Q1 2023 Phibro Animal Health Corp Earnings Call
Yeah.
[music].
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 Fibro Animal Health Corporation first quarter 2023 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question.
And the answer session. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question Press Star One again I would now like to turn the conference over to Damien <unk> Chief Financial Officer. Please go ahead.
Thank you Regina good morning, and welcome to the <unk> Animal Health Corporation earnings call for our fiscal first quarter ended September 32022.
My name is Damian.
Chief Financial Officer of fiber Animal Health Corporation.
Joining me on today's call by Jack <unk>, Chairman, President and Chief Executive Officer, and Daniel Manheim, Director and Executive Vice President of corporate strategy today.
Today, we will cover our financial performance for our first quarter and provide an update on financial guidance for our fiscal year ending June 32023 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 at <unk> Dot Com also on the investors section of our website 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.
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.
Reconciliations of these non-GAAP financial measures to the most directly comparable U S. GAAP measures are included in the financial tables that accompany the earnings press release.
We present, our results on a GAAP basis and on an adjusted basis. Our adjusted results exclude acquisition related items unusual nonoperational or nonrecurring items, including stock based compensation and restructuring costs. Other income expense is 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 Mannheim to share. His opening remarks, which will include his perspective on <unk> first quarter financial performance and guidance for our fiscal year 2023.
Thank you David and good morning, everyone.
Our first quarter net sales reflect year over year growth of 8% driven by 10% sales growth in both our animal health and mineral nutrition segments.
Strong growth in our largest regions I'd say Latin America and Canada.
Our business is strong, but macroeconomic and operational challenges persist supply chain disruptions are less common but still occur.
As we previously discussed we have experienced COVID-19 related labor and logistical challenges with a key supplier, which is tentative led to delayed sales and costly.
We will successfully resolve these talented before quarter end, although not before they had an unfavorable impact on the adjusted EBITDA contributed by our animal health segment.
In addition sustained in places keeping on input cost time, which presents itself in our financial results is lower margins and higher inventory carrying values to mitigate the risks. These challenges present, we will continue with AC prices subject to normal competitive conditions, managing discretionary spending and carry inventory required to support sales growth.
We are overall bullish on our business and our ability to grow sales with both our current portfolio and the pipeline we are developing.
Looking beyond these challenges we are anticipating further benefits from our strategic investments.
The vaccine antigen, especially the bottomline fuel current growth without vaccines, we expect new registrations, which will open new markets for our products and in the second half of our fiscal year expected now that attaches vaccine facility online in Brazil, similar to our facility we have today in Omaha, Nebraska.
With that nutritional specialty products, we adjust to seek approval in Brazil, and the effects of some of the products. We have historically produced only last week plant in Florida, which allows us to leverage our production capabilities more fully at both locations.
Lastly, with companion animals, we've licensed in a paid product for dogs.
In development, while our companion animal projects continued to progress as planned at this point with five accurately named opportunities in the pipeline. We reached our goal of having a meaningful portfolio of companion animal development projects.
Finally, we are reiterating our full year 2023 net sales guidance.
<unk> hundred $62 billion with adjusted EBITDA guidance of $113 million to $118 million.
However, due to rising interest rates and total debt as well as unfavorable changes in tax regulations, while revising guidance for net income diluted EPS adjusted net income adjusted diluted EPS and the adjusted effective tax rate as.
As I'm sure you're aware everyone is navigating through a dynamic and complex operating environment and we're facing an economic theory that many suspect will more than likely what's important improvements. Despite these short term uncertainties. We as I said, we remain bullish on our business and our ability to drive.
Slow growth now.
Now I'll ask David to review, our financial performances in fiscal year 2020 guidance in more detail before opening the lines for questions David.
Thank you Jack and let's go to slide four.
Let's start with consolidated financial performance and then cover segment level performance capitalization metrics include a review of our revised financial guidance for the full fiscal year 2023.
