Q3 2022 Phibro Animal Health Corp Earnings Call
Good morning, My name is shantou and I'll be your conference operator today at this time I would like to welcome everyone to the fiber of Animal Health Corporation third quarter 2022 conference call.
As a reminder, today's conference call is being recorded all lines been placed on mute to prevent any background noise after Easter.
These remarks there'll be a question and answer session if you'd like to ask a question. During this time good press star followed by the number one on your telephone keypad.
If you would like to withdraw your question. Please press star one again thank you.
Daniel video Chief Financial Officer, you May begin your conference.
Thank you Chantelle and good morning, and welcome to the fiber of Animal Health Corporation earnings call for our fiscal third quarter ended March 31, 2022. My name is Damien <unk> and I'm, the Chief Financial Officer of Phibro Animal Health Corporation.
I'm joined on today's call by Jack <unk>, Chairman, President and Chief Executive Officer, and Daniel <unk> Director and Executive Vice President of corporate strategy.
Today, we will cover financial performance for our third quarter as well as revised financial guidance for our fiscal year ending June 32022 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.
<unk> Dot Com also on the Investor section of our website you will find copies of the earnings press release, the third quarter Form 10-Q filed with the SEC yesterday as well as the transcripts on slides discussed and presented on this call.
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 rec.
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 presented our results on a GAAP basis and on an adjusted basis. Our adjusted results exclude acquisition related items unusual nonoperational or nonrecurring items, including stock based compensation and restructuring costs. Other income and expense are 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 nonrecurring income tax items.
Now, let me introduce our chairman President and Chief Executive Officer, Jack that high him to share. His opening remarks, which will include his perspective on <unk> third quarter financial performance and revised financial guidance for our fiscal year 2022.
Jack.
Thank you Damian and good morning, everyone.
Year to date sales reflect year over year growth of 12%.
Given by double digit sales growth across all segments.
Consolidated sales growth was driven by a 10% improvement in our client animal health segment.
We also posted sales growth was 16% and 12% in our mineral nutrition and performance product segments, respectively.
Sales in these two segments correlate with the underlying cost of materials, such as copper, we're seeing the benefits of higher prices on our top line.
Third quarter sales grew 13% over the same quarter, one year ago, driven by growth across all segments as well.
During the quarter. We also acquired business that provides products and services safely to the sugar based ethanol industry in Brazil, we see this acquisition experience to replicate the success. We have had in the U S industry is providing products and services for both the production of ethanol and co products, many of which are consumed by livestock.
Pro forma information, giving effect to the acquisition is not provided because the results are not material to the consolidated financial statements, but the acquisition of the board as part of our animal health MFA and other product category.
While our business is strong macroeconomic headwinds persist the Russian commonly with Ukraine, and lingering impact of the COVID-19 in some markets where we compete.
The Asia Pacific are driving higher than anticipated inflation. It could result in broad economic impact and security concerns, which could adversely affect our business.
Since we began our company employees and are providing support to Ukraine in the form of monetary donations free product and humanitarian services, we sell product.
Indirectly to a European distributor of Russia. These sales represent less than 1% of our annual consolidated net sales.
Most of our industry and our limited time for the Russian market is to continue providing medicines and vaccines and on the ground related regulatory and technical support to help existing constellation combating disease challenges in the production of fluid animals on their farms.
We have no production or direct distribution operations and no planned investments in Russia.
On a year to year basis net sales in our Europe Middle East and African region represented 13% of consolidated net sale.
Obviously COVID-19 is still a wildcard with certain regions such as Asia Pacific on a year to year basis net sales in our Asia Pacific region.
<unk> represents 7% of consolidated net sales.
Our topline growth includes the fact that we have taken price increases to combat historic level of those waste.
These price increases and face surcharges, partially dampened the impact of the cost increases, but our third quarter bottom line also fell short of our projections due to COVID-19 related challenges with a key supplier that led to delayed sales and costs for the shipment as well as a large portion of our indirect sales to Russia due to the conflict.
The combined impact of these factors explain why we did not see the benefits of better pricing dropping to the bottom line the.
The supply issue is getting behind us, while the Russia and Russian Challenge continues.
So to drive profitable growth, we will aim to take aggressive actions to raise prices when normal competitive conditions allow.
For these reasons, we expect an improvement in our fiscal fourth quarter. We raised sales guidance. The retained sales communicated adjusted EBITDA guidance for the full year given year to date given year to date performance revised full <unk>.
Full year sales guidance of $930 million to $950 million, which is a project the year over year increase of 12% to 14%. However, given the aforementioned challenges uncertainty persists and therefore, we are maintaining our full year adjusted EBITDA guidance of $110 $14 million.
