Q2 2023 Phibro Animal Health Corp Earnings Call

Speaker 2: Jack Benheim, Fibre's Chairman, President, and Chief Executive Officer, and Daniel Benheim, Director and Executive Vice President of Corporate Strategy.

Speaker 3: Today we will cover financial performance for our second quarter and share our current thinking on financial guidance for the fiscal year ending June 30th, 2023. At the conclusion of our opening remarks, we will open the lines for questions.

Speaker 4: I'd like to remind you that we are providing a simultaneous webcast of this call on our website www.pahc.com Also on the investor section of our website you will find links to the earnings press release and second quarter form 10q files with the SEC yesterday as well as the transcript and slides discussed and presented on this morning's call.

Speaker 5: 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 disclosure notice marked Forward Looking Statements in our earnings press release.

Speaker 6: Our remarks include references to certain financial measures which were not prepared in accordance with generally accepted accounting principles or US GAAP. I refer you to the non-GAAP financial information section in our earnings press release for discussion of these measures.

Speaker 7: Reconciliations of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures are included in the financial tables that accompany the earnings press release.

Speaker 8: We present our results on a gap basis and on an adjusted basis. Our adjusted results exclude acquisition related items, unusual non-operational or non-recurring items, other income expense as separately reported in the consolidated statements of operations, including foreign currency gains and losses met.

Speaker 9: And lastly, income tax effects related to pre-tax adjustments and unusual or non-recurring income tax items.

Speaker 10: Now, let me introduce our chairman, President and Chief Executive Officer Jack Benheim to share his perspective on Fibros' second quarter financial performance and guidance for our fiscal year 2023. Jack? Thank you, David, and good morning, everyone. Our top line continues to grow. Second quarter net sales are $245 million. We flexed growth of Fibros.

Speaker 11: Health, we report our semifconsecutive quarter of year-over-year sales growth in each of our three major product categories.

Speaker 12: Our county basis, this translates into sales growth of more than 20% in 2022 over 2020, which relative to some industry reports puts us in the top tier of animal health companies.

Speaker 13: Our mineral nutrition business was down year over year primarily reflecting the lower value of the underlying commodity minerals such as copper that drives this business. Our mineral nutrition business is also the one area where we have exposure to the US feed light industry where we are seeing fewer cattle placements as compared to the same border last year.

Speaker 14: In terms of sales by region, we realize 12% growth in Latin America and Canada and 7% growth here in the United States, while markets in Europe , the Middle East, Africa and Asia Pacific decline due primarily to the lingering effect of COVID-19 and persistent economic challenges.

Speaker 15: Overall, we posted a strong financial performance for the first half of our fiscal year with the even stronger projected second half.

Speaker 16: I also want to share that we had a campaign animal experience to our board of directors. On Monday we announced that Alejandro Bernal, the newly appointed president and CEO of Pectex, joined our board. Alejandro is a former executive in Mars, veterinary health, and worked in senior positions at Soedit.

Speaker 17: We welcome his insights and believe there will be particularly a natural with respect to our companion animal business.

Speaker 18: which we seek to meaningfully grow over the coming years as we continue to focus on progressing up pipeline of projects in development and on growing regents.

Speaker 19: Looking beyond fibro, the global economy is showing signs of improvement, but there are still challenges.

Speaker 20: The improving trend of the consumer price index is encouraging, but of course from margins to improve, input costs will need to decline and we will need to work through higher price inventory on hand.

Speaker 21: We are focused on maintaining continuity of supply, which has resulted in us adding about one month of inventory in order to mitigate the risk of supply chain disruptions, impacting our ability to get products to our customers on time.

Speaker 22: In the months to come, as we rebuild our confidence in the supply chain, we will look to bring inventory levels down, which in turn should help to improve our operating cash flows.

Speaker 23: And we continue to focus on raising prices where market conditions allow. I remain bullish on our business and our ability to grow sales, giving us a strong demand for our current portfolio of products, and the projected demand for the pipeline of future and additional specialty, vaccine, and companion animal products we have in development.

Speaker 24: Finally, we are reiterating our full fiscal year 2023 net sales guidance of $960 million to $1 billion and adjusted EBITDA guidance of $113 million to $118 million. However, to reflect the unfavourable impact of the tax adjusted non-operational environmental remediation costs. For more information, visit www.fema.gov

Speaker 25: Charge to the PNM in the second quarter. We lowered guidance for GAP, met income in GAP, diluted EPS. They, me, will explain these charges in more detail, but I also encourage you to read our update disclosures, including in our latest form, thank you. Thank you.

