Earnings Call Transcript - PAHC Q2 2021

Operator, Operator

Thank you for joining us today for the Phibro Animal Health Corporation Q2 2021 Conference Call. I will now turn the call over to our speaker, Damian Finio, Chief Financial Officer. Please proceed.

Damian Finio, Chief Financial Officer

Thank you, Mariama. Good morning, and welcome to the Phibro Animal Health earnings call for our second quarter ended December 31, 2020. I am Damian Finio, Chief Financial Officer of Phibro, and I'm joined on today's call by Jack Bendheim, Phibro's Chairman, President and Chief Executive Officer. We will cover key themes for the quarter, our second quarter financial results, guidance for third quarter ending March 31, 2021, and then open the line to respond to your questions. Before we begin, let me remind you that the earnings press release and financial tables can be found on the Investors section of our website at pahc.com. We're also providing a simultaneous webcast of this morning's call, which can also be accessed on the website. A replay of today's presentation, the slides that accompany the presentation and a transcript of the call will also be available on our website. On to Slide 2. 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. Before we get into the numbers, we want to remind everyone that we present our results on a GAAP basis and on an adjusted basis. We present adjusted results that exclude acquisition-related items; unusual, non-operational or nonrecurring items, including stock-based compensation and restructuring costs; other income and expense as separately reported in the consolidated statements of operations, including foreign currency gains and losses; net and income tax effects related to pretax adjustments and unusual or nonrecurring income tax items. And now I'm pleased to begin today's presentation by asking Jack to share his opening remarks, starting on Slide 3.

Jack Bendheim, Chairman, President and Chief Executive Officer

Thank you, Damian. Welcome to your first investor call as our Chief Financial Officer, and good morning, everyone. I'd like to start today's call with 4 key themes for the quarter. First, we are excited about our second quarter and year-to-date financial results. In the second quarter, although on a consolidated basis, company sales decreased 4%, diluted EPS increased 10% versus the same quarter last year. The decline in consolidated net sales was driven by a 5% decline in the Animal Health segment of our business and a 3% decline in Mineral Nutrition, while Performance Products net sales increased 8%. Keep in mind, there was no COVID-19 impact in the prior year results, which is why I am pleased with our bottom line performance this quarter. Second quarter performance also reflects growth over last quarter. Second quarter sales and diluted EPS grew 6% and 7% over last quarter, respectively. These are solid GAAP financial results in a tough market. Second, we are encouraged by signs the industry is stabilizing despite the continued global pandemic. The world, and more specifically, the Animal Health industry is learning to cope with the ongoing impacts of COVID-19. In our own business, we're learning new ways to service our customers and what were new safety protocols in our production facilities about a year ago are now just part of everyone's daily routine. We are encouraged but remain cautiously optimistic about the near term. Third, we are projecting solid third quarter financial results, although as mentioned, sales in the Animal Health segment of our business were down versus the same quarter last year. Looking ahead to our third quarter, we anticipate flat sales of MFAs, continued strong growth in nutritional specialties, particularly in Europe and in Asia, and in poultry in the United States, and continued expansion in the vaccine space. We also expect continued strong adjusted EBITDA performance from our Mineral Nutrition segment as favorable product mix continues. And lastly, we expect our Performance Products segment to continue to benefit from higher capital volumes in the near term. Despite the pandemic, we continue to invest in our future. I am proud of the fact that our pHi-Tech vaccine device is now being trialed and sold in over a dozen countries and increasingly being serviced remotely, a unique capability that we will look to build upon even as we emerge from the pandemic. The nutritional specialties growth is underpinned by our recently launched OmniGen Pro for the dairy sector, and we continue to spend time and money in developing unique nutritional specialty products that we are confident will be a key pillar of Phibro for years to come. Further, many of you probably saw the announcement we made on January 20 about the expansion of our Mineral Nutrition facility in Omaha, Nebraska. The Omaha production facility is geographically positioned to manufacture and supply Mineral Nutrition products and trace mineral premixes to our U.S. livestock producers. The facility upgrade provides the next evolution of food safety, product quality and output while enhancing our customers' ability to meet growing consumer needs. Moving on, as promised on our last call, I want to give you a bit more information about our expanding efforts in the pet business, where we continue to identify, explore and progress opportunities. Rejensa, our proprietary chew for canine joint health, continues to grow as sales doubled in the last 6 months versus the prior 6 months. Despite the continuing challenges accessing vet clinics due to COVID-19-related restrictions, we are optimistic that we can continue to drive profitable growth and strength. We also have a number of products in development. The first is a novel Lyme vaccine delivery system, which we have previously disclosed. Although our development progress has slowed, due again to COVID, we expect the program to restart in about 6 to 9 months in the early part of our fiscal year 2022. We are also pleased to announce that we have licensed a unique derma care compound for the treatment of atopic dermatitis in dogs. We secured this opportunity at the outcome of a competitive process, where we believe our ability to focus on development and marketing efforts on this product was a key differentiator to being selected. While early stage, we are enthusiastic about the prospect of launching this product down the road into one of the fastest-growing segments of the pet marketplace. Lastly, as another example of the types of opportunities we're interested in, we are currently evaluating potential opportunities in the oral space for cats and dogs, a space with an estimated addressable market of over $2 billion. These are just a few of the many activities that we want to share to help you better understand how we are looking to expand into the multi-billion dollar pet care industry to add another pillar to our business. With that, I would like to ask Damian to share more details on our second quarter financial performance. At the conclusion of Damian's remarks, we look forward to taking your questions.

