Good morning. My name is Shantel and I'll be your conference operator today. At this time, I would like to welcome everyone to the Phibro Animal Health Corporation Second Quarter 2022 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. Damian Finio, CFO, you may begin your conference.

Thank you, Shantel. Good morning and welcome to the Phibro Animal Health Corporation earnings call for the quarter ended December 31, 2021, which is the second quarter of our fiscal year 2022. My name is Damian Finio and I'm the Chief Financial Officer of Phibro Animal Health Corporation. I'm joined on this call today by Jack Bendheim, Phibro's Chairman, President, and Chief Executive Officer; and Daniel Bendheim, Director and Executive Vice President of Corporate Strategy. On today's call, we'll cover financial performance for our second quarter as well as a 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 the second quarter Form 10-Q filed with the SEC yesterday, as well as the transcript and slides discussed and presented on this call. Our remarks today will include forward-looking statements and actual results could differ materially from those 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 exclude acquisition-related items, unusual, non-operational, or nonrecurring items, including stock-based compensation and restructuring costs. Other income and expenses are separately reported in consolidated statements of operations, including foreign currency gains or losses net. And lastly, income tax effects related to pretax 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 second quarter financial performance and a revised financial guidance for our fiscal year 2022. Jack?

Thank you, Damian and good morning, everyone. We had a strong second quarter. In fact, we posted $233 million of net sales, the highest single quarter of sales in the company's history. This was an 8% increase over last quarter and a 13% increase over the same quarter of the prior year. As we discussed on our last call, the rising costs of doing business over the course of the last few months prompted us to take stronger steps to raise prices and pass through incremental freight costs. This is reflected in our performance this last quarter, where in our core Animal Health segment, we saw our margin improve each month over the previous month and we expect it to continue to play out positively over the balance of the fiscal year. Notwithstanding our pricing actions, we saw continued strong demand for our products globally, and we expect this trend to also continue for the balance of this fiscal year. Our largest segment, Animal Health, posted sales growth of 11% over the same quarter of the prior year, driven by continued strong growth in our vaccine product line but also a 12% growth in the MFAs and other. Mineral Nutrition performed well as well, posting a net sales increase over the prior quarter of 23%. Strong top line sales drove adjusted EBITDA of $29.1 million, reflecting a 2% improvement over the same quarter period last year. More importantly, this equates to a second quarter adjusted EBITDA margin of 12.5%, which is a 200 basis point improvement versus last quarter and just 40 basis points shy of our fiscal year 2021 adjusted EBITDA margin of 12.9%. Given our first half performance and outlook for the remainder of the fiscal year, we are raising full year net sales guidance for a second time. We're now projecting net sales for the year of $890 million to $920 million. We are maintaining our adjusted EBITDA guidance of $110 million to $114 million and raising our guidance on adjusted net income and adjusted diluted EPS by about 5%, driven by the favorable change in our projected adjusted effective tax rate. Lastly, I've said it before and unfortunately need to say it again, COVID-19 variants remain a risk. The Omicron variant has created scheduling challenges with a higher-than-normal number of employees having to quarantine. We seem to be through the worst of it, although we remain optimistic that Phibro will continue to navigate the situation successfully as we've done in the past. Now, let me ask Damian to review our financial results, and we will come back to you with questions.

