Hello and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Phibro Animal Health Corporation Second Quarter Investor 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. I would now like to turn the conference over to Dick Johnson, Chief Financial Officer. Please go ahead.

Thank you, Regina, and welcome to the Phibro Animal Health Corporation Earnings Call for our fiscal second quarter ended December 31, 2023. As we said, my name is Dick Johnson, I'm the Interim Chief Financial Officer of Phibro Animal Health. I'm joined today by Jack Bendheim, Phibro's Chairman, President, and Chief Executive Officer; by Daniel Bentheim, Director and Executive Vice President of Corporate Strategy; and also by Glenn David, the Incoming Chief Financial Officer. Today, we'll cover financial performance for our second quarter and provide an update on our financial guidance for our fiscal year ending June 2024. At the conclusion of our remarks, we'll open the line for questions. I'd like to remind you that we're providing a simultaneous webcast of this call on our website, pahc.com and also on the Investors section of our website. You'll find copies of the earnings press release and second quarter Form 10-Q, as well as later today, the transcript and slides that we're discussing on our call this morning. Turning to Slide 2. Our remarks today will include our standard 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 US GAAP. I refer you to the non-GAAP financial information section on our earnings press release for a discussion of these measures. Reconciliations of these non-GAAP financial measures to the most directly comparable US 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, which would include things like stock-based compensation and, in this most recent quarter, a Brazil employment taxes item. Also, other income and expense is separately reported in the P&L including foreign currency losses and also income taxes related to any of those pre-tax income adjustments and any other unusual or nonrecurring income tax items. So with that out of the way, let me introduce our Chairman, President, and Chief Executive Officer, Jack Bendheim, to share his opening remarks.

Thank you, Dick, and thank you to everyone joining us this morning. Our second quarter showed the resilience of our business and was a positive step-up compared with our first quarter. Our core Animal Health business grew net sales at a healthy 6%, and I was especially pleased to see that adjusted EBITDA also grew at 6%, led by high-value new product introductions in our vaccine product line. A strong 31% increase in net sales of vaccines led the way for Animal Health. We are seeing the uptake of our vaccines across various regions, especially in South America. We have launched new commercial vaccines, and have the added benefit of a new attached facility — vaccine facility in Brazil. Looking ahead, we expect the continuing growth in the Animal Health business in the second half of the year. We also expect to see significant improvement in our Mineral Nutrition and Performance Products businesses as we work through inventory imbalances and as we see a rebound in demand. We have affirmed our guidance for net sales, adjusted EBITDA, and adjusted diluted EPS, as Dick will go into in greater detail at the end of his presentation. We are continuing to invest behind our successes. We're looking to introduce additional vaccines in the Americas and have just had our best sales of a new line of nutritional specialty products for poultry here in the United States. We see vaccines, nutritional specialties, and companion animals as continued growth opportunities, and we're making the necessary investments to enable us to achieve our targets. I'm also pleased to welcome Glenn David to Phibro as Chief Financial Officer. As we recently announced, Glenn brings over 30 years of experience in commercial and financial leadership roles, including a wealth of knowledge in the animal health industry. He brings the capabilities needed to contribute to Phibro's future success and to bring value to our shareholders. I look forward to having your questions following Dick's review of our financials. But before I hand it back to him, I want to express my gratitude today for agreeing to step in as interim CFO. As a company, we do not miss a beat. Thanks to Dick's quick return to action, and I'm thrilled that Dick will continue to be available to support Glenn and assist Phibro as a whole.

