Phibro Animal Health Corporation Q3 2023 Earnings Call

Imation third 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 answer session. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad to withdraw your question Press Star.

One again I would know like to turn the conference over to Damien <unk> Chief Financial Officer. Please go ahead.

Thank you Regina good morning, and welcome to the fiber Animal Health Corporation earnings call for our fiscal year 2023 third quarter ended March 31 2023.

My name is Damien <unk> and I'm the chief.

Officer of Phibro Animal Health Corporation, and I'm joined on today's call by Jack Mannheim fibers, Chairman, President and Chief Executive Officer, and Daniel Bedtime Director and Executive Vice President of corporate strategy today.

Today, we will cover our third quarter and fiscal year to date financial results before opening the lines for your questions I'd like to remind you that we are providing a simultaneous webcast of this call on our website www dot <unk> Dot com also on the investors section of our website you will find copies of the earnings press release and third quarter Form 10-Q.

Filed with the SEC yesterday as well as the transcription slides discussed and presented on this morning's 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 to you. 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 are referred 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. Other income and expense is separately reported in the consolidated statements of operations, including foreign currency gains and losses net and lastly <unk>.

Some 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 <unk> to share his perspective on <unk> third quarter and fiscal year to date financial performance Jack. Thank you Damian and good morning, everyone.

We posted strong fiscal year to date sales growth a.

Third quarter net sales were $246 million, which reflects 3% growth over the same quarter last year.

Despite the challenging market and economic conditions consolidated sales growth has been driven primarily by our animal health segment and work with well balanced improvement across all three product categories.

Our animal health segment has achieved remarkable 10% year to date increased net sales compared to the same period of the previous year. We are unfortunately, seeing some signs of recessionary pressure in our mineral nutrition segment as our customers are seeking to reduce purchases and lower inventory, we will take steps over the next few months to ensure inventory is better balanced.

So our customers needs.

Overall, we have posted a strong fiscal year to date sales growth despite the challenging conditions.

We see continued opportunities for growth in our animal health segment as I mentioned on a year to date basis. Our animal health segment has achieved a 10% increase in net sales compared to last year and this segment continues to present us.

US with multiple growth opportunities.

We have posted eight consecutive quarters of year over year sales growth in each of our three major product categories.

From a year to date comparative perspective, the product categories of MFA and other is up 9%, while nutritional specialties are up 12% in vaccines up 9%.

I'm, especially pleased with our vaccine growth in Latin America. We recently opened a new advantage of this vaccine facility in Brazil, and launched commercial poultry vaccines in the region.

And regarding nutritional specialties, we continue to find ways to leverage our products and technologies, we acquired with the 2019 acquisition of Osprey biotech.

I'm also happy report that our companion animal development pipeline continues to progress.

We see companion animals as a medium term growth driver for the company and we will provide updates as the pipeline progresses.

In terms of profitability out today on today's portfolio overtime margins should improve as input costs, we judge historical level. The animal health segment. Adjusted EBITDA margin was 28% for the third quarter, which is a 110 basis point improvement over last year.

Although the year to date EBITDA margin is still 30 basis points shy versus last year, we see signs that input costs are returning to normal levels.

The margin improvement to continue input costs will need to continue to decline and we will need to work through higher priced inventory on hand.

We're taking other actions to manage working capital more closely which we anticipate will help to improve our free cash flow.

We continue to focus on raising prices where market conditions allow and we remain bullish on our business and our ability to grow sales given the strong demand for our current portfolio of products and the projected demand for the pipeline of future nutritional specialty vaccine and companion animal products, we have in development.

Lastly, fiber had a strong third quarter and as we approach our fiscal year end and we remain confident in our full year guidance I will now ask Damien to review, our third quarter financial performance in fiscal year 2023 guidance in more detail before opening the line for questions. Thank.

Thank you Jack I will start with consolidated financial performance on Slide four then cover segment level performance capitalization metrics and conclude with a review of our financial guidance for the full fiscal year 2023.

Consolidated net sales for the quarter ended March 31, 2023 were $245 $7 million, reflecting a $6 1 million or 3% increase over the same quarter one year ago.

This increase was driven by improvement in our largest segment animal health, partially offset by declines in mineral nutrition and performance products.

GAAP based net income and diluted earnings per share decreased 43% driven by higher SGA SG&A and interest expense offset partially by gross profit improvements and lower income tax expense.

After adjusting GAAP results for one offs and nonrecurring and or non operational costs, such as environmental remediation acquisition related items and foreign currency movements consolidated adjusted EBITDA decreased $6 million or 2% in comparison to the prior year's quarter, driven by lower adjusted EBITDA in our mineral nutrition and performance.

Alex segments, coupled with an increase in corporate expenses offset by higher adjusted EBITDA and the animal health segment.

Adjusted net income and adjusted diluted earnings per share decreased 13%, respectively, driven by higher SG&A expenses and taxes offset by higher gross profit.