Consolidated net sales for the quarter ended September 32022, or $232 $5 million, reflecting a $17 9 million or 8% increase over the same quarter. One year ago. This increase was driven by improvement in both the animal health and mineral nutrition segments offset by a slight decline in performance products.
In comparison to a very strong performance in the same quarter last year.
GAAP based net income and diluted EPS decreased 41% driven by higher SG&A expenses interest expense and foreign exchange losses, offset by favorable gross profit and lower income tax expense.
After making our standard adjustments to GAAP results, including acquisition related items foreign currency movements and one offs first quarter adjusted EBITDA was comparable to the prior year's quarter driven by higher adjusted EBITDA in both the mineral nutrition and performance products segments offset by lower animal health adjusted EBITDA and an increase in corporate expenses.
<unk> net income and adjusted diluted EPS declined, 18%, respectively, driven by higher SG&A expenses and taxes offset by higher gross profit.
Moving to the segment level financial performance on slide five I'll start with first quarter financial performance for our largest segment animal health, which includes three product lines, namely Msas and other nutritional specialties and vaccine.
The animal health segment posted $154 $9 million net sales for the quarter, which represents an increase of $13 9 million or 10% versus the same quarter. Prior year within the animal health segment, we reported a $9 million or 11% increase in MFA is another versus the same quarter prior year driven by increased sales.
The processing as used in the ethanol fermentation industry three.
$3 1 million, 8% growth in nutritional specialties, which was driven by higher demand for dairy products, and lastly, a $1 8 million or 8% improvement in vaccine sales driven by increased domestic demand.
In terms of profitability for the segment animal health adjusted EBITDA was $27 million, a 2% decline from the same quarter prior year and a 220 basis point decline in adjusted EBITDA margin due to higher SG&A expenses, partially offset by an increase in gross profit.
Moving on to first quarter financial performance for our other business segments on slide six let's start with mineral nutrition net sales for the third quarter were $59 6 million.
An increase of $5 2 million or 10% 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 mineral nutrition, adjusted EBITDA was $5 $3 million, reflecting year on year growth of <unk> 8 million or 17% and reflects on it.
Improvement in adjusted EBITDA margin of 60 basis points, driven by increased gross profit derived from the higher average selling prices.
Looking at our performance products segment net sales of $18 million for the three months ended September 32022 reflects a $1 2 million or 6% decline versus a strong first quarter in the prior year comparatively speaking this year, we realized lower demand for copper based products, but at higher prices partially offset.
Offset by higher volumes of ingredients for personal care products. Adjusted EBITDA was $2 4 million, an 11% increase and reflective of a 200 basis point improvement in adjusted EBITDA margin.
Lastly, corporate adjusted EBIT declined, 5% or set a different way and corporate expenses increased 5% year on year, driven by net changes in costs related to but not limited to employees professional fees technology and strategic investments.
Yeah.
Turning to our key capitalization related metrics on slide seven free cash flow for the 12 month period, ending September 32022 was a negative $21 million and was comprised of operating cash flow of $17 million less $38 million of capital expenditures in the first quarter, we had a significant and planned seasonal.
<unk> build which is typical and driven primarily by our mineral nutrition business based in Quincy, Illinois, where an adequate level of inventory is needed to minimize logistical issues presented when the Mississippi River freezes.
I wanted to note that the $38 million of capital expenditures excludes the $15 million purchase of property related to our performance products segment in California, We had been leasing this lab and office building, which is adjacent to our site for several years, but decided to purchase the property in Q1 when it went on the market for sale in our opinion now owning the property.
Maximizes the value of our site, both from an operational and land value perspective.
Our gross leverage ratio calculated by dividing total debt of $468 million by trailing 12 month adjusted EBITDA of $111 million was four two times at the end of the first quarter, it's worth noting that for covenant purposes, we use net leverage as defined in our credit agreement.
In terms of liquidity, we had $163 million available quarter end. This includes cash and short term investments of $86 million plus $77 million of unused and available revolving credit.
After quarter end, we executed a credit agreement amendment, which increased our unused and available revolving credit facility by $60 million subject.
