forward to the incremental sales and other opportunities of this new vaccine manufacturing facility presents to our company. I'm also pleased to report that our companion animal development pipeline continues to progress nicely. Shifting back to gross margin, this is where we are really feeling the pressures because supply chain…

Thanks, Jack. I will start with consolidated financial performance, on Slide four, then cover segment-level performance, key balance sheet metrics and conclude with a review of our revised financial guidance for the full fiscal year 2022. And as Jack mentioned, I will provide a bit more detail related to the Animal Health adjusted EBITDA margin, this quarter and how we're managing and plan to continue managing the evolving market dynamics. Consolidated net sales for the quarter ended September 30, 2021, were $214.7 million, reflecting a 10% increase over the same quarter, one year ago. This increase was driven by improvements in each of our three business segments and our four regions. GAAP-based net income and diluted EPS declined 47% versus the same quarter, a year ago. The decline was driven by the increased costs that Jack spoke to earlier, and an increase in selling, general and administrative expenses, which was related to our incremental investments in strategic initiatives and increased travel-related costs. But the primary driver of the decline in this GAAP-based metrics is a $5.8 million unfavorable change in foreign currency gains and losses, which is reported below operating income and driven mostly by the effect of translating intercompany balances to the U.S. dollar for reporting purposes, at the end of a reporting period. After making our standard adjustments to GAAP results, including acquisition-related items, foreign currency movements and one-offs, first quarter adjusted EBITDA, adjusted net income and adjusted diluted EPS were down 8%, 6% and 6% 7%, respectively. These declines were driven by declines in Animal Health gross profit and an increase in selling, general and administrative costs, offset partially by strong performance in our Mineral Nutrition and Performance Products segments. Moving to segment level-financial performance, on Slide five. I'll start with first quarter financial performance for our…

Our first question comes from Erin Wright with Morgan Stanley. Your line is open.

Great. Thanks for taking my questions. Across what categories are you seeing some of the supply chain headwinds and freight cost? And is this across the board or across specific subsegments? And then, are you seeing competitors implement surcharges or associated price increases as well?

So it's a very broad question, Erin, but it's a great question. Obviously, we're hearing what everyone is reading in the papers. Freight rates, are up dramatically across the board and in all markets. So where everyone is focusing on, from the far east of the United States -- and that's up dramatically. We've, ourselves, seen rates go from $4,000 a container to $18,000 a container. But it also is true for shifts coming from South America and the United States. There's just a great imbalance around the world, where the containers are, where the boats are and also the ability of the companies to charge more. The surcharge, we're seeing more in the U.S. and other markets, a delivery of, sort of, finished goods from our factories to the customers, and that's driven by some labor shortages, that's driven by increased energy cost, oil and diesel costs, etc. And there, we're seeing, and we're able to pass on, and it's sort of a normal condition in the U.S. to have a surcharge often ties freight tied to various increases. So that's a phenomenon here. And again, we're hearing from everybody, and our customers see it on products that they're importing themselves. So they are not that difficult in ability to pass on these higher costs.

Okay. Great. And then, could you give us an update on the underlying demand trends and performance across the MFA category? Are you seeing certain pockets of growth that you would call out? And then, also is the regulatory environment around that category, relatively status quo, at this point? Thanks.

Again, remember, when we met last quarter, is just the recovery from COVID around the world. Some countries, obviously, the U.S. has recovered almost 100%. And some markets, even the far east, are not fully recovered, that we're seeing some growth. So part of it is the continued recovery, and demand is strong everywhere for protein. And so, I wouldn't pick on one market, specifically.

Okay. Great. Thank you.

Thanks, Erin.

Your next question comes from Michael Ryskin with Bank of America. Your line is open.

Great. Thanks for taking the questions, guys. I have a couple, quick model ones. First, I just want to follow up on what Erin brought up, in terms of the surcharges and the price raises and whether your competitors are doing the same. Are there any areas where you're worried that it could hurt demand or you could see customers switch to alternatives? And how quickly would you be able to, sort of, adjust and fine-tune that level of surcharge or the level of price raise, if you start seeing that? Is there any communication with your customers now, to, sort of, gauge their willingness to absorb the cost? Just talk us through those dynamics.

It's -- Hi, Michael. No one wants to see price increases. No one wants to receive price increases. As you know, from many, many times of talking, with indirect contact, with all of our customers, we're either selling direct, or we're promoting the product in markets, where we use distributors. So it's not like there's something anonymous. We're not like listing something on Amazon and don't know exactly what the results are going to be. So we're talking all the time. And I believe, our customers are seeing the same requests from across the board. Everyone is -- nothing here that we've mentioned, is unique to us. So one would resist, and I don't blame the customer from resisting. And we'll work with the customers, it has been into the timing. Sometimes we're trying to raise prices, where we have understandings that we're going to keep prices for a year over six months. So that requires more talk and more negotiations. But overall, there's a great understanding across the world that costs have gone up. Costs are going up. So it's not that difficult time to raise prices.