Moving to slide five segment level financial performance I'll start with third quarter financial performance for our largest segment animal health, which includes three product lines, namely MFA is another nutritional specialties and vaccines.

Animal Health segment posted $164 4 million of net sales for the quarter, which represents an increase of $15 8 million or 11% versus the same quarter the previous year.

Within the animal Health segment, we reported an $8 $9 million or 11% increase in MFA is another versus the same quarter prior year, driven by increased demand for msas domestically and in the region of Latin America, and Canada as well as increased demand for processing AIDS used in the ethanol fermentation industry.

$3 6 million or 9% growth in nutritional specialties, driven by higher domestic demand and selling prices for dairy products, along with growth in our companion animal product <unk>.

And lastly, a $3 $3 million or very strong 15% improvement in vaccine net sales driven by increased demand and new product launches in Latin America.

In terms of profitability for the segment animal health adjusted EBITDA was $34 2 million, a $5 million or 17% improvement over the same quarter of the prior year due to higher gross profit on higher sales, partially offset by an increase in SG&A and the adjusted EBITDA margin for the segment improved 110 basis points to 20.

8%.

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 $62 9 million, a $6 $1 million or 9% decline versus the same quarter prior year driven by a decrease in demand for trace minerals. The consequence of customers lowering inventory levels in the face of economic challenges, partially offset by higher average selling prices, which are correlated with the movement.

Of the underlying raw material costs.

Mineral nutrition, adjusted EBITDA was $3 $9 million, reflecting a decline of $3 $4 million driven by lower gross profit.

The adjusted EBITDA margin for the segment was six 1% a decline from the prior comparative period.

Looking at our performance products segment net sales of $18 3 million reflects a $3 $7 million decline driven primarily by decreased demand for copper based products and personal care products, partially offset by higher average selling prices correlated with the movement of the underlying raw material costs adjusted EBITDA was $2 4 million.

Down in terms of dollars versus the comparative period, but reflective of a 20 basis point improvement in adjusted EBIT margin.

Lastly, corporate adjusted EBITDA declined, 15% or said differently, a corporate expenses increased $1 7 million or 15% driven by the intentional increased spend on strategic investments.

Turning to the key capitalization related metrics on slide seven free cash flow for the 12 month period, ending March 31, 2023 was a negative $43 million, reflecting a slight improvement versus what we reported last quarter and was comprised of trailing 12 months of negative operating cash flow of $5 million less $38 million of capital.

<unk> the.

The negative $43 million of free cash flow for the 12 months ended March 31, 2023 is driven primarily by a $43 million increase in inventory over that same period, representing slightly less than one month of additional inventory.

As Jack mentioned in his opening remarks, we will be taking steps over the next few months to make sure our inventory is better balance to the needs of our customers, particularly in our mineral nutrition segment. We're taking other actions to more closely manage working capital, which should also help to improve free cash flow moving forward.

Consistent with the projections, we communicated on our last call free cash flow for the third quarter reflected a $10 million improvement over the second quarter. We are encouraged by the improving trend of operating cash flow and as we continue to focus on cost control lowering inventories and keeping our comps receivable current we project. This trend to continue in the fourth quarter.

Note the $38 million of capital expenditure excludes the first quarter of $15 million purchase of property, although for GAAP reporting. This purchase is categorized as a capital expenditure on the consolidated balance sheet and statement of cash flows. It was financed with the 2022 term loan referred to in the other long term debt footnote included in.

Our Form 10-Q.

Moving on to liquidity, we had $192 million of liquidity available quarter end. This includes cash and short term investments of $77 million plus 100.

Of unused and available revolving credit subject to the leverage ratio limitations defined in the 2021 loan agreement.

In terms of our dividend consistent with the past several quarters, we paid a quarterly dividend of <unk> 12 per share or $4 $9 million in aggregate.

Turning to leverage our gross leverage ratio at quarter end was four three times. This is calculated by dividing total debt of $482 million by trailing 12 month, adjusted EBITDA of $112 million.

It's important to highlight that this does not the leverage ratio used to determine covenant compliance.

Our covenant compliance, we calculated net leverage ratio as defined in the applicable loan agreement.

And lastly, $300 million of our $482 million of gross debt is not exposed to current market interest rates, we have an interest rate swap in place at a fixed sofa rate of six 1%. The variable interest expense paid on the remaining $182 million of total debt is subject to rising interest rates, but its part.

Really offset by interest income earned on our short term investments.

Now, let's turn to slide eight to discuss guidance for the remainder of our fiscal year, which as a reminder ends in less than two months on June 32023.

We are reiterating the fiscal year 2023 financial guidance communicated on our last earnings call in February to.

To confirm our full year guidance is as follows net.

Net sales of $960 million to $1 billion net.

Net income of $34 million to $38 million.

Diluted earnings per share of <unk> 84 to <unk> 94.

Adjusted EBITDA of $113 million to $118 million.

<unk> net income of $49 million to $53 million.

Adjusted diluted earnings per share of $1 21 to $1 31 and.

