Q1 2024 Phibro Animal Health Corporation Earnings Call

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 Fibril Animal Health Corporation FY 'twenty 'twenty four earnings 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, if you'd like to withdraw your question Press Star One again I would now like to turn the conference over to <expletive> Johnson Chief Financial Officer. Please go ahead.

Well, thank you Regina and good morning, everyone and welcome to <unk> earnings call for our fiscal first quarter ended September 30.

My name is Jake Johnson I'm, the Chief Financial Officer, Fibril Animal Health Corporation, and I'm joined today on the call by Jack <unk>.

<unk>, Chairman, President and Chief Executive Officer, and also by Daniel been time, Director and Executive Vice President of corporate strategy.

Today, we'll cover our financial performance for our first quarter and provide an update on our financial guidance for our full fiscal year ending June 2024 at the conclusion of our opening remarks, we'll open the lines for your questions I'd like to remind you that we're providing a simultaneous webcast of this call on.

Our website THC dot com and also on the investors section of our web site. Later today, you will find copies of the earnings press release and in the first quarter Form 10-Q filed with the SEC yesterday.

Well as the slides and transcripts from our presentation. This morning.

Turning to slide two.

Standard disclaimers in our remarks today will include forward looking statements and actual results could differ materially from those projections.

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 and reconciliations of these non-GAAP.

<unk> 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.

Other income or expenses separately reported in the consolidated statement of operations.

Primarily foreign currency gains and losses, and the income tax effects related to any of those pretax adjustments plus any unusual or nonrecurring income tax items now let me introduce our chairman President and Chief Executive Officer, Jack downtime to share his.

That is on fibrosis first quarter financial performance and the outlook for our fiscal year 2024.

Thank you Jake good morning, everyone and thank you for joining us today.

Our first quarter had some strong positive.

Spine overall disappointing results.

Ill health based on gross sales at a healthy 4% and I was especially pleased to see that some of the measures. We have taken to counteract margin erosion, how big promotional EBITDA growth and even faster rate of 6%.

We saw growth across all three product categories and animal health led by 14% growth in vaccines, we're seeing increased uptake of our vaccines across multiple regions, but especially in South America, where we have launched several new commercial vaccines.

Well it has opened a new a conscious risk vaccine facility in Brazil.

We are continuing to invest behind the successes, we're looking at additional vaccine Steve Eric.

Just because the first sales of our new line of nutritional specialty products for U S poultry producers and.

We see that changes in nutritional specialties is double digit annual opportunities for the short and medium term.

We are making the necessary investments enable us to achieve our targets.

We are also continuing to support our other initiatives such as companion animal, but considering the challenging vehicle environment, we are targeting ways to curtail or delay some of your spend.

As mentioned, we are indeed challenging political environment.

International basis as it is.

<unk> revenue drop in margin drop even though as we have recently been on the wrong side of commodity price movement, and some inventory positions, while we anticipate margins returning to some historical levels as we progress through the fiscal year.

Volumes could take longer to recover.

Emily we see weaknesses in some of the other end markets, including dairy in the U S and China and our Street light business based in Latin America.

Finally, the horrific terrorist attacks in Israel, a month ago and have subsequently increased costs relating to our operations in Israel, we have confidence around our ability to meet our supply commitments with us.

All of these reasons, we have decided to lower our guidance for the remainder of this fiscal year as Dave will go into greater detail at the end of its presentation.

Before I hand, it back to Dave I want to touch on the Fda's. Most recent action related to make it at the FDA has been targeted method at so close to a decade mega that it's a very important product with swine producers can help keep baby pigs healthy during the critical early areas of their lives has been safety sold.

So over 50 years and continues to be available and to be use we will continue to support this product and defend your customers ability to use it we are extremely confident in the safety and efficacy.

I look forward to your question.

Following a review of our financials.

Thanks Jay.

Well, let me start with the consolidated financial performance on Slide four then move on to segment level performance.

Other factors and I'll conclude with a review of our updated financial guidance, our consolidated net sales for the quarter ended.

Ending September were about $231 million, reflecting a decrease of $1 million or 1% compared with the same quarter a year ago.

As Jack mentioned, the animal health segment saw a nice increase while both mineral nutrition and performance products decreased from the year earlier.

GAAP based net income and diluted earnings per share decrease driven in part by higher SG&A expenses, and notably by a $10 4 million dollar charge for pension settlement costs. We also saw increased interest expense due primarily to higher <unk>.

<unk>.

Increased foreign exchange losses.

All of which were partially offset by reduced income tax provision.

Our first quarter adjusted EBITDA was $18 $7 million that was a decrease of $3 $5 million.

Within that animal health increased $1 million in the half due to sales growth and favorable gross margins, which was partially offset by higher spending in SG&A mineral nutrition decreased $2 4 million at the EBITDA line due to lower sales and higher costs.

Performance products dropped about $1 million compared to last year at the EBITDA line due to lower sales and and driving and that driving gross profit down.

And finally corporate expenses increased million six year over year.

Due to increased strategic investments some of which was timing and also higher employee related costs.

At the adjusted net income and adjusted diluted EPS lines, we saw adjusted EPS 14th.

That was down a third from a year earlier driven by.

Primarily the higher G&A SG&A expenses, just as a reminder, the.

The large one.

One off pension charge was well is not included in.

And adjusted net income.

But driven by other.

SG&A spending and higher interest expense again, partially offset by <unk>.

Reduced income taxes.

So now if we move to segment level financial performance.

Our first quarter performance of our largest segment animal health.

Animal health segment posted a $160 million of sales for the quarter.

