Q4 2022 Phibro Animal Health Corp Earnings Call
Good morning, My name is Christian I'll be your conference operator today at this time I'd like to welcome everyone to the fiber of Animal Health Corporation, Q4, 2022 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. If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad.
To withdraw your question. Please press star one again.
Thank you Damian Tsuneo, Chief Financial Officer, you may begin.
Thank you, Chris and good morning, and welcome to the fiber of Animal Health Corporation earnings call for our fourth quarter and year ended June 32022, My name is Damian.
I'm, the Chief Financial Officer, and fibrosis I'm joined on today's call by Jack Mannheim fibers, Chairman, President and Chief Executive Officer, Anthony Bedtime Director and Executive Vice President corporate strategy on today's call. We will cover our financial performance for the fourth quarter and our full fiscal year ending June 32022.
And provide financial guidance for our fiscal year ending June 32023.
The conclusion of our opening remarks, we will open the lines for questions like to remind you that we are providing a simultaneous webcast of this call on our website at www Dot P. H C. Dot com also on the investors section of our website you will find copies of the earnings press release and annual report on Form 10-K filed with the SEC yesterday.
Well the transcript and slides 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.
Refer you to the non-GAAP financial information section in our earnings press release for a discussion of these measures reconciliations of these non-GAAP financial measures to the most directly comparable U S. GAAP measures are included in the financial tables that accompany the earnings press release.
Present, 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.
Income expenses separately reported in the consolidated statements of operations, including foreign currency gains and losses, net 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 time to share. His opening remarks, which will include his perspective on the fourth quarter full year financial performance and guidance for our fiscal year 2023 acquisitions. Thank you Damian.
Hello, everyone I am pleased to share that our fourth quarter and full year performance reflected top and bottomline growth on an adjusted basis versus the respective prior periods net sales for the quarter were up 16%.
Versus a year ago, our full year sales were up 13%.
What's most impressive is that each of our three business segments posted double digit year over year percentage growth, reflecting strong demand for our product portfolio and adjusted EBITDA for the quarter was up 17%, while full year adjusted EBITDA was up 3%.
Find has strong financial results, our industry faces macro economic and operational challenges. The consequences of COVID-19 is still linger, which has helped to fuel global macroeconomic headwinds leading to significant inflation for our customers. This translates into higher feed and energy and fertilizer prices.
Which in turn drives higher food prices for consumers.
And five room, this means higher raw material and labor costs, which puts pressure on our margins. Despite increasing prices. We continue to work through supply challenges the labor shortages overall, the company manage well to win another challenging year and our strong performance reflects the efforts of our loyal employees.
In response to higher input costs, we raised prices.
Backlog continues to act in other ways as well internally, we are addressing the impact of higher input costs head on by identifying production efficiencies requiring investments in capital improvements, we will continue to drive efficiencies within our basis by working collaboratively across business segments and geographic regions leveraging.
Our economies of scale where possible.
As we look ahead, we are anticipating for the year over year top and bottom line growth on an adjusted basis in fiscal 2023 with net sales projected to be in the range of $960 million to $1 billion and adjusted EBITDA projections in the range of $113 million to $118 million, reflecting 2% to 6% growth.
In both key financial mentioned.
In the face of these challenges it's important that we continue to keep our eye on the future.
In addition to our existing projects a companion animal development pipeline now includes a gene therapy opportunity targeting MVD and canine bank.
Back in June we announced this opportunity to the market highlighting a collaboration for the development of commercial commercialization with gene therapy with our partner rejuvenate buyer.
They expect a powerful conditional approval as early as calendar year 2023, we're looking forward to progressing these projects in the past with the add to our medium term outlook overall it was another challenging year, but we posted a solid fourth quarter and our full fiscal year of strong financial performance with that I will ask Dave means.
To go through our actual results and projections in more detail before opening the line for questions. Damien Okay. Thank you Jack let me start with our consolidated financial performance for the fourth quarter ended June 32022 versus the same quarter, one year ago on a consolidated basis fourth quarter net sales increased 35 million.
A 16% driven by growth in all three of our business segments, namely animal health mineral nutrition and performance products GAAP based net income and diluted EPS, both declined 56% versus the same quarter a year ago. The decreases were driven primarily by increased foreign currency losses of $8 $3 million and a five point million now.
$10 million increase in provision for income taxes, offset partially by a $3 $7 million more in operating income and point 8 million less interest expense.
After making adjustments to our GAAP results, which include acquisition related adjustments foreign currency movements and one off fourth quarter adjusted EBITDA adjusted net income and adjusted diluted EPS were up 17%, 13% and 13%, respectively, driven by higher animal health revenue and gross profit as well as stronger mineral nutrition gross.
Often partially offset by increased selling general and administrative expenses.