And maybe I could just add to that. I mean, there's two tactics, right? The one is passing through some of the costs. We use shipping as an example, in the form of a surcharge, the other is a price increase. I mean, keep in mind, Michael, we're four months into our fiscal year now. So we've already done some of this in the first quarter. We're doing it as we speak, and it will continue. I think, generally speaking, we're not the only ones doing this, as Jack said, there's other price increases, others are passing through freight. So we're certainly not standing out as an outlier. And from a customer's perspective, they may be more willing to take a freight surcharge than they are on price increase because the freight surcharge may be more temporary. And in those instances, it will vary by customer, by region, by product but that's the way we're looking at, I think, using these two tactics to help improve gross margins, which is reflected in our updated guidance for the year.

Okay. Thanks. That's really helpful. And maybe if I could ask a follow-up on China, in particular, and African swine fever situation there. We've heard some very conflicting reports, and the data points can be coming out of the mix, in terms of the status of the recovery and the status of demand. I'm just wondering, if you could provide an update on what you're seeing on the ground, and what your expectations are for China as a whole, this year, sort of, as you think back to where it was a couple of years ago, pre-ASF how close are you to a full recovery?

So what we've done since we've lost some registration in China, which we -- as we've said before, we have reapplied for. And it's, sort of, held up in some bureaucracy. It's held up from the fact that China is still looking to do a zero COVID, which means they shut down cities or buildings and this week, and it wasn't that way last week. So the rearview registration of our virginiamycin product is going more slowly than we had hoped. But in the meanwhile, we shifted our business in China into a nutritional business, concentrating on the dairy market. And there, we've seen sales growth. So again, that's not answering the question, what happened to the pig market there.

And I can add, again. I think, specific to Asia Pacific, those numbers we posted today, reflected a 25% growth in sales. The combination of volume and price and the volume portion of that sums market share, and we recognize that a portion of this is also recovering, compared to the same period prior year, but we saw 25% growth. We think that sector will continue or that market region will continue to post gains over the remainder of the year. And we're seeing increases in all regions. So the U.S. is up 6%, Latin America and Canada is up 13% and the EU and MENA is up 15%. So we're seeing increases across all regions, across all product lines, and that's assumed in our guidance, going forward.

Right.

Great. That is really helpful. Thanks, Jack and Damian.

Your next question comes from David Westenberg with Guggenheim Securities. Your line is open.

Hi. Thanks for taking the questions. Amazingly, only two people had at me, and I still get all my answered questions -- that -- they still got all my questions, but I'll try to ask things slightly differently here. So first, in kind of in regards to the pricing increases, can you, kind of, maybe give us a sense of the price increases or the magnitude of the price increases, relative to the normal year? So if the normal year is 1% to 2%, is the price increase is going to be 3% to 4%? Or is it going to be somewhere in the magnitude, kind of, higher than that?

So David, we don't typically -- we're not a company that just raises prices across the board, on the same day, every year. Our price adjustments that we referred to and what we've done in the past, are more market-specific, and they're based on competitive market conditions at the time. Rather not comment on whether they're single digits or double digits. Again, things will vary across products, across countries.

Can I, maybe then -- I mean, you are mentioning that the industry, as whole, is, kind of, raising price, so i don't know -- maybe just don't have that number or sense of that number, but is there, kind of, an industry whole -- industry aggregate, price increase that is a certain percentage magnitude higher than normal? I'm just trying to get a sense of the exact same question that everyone else is getting at, which is, how much different of what you're doing is different than what everyone else is doing?

We're in a competitive business, everyone figures out what they need for themselves and goes to the market. The market adjusts, if sector doesn't accept it, and dynamic's a complication. I think, just to reiterate what I said before, everyone is seeing cost increases across the board, and everyone is going to do what they need to do, what they have to do or what they can achieve to get their prices up.

Got you. And maybe I'll just do the last question on the Companion Animal business. I mean, looking out five, 10 years from now, I mean, do you see this as a definitive second stool to the Phibro Animal Health story? Or is this just, kind of -- you think you have good products and you can sell one-off but the heart of Phibro is a livestock company?

Hey, David, it's Donnie. So I think what we've talked about in the past is, we are not a second leg of this tool, but a fourth leg of the stool within our Animal Health division or segment. So you look at MFA and others, which is the largest, we have nutritional specialties and vaccines. We anticipate that nutritional specialties or vaccines, it is probably a good proxy for where we would like to see the companion animal, that -- within the time period that you have mentioned.

Thank you.

It says in our original guidance, David. Sales have doubled, and fiscal year '22 or fiscal year '21, in that same assumption, is in the guidance -- the revised guidance that we've gave today.

Thank you, guys.

There are no further questions at this time. Damian, I am turning the call back to you. Thank you, Shantel, and thank you everybody on today's call, for your time, attention, questions and interest in Phibro Animal Health Corporation Hopefully, we were able to provide the clarity needed. But as always, feel free to reach out to us via the Investors section of our website, should you have any further questions. Have a great rest of your day, and please continue to stay safe. Thank you.

This concludes today's conference call. You may now disconnect.