Phibro Animal Health Corporation

Good morning. My name is Chantal, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fibro Animal Health Corporation first quarter 2022 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. Damian Finio, CFO, you may begin your conference.

Thank you, Chantel. Good morning, and welcome to the Fiber Animal Health Earnings Call for the quarter ended September 30th, 2021, which is the first quarter of our fiscal year 2022. My name is Damian Finio, and I am the Chief Financial Officer of the Fibro Animal Health Corporation. I'm joined on today's call by Jack Benheim, Fibro's Chairman, President, and Chief Executive Officer, and Daniel Benheim, 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 investor 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 US 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 non-recurring 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 of net. And lastly, income tax effects related to pre-tax adjustments and unusual or non-recurring income tax items. Now, let me introduce our Chairman, President, and Chief Executive Officer, Jack Benheim, to share his opening remarks, which will include his perspective on FIBRO's first quarter financial performance and revised financial guidance for our fiscal year 2022.

Jack? Thank you, Damien, 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 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 SGA costs were up because, as discussed in our last call, we're committed to increasing our incremental investments in 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 visit customers and attend conferences face-to-face. But with Fibro and other companies, I'm really feeling the pressure is on gross margin. Before I speak more to the pressure on gross margin, I was also very pleased to see the start of a return on one of our key strategic investments. The vaccine facility in Sligo, Ireland, As I said earlier, vaccine sales grew 25% in the first quarter. Part of what 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 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 and labor challenges, among other things, persist. These challenges clearly had an impact on our first quarter profitability, reflected in the 270 basis point consolidated gross margin decline in comparison to the same quarter last year. While we raised prices of select products and realized increased volumes, these increases did not fully compensate for the higher cost of freight, labor, materials, and unfavorable currency movement. Combined, these items more than offset improvements in volume and price and reduced first quarter margins. Subject to normal competitive conditions, we will continue taking steps to adjust pricing to reflect changes in cost and pass through incremental freight costs in the form of a surcharge. the benefit of which should be realized primarily in the second half of the current fiscal year. Because of these market dynamics and the actions we've taken and will continue to take, we are revising our financial guidance. We are raising full-year net sales guidance from a range of $840 to $870 million to a range of $860 to $890 million. However, we are maintaining our previous issue adjusted EBITDA guidance for $110 to $114 million. Our revised financial guidance reflects that we will continue to focus on what we can control and that we are committed to taking the actions needed to maintain the company's profitability. But let's keep in mind that COVID-19 variants remain a risk. Vaccine and booster availability and administration varies, and the virus continues to have an adverse impact on the economies of many of the countries where we sell our products. As the economic impact varies, the strength of the respective currencies opposite the U.S. dollar also varies. In addition to adding pressure to gross margin, this variability impacts comparisons of actual results of prior periods, our actual results versus our projections and our projections going forward. As many of you know, I have been in this business for a few years, but some dynamics occurring in the marketplace are at first even for me. We've seen frequent shipping delays and variability, yet carriers are raising prices. We're seeing a shortage of qualified workers, while the workers that are available can demand a higher wage. We're seeing fluctuations in the value of foreign currencies relative to the U.S. dollar, yet hearing those economies are recovering. The economic effect of the COVID-19 pandemic has been difficult to predict and continue to persist. Overall, our first quarter financial performance was in line with our internal expectations, and I'm encouraged by our top-line sales growth across all segments, especially animal health. and I'm also pleased about the first sales out of the facility in Slido. We are focused on what we can control and committed to taking the actions needed to maintain the company's profitability despite the continued COVID-19-related challenges. Now, let me hand the call back to Damien to review our results and discuss in more detail how we plan to improve margins going forward. Damien.