On slide six looking at the same financial metrics that now for the full year on a consolidated basis, our full year financial performance improved over the prior year net sales increased $109 million or 13% driven again by growth across all three business segments animal health mineral nutrition and performance products GAAP base.
Net income and diluted EPS for the full year declined 10% versus the prior year driven by increases in the provision for income taxes, and selling and general and administrative expenses offset by improved property operating profit less interest expense and foreign currency gain.
After adjusting GAAP results for one off acquisition related items and foreign currency movements, adjusted EBITDA improved 3% driven by sales and gross profit growth offset by an increase in strategic initiatives.
While adjusted net income and adjusted diluted EPS improved 4% driven by higher gross profit on higher sales offset partially by increases in SG&A costs, driven by incremental strategic investments.
Turning to business segment performance on slide seven starting with the fourth quarter financial performance of our largest segment animal health, which is comprised of the msas and other nutritional specialties and vaccine product categories net sales increased $20 million or 13% versus the same quarter prior year the increase in our.
Health segment net sales was driven by improvements in all product categories.
First a 12% increase in msas and others versus the prior quarter driven by higher average selling prices and increased sales of processing AIDS used in the ethanol fermentation industry.
Second a 15% improvement in nutritional specialties net sales driven by strong domestic demand and dairy growth in the Asia Pacific region, and strong demand for our companion animal product for gemstone and third a 19% improvement in vaccine net sales driven by strong demand across all regions in terms of profitability.
City Animal health adjusted EBITDA was $33 $5 million, an increase of $4 million were 14% over the prior year quarter, while adjusted EBITDA margin was flat the improvement was driven by the increase in revenues and resulting gross profit offset partially by an increase in selling general and administrative expenses.
Moving to slide eight which reflects full year financial performance for our animal health segment, net sales were up $61 million or 11% versus the prior year. The increase in animal health full year net sales was driven by a 10% increase in msas and other versus the prior year, primarily due to increased demand for msas, particularly in the Latin American.
Canada region, coupled with strong demand for processing AIDS us in the ethanol fermentation industry.
So 10% growth in nutritional specialties, driven by strong international and domestic demand, particularly for dairy coupled with growth in our companion animal product agenda, and lastly, a 21% increase in vaccine net sales driven by strong demand in most regions and.
In terms of profitability animal health adjusted EBITDA for the year was $124 million, which was consistent with the prior year, while the adjusted EBITDA margin declined 230 basis points of stronger sales and gross profits were offset by higher selling general and administrative expenses, reflecting the impact of higher than typical inflation in the macroeconomic headwinds.
That's great.
Moving on to fourth quarter financial performance for our other segments on slide nine let's start with mineral nutrition net sales for the fourth quarter was $69 $4 million, an increase of 22% versus the same quarter prior year, driven by higher average pricing of trace minerals.
Mineral nutrition, adjusted EBITDA was $6 $7 million, an increase of 44% driven by increased gross profit and the adjusted EBITDA margin for the quarter was nine 6% an improvement of 150 basis points versus a year ago.
Moving to our performance products segment, we finished the year strong with net sales of $19 3 million for the three months ended June 32022, reflecting an increase of 16% over the prior year same quarter, driven by strong demand and pricing for copper based products as well as strong demand for ingredients used in personal care products the increased demand drove it.
Adjusted EBITDA of $2 4 million for the quarter, a 5% improvement versus the same quarter prior year, while the adjusted EBITDA margin declined 100 basis points to 12, 3% Lastly, corporate expenses increased 17% and one $6 million versus the same quarter. Prior year, primarily driven by an increase in investments relating to the store.
TV initiatives.
Now looking at full year financial performance for the segments on slide 10.
Mineral nutrition net sales for the full year were $260 million, an increase of 18% versus the prior year driven by higher average selling prices of trace minerals mineral nutrition adjusted EBITDA was $24 million, an increase of 40% driven by increased gross profit unfavorable product mix and adjusted EBITDA margin for the quarter was <unk>.
Nine 3% an improvement of 150 basis points versus one year ago.
Turning to full fiscal year results for our performance products segment net sales was $76 million, an increase of 13% over the prior year driven by strong demand for ingredients used in personal care products and strong demand and favorable pricing of copper based products. However, adjusted EBITDA of $8 7 million represents a decline of eight.
Percent and was driven by higher raw material and production costs versus the prior year. Consequently, adjusted EBITDA margin declined 270 basis points to 11, 5%.
Lastly, corporate expenses increased $3 million or 7% versus prior year. The increase was driven primarily by an increase in investments related to strategic initiatives I'll.
Ill discuss our projections for fiscal year 2023, momentarily, but it's worth mentioning now that we intend to continue investing in the company's future. Despite the pressure that the macroeconomic environment is putting a margin of corporate expenses will increase again this coming year.