Overall, I honestly, the daily with a challenging economic environment and I'm very proud of what our team tailored five who have accomplished to help us maintain our competitiveness with that let me hand, the call over to Damian to review our financial performance in more detail before opening the lines for your questions David.
Thank you Jack I'll 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 year 2020.
Consolidated net sales for the quarter ended March 31, 2022 were $239 $6 million, reflecting a $27 9 million or 13% increase over the same quarter one year ago.
This increase was driven by improvements across all reportable business segments major product categories and geographic regions.
GAAP based net income and diluted earnings per share increased 45% and 47% respectively versus the same quarter, one year ago. The net income increase and resulting diluted earnings per share increase was driven by stronger volumes and selling prices driving higher gross profit of $10 million increase in foreign currency gains offset.
By a $3 $5 million increase in income tax expense and higher SG&A expenses.
Although we reported a foreign currency gain again this quarter about volatility in foreign currency exchange rates continues the fibril. The impact is primarily driven by the effect of translating intercompany balances to the U S dollars for reporting purposes at the end of every reporting period.
After making our standard adjustments to GAAP results, including acquisition related items foreign currency movements of one offs third quarter adjusted EBITDA was comparable to the prior year's quarter included in the calculation of adjusted EBITDA as higher gross profit in our mineral nutrition business segment offset by lower gross profits in our animal health segment and a slight increase.
And corporate expenses.
Adjusted net income and adjusted diluted earnings per share declined, 4% and 3% respectively. Due to the increases in employee related and technology related costs, partially offset by higher gross profit driven by an increase in volumes and average selling prices.
Moving to segment level financial performance on slide five I'll start with third quarter financial performance for our largest segment animal health, which includes three product lines, namely Msas and other nutritional specialties and vaccines.
The animal health segment posted for the quarter, which represents an increase of $14 $2 million.
The prior year within.
Within the animal Health segment, we reported a $5 8 million or 7% increase in MFA and other versus the same quarter prior year driven.
And by increased sales of processing AIDS used to improve production efficiency and the estimate of $4 million or 12% growth.
Nutritional specialties, driven by higher demand in dairy and microbial product as well as increased revenues of our companion animal product magenta.
And lastly, a very strong $4 million or 21% improvement in vaccine net sales driven by increased domestic and international volumes.
In terms of profitability for the segment animal health adjusted EBITDA was $29 2 million, 6% decline from the same quarter prior year in dollar terms and a 330 basis point decline in adjusted EBITDA margin due to the challenges Jack highlighted in his opening remarks, and an increase in SG&A expenses.
Moving onto third quarter financial performance for our other business segments on slide six starting with mineral nutrition net sales for the third quarter were $69 million, an increase of $10 9 million or 19% versus the same quarter prior year, driven by higher average selling prices of trace minerals correlated with the movement of the underlying raw material.
Costs.
Nutrition, adjusted EBITDA was $7 $3 million, reflecting year on year growth of $2 1 million or 40% and reflects an improvement in adjusted EBITDA margin of 160 basis points driven by increased gross profit derived from the higher average selling prices.
Looking at our performance products segment net sales of $22 million for the three months ended March 31, 2022 reflects the $2 8 million or 15% improvement over the same quarter. Prior year as a result of higher volumes of ingredients for personal care products and higher volumes and average selling prices of copper based products.
Adjusted EBITDA was $2 $9 million comparable to the prior period with a modest decline of 2% and a 230 basis point decline in terms of adjusted EBITDA margin.
Lastly, corporate adjusted EBIT declined, 3% or said differently corporate expenses increased 3% driven primarily by increased technology related costs and the planned and intentional incremental increase in strategic investments.
Turning to key capitalization related metrics on slide seven free cash flow for the 12 month period, ending March 31, 2022 was $1 million comprised of operating cash flow of $33 million less $32 million of capital expenditures.
Our gross leverage ratio calculated by dividing total debt of $417 million trailing 12 month adjusted EBITDA of $107 million was three nine times at the end of the third quarter. This was a slight increase from last quarter and driven by an increase in total debt used to fund the ethanol industry related acquisition in Brazil that we executed.
In the third quarter.
The pro forma information, giving effect to the acquisition has not been provided because the results are not material to the consolidated financial statements.
And in terms of liquidity, we had $216 million available at quarter end. This includes cash and short term investments of $93 million and $123 million of unused and available revolving credit.
$17 million decline in available revolving credit from last quarter and is again related to the aforementioned acquisition and it's important to note that the accessibility of availing revolving credit is subject to leverage ratio limitations outlines in our loan agreement.
