Q1 2022 Phibro Animal Health Corp Earnings Call
Okay. Thank you Sean tell 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 Finito and I am the Chief Financial Officer of the fiber Animal Health Corporation I am joined on today's call by Jack Manheim fibrous chair.
<unk>, President and Chief Executive Officer, and Daniel Ben Haim Director and Executive Vice President of corporate strategy.
On today's call, we will cover financial performance for our fiscal our first fiscal quarter as well as revised financial guidance for our fiscal year ending June 30th 2022 at.
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 PHC Dot com also on the investors section of our web site 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.
Ah 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 how.
Our remarks include references to certain financial measures, which were not prepared in accordance with generally accepted accounting principles or use gap.
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 us GAAP measures are included in the financial tables that accompany the earnings press release.
We present, our results on a gap basis and on and adjusted basis. Our adjusted results exclude acquisition related items unusual non operational or non-recurring items, including stock based compensation and restructuring costs other.
Other income and expenses of separately reported in the consolidated statements of operations, including foreign currency gains and losses, 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 Ben Haim to share. His opening remarks, which will include this perspective on Fibrose first quarter financial performance and revised financial guidance for our fiscal year 2022, Jack.
Thank you Jamie and good morning, everyone let.
Let me start by saying that we are most encouraged by the 10% growth in both at consolidated net sales.
As well as in our animal health segment.
Growth in the animal whole segment was driven by 6% growth in the in my face and other.
And even strong growth in crucial specialties in 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 a sales growth our adjusted EBITDA reflected decline of 8%.
Our SG&A costs were up because as discussed in our last call, we're committed to increasingly incremental investment strategic initiatives to fuel future growth.
We're also driven by an increase in compensation related costs, including travel I have to say, it's good to see a sales teams get getting back outdated visited customers intend conferences face to face, but with fiber and other companies are really feeling the pressure is on gross margin.
Before I speak what their pressure on gross margin I was also very pleased to see that Scott a return on one of our key strategic investments.
The vaccine facility in Sligo, Ireland.
As I said earlier that Haynes sales grew 25% of the first quarter part of what drove this impressive growth is the fact that we recorded our first sales and slide up.
A very important to much anticipated milestone that we reach ahead of schedule.
I'll look forward to the incremental sales and other opportunities this new vaccine manufacturing facility presents to our company.
Most of the pleased to report that rock 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 labour 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 on that last year.
While we raise prices of select products and realized increase volumes. These increase in did not fully compensate for the higher cost of freight labor materials and unfavorable currency movements.
Combine these items more than offset improvements in volume and price and we do switch first quarter marches.
Subject to normal competitive conditions, we will continue taking steps to address pricing to reflect changes in costs and pass through incremental freight costs in the form of a surcharge.
The benefit of which would be realized primary primarily in the second half of the current fiscal year.
Because of these mock dynamics and the actions, we've taken and will continue to take.
Advising our financial guidance, we are raising full year net sales guidance from a range of 840 $870 million to arrange a $860 million to $890 million.
However, we are maintaining our previous issues adjusted EBITDA guidance of $110 $14 million.
A revised financial guidance reflects that we will continue to focus on what we can control and that we are committed to take any action needed to maintain the company's profitability.
Well, let's keep in mind, the COVID-19 barriers remain a risk vaccine and booster availability administration berries and the virus continues to have an adverse impact on the economy. So many of the countries, where we sell our products as the economic impact rarities the strength of the respective currencies opposite the U S dollars also varies.
In addition to adding pressure to gross margin. This variability impacts comparisons of actual results a prior period are actual results versus our projections in our projections going forward.
As many of you know I have been in this business for a few years with some dynamics occurring in the marketplace. Our 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 was seen fluctuations in the value of foreign currencies relative U S. Dollar yeah hearing those economies are recovering the economic effects of the COVID-19 pandemic has been <unk>.
Pickles to predict and continue to resist.
Overall, our first quarter financial performance was aligned with our internal expectations and I am 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 Sligo.
We have focus on what we can control and committed to take any action 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 discussing more detail, how we plan to improve margins going forward Damien.