Damian Finio, Chief Financial Officer

Thanks, Jack. On to Slide 5. I'll start by reviewing consolidated results for our second quarter ended December 31, 2020, and then sharing some more detail on our individual business segments and then close out my remarks with our expectations for the third quarter. In summary, we posted strong second quarter financial results on a consolidated basis. Versus the prior year, second quarter sales declined 4%, but net income and diluted EPS grew 8% and 10%, respectively. On an adjusted basis, adjusted EBITDA, adjusted net income and adjusted diluted EPS were comparable to the prior year. Our GAAP profitability measures improved versus the prior year due to reduced spending and a lower effective tax rate. The effective tax rate for the quarter was 20.3% versus 29.6% in the prior year, due primarily to the impact of the final Global Intangible Low-taxed Income regulations issued in July 2020 and a benefit related to exchange rate differences on intercompany dividends. Next page. Now let me explain what's driving consolidated results in a little bit more detail. As mentioned, consolidated net sales were $206.1 million for the quarter. That's a decrease of $7.9 million or 4% versus the prior year. The sales decrease was driven by a $7.5 million or 5% decline in the Animal Health segment, a $1.5 million or 3% decline in Mineral Nutrition, partially offset by a $1.1 million or 8% increase in Performance Products. As Jack mentioned in his opening remarks, there was no COVID-19 impact in the comparable prior quarter. Despite the decrease in sales, we reported GAAP net income of $12.8 million, an 8% increase versus the prior year, and diluted EPS of $0.32, a 10% increase versus the prior year. These increases were driven by an improvement in gross margin, lower SG&A costs and provision for income taxes, offset partially by foreign currency losses. Moving from GAAP results to adjusted results, second quarter financial results after adjustments to exclude things like one-offs, acquisition-related items, other income and expense including foreign currency gains or losses, adjusted EBITDA, adjusted net income and adjusted diluted EPS were all comparable to the prior year. The adjusted net income and adjusted diluted EPS calculations also reflect the income tax effects related to the pretax adjustments and unusual or nonrecurring income tax items. Now Slide 7. Let's break down our consolidated results by business segment, starting with our largest segment, Animal Health, which is comprised of MFAs and other nutritional specialty products and vaccines. As I mentioned earlier, net sales of our Animal Health segment decreased 5% versus the prior year. The decrease in Animal Health net sales is comprised of 3 components: first, an 11% decline in MFAs and others versus the prior period. The decline was driven by lower international demand, primarily in Asia and Latin America, offset by favorable domestic customer order patterns. Second, a 10% growth in nutritional specialties, driven by domestic and international growth in dairy products. And third, a 2% decline in vaccine net sales, driven by higher domestic vaccine sales, which was more than offset by lower international volume due to timing of customer orders and reduced demand. In terms of profitability, Animal Health adjusted EBITDA decreased $0.5 million or 1% on lower sales and gross profit, partially offset by favorable SG&A costs, driving an adjusted EBITDA margin improvement of 100 basis points to 24.5%. Next page, please. Now let's walk through the financial performance of our other business segments, namely Mineral Nutrition and Performance Products, then a brief word about corporate expenses. Starting with Mineral Nutrition, net sales for the second quarter were $54.2 million, a decrease of $1.5 million or 3% versus prior year, driven by lower average