Speaker 26: Overall, I am pleased with our second quarter and first half performance. A full year guidance implies an even stronger second half of Piscuit at 2023. But these projections are achievable and consistent with how our financial performance played out last fiscal year. Like you, we are hopeful that the global economy will take you to improve.

Speaker 27: But in respect of the global backdrop, I mean, bullish in a five-row in opportunities to drive growth. Now, I'll hand it over to Damon to review a second-order financial performance and fiscal year 2020 to be guided into more detail before opening lines for questions. Thank you.

Speaker 28: Thanks, Jack. Let me start with consolidated financial performance on slide 4. Then cover segment level financial performance, key capitalization metrics, and conclude with a review of our financial guidance for the full fiscal year 2023.

Speaker 29: Consolidated net sales for the quarter ended December 31st, 2022, were $244.6 million, reflecting an $11.9 million, or 5%, increase over the same quarter one year ago. This increase was driven by improvement in both the animal health and performance product segments offset by a decline in mineral neutralization.

Speaker 30: $4 million after tax charged to the P&L in the second quarter.

Speaker 31: Most but not all of these charges relate to a tentative settlement of a lawsuit filed in 2014 seeking contribution from five-o'-tech and one of our other subsidiaries, which are included in our performance product segment, and several other parties towards past and future costs associated with the investigation and remediation of a regional ground water plume affected by the Omega chemical site.

Speaker 32: which is an up-gradient of our fibrotech facility in Santa Fe Springs, California.

In January 2023, the plaintiffs in the lawsuit, the Environmental Protection Agency, and certain defendants, including FiberTech, reached a tentative settlement that would provide for a cash-out settlement with contribution protection, which would release FiberTech and its affiliates from liability.

for contamination of the groundwater plume affected by the omega chemical site with certain exceptions.

The tentative settlement would also resolve claims asserted by the EPA in August 2022 for its unrecovered past and future response costs related to the Omega Groundwater Plume, as well as claims for indemnification and contribution between FiberTech and the successor to the prior owner of the FiberTech site.

You can find further details in our second quarter form 10Q in footnote 7 commitments and contingencies under the subheading environmental and in addition to the increase in the environmental reserve related to the groundwater plume affected by the Omega chemical site We adjusted the reserve for other non-operational environmental remediation costs relating to contamination at the fiber tech site that also predated our ownership.

After adjusting gap results for one-off to non-recurring and or non-operational costs, including the environmental costs they just discussed, acquisition-related items and foreign currency movements consolidated adjusted EBITDA increased $1.8 million or 6% in comparison to the prior year's quarter.

Driven by higher adjusted EBITDA and both the animal health and performance product segments, offset by lower mineral nutrition and adjusted EBITDA, an increase in corporate expenses.

Adjusted net income and adjusted diluted EPS decreased 9% respectively driven by higher SGNA expensive and taxes offset by higher gross profit.

Moving on to slide five, segment level financial performance. I'll start with second quarter financial performance for our largest segment, Animal Health, which includes three product lines, namely NFAs and others, nutritional specialties and vaccines.

The animal health segment posted $163.8 million of net sales for the quarter, which represents an increase of 12.9 million or 9% versus the same quarter prior year.

Within the animal health segment, we reported a 5.5 million or 6% increase in MFAs and other versus the same quarter prior year Driven by increased demand for MFAs in Latin America and processing aids used in the ethanol fermentation industry.

6.5 million are very strong, 17% growth in nutritional specialties driven by higher domestic demand and selling prices for dairy products along with growth in regenza, and lastly, a point $9 million or 4% improvement in vaccine net sales driven by increased demand.

In terms of profitability for the segment, Animal Health Adjusted EBITDA was 37.1 million, 10% improvement over the same quarter prior year due to higher gross profit on higher sales and margin improvement, partially offset by an increase in SG&A.

And adjust the dbid martian where the segment improved 30 basis points to 22.6%.