Thanks, Jack. So let me start with the consolidated financial performance on Slide 4, and then we'll move on to segment-level performance and some other information. Consolidated net sales for the quarter were just under $250 million, and that was an increase of $5.3 million or 2% over the same quarter of a year ago. The Animal Health segment grew 6%, while both Mineral Nutrition and Performance Products saw sales decline. GAAP net income and GAAP diluted EPS decreased driven by a substantial increase in foreign exchange losses, mostly from a major devaluation in Argentina, also driven by higher operating expenses that we referred to as selling, general, and administrative expenses that included a $4.2 million charge for a Brazil employment tax issue. And third, increased interest expense driven by higher variable interest rates. Income taxes were a partial offset as they decreased $2.6 million. After making our standard adjustments to GAAP results, including the items I named earlier, overall, adjusted EBITDA decreased $1.5 million compared to the year earlier. Animal Health adjusted EBITDA improved by $2.2 million or 6% driven by gross profit from increased sales but partially offset by higher operating expenses. Mineral Nutrition decreased almost $1 million driven by unfavorable inventory cost and slight decline in volumes. Performance Products decreased $1.5 million year-over-year due to lower product demand and unfavorable product mix. And finally, we spent more in our corporate expenses. We spent $1.3 million more than last year, which was driven by a planned increase in strategic investments. Adjusted net income and adjusted diluted EPS declined 2%, reflecting the changes in adjusted EBITDA and the higher interest expense due to the higher variable interest rates. The effective income tax rate improved, and it was a partial offset to the negatives. Now looking at Slide 5 and moving to segment-level financial performance. And let's first look at Animal Health. The Animal Health segment posted sales of about $173 million. That was an increase of over $9 million or 6% over the prior year. And within that Animal Health segment, we saw sales increase, especially in vaccines, as vaccine sales grew $7 million, a healthy 31% increase driven by product launches in poultry products introduced into Latin America, plus we saw an increase in domestic demand. In our MFAs and other category, net sales grew $4.8 million or 5% due to demand in various international regions and also continuing growth for demand for our processing aids used in the ethanol fermentation industry. Nutritional specialties net sales declined in the quarter by $2.4 million or about 6%, mostly due to reduced demand from the domestic dairy business. All of that drove Animal Health adjusted EBITDA of about $39 million, also a 6% increase as the higher gross profit from increased sales was partially offset by increased SG&A. Now moving to the other business segments on Slide 6, starting with Mineral Nutrition. Net sales for the quarter were $61 million, a slight decrease from last year due to a decline in average selling prices and also some reduction in sales volume. Mineral Nutrition adjusted EBITDA was $3.5 million, reflecting a year-on-year decrease of $900,000 as we worked through some unfavorable inventory positions. Looking at our Performance Products segment, net sales of $15.5 million for the three months reflect a $3.7 million or a 19% decline driven by reduced demand for personal care product ingredients and for industrial chemicals. Adjusted EBITDA was $800,000 for the quarter, a decline of $1.5 million compared to the prior year, largely reflecting reduced sales and also reflecting unfavorable product mix. Corporate expenses increased $1.3 million driven by the planned increased strategic investments. Now if we turn to the capitalization-related metrics on Page 7, we saw positive free cash flow. For the trailing 12 months, we now have generated positive free cash flow of $37 million, which is comprised of $74 million from operating cash flow and then invested $37 million in capital expenditures. As a result, we ended December with cash and cash equivalents and short-term investments of $92 million on the balance sheet at the end of the quarter. Our gross leverage ratio was 4.4 times at the end of the quarter based on $476 million of total debt and $108 million of trailing 12-month adjusted EBITDA. Consistent with our history, we paid a quarterly dividend of $0.12 a share or $4.9 million in the aggregate. As a reminder, $300 million of our debt is at a fixed rate of 61 basis points plus an applicable margin of 1.75%. The remaining amount of our debt, or $176 million, is subject to variable interest rates, although offset somewhat by interest earned on our excess cash and short-term investments. Now looking at our guidance for the full year, we have affirmed our guidance for net sales, adjusted EBITDA, and adjusted diluted EPS. So no changes to those measures. We have updated our guidance for the GAAP measures to reflect recent developments, which would include the Brazil employment taxes issue, additional foreign currency losses, again, mostly coming out of Argentina devaluation, and then some other smaller items and the related income tax effects of those things. So in closing, we are optimistic as we enter the second half of our fiscal year. We're confident in the demand for our products around the world and look forward to seeing continued improvement in our business as we move forward. And with that, operator, let's please open the line for questions. Thank you.

Our first question will come from the line of Erin Wright with Morgan Stanley. Please go ahead.

Great, thanks. Can you give us an update on just underlying demand trends and how you're thinking about fundamentals in some of the key livestock categories for you, like poultry and dairy? And what are you expecting over the next 6 to 12 months across those categories? Thanks.

Hi, good morning Erin. It's a short question but a long answer. We are seeing positive trends globally, and the underlying demand has returned. The effects of COVID are finally diminishing in terms of imbalances, inventory, and inventory costs, as people are returning to restaurants, schools, and other places. Normal buyers have come back into the market. Additionally, the most significant factor in raising animals is the cost of feed, and we are observing a decline in both soybean and corn prices, which improves profitability across the board. There are still some exceptions, like the dairy industry in the states, which will take longer to stabilize, but even there, the trend is positive. This is one of the reasons for our optimism. We are experiencing good sales growth in all regions, with increasing sales and stable price increases, which further supports our positive outlook.

Okay. Thanks. And then adjusted EBITDA margin was strong in Animal Health. Is that just a function of the mix dynamic with the strength in the vaccines, or what drove that? And you mentioned price—is that going to quantify what you're realizing in terms of price? Did you take another price increase at the beginning of the year in terms of your Animal Health business? Thanks.

Yes. It's all those things, Erin. Certainly, we're seeing favorable product mix. Within Animal Health, vaccines, in general, have the highest margins. So as we grow that part of our business, we're getting that favorable benefit, and that's allowing us to continue to build the business by making very targeted expense investments in people mostly in certain markets, but we're able to offset that expense increment. So that's why the improvement. And I think as we grow going forward, it's reasonable to expect the kind of bottom-line growth at least equal in percentage terms to the top-line growth.

Okay. That's helpful. And then just if I could sneak one more in here. There was a recent deal on the tape for Elanco's aquaculture business to Merck. And Merck is already larger in that space, obviously, but does this change anything from a competitive standpoint for you? How big is—or what's your commitment to your aquaculture business? Or how big is that now? Thanks.