selling prices. The decline in average selling prices is correlated with the movement of the underlying raw material costs. Mineral Nutrition adjusted EBITDA was $4.2 million, an increase of $0.5 million or 14%, driven by increased gross profit on favorable product mix. Mineral Nutrition adjusted EBITDA margin improved 110 basis points to 7.7%. In terms of our Performance Products segment, we are having a strong year. Net sales of $15.8 million for the 3 months ended December 31, 2020, were an increase of $1.1 million or 8% over the prior year as increased volumes of copper-based products were partially offset by lower sales of personal care product ingredients. The increased gross profit drove $2.3 million of adjusted EBITDA for the quarter, which is a 56% increase versus the prior year, and an adjusted EBITDA margin of 14.4%, an improvement of 440 basis points versus the prior year. Lastly, corporate expenses. They increased $0.8 million or 7% versus prior year due to increased costs for professional fees and information technology. Now on Slide 9, shifting gears to capitalization-related metrics. The business provided $19 million of cash in the second quarter before financing activities. And our gross leverage ratio, which is calculated by taking our total debt of $387 million divided by trailing 12 months adjusted EBITDA of $107 million, was 3.6x as of December 31, 2020. Now that's a slight improvement from the quarter ending September 30, 2020. In terms of liquidity, we had $165 million available. This includes cash and short-term investments of $96 million and $69 million of unused and available revolving credit. And consistent with the past several quarters, we will pay a routine quarterly dividend of $0.12 per share or $4.9 million. Lastly, on Slide 10, looking ahead to financial guidance. Although we are seeing stabilization across the Animal Health industry and within our company specifically, given the uncertainty of the future course of the pandemic, we will continue to provide only near-term guidance. That said, we expect solid financial results again for our third quarter as follows: net sales of approximately $205 million to $208 million; net income of approximately $11 million to $12 million; diluted EPS of approximately $0.27 to $0.30; adjusted EBITDA of approximately $27 million to $29 million; adjusted net income of approximately $12 million to $13.5 million; and lastly, adjusted diluted EPS of $0.30 to $0.33. To conclude our opening remarks and to reinforce Jack's sentiments, we posted solid financial results for the second quarter. We are encouraged by signs of stability across the industry. We continue to invest in our future and are projecting solid third quarter financial results. Thank you for your time and attention. Mariama, if you could please open the lines for questions.

Operator, Operator

Your first question comes from David Westenberg.

David Westenberg, Analyst

Congratulations on the strong margins. Could you describe the derma care product and your approach to it? Is it related to IL-31 or JAK, such as a JAK inhibitor or a monoclonal antibody? Why do you believe this is the right approach? Additionally, could you provide some insight into the expected launch timeline?

Jack Bendheim, Chairman, President and Chief Executive Officer

Thank you for the questions, but I won't be able to provide answers to them just yet. We are still in the early stages. We believe that we've successfully secured a competitive licensing agreement for a product that has the potential to serve the market widely. However, there are many milestones to achieve over the next few years before we can bring it to market, and that assumes everything progresses smoothly. While the launch is still in the future, we would not have pursued this path if we didn't believe we could meet the necessary standards for a derma care product.