Thanks, Jack. I'll start with consolidated financial performance on Slide 4 and 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. The consolidated net sales for the quarter ended December 31, 2021, were $232.7 million, reflecting a $26.6 million or 13% increase over the same quarter one year ago. This increase was driven by improvements in our largest segments, Animal Health and Mineral Nutrition, offset slightly by a $0.6 million sales decline in our Performance Products segment. GAAP-based net income and diluted earnings per share increased 36% and 34%, respectively, versus the same quarter a year ago. The net income increase was driven by stronger volumes and selling prices, partially offset by increases in raw material costs and unfavorable product mix, as well as a $4.8 million increase in foreign currency gains, offset by a $2.8 million increase in income tax expense reported below operating income. Although it was good to see a foreign currency gain this quarter, volatility in foreign currency exchange rates continues. For Phibro, the impact is primarily driven by the effect of translating intercompany balances to the U.S. dollar for reporting purposes at the end of the reported period. After making our standard adjustments to GAAP results, including acquisition-related items, foreign currency movements and one-offs, second quarter adjusted EBITDA improved 2% over the same quarter of the prior year. The adjusted EBITDA improvements were driven by higher gross profit in our Animal Health and Mineral Nutrition segments, offset by higher SG&A and a decline in the profitability of our Performance Products segment. Adjusted net income and adjusted diluted earnings per share improved 9%, driven by higher gross profit from an increase in volumes and average selling prices, partially offset by increased SG&A due to the intentional incremental spend on strategic investments. Moving to segment level financial performance on Slide 5, I'll start with second quarter financial performance for our largest segment, Animal Health, which includes three product lines, namely MFAs and other, nutritional specialties, and vaccines. Net sales of our Animal Health segment were $150.9 million which represents an increase of $14.7 million or 11% versus the same quarter of the prior year. Within the Animal Health segment, we reported a $10.1 million or 12% increase in MFAs and other versus the same quarter of the prior year, driven by stronger demand in North and South America, reflecting continued recovery from the effects of the pandemic. Processing aids used by producers of ethanol, distillers' corn oil, and distillers' grain products contributed $3.5 million of the $10.1 million increase. We also had a $0.9 million or 3% growth in nutritional specialties, driven by increased selling prices and volumes, as well as increased revenues of our companion animal product, Rejensa. Lastly, a very strong $3.6 million or 20% improvement in vaccine net sales, driven by increased domestic and international volumes. In terms of profitability for the Animal Health segment, adjusted EBITDA was $33.7 million, a modest increase of 1% over the same quarter of the prior year, driven by higher gross profit and offset partially by an increase in SG&A expenses. Moving on to second quarter financial performance for our other business segments on Slide 6; starting with Mineral Nutrition. Net sales for the first quarter were $66.7 million, an increase of $12.5 million or 23% versus the same quarter of the prior year, driven by higher average selling prices of trace minerals correlated with the movement of the underlying raw material costs. Mineral Nutrition adjusted EBITDA was $5.5 million, an increase of $1.3 million or 32% and reflects an improvement in adjusted EBITDA margin of 60 basis points, driven by increased gross profit derived from the higher average selling prices. Looking at our Performance Products segment, net sales of $15.1 million for the three months ended December 31, 2021, reflect a decline of 4% from the same quarter of the prior year as a result of lower average selling prices and lower volumes, primarily related to shipping delays in copper-based products, partially offset by higher sales of personal care product ingredients. Adjusted EBITDA was $1.3 million, a decrease of $0.9 million, driven by higher material and production costs. Lastly, corporate adjusted EBITDA declined 2% or, said differently, corporate expenses increased 2%. As I've mentioned on previous calls, this is intentional and expected as the change is driven by the incremental increase in strategic investments. Turning to key capitalization-related metrics on Slide 7, free cash flow for the 12-month period ending December 31, 2021, comprised of $44 million of operating cash flow less $30 million of capital expenditures, was $14 million. Our gross leverage ratio calculated by dividing total debt of $401 million by trailing 12-month adjusted EBITDA of $107 million was 3.8x at the end of the second quarter, which is consistent with the end of the prior quarter. In terms of liquidity, we had $235 million available at December 31, 2021. This includes cash and short-term investments of $95 million and $140 million of unused and available revolving credit. As a reminder, the accessibility of available revolving credit is subject to leverage ratio limitations outlined in the loan agreement. And lastly, consistent with the past several quarters, we paid a quarterly dividend of $0.12 per share or $4.9 million in aggregate. That concludes my opening remarks on the second quarter financial performance. In summary and to further reinforce what Jack stated earlier on the call, we posted strong second quarter financial performance, driven by the highest sales reported in a single quarter since our inception. This is encouraging evidence of the strong demand for our products and the beginning of the positive impacts resulting from actions we've taken to adjust price and pass through incremental freight costs. We anticipate further margin improvement through our fiscal year-end June 30 because of these actions. Before I close, however, I would like to share how we're thinking about the second half of our fiscal year and our second raise to the full year guidance. Please turn to Slide 8. As I mentioned earlier, our adjusted EBITDA margin for the second quarter reflected a 200 basis point increase from the first quarter, and it was just 40 basis points shy of what we realized in fiscal year 2021. Given the top line growth we've realized and what we project coupled with the improvements in adjusted EBITDA margins realized and expected to continue, we are raising full year sales guidance by $30 million on both the low and high end of the range. Said another way, from our last guide of $860 million to $890 million, up to our revised guidance of $890 million to $920 million. This represents an increase of about 3% from our prior guidance for the full fiscal year. In terms of adjusted EBITDA, with $52 million reported in the first half, we are maintaining our adjusted EBITDA guidance of $110 million to $114 million for the full year which implies a projected adjusted EBITDA in the range of $58 million to $62 million in the second half of our fiscal year 2022. From an adjusted EBITDA margin perspective, the $58 million to $62 million of projected second half adjusted EBITDA reflects an improvement over the first half, bringing margins roughly back in line or above what the business delivered in the prior two fiscal years. Lastly, we are raising guidance on adjusted net income and adjusted diluted earnings per share, given a favorable change to our projected adjusted effective tax rate, driven by a shift in jurisdictional mix of taxable earnings. Given what I mentioned earlier about the positive impacts resulting from actions we've taken and our projected strong second half performance, we are confident that the current momentum of the business can deliver this revised guidance. So in summary, our revised fiscal year 2022 guidance is as follows: net sales of $890 million to $920 million which is an increase from the $860 million to $890 million last communicated; adjusted EBITDA of $110 million to $114 million which, as I said, was unchanged from previous guidance; adjusted net income of $52.8 million to $56.4 million which is an increase from the $50.7 million to $53.3 million, last communicated; adjusted diluted earnings per share of $1.30 to $1.39 which is an increase from the $1.25 to $1.32 in our last guidance; and an adjusted effective tax rate of 26% to 27% which is an improvement from the 29% to 31% assumed in our prior guidance for the full fiscal year. Overall, a strong second quarter, very solid first half, and we are projecting an even stronger second half to close out the full year. That concludes Jack and my opening remarks. Shantel, if you could please open the lines for questions.