I will start with consolidated financial performance on Slide four then cover segment level performance key balance sheet metrics and conclude with a review of our revised financial guidance for the full fiscal year 2022.
And as Jack mentioned, I will provide a bit more detail related to the animal health adjusted EBIT margin this quarter and how we're managing and plan to continue managing the evolving market dynamics.
Consolidated net sales for the quarter ended September 30th 2021, or $214.7 million, reflecting a 10% increase over the same quarter. One year ago. This increase was driven by improvements in each of our three business segments and our four regions.
Gap based net income and diluted EPS declined 47% versus the same quarter a year ago. The decline was driven by the increased cost the Jack spoke to earlier and an increase in selling general and administrative expenses, which was related to our incremental investments and strategic initiatives and increased travel related costs, but the primary driver of the decline in the gap based <unk>.
Metrics as a five $8 million unfavorable change in foreign currency gains and losses, which is reported below operating income and driven mostly by the effect of translating intercompany balances to the U S. Dollar for reporting purposes at the end of our reporting period.
After making our standard adjustments to GAAP results, including acquisition related items foreign currency movements and one off first quarter adjusted EBITDA adjusted net income and adjusted diluted EPS were down 8%, 6% and 6% respectively. These declines were driven by declines in animal half gross profit and an increase in cell.
General and administrative costs offset partially by strong performance in our mineral nutrition and performance product segments.
Moving this segment level of financial performance on slide five I'll start with the first quarter financial performance for our largest segment animal health, which includes three product lines, namely Msas and other nutritional specialties and vaccines.
Net sales for our animal health segment increased 10% versus the same quarter prior year within the animal Health segment, we reported a 6% increase in mfa's another versus the same quarter. Prior year. This was driven by stronger international demand, primarily for poultry and cattle products and the Latin American and South Eastern Asia regions, partially.
Offset by timing of certain domestic and other international customer orders 10.
10% growth of nutritional specialties, which was driven by strong international growth and dairy products and lastly, a 25% improvement in vaccine net sales driven by growth across all major markets, primarily stronger demand in eastern Europe and India.
In terms of profitability animal health adjusted EBITDA was 27 $6 million a decline of 8% driven by lower gross profits and increases in SG&A costs, reflecting the challenges that Jack spoke about earlier on the call.
That said I wanted to share how we're looking at top and bottom line first quarter's performance of our animal health segment. Please.
Please see the schedule on slide six for a reconciliation of animal health fiscal year 2021, first quarter sales and adjusted EBITDA performance versus this year's first quarter performance.
In simple terms net sales are up while adjusted EBITDA and adjusted EBIT margin or down note because we do not report gross margin by business segment I'm using adjusted EBITDA margin here as a proxy for the gross margin pressure that Jack mentioned and as you can see the animal health segment adjusted EBITDA margin decreased 380 basis points from 23, 4%.
To 19.6%.
And the first quarter to three product lines with an animal health each posted incremental net sales, which combines totaled $12.6 million msas. Another contributed five 6 million nutritional specialties contributed to 8 million wildlife vaccines contributed for $2 million.
This $12.6 million of incremental sales drove incremental animal health adjusted EBITDA of five 3 million to 7 million in $2.6 million were attributable to price and volume respectively.
The $5.3 million of incremental adjusted EBITDA on the 12 6 million of incremental net sales equates to a 42% gross margin, which is roughly in line with what we would expect.
However, six $7 million of incremental costs of goods inclusive of labor materials, and freight coupled with unfavorable currency movements of $1.6 million in incremental selling general and administrative expenses of one $1 million driven by those investments and market expansion initiatives in sales and marketing related travel costs combined.
More than offset the improvements in volume and price on a net basis, both adjusted EBITDA margins declined relative to the same quarter in the prior year.
And although not called out separately on this reconciliation, there's a bit of product and geographical mix impact embedded in each of these reconciling items.
Low or non-GAAP adjusted results exclude the foreign currency gains and losses, we do not typically call out the impact of currency movements on a reported gap based gross profit are operating income results. However, we wanted to share estimate of these impacts with you today as we believe it helps to provide further clarity on first quarter animal health financial performance.