David Westenberg, Analyst

Got it. I completely understand that we are early in the pipeline. Can you discuss the margin contribution of Performance Products in relation to the overall base business? I'm trying to gauge what to expect in terms of bottom line contribution as that segment grows. This quarter appeared to be different from previous years, as you had strong margin contributions despite a revenue slowdown.

Jack Bendheim, Chairman, President and Chief Executive Officer

Yes. Normally, when we discuss Performance products, it's not an area we're focusing on. This quarter saw some unusual factors come together, including increased volumes of our copper products and significantly higher copper prices, which made it stand out. This trend might continue for another one or two quarters, but in the long run, as we have always stated, this is not where we direct our attention.

David Westenberg, Analyst

Totally understand. Okay. So just maybe the last one in terms of more growth in the portfolio and new products. What are your appetites for potentially entering the generics market for cattle? I mean, obviously, DRAXXIN is coming off patent, and it tends to be an easier product to develop. Since the patent has been expired for a long time, and there are large markets, is cattle generics something that interests you in the next few years?

Jack Bendheim, Chairman, President and Chief Executive Officer

Overall, cattle interests us a lot, and we're very active sort of ex the U.S. in cattle markets, specifically in Mexico and Brazil, growing in Canada, Australia, South Africa. I think I’ve made more of the big markets. So we are looking, and we recently signed an agreement and announced with Virbac to distribute their generic DRAXXIN in the Canadian market. And we're going to look for opportunities like that. I think there is a lot of generics coming into the DRAXXIN market, but where we have feet on the ground and where we can make some money and why not. So I think that's specifically what we're looking at. But right now, I don't think I want to go any further into the other products we're looking at.

Operator, Operator

Your next question comes from Balaji Prasad.

Balaji Prasad, Analyst

This is Balaji. A couple of questions. Maybe first, let me start with China. So 10 days ago - 8 to 10 days ago, there seemed to be reports of newer strains of African swine fever emerging in China. And what I find most concerning is that they seem to be on farms owned by the fourth largest hog producer. So what are the implications of this, a, for the industry in the near term? And looking beyond, as you seek to participate in the re-herding in China, what implications does it have for your business?

Jack Bendheim, Chairman, President and Chief Executive Officer

You're absolutely right about the recent developments. The Chinese are making significant efforts to rebuild their hog population following the decline caused by African swine fever a few years back. However, some farms are reportedly using unapproved vaccines, which could be contributing to the reemergence of the disease. Additionally, they have not effectively controlled African swine fever in the past. The major farms, which can manage better biosecurity, have lower population densities due to the high prices of hogs in China. Although there have been outbreaks, the Chinese are diligently working on repopulation. Nevertheless, this process will take time. Therefore, I expect that exports from the markets we are involved in, such as the U.S. and Brazil, will continue to perform well over the next couple of years.

Balaji Prasad, Analyst

Maybe just a follow-up to that. So I also asked, where do you currently stand with your registration process which is ongoing in China? And at what point should we factor you participating in the re-herding cycle?

Jack Bendheim, Chairman, President and Chief Executive Officer

The good news is that China has done an excellent job recovering from COVID, leading the regulatory authorities to reopen. We have submitted our re-registration package, which is positive because without participating, you cannot expect to win. We’ve started the process, and our internal estimates suggest it may take between 1.5 and 2 years.

Balaji Prasad, Analyst

That's helpful. Maybe one quick question, and then I'll join the queue. So could you provide us an update on where you're with next-gen OmniGen? What kind of traction you had in the last quarter?