Turning to key capitalization related metrics on slide 11 on a trailing 12 month basis free cash flow was a negative $5 million as capital expenditures exceeded operating cash flow generated by the business as discussed on previous calls we have been intentionally building inventory levels to both support our top line growth, but also to better manage some.
Fly chain disruptions, however, because of the effects of inflation is more expensive to replace those inventories and their depleted us consuming cash to free up more cash we are placing even more attention on monitoring inventory levels and leveraging our economies of scale to drive more competitive freight costs of course, given these inflationary times this will be a challenge but our.
Anticipation is that free cash flow will improve going forward.
Moving on our gross leverage ratio was three nine times at June 30th is calculated by dividing total debt of $434 million by trailing 12 month, adjusted EBITDA of $111 million.
I want to note that we use net debt and adjusted EBITDA as defined by our existing loan agreement to calculate the net leverage ratio used for covenant compliance purposes.
In terms of liquidity, we had $194 million available at year end. This includes cash and short term investments of $91 million and $103 million of unused and available revolving credit the accessibility of available revolving credit is subject to leverage ratio limitations outlined in the loan agreement and lastly, <unk>.
System with the past several quarters, we announced a quarterly dividend of <unk> 12 per share or $4 $9 million.
That concludes our perspective on both fourth quarter and full year financial performance. So, let's turn our attention to the outlook for fiscal year 2023. So please turn to the financial guidance shown on slide 12.
For fiscal year, 2023, largely driven by strong demand for our products across all regions, coupled with the annualized nation of price increases taken in fiscal year 2022, we are projecting consolidated net sales in the range of 960 million to $1 billion, which reflects a year over year growth rate of approximately 2% to six.
Percent.
Underpinning these consolidated topline projections is the assumption that we can grow our largest segment animal health by 3% to 7%, which is driven by anticipated double digit percentage growth nutritional specialty products as we continue to drive the use of direct fed microbial and further increases in the sales of <unk> Permian animal product as well.
As healthy growth of our other two animal health product categories vaccine and MFA is another.
For our other business segments, namely mineral nutrition and performance products were projected flat to low single digit percentage sales growth as the sales of these segments directly correlate to the underlying causes that raw materials.
And we have seen indications that customers are managing their inventory levels to help combat the incremental cost of inflation.
Despite the pressure on margins, we are steadfast in our commitment to continue investing in the company's future. We are planning $37 million of investments in strategic initiatives and increase of $8 million over fiscal year 2022. This includes but is not limited to investments in our companion animal development pipeline African swine.
Fever continued registration of products in new markets and the ongoing build out of our newest vaccine production facility in Sligo, Ireland. We also intend to spend $39 million on capital improvements, which is an increase of 2 million over fiscal year 2022. This includes but is not limited to a significant investment in our larger production facility in Quincy, Illinois.
<unk>, which will increase manufacturing capacity and in turn lower projected per unit cost.
Banning vaccine manufacturing capacity at several locations and completing efficiency projects at our facilities in Israel.
As such with the animals nation of price increases and actions taken to manage costs. We are projecting adjusted EBITDA in the range of $113 million to $118 million, which also reflects a growth rate of 2% to 6%.
On a GAAP basis, net income and diluted earnings per share are projected to be flat or declining by up to 8% largely dependent on movement in our tax provisions, including uncertain tax positions often referred to as Gen 48 reserves as well as movement in foreign currencies.
For adjusted net income and adjusted Diluting earnings per share we are projecting a decline of 2% at the low end of the range and an improvement of 5% at the high end.
In terms of our adjusted effective tax rate, we are projecting a rate of about 30%, which is in line with our actual adjusted effective tax rate in fiscal year 2022 and 2021.
Lastly, and consistent with last years quarterly trend, we expect the seasonal driven decline in our upcoming first quarter net sales and adjusted EBITDA relative to the fourth quarter of fiscal year 2022 with quarter on quarter improvement as we progress through fiscal year 2023.
In summary, our fiscal year 2023 financial guidance is as follows net sales of approximately $960 million to 1 billion, reflecting growth of two 6% on a GAAP basis net income of approximately $45 million to $49 million and diluted earnings per share of $1 11 to $1.21.
Adjusted EBITDA of approximately $113 million to $118 million, reflecting growth of 2% to 6%.
Adjusted net income of approximately $52 million to $56 million and adjusted diluted EPS of approximately $1.28 to $1 38 them, reflecting a year over year and 2% declined on the low end of the range or 5% growth on the high end and an adjusted effective tax rate of 30%, which is comparable to the 29.
5% actual effective tax rate for fiscal years, 2022, and 'twenty one.
Overall, we had a strong fourth quarter posted net sales and adjusted EBITDA performance improvements for both the quarter and the full year and we are projecting further growth in fiscal year 2023.