Subject to normal competitive conditions, we have and will continue to take steps to adjust pricing to reflect the changes we're seeing in cost and pass through incremental freight costs in the form of a surcharge.
These tactics take time to go into effect and of course some of the improvement ends up an inventory and doesn't work its way through the P&L until the product is sold so generally speaking our assumption is that will realize the benefit. These actions primarily in the second half of this fiscal year.
Okay, hopefully that helps to better explain the first quarter financial performance of our animal health segment.
Now, let's move on the first quarter financial performance for our other business segments on slide seven.
Starting with mineral nutrition net sales for the first quarter were $54 $4 million, an increase of 6% versus the same quarter. Prior year, driven by increased average selling prices, partially offset by lower volumes.
Mineral nutrition, adjusted EBITDA was $4.5 million, an increase of 49% and reflects an improvement and adjusted EBIT margin of 240 basis points driven by increased average selling prices, partially offset by lower volumes.
The strong financial results posted by our performance product segment last fiscal year continued into the first quarter of this fiscal year.
Net sales of $19.2 million for the three months ended September 30th 2021 reflect an increase of 25% over the same quarter prior year driven by strong demand for copper based products, coupled with increased selling prices correlated with underlying raw material costs.
The increased gross profit drove $2.1 million of adjusted EBITDA for the quarter, an 8% increase versus prior year same quarter and then adjusted EBIT margin of 11, 1%, which is a 170 basis point decline from a year ago.
Lastly, corporate expenses increased 9% versus the prior year as plan do to incremental investments and strategic initiatives and higher compensation related costs.
Turning the key capitalization related metrics on slide eight free cash flow, which we define as cash flow from operating activities less capital expenditures for the 12 month period, ending September 30th 2021 was $21 $1 million or gross leverage ratio calculated by dividing total debt of 406 million.
By trailing 12 month adjusted EBITDA of $106 million was three eight times at the end of the first quarter.
In terms of liquidity, we had $234 million available as of September 30th 2021. This includes cash and short term investments of $97 million and $137 million of unused and available revolving credit now as a reminder, the accessibility of available revolving credit is subject to leverage ratio lip.
Mutations outlined in our loan agreement.
Lastly, consistent with the past several quarters, we announced a quarterly dividend of 12 per share or $4.9 million in aggregate.
Alright that wraps up our opening remarks on our first quarter financial performance. So, let's focus now and revise financial gardens guidance for our fiscal year 2022.
As Jack and I. Both mentioned previously, we're taking actions to adjust pricing and pass through certain incremental costs subject normal competitive conditions. As a result of these actions we are raising our full year net sales projections by $20 million from the initial range of 840 $870 million to the revised range of $860.
$890 million, which as revised implies a full year growth rate of approximately 3% to 7% and 1% to 6% growth rate for the remaining three quarters of our fiscal year 2022. These projections assume growth for each of our three business segments, but driven mostly by animal health specifically are nutritional specialty in vaccine product lie.
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We are maintaining adjusted EBITDA guidance in the range of $110 million to $114 million. This implies a full year growth rate of 2% to 6% in a 5% to 9% growth rate for the remaining three quarters of our fiscal year 2022.
We are still planning spend a year over year incremental $10 million on investments in strategic initiatives relating to a companion animal development pipeline the facility in Sligo, Ireland, where work continues despite recording our first sale from the facility of this quarter African swine fever vaccine development activities and the cost of ongoing product registrations were more.
Maintaining our adjusted net income injections in the range of 57 million to $53.3 million in projected adduced adjusted diluted earnings per share in the range of one dollar and 25 cents.
The $1.32 a.
A revised guidance reflects the projected adjusted EBIT margin of 12, 8%, which is comparable to the 12.9% we realized in the prior fiscal year.
Lastly, on a gap and adjusted basis or revised guidance assumes the return to a normalised effective tax rate ranging from $29 and 31% consistent with guidance provided previously.
To reiterate what Jack said, 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.
That concludes our opening remarks Chantelle could you. Please open the lines for questions.
At this time I would like to remind everyone in order to ask a question press star at the number one on your telephone keypad will pause for just a moment to compile the Q&A roster.
Alright first question comes from Aaron right with Morgan Stanley.
Your line is open.