Jack Bendheim, Chairman, President and Chief Executive Officer

We are beginning to see progress with the next generation product, which we refer to as OmniGen Pro. Most of the sales growth we experienced this past quarter has come from that product, and I believe we will continue to see positive results. Like many in the Animal Health sector, the primary challenge we face currently is effectively bringing our team together with the customer's team to review all the data and successes. Until vaccination rates improve significantly, progress will likely be slow. We are experiencing solid success; it’s a great product, but I estimate it will take about a year before we see accelerated growth for it.

Operator, Operator

Your next question comes from Erin Wright with Credit Suisse.

Haley Christofides, Analyst

This is Haley Christofides, on for Erin this morning. I kind of wanted to focus on vaccines. Can you speak to the key drivers of the lower demand trends internationally that you called out this quarter? And when do you think we can potentially return to double-digit growth across that segment longer term?

Jack Bendheim, Chairman, President and Chief Executive Officer

It's a great question. In certain regions of the world where poultry is a primary protein source, the impact of COVID has mainly been economic. While the average effects of illness and loss are felt universally, in those markets, demand has decreased significantly due to a drop in economic activity. The recovery in demand will largely depend on the success of vaccination programs, which we are starting to see in North America and Europe, areas that rely heavily on these vaccines. I anticipate that we will begin to see increases, but we will not return to normal until vaccinations are fully effective, which, if current trends continue, may take about a year.

Haley Christofides, Analyst

Okay. That's helpful. That makes sense. And kind of a follow-up to that. You provided some helpful clarity on the Animal Health trends by segment for 3Q, but I was wondering if you could kind of go into demand trends across species beyond poultry? And how we should think about those in the next couple of quarters?

Jack Bendheim, Chairman, President and Chief Executive Officer

So, which market are you referring to?

Haley Christofides, Analyst

Globally.

Jack Bendheim, Chairman, President and Chief Executive Officer

The next biggest market for us would be hog, and that business in the market where it often depends on exports, and China, as I said earlier, is still the biggest importer of hogs, pork in the world. So I think that continues and grows a little bit over the next couple of years. So I think for the production animal, the volume is going to be good. The thing you have to start thinking about, which we have not had to think about for many, many years, is higher input costs. The cost of corn and soybeans have risen dramatically. So that's going to change the economics, which changes the dynamics of the overall animal protein business. And it helps our business because our products help make those products work better, right? It helps the animals stay healthier so they convert the corn and the soybean at better rates. But there was a balance, and the first number is that if you are a pig producer or if you're a chicken producer, what you look at is what is my input cost? And that is the biggest dynamic that all of our customers all over the world are facing.

Operator, Operator

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

Michael Ryskin, Analyst

I want to follow up on what you mentioned about input costs and corn prices. Looking at the recent surge in corn prices over the past few months, particularly since mid-December, I've noticed reports indicating that poultry and hog producers are becoming more cautious. How much of this are you considering in your forecast for the third quarter? Is it too soon to speculate on its potential impact on herd size and expansion in the U.S. and abroad? Are you waiting to see if these prices hold steady? Additionally, have you received any feedback from customers regarding a slowdown in purchase orders? I'm curious, as there appears to be significant concern in that area.

Jack Bendheim, Chairman, President and Chief Executive Officer

Thanks, Michael. It's a great question. So right now, right, it's in the talking stage. Most people who we deal with around the world have hedged and locked in their prices 6 months ago. So they might not even be seeing these higher prices, but it's something they start thinking about going forward. The balance is demand. So if there is a demand for chicken or for pork, someone is going to make it, if someone's going to have to use the input cost no matter what the price is. So if you ask me, do I think the price of chicken and pigs will go up around the world? I think the answer to that is yes. If you ask me when, I don't know. But overall, we're seeing these higher input costs and that means, ultimately, the price of protein will be higher.

Michael Ryskin, Analyst

I appreciate your insights. I've noticed your comments highlighting the strength in nutritional specialties related to dairy. This is an end market we've been discussing for years, particularly regarding its challenges in the U.S. I'm curious if any of this is due to it being a catch-up or easier comparisons, or if you're observing any fundamental changes in the market that suggest the outlook for dairy may be improving.