Subject to the same leverage ratio limitations is contained in the original credit agreement.
We have no specific plans to access this incremental credit availability today, we believe that this was a prudent action to take given the current uncertainty in the financial markets.
Turning to dividends consistent with the past several quarters, we paid a quarterly dividend of <unk> 12 per share of $4 $9 million in aggregate.
And lastly, I wanted to highlight the $300 million of our $468 million of gross debt is not exposed to rising interest rates because in early calendar year 2020, we secured an interest rate swap at a fixed LIBOR rate of six 2% the variable interest expense paid on the remaining $160 million of total debt is sub.
Rising interest rates, although offset somewhat by interest income earned on short term investments.
I also wanted to make mention that with the amendment to the credit agreement executed after quarter end, we began the process of transferring our credit agreement and interest rate swap agreement from LIBOR to so for this for the secured overnight financing rate as I'm sure. Many of you are aware LIBOR settings on U S debt facilities are scheduled to cease at the end of June .
2023.
To summarize our goal is to end our fiscal year with less debt and improved gross and net leverage ratios in comparisons to what we reported at the end of our first quarter.
Now, let's turn to slide eight which lays out the revisions we made to our guidance for fiscal year ending June 32023.
As Jack mentioned earlier, we are reiterating guidance for net sales of $960 million to $1 billion and adjusted EBITDA guidance of $113 million to $118 million, while revising guidance for net income diluted EPS adjusted net income adjusted diluted EPS and our adjusted effective tax rate.
The adjustments reflect increased interest expense net due to higher interest rates and debt outstanding and the projected impact of recently released final tax regulations that eliminate credit ability of the Brazil income tax beginning with our current fiscal year, which in turn will increase our U S federal guilty tax liability.
The financials. We are revising are as follows net income lowering from a range of 45% to $49 million to a range of $39 $43 million.
Diluted EPS lowering from a range of $1 11 to $1 21.
To a range of 96 to $1 <unk>.
Adjusted net income lowering from a range of $52 million to $56 million to a range of $49 million to $53 million.
Adjusted diluted EPS lowering from a range of $1 28 to $1 38.
To a range of $1 21 to $1.31 and lastly, given the changes in tax regulations, we are raising our fiscal year 2023.
Adjusted effective tax rate from 30% to 33%.
Guidance for GAAP measures assumes actual foreign exchange losses for the quarter ending September 32022, and the company's projected foreign exchange rates for the nine months ending June 32023.
In closing this was a challenging environment from both an operating and an economic perspective, we are very confident in the demand for our products around the world and we look forward to seeing some of the other opportunities that Jack highlighted in his opening remarks coming to fruition in this fiscal year.
With that Regina could you. Please open the lines for questions.
Tom I would like to remind everyone in order to ask a question simply press star followed by the number one on your telephone keypad. Our first question will come from the line of Erin Wright with Morgan Stanley . Please go ahead.
Great. Thanks.
Thanks for taking the questions I would like to know what's embedded in your in your fiscal 'twenty three guidance now as it relates to price.
And your ability to take price and in the coming quarter. Then is how are you thinking about that dynamic. Thanks.
Okay.
Okay.
Okay.
I'll start and then hand, it over to Jack So as I mentioned, we reiterated our guidance for sales.
We continue to take pricing actions and markets, when and where we can as competitive conditions allow we started that process last fall, but at the same time last year and this will continue this year and we'll continue to do that because we are seeing.
Input costs, which is reflected in our tighter margins.
And higher inventory carrying values.
And not much to add to that.
We are in a competitive environment around the world.
But there are opportunities because everyone else is facing inflationary costs as well. So we will we haven't.
And there's no set number but as Damian said, we will opt to opportunistically raise prices, where we can.
Okay got it and then could you just give us a general update on fundamentals across your key lifestyle categories, including dairy ruminants, <unk> swine poultry and Aqua.
How those are trending what you're yes.
Most optimistic about over in the coming quarters in terms of fundamental demand trends.