And lastly, an estimated adjusted effective tax rate of 33%.

Guidance for the full year GAAP metrics assumes actual foreign exchange losses for the nine months ending March 31, 2023, and the company's projected currency exchange rates for the fourth quarter ending June 32023.

Lastly on slide nine the momentum behind our ESG effort continues to bill. Thanks in large part to the enthusiasm and engagement of our employees next week, we intend to publish our second ESG report titled helped at the Heart, which reflects the progress made in calendar year 2022, we will issue a press release with a report.

Is made available.

In closing we are pleased with our third quarter and year to date financial performance, our animal health segment growth. Despite the challenging market dynamics continues to outperform the market and we are excited by the variety of opportunities for growth that we see for this our largest business segment.

With that Regina 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 one on your telephone keypad.

For just a moment to compile the Q&A roster.

Our first question will come from the line of Michael <unk> with Bank of America. Please go ahead.

Hi, This is bulk chanoff on for Mike. Thanks for taking my question and congrats on the quarter. So I. Appreciate you guys flagging the recession kind of macro impacts that youre seeing in mineral nutrition and just wondering how would you describe the possibility that these impacts spread beyond mineral nutrition to your broader.

Our animal health segment, just kind of a range of outcomes around in this recessionary impact to that.

Semi related follow up.

Thanks for the question.

We view our business is recession resistant.

We've been in the business a long time, we've been through recessions.

And effectively people eating protein is really.

Among the very very last things to go.

And we see changes mean people might give up stake and go to chicken or some combination but overall.

Our business is more tied to population growth and to general well.

Which.

Session sort of again sort of recession resistant.

I appreciate that and then so.

Sticking with mineral nutrition last quarter, you called out some tonnage.

Sharpness in the U S beef cattle feed lots and I realize it's only with small part of the portfolio, but I was wondering if you have any updates on what youre seeing in terms of feedstock dynamics.

So for this last quarter, so remains a very small part of our business.

But what we're seeing is demand sort of it's more driven by the fact that it's alright.

We spoke about in my opening remarks.

Over last year when shipping was so difficult and people were very concerned about supply chain. There was more of an increase in inventories both at our customers and ourselves.

And the worst thing to do is to be is to run ads. So prices were better volumes or better and I think as the shipping lines.

<unk> NAND is shipping has become less of a problem less of a concern there is as big adjustment and I think that's a bigger part of this than anything else.

Much appreciate it thank you.

Your next question comes from the line of <unk> Prasad with Barclays. Please go ahead.

Hi, Good morning, Lisa the Shaw on for <unk>, Thanks for taking our questions.

Just a quick one on launching an American business, China has recently lifted the embargo on the Brazilian beef imports do you see this change as a potential tailwind for you All Latin America, and will house business, which had been performing well recently thanks.

So I think that is among the other tailwind of.

Brazil, being a phenomenal producer and a very very big ex Florida a protein.

So China, removing any barriers to Congress is definitely helpful and the state and the health of the of the <unk>.

<unk> business as well as the other businesses as we see is continuing to help.

Latin America was specifically, Brazil, and its production and export of protein.

Got it very helpful. Thank you.

Again for any question Press Star one on your next question comes from the line of Brian <unk> with Roth MK Yang. Please go ahead.

Thanks, Good morning.

You could remind us on.

The capacity of the Brazilian vaccine facility and what it could mean to grow.

So the facility. Thanks for the question the facility that we built is a small facility involved with the autogenous vaccine basis.

<unk> vaccine business means it's accustomed vaccine we go on farms, we pick up.

We try to isolate the viruses and we make accustomed vaccine for that so it's literally it's a farm by farm business.

The prices that you get a higher price I would say, it's more effective because we're dealing with farm by farm variances, but it's not a it's not a huge volume business, but beyond that we recently received approval.

For some of our vaccines that we produce poultry vaccines that we produce in Israel and we <unk>.

To Brazil, so that's a new stock to our business and that obviously has a much larger business.

Great. Thank you and then.

I just was hoping maybe we could kind of.

Okay.

Get some visibility on just the underlying like U S boiler volumes kind of how they progressed from January to now or are they kind of higher now than they got it.

Again, the third quarter.

Yes.

The U S boiler volumes I would say maybe down to flat.

And holding steady.

Yes, that's it.

Okay, and then Tim.

Same question for maybe Brazilian cattle.

It's.

Okay.

Canada is not as not overlaying, our focus even though it's a bigger part of our business, Brazil, I would say, Brazil cattle business just remains flat to slightly up.

Okay. Thank you so much.

We have no further questions at this time I will turn the conference back over to Damien <unk> for any closing remarks.

Okay. Thank you Regina and thank you everyone for participating in today's call. We appreciate your time attention and interest in fiber animal Health Corp have a great rest of your day and please be sure to check out our second ESG report when it's published next week. Thank you.

Ladies and gentlemen that will conclude today's call. Thank you all for joining.