Moving on to second quarter financial performance for our other business segments on slide six, let's start with mineral nutrition Net sales for the third quarter were sixty one point six million dollars two million dollars more than the prior quarter But a five million dollar or eight percent decline versus the same quarter prior year

Driven by a decrease in demand for trace minerals, a consequence of some customers lowering post-COVID inventory levels to adjust for the impact of heat and drought in the U.S. Midwest on feed intake, as well as other economic challenges, partially offset by higher average selling prices which are correlated with the movement of the underlying raw material costs.

Mineral nutrition adjusted even at a 4.4 million dollars, reflecting a decline of 1.1 million dollars or 20 percent driven by lower gross profit.

Adjusted even a margin for the segment was 7.1%, a 120 basis point decline versus the same quarter prior year.

Looking at our performance product segment, net sale of $19.2 million reflects a $4.1 million per-helfty 27% improvement driven primarily by increased demand for copper-based products and higher average selling prices for copper-based products and ingredients for personal care products.

The adjusted EBITDA was $2.3 million, 73% increase, and reflective of a 310 basis point improvement in adjusted EBITDA margin.

Lastly, corporate adjusted EBITDA declined 12% or said differently, corporate expenses increased 12% driven by increased costs related to employees and strategic investments.

Turning the key capitalization-related metrics on slide 7, free cash flow for the 12-month period ending December 31, 2022 was a negative $45 million and was comprised of trailing 12 months of negative operating cash flow of $5 million, less $40 million of capital expenditures.

It's important to note that the $40 million of capital expenditures excluded a first quarter $15 million purchase of property. Although for gap reporting, this purchases categorized as capital expenditures on the consolidated balance sheet in the state of the cash flows, it was financed with the 2022 term loan referred to in the other long term debt footnote included in our second

one month of additional inventory on hand, which is intended to mitigate the risk of supply chain disruptions, which impact the company's ability to fulfill customer orders on a time and so.

Consistent with the projections we communicated on our last call, operating cash flow for the second quarter reflected a $9 million improvement over the first quarter, although on a trailing 12 month basis free cash flow declined 24 million versus the last quarter end. This delts related to the difference between free cash flow for the quarter ending December 31st, 2020.

plus $124 million of unused and available revolving credit, subject to the same leverage ratio limitations as defined in the 2021 loan agreement.

In terms of our dividend, consistent with the past several quarters, we paid a quarterly dividend of $12 cents per share or $4.9 million in aggregate.

Turning to leverage, our gross leverage ratio of quarter-m was 4.2 times consistent with last quarter-end. This is calculated by dividing total debt of $477 million by trailing 12-month adjusted of $113 million.

It's worth noting that this is not the leverage ratio used to determine financial covenant compliance. For covenant compliance, we calculated net leverage ratio as defined in the 2021 loan agreement.

And lastly, I wanted to highlight that $300 million of our $477 million of gross debt is not exposed to current market interest rates.

We have an interest rate swap in place which has now been fully converted from live order to SOFOR, the secured overnight financing rate, at a fixed SOFOR rate of 0.61%. The variable interest expense paid on the remaining $177 million total debt is subject to rising interest rates but is partially offset by interesting income earned on short-term.

million dollars and adjusted the ebit of items of 113 to 118 million dollars.

We are reiterating guidance for adjusted net income, adjusted diluted EPS, and our adjusted effective tax. However, we are lowering guidance for gap net income and gap diluted EPS to reflect the unfavorable impact net of tax of the non-operational environmental tentative litigation settlement and remediation costs charged to the P&L in the second quarter.

That said, let me summarize where we now stand for our full year guidance.

We are projecting net sales of 960 million to one billion dollars. No change.

Net income of $34 to $38 million, which is a reduction from the $39 to $43 million range previously communicated and reflective of the after-tax effect of the $6.6 million of environmental costs charged to the P&L in the second quarter.

Because of the reduction in net income guidance, diluted EPS guidance now stands at 84 cents to 94 cents, which is a reduction from the 96 cents to $1.06 range previously communicated.

Adjusted EBITDA of $113 to $118 million, again no change, adjusted net income of $49 to $53 million, which is unchanged. Adjusted diluted EPS of $1.21 to $1.31, also unchanged, and lastly, an estimated adjusted effective tax rate of 33%. Again no change.

Guidance for full year gap metrics assumes actual foreign exchange losses for the six months ending December 31st, 2022 and the company's projected currency exchange rates for the next six months for the six months ending June 30th, 2023

In closing, we're pleased to report that our second quarter and first half adjusted financial performance was in line with our expectations. And as our full year guidance implies, we are projecting and looking forward to and even stronger second half.

