Phibro Animal Health Q2 2024 Earnings Call Transcript

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Provided by Quartr
February 8, 2024

There are 9 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 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.

Operator

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

Speaker 1

Thank you, Regina, And welcome to the Fibro Animal Health Corporation earnings call for our fiscal Q2 ended December 31, 2023. As we said, my name is Dick Johnson. I'm the interim Chief Financial Officer of Fibro Animal Health. I'm joined today by Jack Bendheim, 5 Bro's Chairman, President and Chief Executive Officer Mike Donnie Bendheim, 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 2nd quarter and provide an update on our financial guidance for our fiscal year ending June 2024.

Speaker 1

At the conclusion of our remarks, we'll open the line for I'd like to remind you that we're providing a simultaneous webcast of this call on our website, pahc.com. And also on that 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 U. S.

Speaker 1

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 U. S. GAAP measures are included in the financial tables that accompany the earnings press release.

Speaker 1

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, which would include things like stock based compensation and in this most recent quarter, Brazil employment taxes item, also other income and expenses separately reported in the P and L including foreign currency losses and also income taxes related to any of those pretax income adjustments and any other unusual or non recurring 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. Jack?

Speaker 2

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 Q1. 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.

Speaker 2

We have launched new commercial vaccines and have the added Benefit of Renewal Ataj's facility vaccine facility in Brazil. Looking ahead, we expect 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 press sales of a new line of nutritional specialty products for poultry here in the United States.

Speaker 2

We see vaccines in nutritional specialties and companion animal 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 Fibro 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 fiber's future success and to bring value to our shareholders. I look forward to hearing your questions following Dick's review of our financials.

Speaker 2

But before I hand it back to him, I want to express My gratitude to Dick for agreeing to step in as Interim CFO. As a company, we did not miss a beat, thanks to Dick's quickly transaction. And I'm thrilled that Dick will continue to be available to the Sobeck Glenn and assist Fargo as a whole. Dick? Thanks, Chad.

Speaker 1

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 $250,000,000 And that was an increase of $5,300,000 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 refer to as selling, general and administrative expenses That included a $4,200,000 charge for a Brazil employment tax issue. And 3rd, increased interest expense driven by higher variable interest rates.

Speaker 1

Income taxes were a partial offset as they decreased $2,600,000 After making our standard adjustments to GAAP results, including the items I named earlier, overall adjusted EBITDA decreased $1,500,000 compared to the year earlier. Animal Health adjusted EBITDA improved by $2,200,000 or 6%, driven by gross profit from increased sales, but partially offset by higher operating expenses. Mineral Nutrition decreased almost $1,000,000 driven by unfavorable inventory costs and a slight decline in volumes. Performance Products decreased $1,500,000 year over year due to lower product demand and unfavorable product mix. And finally, we spent more in our corporate expenses.

Speaker 1

We spent $1,300,000 more than last year, which was driven by a planned increase in strategic investments. Adjusted net income and adjusted diluted EPS declined 2% respectively 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 have been moving to segment level financial performance. And let's first look at Animal Health.

Speaker 1

The Animal Health segment posted sales of about $173,000,000 That was an increase of over $9,000,000 or 6 percent over the prior year. And within that Animal Health segment, we saw sales Increase especially in vaccines as vaccine sales grew $7,000,000,000 a healthy 31% increase driven by product launches in poultry products introduced into Latin America, plus we saw an increase in domestic In our MFA is another category net sales grew $4,800,000 or 5%. Due to demand in various international regions and also continuing growth and demand for our processing aids used in the ethanol fermentation industry. Nutritional Specialty net sales declined in the quarter by $2,400,000 or about 6%, mostly due to reduced demand from the domestic dairy business. All of that drove Animal Health adjusted EBITDA of about $39,000,000 also a 6% increase as the higher gross profit from increased sales was partially offset by increased SG and A.

Speaker 1

Now moving to the other big business segments on Slide 6, starting with Mineral Nutrition. Net sales for the quarter were $61,000,000 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 $3,500,000 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 $15,500,000 for the 3 months reflect a $3,700,000 or 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 $1,500,000 compared to the prior year largely reflecting reduced sales and also reflecting unfavorable product mix.

Speaker 1

Corporate expenses increased $1,300,000 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 and for the trailing 12 months we now have generated positive free cash flow of $37,000,000 which is comprised of $74,000,000 from operating cash flow and then invested $37,000,000 in capital expenditures. And as a result, we ended December with cash and cash equivalents and short term investments with $92,000,000 on the balance sheet at the end of the quarter. Our gross leverage ratio was 4.4x at the end of the quarter based on $476,000,000 of total debt and $108,000,000 of trailing 12 month adjusted EBITDA. Consistent with our history, we paid a quarterly dividend of $0.12 a share or $4,900,000 in the aggregate.

Speaker 1

And as a reminder, about as a reminder, dollars 300,000,000 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 $176,000,000 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 and our guidance for the full year, We have affirmed our guidance for net sales for adjusted EBITDA and for 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 that 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.

Speaker 1

So in closing, we are optimistic as we enter the second half of our fiscal year. We're confident on our 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.

Operator

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

Speaker 3

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.

Speaker 2

Hi, good morning, Aaron. Short question, long answers. So we're seeing around the world positive trends. I mean, the underlying The 2 underlying lines have sort of come back to historic positions. One is, demand has returned.

Speaker 2

I mean, the effect of COVID, I think we're finally seeing coming to the end in terms of imbalances and inventory and cost of inventory, People sort of returning to whether it's restaurants or schools, etcetera, etcetera. So The normal buyers have returned or returning to the market. Same time, the most important ingredient in raising animals is cost of feed And we've seen a decline in both the cost of soybeans and corn, which has returned profitability pretty much Across the board. I mean, there's still some outliers, which will take some time like the dairy industry in the States. But even that the trend is in the right direction.

