Phibro Animal Health Q1 2024 Earnings Call Transcript

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November 9, 2023

There are 8 speakers on the call.

Operator

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 FY 2024 Earnings 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.

Operator

I would now like to turn the conference over to Dick Johnson, Chief Financial Officer. Please go ahead.

Speaker 1

Well, thank you, Regina, and good morning to everyone, and welcome to Phibro's Earnings Call for our fiscal Q1 ended September 30th. My name is Dick Johnson. I'm the Chief Financial Officer of Phibro Animal Health Corporation. I'm joined today on the call by Jack Bendheim, Phibro's Chairman, President and Chief Executive Officer and also by Daniel Bendheim, Director and Executive Vice President of Corporate Strategy. Today, we'll cover financial performance for our Q1 and provide an update on our financial guidance for our full fiscal year ending June 2024.

Speaker 1

At the conclusion of our opening remarks, we'll open the lines for your 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. Later today, you will find copies of the earnings press release and the first quarter Form 10 Q filed with the SEC yesterday as well as the slides and transcripts from our presentation this morning. Turning to Slide 2, just the standard disclaimers. Our remarks today will include forward looking statements And actual results could differ materially from those projections.

Speaker 1

For a list and description of certain factors that could To 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.

Speaker 1

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, Other income or expenses separately reported in the consolidated statement of operations, primarily foreign currency gains and losses and the income tax effects related to any of those pre tax adjustments, plus any unusual or non recurring income tax items.

Speaker 1

Now, let me introduce our Chairman, President and Chief Executive Officer, Jack Benthyne, to share his perspective on Phibro's Q1 financial performance and the outlook for our fiscal year 2024. Jack?

Speaker 2

Thank you, Dick. Good morning, everyone, and thank you for joining us today. Our Q1 had some strong positive despite the overall disappointing results. Our core Animal Health business grew sales at a healthy 4%. And I was especially pleased to see that some of the measures we have taken The counteract margin erosion helped animal health EBITDA growth and even passed the rate of 6%.

Speaker 2

We saw growth across all three product categories in animal health led by 14% growth in vaccines. We are seeing increased uptake of our vaccines across multiple regions, but especially in South America where we have launched several new commercial vaccines. Azuella has opened a new Atanas vaccine facility in Brazil. We are continuing to invest behind our successes. We are looking to introduce additional vaccines in the Americas And I've just recorded our first sales of a new line of nutritional specialty products for U.

Speaker 2

S. Poultry producers. We see Vaccinations and Retritional Specialties as double digit annual opportunities for the short and medium term, and we are making the necessary investments Enable us to achieve our targets. We have also continued to support our other initiatives such as Companion Animal. But considering the challenging macro environment, We're talking ways to curtail or delay some of the spend.

Speaker 2

As mentioned, we're in a challenging macro environment. Our Mineral Nutritional business has seen revenue drop and margins drop even more as we have recently been on the wrong side of commodity price movements

Speaker 1

and

Speaker 2

some inventory positions. While we anticipate our margins returning to some historical levels as we progress through the fiscal year, volumes could take longer to recover. Similarly, we see weaknesses in some of the other end markets, including dairy in the U. S. And China and our feedlot businesses in Latin America.

Speaker 2

Finally, the horrific terrorist attacks in Israel a month ago and the subsequent war have increased the cost relating to our operations in Israel. We have confidence in our ability to meet our supply commitments to customers. For all these reasons, we have decided to lower our guidance for the remainder of this fiscal year As Dick will go into greater detail at the end of his presentation. Before I hand it back to Dick, I want to touch on the FDA's most recent The FDA has been targeting Mecadox for close to a decade. Mecadox is a very important product for swine producers to help keep baby piglets healthy during the critical early period of their lives.

Speaker 2

It's been safely sold in the United States for over 50 years It continues to be available and to be used. We will continue to support this product and defend our customers' ability to use it. We are extremely confident in its safety and efficacy. With that, I look forward to hearing your questions following this review of our financials.

Speaker 1

Thanks, Jack. Well, let me start with the consolidated financial performance on Slide 4, Then move on to segment level performance and other factors. And I'll conclude with a review of our updated financial guidance. Our consolidated net sales for the quarter ending September were about $231,000,000 reflecting a decrease of $1,000,000 or 1% compared with the same quarter a year ago. As Jack mentioned, the Animal Health segment saw a nice increase while both Mineral Nutrition and Performance Products decreased from the year earlier.