Jack Bendheim, Chairman, President and Chief Executive Officer

Yes. The outlook for dairy resembles California's weather; it always seems promising just before you arrive. It's a complex situation. The dairy producers had started improving, but now they are facing higher input costs again. Overall, if I examine the U.S. dairy segment, they are managing fairly well. The pork producers are likely doing fine too, while the poultry producers appear to be facing challenges due to rising input costs. However, as I mentioned earlier, the situation is balanced. If you hedged your corn prices, which happened six months ago with a two-year hedge, you should be in a good position. We lack clear visibility into our customers' situations, but I believe this will ultimately revert to supply and demand dynamics. If demand holds up, the supply will align accordingly, and prices will stabilize.

Michael Ryskin, Analyst

Okay. That's helpful. And yes, I totally agree with you on the many, many false starts we've had in dairy, where that would improve for 1 quarter and then it was one step forward, 2 steps back. So completely makes sense. One last one for me and then I'll hop back. I think the biggest surprise for us in the quarter was actually on the P&L, on the SG&A and sort of your ability to contain costs there despite the improved performance in the top line. At the same time, you're talking about a lot of investment going forward in the companion animal business, in the derma care and some of your other products there. And also just continued investment in your core MFA and nutritional specialties businesses. How should we think about that lever going forward? Was this just a little bit of a timing benefit in the quarter? Or are you able to find some cost constraints that you think will carry forward?

Jack Bendheim, Chairman, President and Chief Executive Officer

There are three factors to consider regarding SG&A, with two key aspects. Firstly, due to everyone staying home and no traveling or customer visits, we're experiencing a reduction in monthly expenses globally. This is one way we're saving money. On the other hand, we have ongoing costs related to maintaining our plants and production, which have continued throughout this period without shutdowns, though they're now more costly. Basic protective equipment is the least expensive part of this, but the expenses related to plant operations, worker transportation, and managing illnesses have increased. When one employee is sick, it often leads to everyone needing to stay home, resulting in additional costs for replacements and overtime. Although we are saving money by not visiting customers, those savings don't entirely cover the increased operational costs. Furthermore, while it's important to reach out to customers and promote new products, we find ourselves limited to selling the same items and unable to bring in new business. This is all reflected in the numbers, and we continue to take a quarter-by-quarter approach due to the ongoing impact of COVID worldwide.

Operator, Operator

Your next question comes from Kevin Kedra with G. Research.

Kevin Kedra, Analyst

I want to come back to the companion animal story. Obviously, this is an area of focus for you guys with Rejensa and then the pipeline. Do you feel that what you have right now in development is kind of good? Are you guys looking to further expand in that area? And have you considered moving also into the equine market, given your strength in livestock? I would imagine, there are greater synergies there in equine than necessarily dogs and cats.

Jack Bendheim, Chairman, President and Chief Executive Officer

Equine presents a challenge for us. Selling cat products in the cattle market doesn't help us sell horses. However, we are moving forward by establishing a fourth pillar in our business focused on companion animals, and we intend to approach this gradually and uniquely. The competition in this field is fierce, and acquiring a product line is quite costly due to high multiples in the companion animal sector. We are leveraging our capabilities, including our scientists and development teams, along with our market knowledge. We've brought in some exceptionally talented individuals specifically for companion animals, and we are receiving substantial interest. Many innovators have promising products but struggle to reach larger companies due to the "not invented here" mindset. We have reviewed numerous products, successfully launched one, and are currently investing in several others. Our approach will be deliberate, but I anticipate that in 3 to 5 years, companion animals will comprise a significant portion of our business.

Kevin Kedra, Analyst

That's helpful. I wanted to ask about cash flow. You had a very good cash flow quarter. You gave us good metrics for Q3. But just wondering if you could give us any sort of sense directionally on how we should be thinking about the cash flows for Q3, maybe for the balance of the year? And then kind of related to that, the Omaha plant expansion. Anything we should be thinking about in terms of CapEx and the impact there?