So we are committed, but it's a small business. So the movement of the products from Elanco to Merck will have no effect on our business.

Your next question comes from the line of Balaji Prasad with Barclays. Please go ahead.

Hi. This is Mikaela on for Balaji. Thanks for taking our question. Just two for me. Can you first just remind us of how Rejensa has been tracking? And following up on the previous question, could you just talk a little bit more specifically about geographies and species that are standing out and the outlook for the rest of the year? Thanks so much.

Hi. It's Daniel. I'll take the Rejensa question. We actually did not call out this year's specific guidance with regard to Rejensa in our annual report. So it's part of the nutritional specialties. It continues to grow nicely, double-digit growth. But other than that, for competitive reasons, we don't call out more specifics.

Species and geographies.

In general, poultry accelerates always across the world for economic and religious reasons. And we're seeing that in most of the geographies we're in for ourselves. We are increasingly focused on the cattle business. So cattle is forming a more important part of our business, but still small relative to the US anyway, and it's dairy relative to the United States.

Thanks so much.

Your next question comes from the line of Michael Ryskin with Bank of America Securities. Please go ahead.

Hi. This is someone filling in for Mike. Thank you for taking my questions. I was curious, aside from the impact on the profit and loss statement, are you noticing any changes in customer behavior due to the decline of the Argentine peso? Do you anticipate how this might affect operations based on the platform's past experiences in the country?

Well, the good news is Argentina has many decades of experience with economic chaos. So those folks know how to manage their business whether their currency is up, down, or sideways. And so I think we have not seen any change in customer behavior since the devaluation, which was the middle of December. I think our customers and the industry in Argentina view this as a very positive step toward fiscal sanity and normality in Argentina. So I think we took some pain there, but we're all hopeful that the gain is going to be worth the pain as the business goes forward. Argentina is an agricultural powerhouse, and there's a lot of opportunity there, and we like the market.

Got it. That makes sense. And then popping across the world. Can you give us an update on your operations in Israel and maybe a ballpark for the headwind you're facing if the broader drives on? And has it changed at all since Red Sea shipping has become more of an issue?

So you know as you can tell just read the paper, it's not the easiest time to be operating in Israel. We have been successful operating our facilities and meeting our shipping commitments. Clearly, it's been more expensive as some of our people have been called out. But overall, we've slogged through this. And hopefully, this comes to an end soon, and then things will return to normal.

Much appreciated. Thanks for the time, guys.

And your next question will come from the line of Brian Wright with Roth MKM. Please go ahead.

Thanks. Good morning. Can you help us get a feel for how much of the vaccine growth year-over-year is from the autogenous vaccine?

We don't break it out. So again, for some competitive reasons. Overall, the autogenous business is small compared to the regular vaccine business. It is, you know, I wrote the name for it, autogenous custom vaccine. I don't know if you understand what happens but maybe we have spoken in the past. Literally, we go to farms, and we take blood samples. If they're not, basically, things are not responding well to the normal vaccines, the regular vaccines. And we developed a custom vaccine for that farm that will respond to the viruses and the bacteria they're seeing. We created a custom-made vaccine. It's much more expensive, but it's more effective, and we go back and sell it. So it's a retail effectively; it's a retail way. It's farm-to-farm as opposed to the wholesale way if I have a vaccine that can cover half the country.

So when you're talking about the poultry product introductions in Latin America, that's not the custom vaccine for the poultry.

Correct.

Okay. Thank you. And then can you just remind us on the seasonality of the vaccine business?

So overall, there's no seasons. You're talking about viruses; you're not talking about bacterial issues. So it's year-round.

Great. Okay. Perfect. And then lastly if I could just with the— to make Glenn on—as CFO. Is there kind of—are you conditioning the role changing anything at all from what it has been in the past?

And so I'm not. On the other hand, I'm showing, as you see yourself in the banks, every individual has their own way of doing things. So and Glenn's in the room, he can answer that. But I truly expect, like I said, we are standing on the shoulders of giants. So everyone will make their changes and all the changes together make for a better job.

Great. And then if I can ask one last one since you did say Glenn is in the room. And this might be a little early, but just early thoughts, Glenn, as far as your top priorities as you come in?

Thanks. First, I'm really excited to be here and joining Phibro. Obviously, I have a real passion for the industry and glad to join one of the key players in the industry again. I have been really impressed with the management team so far. And it's really just two or three days in. So really no ongoing hypotheses yet, but I really look forward to working with the team, getting to understand Phibro in more detail and then looking to work with the team to really drive profitable growth moving forward. So more to come. And I really look forward to working with the analysts and communicating with you over the next weeks and months.

Great. We'll save that one for our next quarter too.

Perfect.

Thank you.

And we have no further questions at this time. I'll turn the call back to Dick Johnson for any closing remarks.

All right. Well let me add my welcome to Glenn and wish him well. And as Jack said, we'll keep working together. I'll be available for questions as needed. And with that, I wish everyone well. Thank you very much for joining us today and take care and talk to you next time. Bye now.

That concludes today's conference call. Thank you all for joining. You may now disconnect.