Speaker 1

GAAP based net income and diluted earnings per share decreased driven in part by higher SG and A expenses and notably by a $10,400,000 charge for pension settlement cost. We also saw increased interest expense Due primarily to higher rates, some increased foreign exchange losses, all of which were partially offset by reduced income tax provision. Our first quarter adjusted EBITDA was 18 point $7,000,000 that was a decrease of $3,500,000 Within that Animal Health Increased $1,500,000 due to sales growth and favorable gross margins, which was partially offset by Higher spending in SG and A. Mineral Nutrition decreased $2,400,000 at the EBITDA line Due to lower sales and higher costs, performance products dropped about $1,000,000 compared to last year at the EBITDA line due to lower sales and driving gross profit down. And finally, corporate expenses increased $1,600,000 year over year due to increased strategic investments, some of which was timing And also higher employee related costs.

Speaker 1

At the adjusted net income and adjusted diluted EPS lines, We saw adjusted EPS of $0.14 that was down a third from a year earlier driven by Primarily the higher SG and A expenses. Just as a reminder, the large one off pension charge was is not included in adjusted net income But driven by other SG and A spending and higher interest expense, again, partially offset by Corp. Reduced income taxes. So now if we move to segment level financial performance, our Q1 performance of our largest segment Animal Health. Animal Health segment posted $160,000,000 of sales for the quarter.

Speaker 1

That was an increase of close to $6,000,000 or 4%. And within that sales increase, We saw as Jack pointed out, better than $3,000,000 increase or 14% Growth in Vaccine Net Sales. The increase was driven primarily by poultry product introductions in Latin America And also growth in the U. S. Swine sector, but there was some offset, a partial offset due to timing of deliveries in other international regions.

Speaker 1

In Nutritional Specialties, we saw a growth of about $1,000,000 or 3% And there it was driven by increased volumes in poultry products, primarily in the U. S. Domestic market. And finally, MFA is another increased about $1,000,000 or 1%. And that increase was driven by increased sales of processing aids used in the ethanol fermentation industry.

Speaker 1

In terms of profitability for the segment, Animal Health adjusted EBITDA was $28,500,000 up 6% from the same quarter a year earlier and a 30 basis point improvement in adjusted EBITDA margin due to the improved gross profit of the segment. Moving on to Q1 financial performance in our other business segments on Slide 6 and starting with Mineral Nutrition. Net sales were $56,000,000 down About $3,500,000 or 6% versus the same quarter last year. There was declines the sales declined due to Lower average selling prices and reduced volumes due to a drop in demand and Mineral Nutrition adjusted EBITDA Dropped even more strongly at $2,000,000 It was a 46 percent decline year on year, driven by the sales decline and, higher costs. Looking at performance products, net sales were about $15,000,000 for the quarter, down About $3,000,000 or 8%.

Speaker 1

And this was driven primarily as lower demand Corp. For ingredients used in personal care products and that reduced sales drove a decline in adjusted EBITDA of About $1,400,000 a large percentage decline on a relatively small base. And corporate expenses were up 13% driven by strategic investments and employee related costs. Turning to key capitalization related metrics. Our free cash flow for the 12 month period ending September was a positive $4,000,000 that's first time in some time that we've seen a trailing 12 month Positive free cash flow.

Speaker 1

So that's good news and reflects a lot of work and progress we're making And managing our working capital and our cash flows. And just it was comprised overall of over that 12 month period of $40,000,000 from operating activities, less $36,000,000 of capital expenditures. We ended the quarter with a gross leverage ratio of 4.4 times. That's Simple math of $484,000,000 of total debt divided by $109,000,000 of trailing adjusted EBITDA. Looking at the dividend is consistent with our history.

Speaker 1

We paid a quarterly dividend during the quarter of $0.12 a share, which is about $4,900,000 in the aggregate. And as a reminder, dollars 300,000,000 of our debt is not exposed to rising interest plus the margin adder. The remainder of our debt is subject to floating interest rates, which are now determined by The by sulfur, which is the replacement for LIBOR. We also are seeing some partial offset from higher earnings interest income earned on our short term investments. And now let's look at our updated guidance.

Speaker 1

So If we look at those boxes on the right hand side, we show you the new updated guidance. Just call out a couple of lines. Sales now expected to be between $980,000,000 and $1,000,000,000 and adjusted EBITDA 106, between 106,000,000 and 112,000,000 and you see the other numbers that are driven by Those two key metrics. The updated guidance reflects reduced expectations for the fiscal year compared with our previous guidance. We see difficult fundamentals in certain parts of our business including, international beef feedlots, the U.