Jack Bendheim, Chairman, President and Chief Executive Officer

I'll address the second half first. We plan our capital expenditures a year ahead, and some of these projects are significant. The Omaha expansion is nearing completion; we have been working on expanding and modernizing that facility for one and a half years. We continue to evaluate capital expenditures across all our businesses. As you know from previous discussions, we produce about 70% of what we sell, and we expect business growth, which necessitates ongoing capital investments. Now, I'll turn it back to Damian for insights on cash flow.

Damian Finio, Chief Financial Officer

All right. Thanks, Kevin, for the question. So you're right. Year-to-date, we're ahead of our plan in terms of cash flow, and that's driven by our stronger-than-anticipated bottom line performance. I would say, for the second half of the year, given our inventory levels at December 31, coupled with the guidance for the third quarter, we should have steady cash flows in the second half of the year. I would expect some of that cash, though, would be invested back in the business more so than first half to do 2 things: one, expected ramp-up of some of our capital improvement projects; and as Jack alluded to, continued investments in the future.

Operator, Operator

Your next question comes from David Risinger.

Melina Santoro, Analyst

This is Melina Santoro on for Dave. First, can you maybe discuss what the key factors are to consider for the March quarter? I know guidance kind of implies a flat revenue sequentially at the midpoint, but EBITDA is expected to be down slightly at the midpoint and EPS down as well sequentially.

Damian Finio, Chief Financial Officer

Yes. I'll take that one also. So I think it's consistent with what I just said. What you're seeing in cash flows, you're also going to see in the results. So we're expecting more of the same in the third quarter in terms of sales, but when you look to profitability, we do expect a ramp-up of certain expenses to invest in the future, etc. So from a profitability perspective, quarter 2 to quarter 3, you're right, the bottom line is a little bit less as a percentage of topline.

Melina Santoro, Analyst

Okay. That's helpful. And then my second question is, can you provide any updates on the FDA's assessment of Mecadox? And maybe any updates from the Brazilian regulatory agencies on virginiamycin?

Jack Bendheim, Chairman, President and Chief Executive Officer

We are maintaining communication with the FDA, but we haven't received much feedback. With the change in administration and the absence of a new commissioner, I expect progress will be slow. However, we remain committed to vigorously defending this product, which has been successful in the market for 40 years, proving to be safe and effective. We want to ensure that it remains available. Regarding Brazil, we haven't received updates yet, but we are continuing our efforts. All our applications are in the process, and everything is currently grandfathered according to their information. They will address our situation when they can.

Operator, Operator

There are no further questions at this time. I will now turn the call back to Balaji Prasad, who has just entered the queue with one more question.

Balaji Prasad, Analyst

So Jack, just wanted to get an update on your Irish facility. When we last spoke, you had received the approval after the inspection. So are we still on for mid-'21 launch? And would you be able to quantify the impact of the market this facility would open for you? And also at what point in time could we start seeing improvements in OpEx coming through from this facility?

Jack Bendheim, Chairman, President and Chief Executive Officer

We have received our initial regulatory approval and are currently preparing to submit for the second approval, which includes an inspection. We are on track to begin operations at that facility early in our next fiscal year. This will open up the Middle East market for us across a variety of products. While I cannot specify the exact potential, I can say that once we start selling, it will be profitable. We're on schedule; there are no delays, and we are confident that this facility will be beneficial for us.

Operator, Operator

There are no further questions at this time. I will now turn the call back to Damian Finio for closing remarks.

Damian Finio, Chief Financial Officer

Okay. Thank you, everyone, for your thoughtful questions. For those interested, Jack and I will be hosting a fireside chat on February 25 at the Bank of America Merrill Lynch 2021 Virtual Animal Health Summit. Details should be issued on that via press release tomorrow. We appreciate you taking the time to join us on today's call. Have a great rest of your day and continue to stay safe.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.