Great. Thanks for taking my question is.
Select categories are you seeing some of the supply chain headwind and pay cash.
And is this across the board or across specific Subsegments and then are you seeing competitors implement surcharges are associated price increases as well.
So.
Very broad question.
Erin, but it's a great question.
Obviously, we're hearing everyone's reading in the papers.
Freight rates.
Dash Ocean freight rates are up dramatically across the board and all market. So we know everyone focusing on freight from the far east of the United States and that's up dramatically. We've we've ourselves senior rates go from $4000 that contained into 18000 valves and Dan.
But.
It also it's troop ships coming from South America, and I'd say, there is just wait and balance around the world, where the containers all with abode sod.
And and also the ability of the companies to charge more.
The surcharge, we're seeing more in the U S.
And in other markets and delivery.
Of sort of finished goods from our factories for the customers and.
And that's driven by some labour shortages, that's driven by.
Increased energy costs oil diesel costs et cetera, and now we're seeing and we're able to pass on it sort of.
A normal condition in the U S to have a surcharge oftentimes fragrant now just tied tied.
[noise] tied to various increases so that that's a phenomenon here.
And again, we're hearing from everybody.
And.
A customers see it on products.
They are importing themselves so.
Is not that difficult and an ability to pass on these higher costs.
Okay, Great and then could you give us an update on the underlying demand change in performance across the MSA category are you seeing.
Pockets of course that you would call out and then Australia, the regulatory environment around that that category relatively status quo at this point. Thanks.
It's.
Some of it again remember <unk> last quarter.
Is just the recovery from Covid around the world. Some countries, obviously you actually recovered.
Almost 100% some markets, even the far east and not fully recovered that we're seeing some growth. So part of it is the continued recovery in demand as strong everywhere from protein.
And.
So I wouldn't take on one market specifically.
Okay, great. Thank you.
Okay here.
Your next question comes from Michael Princekin with Bank of America. Your line is open.
Great. Thanks for taking my question guys have a couple quick small ones first I just want to follow up on the air and brought up.
In terms of the surcharges on the price range and somebody in your competitors are doing the same are there any areas, where you're worried that it could hurt demand or and you can see customers switch to alternative and how quickly would you be able to sort of adjust and fine tune that level of surcharge or the level of price range. If you start seeing that.
Is there any communication with your customers now to sort of gauge their willingness to absorb the cost.
Office through those dynamics.
It's.
Hi, Michael.
No one wants to see price increase is no one wants them to see price increases.
As you know from many many times are talking weird in direct contact with.
All of our customers.
We the selling direct or we're removing the product and market do we use distributors. So it's not like there's something anonymous went outlets lifting something.
<unk> and don't know exactly what the results are going to invade so we're talking all the time.
And.
I believe our customers are saying the same request from across the Board addition, everyone is nothing here that mindset mentioned is unique to us.
So.
One one would resist I don't blame the customer for resisting and we'll work with customers in the ads.
Have an incident timing, sometimes we're trying to raise prices, where we have understanding that we're going to keep prices for a year over six months. So they have required.
More talk more negotiations, but overall there is a great understanding across the world that costs have gone up costs are going up.
So it's not that difficult time to raise prices.
Maybe I could just add to that come in there's two tactics right. There's one is passing through some of the costs. We use shipping as an example in the form of a surcharge. The other is a price increase I mean keep in mind microaire for months and toward fiscal year now. So we've already done some of this in the first quarter, we're doing it as we speak and it will continue I think generally speaking we're not the only ones doing this.
As Jack said, there's other price increases others are passing through frakes. So we're certainly not standing out as an outlier and from a customer's perspective, they may be more willing to take a freight surcharge. When they are price increase because of freight surcharge may be more temporary and in those instances it'll vary by customer by region by product.
But that's the way we're looking at I think using these two tactics to help improve gross margins, which is reflected in our updated guidance.
For the year.
Okay. Thanks, that's really helpful and maybe if I could have a follow up on <unk>.
China in particular in Africa fly shimmering situation there we've heard.
Some very conflicting reports and the data points can you coming up mixed in terms of the status on the recovery and the status of demand I'm sorry, if you could prevent update on what you are seeing on the ground and what your expectations are for China as a whole this year.