So with that, Jeannie, 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, then the number one on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Brian Wright with Roth MKM. Your line is open.

Thanks. Good morning. I have one in the

And I apologize if I missed this, but could you provide a little quantification between the higher SNA between employee cost and strategic investments or any color around that?

Yeah, I could take that question. So on the employee cost, we had more vacancies last year that we were able to fill this year given the free up in the labor market. So that's what's driving the higher employee cost. So it's a combination of the number of people as well as the costs per labor hour. So that's what we're doing.

On the strategic investments, as I think we mentioned in our guidance earlier in the year, intent was to spend about an additional $10 million. Good portion of that is allocated to our companion animal development pipeline, but also our development projects for vaccines and nutritional specials.

And think about that kind of rightfully over there, you hear that kind of the way to think about that.

In terms of growth, second half over first half, we expect to slight increase in the second half of the year, but that's baked into our guidance.

Great, thank you. And then on the follow-up, you know, with the additional board member on Alejandro is

I understand getting strategic advice on competing in the companion animal business, but are there also potential, it seems like there might be synergistic business opportunities between the two organizations?

I mean, we're 100 to start it. I don't believe so. I think we're obviously more concerned about complex of interest than we are about it.

Synergies are more synergies and more conflicts.

Got it. Okay. Thank you so much.

Your next question comes from the line of Michael Riskin with Bank of America's Charities. The line is open.

As Wolf on from Mike, thanks for taking the questions. I wanted to start with a high level. One, fiber as animal health business continues to put fairly impressive results relative to the livestock divisions of some of your peers. Can you talk to what's allowing your animal health business to do so well in the current environment? Is it a function of portfolio and species mix or are there other factors that we should be considering here?

It's just great management. Fair enough. Get argue with that.

Okay, very nice. Can't argue with that.

I think it's literally where we're positioned in the market and the products that we've developed, especially concentrating on the changes that happened in history when antibiotics came out. The Ah hand ones, is becoming a European AppsSign, so that's where I want to ask everybody to look at them.

I've said often that the antibiotics came out but no one told that to the bacteria. So, the bacteria is still there and we've done a great job. Our team has done a great job in developing non antibiotic.

Most of the nutritional specialties and vaccines that help control that bacteria and help the farm is raising animals in a healthy way.

Got it. And just as a follow up, you noted seeing some weaker feed law placements. Can you talk to what you're seeing more generally in the market and are you expecting this to kind of persist for as long as we see the drought persist or there are other things going on there?

Well, you know, there's, as we mentioned earlier, we don't do a lot of business feedlots, but what we are seeing and where it has affected us, the drought has forced on the farmers to take animals off.

you know, off the pasture because there wasn't any ability to feed them the pasture and move them fast at the feedlot.

That has been in the early first part the sort of an increase.

Now when those animals have been processed, there are fewer animals following it, and that will have, I would say, more of an effect next year than it even has this year.

So it had more effect in calendar year at 2023 that it had in calendar year 2022. Much appreciated. And then just the last one here, there have been a flurry of recent articles on the impact of the bird flu to the global layer flock. I know that you're...

You know, we've seen a view of influence in the past, but by the summertime it's gone. And this year it's not gone. And the summertime and it continues to persist.

So, as you, we all see the effect it had on the price of eggs.

And then that might be a consumer pullback and those prices might start dropping. It's so far I hadn't really hit the broiler in the street.

which is the biggest part of our business, the biggest part of the chicken business. But it's out there and it's scary.

I thought it much appreciated. Thanks, yes.

Your next question comes from the line of a representative at Barclays. Your line is open. Your line is open.

Hi, good morning. This is Shao for Bellagio. Thanks for taking our questions. We see that one of the important contributing factors for your growth in the MFA business is the growth in Latin America. Do you expect this trend to continue or what is your outlook for your MFA and animal health business in Latin America? Thanks.

Thank you for that question. We've been investing a while in Latin America and expanding our presence there. And yes, I think we will continue to see growth in those markets, relative to what we've done in the past.

God it, that's very helpful.

Any other questions? Any of them in the queue that we can respond to?

You may be on mute, we cannot hear your line, so we will assume there's no more questions for today, so we appreciate your time. Thank you for your interest in fibro animal health and have a great rest of your day.

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