Areas, where where we'll kind of keep an eye on.
Overall, the animal protein business, notwithstanding growing recession is doing well.
And the markets we're in.
We are seeing strong demand as reflected in our sales.
Sort of across the board.
And that win.
Point out any single segment. The segment now I'd say that everyone knows is going sort of worse as U S cattle business, which is part of the business when an accident but.
Kind of a business in Brazil is doing quite well in Fcs.
Growing so I wouldn't point to any one segment, but again overall.
As we've often said.
For a long time.
People tend to buy the last thing you gave up and that's sort of reflected in our business.
Got it thank you so much.
Our next question will come from the line of Michael Riskin with Bank of America. Please go ahead.
Hi, This is wolf on for Mike. Thanks for taking the questions I'm wondering if you could give a bit more color on how sales trended in the context of your target of doubling in sales year over year, we're hearing a lot from other others in our animal health coverage, that's having pretty severe labor shortages and some staffing challenges. So I'm just wondering if you can talk to you.
Spirits and launching a new product for the vet channel against that backdrop.
I'll take it as Johnny good morning.
So as you mentioned is the guidance, we gave was doubled year over year.
In Q1, we were from a sales perspective, a little bit sort of that we were high built very high double digits.
Not enough that makes us think we look at our full year goal.
I'd say just anecdotally, we did see a little bit of a slowdown relative to the pace that we were going on so which very well maybe reflected we obviously don't have the same level of exposure at some of the competitors that you mentioned.
Talked about the vet challenges so.
Still obviously strong high double digit growth, perhaps sequentially, a little bit of a slowdown quarter over quarter.
Got it. Thank you and then one slightly more technical one can you give us a little more color on Brazil.
Brazilian income tax law changes.
Change your flag should we be assuming 33% is it fair baseline going forward for your tax rate or are there ways that you can offset this over time.
I'll take that one so as I mentioned in the adjusted effective tax rate and our guidance increased from 30% to 33% and Thats driven on the heels of changes in actual U S. Federal tax legislation, which now disallowed the income tax that we pay on Brazilian earnings in the high tax exception category and within.
That country included in that category that translates into a higher calculation of guilty tax and our federal U S tax liability, which overall has a net impact of three percentage points on tax because we have a pretty sizeable operations in Brazil, and generate a pretty decent portion of our taxable income globally.
The Brazil market.
Well, we are looking for ways not just to decreased tax in Brazil, or the U S, but really around the world and continue to try to find opportunities where we can do so.
Much appreciate it thanks for the questions.
Again to ask a question. Please press star one on your telephone keypad. Our next question will come from the line of <unk> <unk> with Barclays. Please go ahead.
Titan regarding leasing shelf oncologic. Thanks, we will take your question actually could you add any additional color and updates on the deal with Uber niche bio. Thank you so much.
Hey, good morning, everybody again, we have nothing new to add from last quarter.
Still.
Believes that they could file their interest.
<unk> filing.
For a conditional license by the end of next calendar year.
Got it. Thank you so much and the addition could you add some color or thoughts on the livestock side.
Okay.
Sorry.
Got my style and.
On innovation.
Great.
Yes.
U S livestock business.
We don't have much. Unfortunately, we only have as much exposure to that to that business.
It's all tied into.
Less rain a lot less passion.
Higher cost with feed generated by the conflict in Europe . So overall.
It's a lot of money to put it.
I'll pass it to put into the feed lots of Alere.
<unk>.
<unk> taken these catalysts, Florida.
And which means less capital, which leaves less products being sold.
Got it that's very helpful. Thank you.
We have no further questions at this time I will turn the conference back over to Damien for any closing remarks.
Okay. Thank you Regina and thank you everyone for listening in on today's call. We appreciate your time attention and interest in support of fiber Animal Health Corporation and please have a great rest of your day and enjoy the upcoming holiday season. Thank you.
Ladies and gentlemen that will conclude today's call. We thank you all for joining you may now disconnect.
Yes.
[music].