Speaker 1

S. And China dairy sectors And the pace of recovery in the Mineral Nutrition and Performance Products segments, plus the cost of manufacturing disruptions And inefficiencies due to the current conflict in Israel. I would note that we expect our December quarter to be Roughly similar to or less than last year, reflecting some of the issues described above. So in closing, this is a challenging environment from various perspectives, but we remain confident in the demand for our products around the world And the longer term opportunities ahead of us. And with that, operator, if you would please open the line for questions.

Speaker 1

Thank you.

Operator

Corp. Our first question will come from the line of Balaji Prasad with Barclays. Please go ahead.

Speaker 3

Hi, good morning, everyone. This is Mikaela on for Balaji. Can you hear

Speaker 1

me? Yes.

Speaker 3

Okay, great. Just wanted to dig in a bit more around the FDA's recent notice for Carbidox and the potential implications for EmekaDox. As you mentioned, it seems you've provided a greater deal of safety data to the FDA in prior instances. So just wondering what your next steps here will look like? Thanks.

Speaker 2

Hopefully, he goes through what our next steps are. But As I've said earlier, and I think we should have said in our press release, this product has been on the market for 50 years. It's safe and an effective product. And we have sort of been bad seeing the FDA. They Don't like this product because it has some carcinogenic products in it.

Speaker 2

But by law, as long as there's no leftover Costogenic products in the meat is safe to use and we've proven that and we've seen some of that open And with tests developed by the FDA with us over these last 50 years, so there might be some mindset changes in the FDA, but this product is

Speaker 3

Great. Thanks. And just one follow-up. Can you just remind us of how REGENZA has been tracking? Thanks.

Speaker 4

I'll take that. This is Donnie. So REGENZA continues on sales out to grow nicely. It's It's not immune to the kind of slowdown we've seen in the vet channel throughout the industry. So the pace has slowed a little bit, But overall, we continue to be happy with its growth and its hitting plan.

Speaker 3

Thanks so much.

Operator

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

Speaker 5

Hey, guys. Thanks for taking the questions. And Dick, welcome back. It's been a while. I want to ask first on some of your comments regarding further outlook for fiscal year 2024.

Speaker 5

You specifically called out OUS International Beef Feed Lots. Just wondering if you could expand a little bit on what's going on there. We often hear about U. S. Beef feed lots and herd contraction and some of the pressures there, but Not as much discussion as what's happening internationally.

Speaker 5

So any color could be really helpful.

Speaker 2

I mean, the color is around our business in Latin America, where which is generally it's the higher cost of grain, Which has put pressure, and turned some of these businesses and some of the production of beef into lost businesses. So we've seen drop in volume, in fewer cows on the feedlot, which translates for us into fewer products sold. We see corn prices starting to drop. There were the 7s and now they're down into the 6s. We have the higher production of corn in the United States, so the prices should drop further and we said that business should turn around.

Speaker 2

That's basically been the driver.

Speaker 5

Okay. So it sounds like it's primarily macro driven and tied to input costs, especially feed costs, and hopefully that will be relatively quick to turn around. Is that the right interpretation?

Speaker 2

Exactly. I mean, that's what we're saying and that's what we're saying also in the dairy business.

Speaker 4

Okay, Great. That was actually going

Speaker 5

to be another one of my questions. So then if I could ask on the vaccine strength, I mean that's been a really good business for you for a while now, but You really emphasized that this quarter that vaccines especially in the LATAM was doing really well. Is that any particular product introduction. This should be called out as a broad portfolio effect. I know you guys did an acquisition a couple of years ago where you brought in Corp.

Speaker 5

Some novel vaccine technology. Is that what we're seeing the benefits of? If you could just dive into the vaccine strength, that'd be great.

Speaker 2

So it's a few products that we have developed. I mean, the novel technology that we've been using is the Tabak or the ability to tablet, tabletize a vaccine, which makes it easier to use in the field. And the combination of both those things, we're seeing growth in the market. I mean, you always remember, You also need to see the virus and we are seeing the virus in these markets. So the virus is spreading And with the virus spreading, we have a very effective product and the vaccine follows.

Speaker 5

Okay. Great. If I can squeeze in one last one. Some comments again on I think you mentioned you want to control cost or control the spend just a little bit in companion business. Could you expand on that?

Speaker 5

Is that new product development? Is that anything any promotions or sales efforts tied to REGENZA? Just kind of like where are you Pulling back a little bit in that part of the business.