Lastly, consistent with the past several quarters, we paid a quarterly dividend of <unk> 12 per share or $4 $9 million in aggregate.
Now that I've had the chance to share our perspective on third quarter actual financial performance I'd like to shift gears and explain how we're thinking about our fourth quarter and I'll turn for our full fiscal year ending June 32022. So please turn to slide eight.
On our February 10th earnings call, we communicated our expectation that adjusted EBIT margins would improve in the second half of our fiscal year that was not the case in Q3, but we were unaware what we were unaware of them that caused that just two weeks later, Russia invade Ukraine and the supply chain and economies that we expected to continue on the road to recovery from the impacts of the <unk>.
Pandemic were pushed right back into an environment of uncertainty specific to fibers third quarter net sales were stronger than anticipated, but COVID-19 related protocols limited available staff with one of our key suppliers issues, mostly resolved, but the disruption did lead to some delayed sales and cost of your shipments for those sales orders that we were able to fulfill.
We are also limiting indirect sales to Russia to existing customers of animal health products, only which translated into some lost sales in the third quarter and going forward.
The impact of these factors in a bit of unfavorable noise relating to the timing of shipments and product mix.
Claims why we did not see the benefits of better pricing dropping to the bottom line as projected.
Given our year to date financial performance, coupled with historic levels of inflation and persistent macroeconomic headwinds, we raised financial guidance for net sales with no change to adjusted EBITDA guidance.
The revised financial guidance assumes price increases subject to normal competitive conditions have been and will continue to go into effect, while freight surcharges where applicable.
And we will continue to be applied.
In summary, our revised fiscal year 2022 guidance is as follows net sales of $930 to $950 million, which is an increase from the $890 to $920 million last communicated.
Adjusted EBITDA $110 million to $114 million as David previously no change there.
Adjusted net income of 52, 8% to $56 $4 million adjusted diluted EPS of $1 30 to $1 39 per share and an adjusted effective tax rate of 26% to 27% all of which are unchanged and therefore consistent with what we communicated.
These full year projections on our existing base business imply a fourth quarter projected adjusted EBITDA margin of about 12% to 14%, which would be an improvement over third quarter and year to date actual adjusted EBIT margins of 11, 7% to 11, 6% respectively.
In summary, we're confident and encouraged by the demand for our products reflected in the third quarter and year to date topline growth and although our price increases are somewhat lagged the cost increases we're facing with materials and distribution. We are also confident in our ability to continue raising prices where competitive conditions allow.
Before we open the line for questions I wanted to highlight that we plan to publish our inaugural economic social and governance or ESG report shortly on that day, we will issue a press release, which will provide a link to the publication on our website.
This report is the output of a collaborative effort involving our team members around the world and we are excited to officially be starting our ESG journey and to share our story with you.
That concludes our opening remarks hotel could you. Please open the lines for questions.
At this time I would like to remind everyone.
A question Press Star one we'll pause for just a moment to compile the Q&A roster.
Again, if you would like to ask a question press star one.
First question comes from Michael Lewis.
Think of America. Your line is open.
Hi, This is wolf chanoff on for Mike. Thanks for taking the questions I saw that you've noted that sales of insurance that continue to grow in the quarter can you give us a bit more color around how things have trended maybe a high level outlook for the balance of the year.
So sales for our companion animal product rejections have been very.
Very strong as we have said I think on earlier calls we expected sales in fiscal year 'twenty two to double over fiscal year 'twenty, one our guidance.
Reflects that that will be the case and we'll get into guidance for fiscal year 'twenty three on our call later in the summer, but we would expect that trend to continue next year as well.
Great. Thank you.
Turning to a bit more of a macro topic can you talk to the effects that you are seeing it throughout the U S. On your beef and dairy franchises, how should we think about the implications of more cattle on feed lots for the sales of cabinet space in the coming year is there any sense from customers that you may have.
Longer term impact on U S herd sizes or should we be thinking about this as kind of a temporary headwind.
Thanks for the question as we've stated in the past.
Sales to the U S beat the industry sort of limited to the dairy industry.
So we see the effects of the drought in the U S and not directly affecting us there might be some indirect effects.
Sales to the beef industry in Brazil, and in Mexico, and other margin pain in other markets, where we participate in.
But what youre, leading is happening with the drought is affecting its moving more cattle feedlot and the level of Florida is much higher than it has been in the past.
Thank you very much.
There are no further questions at this time I will turn the call back over to Daniel <unk> for closing remarks.
Okay. Thank you Chantelle and thank you everyone for listening in on today's call. We appreciate your time attention and questions and interest in fiber growing animal Health Corp have a great rest of your day and let's all hope for a peaceful resolution to the conflict in Ukraine very soon thank you.
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