That concludes our opening remarks, Chris could you. Please open the lines for questions.
Certainly as a reminder, if you'd like to ask a question. Please press Star then one on your telephone keypad. Our first question is from Mike Briskin with Bank of America. Your line is open.
Hi, Good morning. This is John came on for Mike.
I wanted to ask on the regions.
Could you give us a bit more color on how things have trended compared to your expectations.
Doubling sales and 22 in the current inflationary environment.
Could you if he said update us on what your high level outlook is for 'twenty, two and longtime that'd be great.
Hey, John this is donny.
Donnie.
Thanks for the question so last year, we just.
We guided towards doubling sales year over year, and we achieved that.
Embedded in this year's guidance is that we're looking to double sales again so.
You know I do think that we have seen a little bit of slowness at the event.
So I think other companies have reported as well.
We just had the advantage I guess of still being in early innings. So despite the fact that there might be a little bit of a macro slowdown.
The opportunity for us.
We are seeing our momentum continued to build them, we feel pretty good about that number for the year.
Great and on the African swine fever, and do you have any expectations or what are your expectations for fiscal 'twenty three.
On that in China.
Well.
As you know everything you follow after this one for you Brett.
Not been solved.
You know the Chinese have done a much better job in Biosecurity.
But the problem that exists both in China, and the far east.
And interestingly seeing it more and more in Europe .
Some of the the wild pigs.
And that had been caught with the potential of outbreaks or theyre all over the place and so far there has not been a vaccine as well. So we're continuing on developing a vaccine it's been difficult.
I think as we said before.
To get our people into China almost may.
I would say it's difficult or impossible.
Because of the Covid restrictions so it slow down.
But we continue to remain optimistic that we have.
Solutions had a problem and as we continue to develop.
Thank you I appreciate that.
Again, Thats star one to ask a question. The next question is from Erin Wright with Morgan Stanley . Your line is open.
Hi, everybody. This is Justin Wang on for Aaron Thanks for the questions.
We were wondering if you can go over it would be underlying livestock market trends across the various geographies.
Especially for the U S for the animal health business, and what Youre seeing there and I have a follow up.
Yes.
A short question, but it requires hours of answers.
And overall, what we're seeing around the world is strong livestock business.
I mean, as you know what you're reading and prices are up across the board sort of every market.
And the consumers continue to pay the prices. So we're not seeing a slowdown and that's reflected in our sales.
Again across the world across our markets we're in.
I mean, there unusual factors that you have to add to the sandwiches.
Increasing drought in the United States. So in the cattle side is an increase in Florida is less animals.
Raised on grass and avoid the feedlot.
Understanding the nature of all of our businesses the more on feedlots a better it is.
That might come to an end in six months or a year from now.
But you can tell and again, it's a global business. So what what we see reflected in the U S might be reflected in different way down in Brazil.
So as I said based on what we're seeing in ourselves in the markets. We're in business for the animal health industry continues to be good.
Okay. That's helpful. Thank you and just on the guidance here. What is your guide currently assume in terms of price realization for the year and we were wondering if you could speak a little bit more on the incremental investments that you're making.
For the year and what that entails.
Alright. Thanks for the question just so I can take that one so in terms of our guidance as I mentioned sales, 2% to 6% growth next year, it's really two parts to that continued strong demand across all segments and regions and then the annualized <unk> of fiscal year 'twenty two price increases we will see a full year of that in 2023. If you remember last year, we spoke I think.
This is the second quarter. It was the first quarter earnings call. We said that we took pricing action pricing action lagged the cost increases. So we expected most of that in the second half of fiscal year, 'twenty, two which ended up being true our margins going forward in fiscal year 'twenty three are consistent with what we realized in the actual number.
In fiscal year 'twenty two so if you think about that that implies that the price increases that we've taken and the annualized <unk> of those in fiscal year 'twenty three are keeping up with the cost increases.
In terms of the strategic investments that you mentioned.
Again, some of those will continue to be reported in the companion or in the corporate.
Business segment, the investments are theres, a pretty good spread across different types of projects I would say, it's a diverse portfolio. Most of the concentration is in our three growth drivers for fiscal year 'twenty three in the medium term, which is vaccines companion animals and nutritional specialties.
Thank you very much I appreciate that.
Yeah.
We have no further questions at this time I'll turn it over to you Mr. <unk> for any closing remarks.
Alright, Thank you, Chris and I want to repeat what Jack said to start the call, which is and thank you again to our employees for enabling <unk> to achieve such strong financial performance in fiscal year 2022.
We appreciate you taking the time today to join our call and for your continued interest in fiber of animal Health Corporation on behalf of Jack Dani the rest of the executive management team. We are excited about the opportunities in fiscal year 2023 presents and the investments that we're making in our future. We hope you enjoy these last days of summer and thanks, again and have a great rest of your day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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