Speaker 2

So and that's one of the reasons they said we're positive. We're seeing good sales In all regions, increasing sales, we're seeing price increases holding. So again, it's the reason we're optimistic.

Speaker 3

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 vaccines or what drove that? And you mentioned price a second ago, Can you 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?

Speaker 3

Thanks.

Speaker 1

Yes, it's all those things, Eric. 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 with 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 and as in percentage terms to the top line growth.

Speaker 3

Okay. That's helpful. And then just if I could think one more in here, like there was a recent deal on the tape for Elanco's aquaculture business to Merck, and Mark's 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.

Speaker 2

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.

Speaker 3

Got it. Thank you.

Operator

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

Speaker 4

Hi, this is Mikaela on for Balaji. Thanks for taking our question. Just 2 for me. Can you first just remind us of how REGENZA has been tracking? And following up on the previous question, I guess, could you just talk a little bit more specifically about geographies and species that are standing out and outlook for the rest of the year?

Speaker 4

Thanks so much.

Speaker 5

Hi, it's Donnie. I'll take a REGENZA question. We actually did not call out this year specific guidance with regard to REGENZA in our annual. So it's part of Nutritional Specialties. Continues to grow nicely, double digit growth.

Speaker 5

But other than that, for competitive reasons, we don't call out more specifics.

Speaker 1

And species and geography? Species and geography,

Speaker 2

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

Speaker 3

Thanks so much.

Operator

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

Speaker 6

Hi, this is Wolf on for Mike. Thanks for taking the question. I was wondering beyond the hit to the P and L, are you seeing any changes in customer behavior related to the drop in the Argentine peso? Do you have any expectation for how the impact operations could play out based on the flat harvest history in the country?

Speaker 1

Well, the good news is Argentina has many decades of experience with Economic chaos. So those folks know how to, you know, they 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 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 it's going to be that we're good.

Speaker 1

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.

Speaker 6

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 board drags on? And has it changed at all since The Red Sea shipping has become more of an issue?

Speaker 2

So as you can tell just reading the papers, It's not the easiest time to be operating in Israel. We have In successful operating our facilities and meeting our shipping commitments, Clearly, it's been more expensive, as some of our people have been called up. But overall, we've slogged through this and hopeful that this comes to an end soon and then things will be turning to normalcy.

Speaker 6

Much appreciated. Thanks for the time

Operator

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

Speaker 7

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

Speaker 2

We don't break it out. So again, for competitive reasons, overall, the autogenous business is small Compared to the regular vaccine business, it is I wrote the name for it, it's a custom vaccine. And I don't know if you understand what happens, but maybe we've spoken in the past. Literally, we go to farms and we take blood samples, if they're not if they're basically if things are not responding well to the normal the normal vaccines, the regular vaccines And we develop a custom vaccine for that VON that will respond to the viruses they're saying, to the bacteria they're saying, We created a custom made vaccine. It's much more expensive, but it's more effective and we go back and sell it.

Speaker 2

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, they can cover half the country. So

Speaker 7

when you're talking about the poultry product introductions in Latin That's not a custom vaccine for the poultry?

Speaker 2

Correct.

Speaker 7

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

Speaker 2

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

Speaker 7

Great. Okay, perfect. And then lastly, if I can, just with Renee Glenn on as CFO. Is there kind of are you conditioning the role changing any at all from what it has been in the past?

Speaker 2

So I'm not. On the other hand, I'm sure 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, but I truly expect, Like I said, with the news that said, we're all standing on the shoulders of giants. So everyone will make their changes and all the changes in together make for a better job.

Speaker 7

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

Speaker 8

Thanks. First, really excited to be here and joining Fibro. Obviously, I have a real passion for the industry. I'm glad to join one of the key players in the industry again. And I've been really impressed with the management team so far.

Speaker 8

And it's really just 2 or 3 days in. So really no ongoing hypotheses yet, but really look forward to working with the team, Getting to understand Fibro in more detail and then looking to work with the team to really drive profitable growth moving forward. So more to come and really look forward to working with the analysts communicating with you over the next weeks months.

Speaker 7

Great. We'll save that one for next quarter or 2.

Speaker 2

Thanks, Darcy.

Speaker 7

Thank you.

Operator

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

Speaker 1

All right. Well, I'll add my 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, wish everyone well.

Speaker 1

Thank you very much for joining us today. And take care and talk to

Speaker 2

you next time. Bye now.

Operator

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

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Key Takeaways

  • Animal Health net sales rose 6% year-over-year to about $173 M, with a 31% jump in vaccine revenues driven by new product launches and the refreshed Brazil facility, lifting Animal Health adjusted EBITDA by 6%.
  • Consolidated net sales grew 2% to just under $250 M, though GAAP net income and EPS fell due to foreign exchange losses (notably the Argentine peso devaluation), a Brazil employment-tax charge, and higher interest expense; adjusted EBITDA declined by $1.5 M.
  • Mineral Nutrition segment sales dipped modestly, leading to a $0.9 M EBITDA decrease from unfavorable inventory costs, while Performance Products sales slid 19% year-over-year, cutting adjusted EBITDA by $1.5 M on lower volumes and mix shifts.
  • The company affirmed its full-year guidance for net sales, adjusted EBITDA, and adjusted EPS, expects improvement in Mineral Nutrition and Performance Products in H2, and continues investing in vaccines, nutritional specialties, and companion animal growth.
  • Trailing-12-month free cash flow was $37 M, ending the quarter with $92 M in cash and short-term investments, a gross leverage ratio of 4.4x, and a maintained quarterly dividend of $0.12 per share.
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Earnings Conference Call
Phibro Animal Health Q2 2024
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