Hi everyone. Great, thank you so much. Can you speak to the magnitude of the price increases you were able to take in the quarter? What's embedded in your expectations for the balance of the year? And are you seeing any pushback? Or what's the feedback from a customer perspective? And how does the strategy or your strategy compare to your competitors out there? Thanks.

Let me begin with the second part of your question, Erin. I noticed this morning that inflation is up 7%. We are currently in a situation where everyone is experiencing higher prices, and as a result, the resistance to price increases is less than it typically would be. People are noticing it everywhere, and because of that, we've been able to raise our prices. I would say this isn't finished because if inflation persists and our costs rise, we will need to, and will, increase prices again. However, I won't disclose the specific amount at this time. That's a great broad question. We are seeing strong demand in most species groups and in pretty much all markets. I mean, some of the markets that are still high-hit with COVID. Clearly, demand has not come back as rapidly as in other markets. But in the major markets we deal with in North America, South America and somewhere in the Far East we are seeing demand increase across all species.

Okay. And just one quick one, if I could sneak it in. The $3.5 million benefit to the MFA category, is that something that continues here or was embedded in expectations for the balance of the year?

And is that specifically talking about the sales for the ethanol?

So I mean, the ethanol sales are products that are sales for either the co-products that they produce or for ethanol self-using products that typically we sell throughout animal health. That's an ongoing business. And that's a business that has continued to strengthen year-over-year and it's an international business for us and one that we continue to see great horizons for.

Okay, all right. Thank you.

Great. Thanks for taking the questions. Jack, I want to ask first on some recent news we've seen in the space. The bird flu, the avian flu outbreaks in the United States, I think just yesterday, it was detected in a commercial port operation for the first time in a couple of years. We've gotten a lot of questions on this. And given you have relatively high poultry exposure, I'm just wondering if you could characterize the risk. Obviously, still very early, but sort of walk us through the various scenarios and how you think that play out over the rest of the year?

So avian influenza is a big risk to the poultry industry. And the response to it, I mean how it affects us, really depends on the country. The U.S. is always well prepared for any outbreaks because we have really good biosecurity. We have good protocols of what you do when you detect it, like you do to sort of clean out the area around it to minimize what will happen. Some other countries of the world are not as good. So it is out there. It is so far has not had a big impact on the business.

Okay. And then a follow-up question on Mecadox. Last month, you noted that there's going to be a public hearing with the FDA in mid-March. Obviously, Mecadox has been sort of an issue for a number of years now. Can you talk about any recent dialogue with the agency, sort of what are your expectations? And what's your outlook going into the hearing?

I think it's significant that the agency announced this public hearing, which emphasizes areas we are quite confident in. This involves examining the safety of a product that has been on the market for more than 40 years and is utilized by over 90% of feed producers in the United States, particularly in nurseries, making it a crucial product. An interesting aspect is that the use of Mecadox or carbadox enables producers to utilize substantially fewer antibiotics that are critical for human health. We are entering a situation where some individuals at the agency believe this product should be removed from the market due to its long history of 45 years. However, the agency, along with consumers in this country, has invested significant time and effort in reducing the use of human antibiotics in animals, which creates a conflict. We are grateful to the agency for initiating this public hearing. However, as you know, government decisions can be unpredictable.

Okay, great. If I could squeeze in one last question, I want to follow up on something Erin asked earlier. I want to make sure I understand correctly. Regarding the price increases in the past, you have indicated that much of it is due to freight surcharges and is therefore somewhat temporary. Is it still reasonable to assume that if inflation normalizes at some point in the future, those price increases will be rolled back and we will return to historical pricing?

We've always stated that we produce most of the products we sell. Recently, we've experienced various price increases. The labor shortage is well-known, and we've seen increases in labor costs as well as raw material costs. These are expenses we must pass on and won't be reversed. Additionally, there are shortages of drivers in the U.S. that have led to increased freight costs. It's not unusual in our industry, and others, to observe freight surcharges, which can easily be transferred to customers as long as those costs remain high. If trucking prices decrease in the future, our costs will decrease as well, and consequently, our prices will lower too. The primary purpose of a price increase is to cover ongoing increased costs, and we have effectively addressed that.

Okay, that's really great. Thank you so much.

Great. Thank you, Shantel, and thank you, everybody who joined today's call. As always, we appreciate your time, attention, questions, and interest in Phibro Animal Health Corporation. As always, feel free to reach out to Jack, Daniel, or myself directly or 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.

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