Speaker 1

Yes, I'll take

Speaker 4

that Donnie again. So it deals with our pipeline. I think We have strong stage gates throughout and when a product misses a stage gate, we kind of Looking at it again, one of our products in our pipeline, dealing with one of our oral care products. We have 2 oral care products in our pipeline, 1 for dog, 1 for cats. The dog product, we've decided to slow down on our spend there because it doesn't we're only looking at the opportunity in light of the results we're getting.

Speaker 4

So We are curtailing our spend in that respect. Okay. Really helpful as always. Thanks a lot guys.

Operator

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

Speaker 6

Thanks. Good morning. Two real quick questions. Just was trying to get a little more understanding the detail about the pension settlement in I've read the 10 Q, but just trying to understand what exactly happened there?

Speaker 1

Sure. So I think first, let me say that for the corporation, this was a non cash event. In other words, We funded we put money into the pension plan years ago. So this was a transaction that happens inside the pension plan. It's something that many, many corporations have been doing.

Speaker 1

We essentially Got an insurance company agreed to irrevocably assume the liability for paying those future benefits Corp. For a group of people that are in the pension plan. And so basically The on a present value basis, the insurance company took over, the precise number is there, but it was 20 $4,000,000 The insurance company took over a $24,000,000 present value of a liability and The pension plan took $24,000,000 of its assets and paid the insurance company to take over that liability. So, and then from there on, you get into some accounting recognition rules where We had to recognize this $10,000,000 charge, but again, a non cash item To the corporation, to fibro.

Speaker 6

Okay. So That's still off the books as far as the insurance company has that obligation. There's no counterparty risk

Speaker 1

No, there's no counter party risk and the insurance company we were very careful to only Consider transferring this liability to very highly rated insurance companies. So this is, I forget how the rating system works, but this is A very highly rated, very financially stable insurance company who has irrevocably assumed The obligation to pay these benefits over time in the future.

Speaker 6

Okay. Thanks. And then just one detail On the follow-up, of that of the gross debt, how much is characterized as first lien?

Speaker 1

Fundamentally all of it. It's with the exception of a small, I think it's around $11,000,000 Every the remainder of the gross debt is all within one credit facility. It's broken into various pieces. There's a revolver piece and a term loan piece, but it's all It's all supported by the same collateral package.

Speaker 6

Okay. Thank you so much.

Operator

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

Speaker 7

Hi, thank you. This is Linda Bolduc on for Erin Wright. So we have two questions. Can you speak to the dynamics you're seeing across the core MAS business and how are you thinking about the dynamics for the balance of this year?

Speaker 2

Can you repeat the first question?

Speaker 7

Yes. Can you please speak to the dynamic business and how are you thinking about that dynamics for the balance of the year thereon.

Speaker 1

Sorry, you cut out on that. Your question is something about the dynamics And what was the rest of the question?

Speaker 7

And how you're thinking about dynamics for the balance of this year?

Speaker 2

So the MFA business, which translates to mean medically Feed additives is a very, very big category. In other words, any product I would say worldwide is a $3,000,000,000 to $4,000,000,000 business and Corp. It's shared by a few producers and a few generic producers and it's a very strong business. It's the most efficient way to get products into the animal, whether it's a chicken, a pig or a cow. Corp.

Speaker 2

And we've seen depending on disease pressures, We see that to be always a steady business and we see that growing in line with what we've always talked about population and economic growth. That's been our history with this product and that's how we see it going forward.

Speaker 7

Thank you. That's helpful. And one quick follow-up. On Performance Products. Can you remind us of any key drivers there and your overall commitment to that business?

Speaker 1

Our key products are there's a couple of smaller segments within or kind of businesses within that segment. One of the important categories is We represent and market ingredients for personal care products. So Importantly, some ingredients for, that we sell the toothpaste manufacturers, ingredients that, go into shampoos, other products like that. And then our the second piece of that business is copper based products, where that's a that's a legacy business that Phibro has had for a long time. We have said, that the business is opportunistic.

Speaker 1

It's not core. It's a relatively small part of the company. It's cash flow positive. It's It's not something that is terribly distracting. So, Up until this point, we've retained the business.

Speaker 7

Thank you.

Operator

With that, I'll hand the call back to Dick Johnson for any closing remarks.

Speaker 1

Well, it's nice to be back on the phone with folks and enjoy the Corp. Q and A this morning. We thank you for your time and your interest in Phibro. And we'll talk to you again on our next earnings call. So Everybody have a nice day and hope you're doing well.

Speaker 1

Take care. Bye now.

Operator

That will conclude today's call and we thank you all for joining. You may now disconnect.

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Phibro Animal Health Q1 2024
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