As you think back to where it was a couple of years ago pre ASF, how close are you to a full recovery.
So what we've done.
Since.
We have lots of registration in China, which as we said before we are re applied for and it's sort of held up in some bureaucracy is held up on the fact that China still looking to do get zero, Covid, which reads a shutdown.
Cities, our buildings and it's.
This week and it wasn't that way last week, so the rearview registration of our Virginia rising product is point.
More slowly than we had hoped but in the Meanwhile, we've shifted our business in China.
And joined nutritional business concentrating on the dairy market and there we've seen we've seen in sales growth.
So.
Again that fine answering the questions what's happening is that a big market there.
And I can add again, I think moves specific the Asia Pacific those numbers, we posted today reflected a 25% growth in sales the combination of volume and price and the volume portion of that some of the market share and we recognize that a portion of his also recovery compared to the same period prior year, but we saw 20.
5% growth, we think that sector will continue for that market region will continue to.
To post gains over the remainder of the year and we're seeing increases in all regions. So the U S is up 6% Latin American Canada is up 13% and the EU and Mina is up 15%. So we're seeing increases across all region across all product lines and Thats assumed in our guidance going forward.
Right that's real helpful. Thanks, Jack payment.
Again, if you would like to ask a question Press Star then the number one on your telephone keypad. Your next question comes from David Westenburg with Guggenheim Securities. Your line is open.
Hi, Thanks for taking my question.
Only two people at a b and I still I still get all my answered questions are they still got all my questions, but I'll try to ask things are slightly different and here I am so first in kind of in regards to the pricing increases can you cut and maybe give us a sense of the price increases are the magnitude of the price increases relative.
To the normal year. So it's a normal year is 1% to 2% is the price increase is going to be 3% to 4% or is it going to be some more in the magnitude and kind of higher than that.
So David we don't typically we're not accompany that this raises prices across the board on the same day every year. So our price adjustments that we referred to and what we've done in the past or more market specific and they're based on competitive market conditions.
Nine.
I'd, rather not comment on whether they're single digits or double digits again things will vary across products across countries.
Can I, maybe then I mean, you are mentioning that the industry as a whole is kind of Ah raising prices. So I'm I don't know maybe maybe you just don't have that number or a sense on that number by it.
Is there.
Kind of an industry hole.
Industry aggregate price increase that is a.
A certain percentage magnitude higher than normal.
I'm just trying to get a sense of the exact same question that everyone else's.
Getting at which is.
How much different of what you're doing is different than what everyone else is doing.
Yeah.
We are in a competitive business everyone.
Figured out what they need from themselves and goes to the market and the market adjusts with Katzir investment accepted.
Dynamics of complication.
I think just to reiterate re area, where it said before everyone is seeing cost increases across the board.
And everyone is going to do with a need to do what they have to do what they can achieve to get their prices up.
Gotcha, and maybe I'll just do the last question on the companion animal business.
Looking out.
510 year for years from now I mean do you see this as a definitive seconds to Walter to the fiber animal how story or is this just kind of.
Thank you have good products and.
You can tell one off but the heart of a fibro is in is a.
Livestock company.
Hey, David It's Donnie.
So I think what we've talked about in the past is not necessarily a second like to a stool by the fourth leg the stool within our animal Health Division.
Division or segment. So you look at MSA and others, which is the largest we have nutritional specialties in vaccines.
Dissipate that.
Nutritional, especially the vaccines is probably a good proxy for where we'd like to see.
The companion animal segment within the time period that you mentioned.
Okay.
We said in our original guidance Davis resents with sales with double in fiscal year 2002 of our fiscal year 21, and that same assumption is in guidance that revised guidance that we gave today.
Thank you guys.
There are no further questions at this time, Damien and turn the call back over to you.
Alright, Thank you Sean tell and thank you everybody on today's call for your time attention questions and interest in fiber animal Health Corporation, hopefully, we were able to provide the clarity needed, but as always feel free to reach out to us via the investors section of our website should you have any further questions have a great rest of your day and please continue to stay safe. Thank you.
This concludes today's conference call you may now disconnect.
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