That was an increase of close to $6 million or 4%.

And within that sales increase we saw is as Jack pointed out.

Better than $3 million increase or 14%.

Growth in vaccine net sales.

The increase was driven primarily by poultry product introductions in Latin America, and also growth in the U S. Swine sector, but there was some offset or partial offset due to timing of deliveries deliveries in other international regions.

Nutritional specialties, we saw growth of about $1 million or 3%.

And there it was driven by increased volumes in poultry products, primarily in the U S.

Domestic market and finally, MSA is another increased about $1 million or 1%.

And that increase was driven by increased sales of processing AIDS used in the ethanol fermentation industry.

In terms of profitability for the segment animal health adjusted EBITDA was $28 $5 million up 6% from the same quarter, a year earlier and a 30 basis point improvement.

Adjusted EBITDA margin due to the improved gross profit in the segment.

Moving on to first quarter financial performance in our other business segments on slide six and starting with mineral nutrition.

Net sales were $56 million down.

$3 $5 million or 6% versus the same quarter last year.

There was declines the sales declined due to lower average selling prices and reduced volumes due to a drop in demand and mineral nutrition adjusted EBITDA.

Dropped even.

More strongly at $2 million San Jose.

It was a 46% decline year on year.

Driven by the sales decline.

Higher costs.

Looking at performance products net sales were about $15 million for the quarter.

Down about $3 million or 8%.

And this was driven primarily as lower demand.

For ingredients used in personal care products.

And that reduced sales drove a decline in adjusted EBITDA of about $1 four.

A large percentage decline on a relatively small base.

Corporate expenses were up.

13% driven by strategic investments and employee related costs.

Turning to key capitalization related metrics.

Our free cash flow for the 12 month period, ending September was a positive $4 million. That's that's.

First time in some time that we've seen a trailing 12 month positive free cash flow. So that's good news and reflects a lot of work in progress, we're making in and managing our working capital and our cash flows.

And just it was comprised overall of over that 12 months period of $40 million from operating activities less $36 million of capital expenditures.

We ended we ended the quarter with a gross leverage ratio of four four times.

Thats simple math $484 million of total debt divided by $109 million of trailing adjusted EBITDA.

Looking at the dividends consistent with our history, we paid a quarterly dividend during the quarter of <unk> 12, a share.

Which is about $4 9 million in the aggregate.

And as a reminder, $300 million of our debt is not exposed to rising interest rates, because we fix the variable portion of our interest rate to a fixed rate of 61 basis points.

Plus the plus the margin adder, the remainder of our debt is subject to floating interest rates, which are now determined by.

They.

By sulfur, which is the replacement for LIBOR.

We also are seeing some partial offset from higher earnings interest income earned on our short term investments.

Now, let's look at our updated guidance.

If we look at those boxes on the right hand side.

We show you the new updated guidance just call out a couple of lines.

Sales now expected to be between $980 million and.

$1 billion.

In 'twenty.

Million.

And adjusted EBITDA.

106 between $106 million and $112 million and Youll see the other.

Numbers that are driven by.

Those those those two key metrics the.

The updated guidance reflects reduced expectations for the fiscal year compared with our previous guidance.

We see difficult fundamentals in certain parts of our business, including <unk>.

International beef feedlots.

And China dairy sectors, and the pace of recovery in the mineral nutrition and performance products segments, plus the cost of manufacturing disruptions and inefficiencies due to the current conflict in Israel.

I would note that we expect our December quarter to be roughly similar to or less than last year, reflecting some of the issues described above.

So in closing this is a challenging environment from various perspectives, but we remain confident in the demand for our products around the world and the longer term opportunities ahead of us.

And with that operator, if you would please open the line for questions. Thank you.

At this time, if you'd like to ask a question simply press star one on your telephone keypad. Our first question will come from the line of <unk> Prasad with Barclays. Please go ahead.

Hi, Good morning, everyone. This is Nick Hiller on for Blockchain can you hear me.

Yes.

Okay great.

I wanted to dig in a bit more around the fda's recent notice for carbo docs and the potential implications for Mecca docs.

You mentioned it seems you've provided a great deal of safety data to the FDA in prior instances. So just wondering what your next steps here will look like thanks.

And fully go through what are the steps up but is.

As I've said earlier I think we said it best.

Police.

Spot is a common market for 50 years.

It's safe and effective product.

Yes.

And.

We had sort of been balancing the FDA.

I don't want this product because it has some cost of zinc.

Got it got it.

But by lower as long as there's no less.

Cost of products in the meat and safe to use.

We've proven that and we see some that OPEC and what tends to jump on the SBA with US all these last 50 years.

So there might be some mindset changes in the SBA, but this product is.

Used by most of the hot because since the United States.

And again as safe and effective.

Great. Thanks, and just one follow up can you just remind us remind us of power Gen set where Jennifer has been tracking thanks.

I'll take that this is donny.

So we just.

It continues on sales out to grow nicely, it's not immune to the kind of the slowdown we've seen in the vet channel.

The industry. So the pace has slowed a little bit, but overall, we continue to be happy with it.

It's growth in spending plan.

Plan.

Thanks, so much.

Your next question comes from the line of Michael Riskin with Bank of America. Please go ahead.

Hey, guys. Thanks for taking the questions and welcome back it's been a while.

I want to ask first on some of your comments regarding further outlook for fiscal year 'twenty four you sort of called out all U S.

International the Feedlots I was wondering if you could expand a little bit on what's going on there, we often hear about USB feedlots and herd contraction of some of the pressures there but.

Not as much discussion as to what's happening internationally, so any color would be really helpful.

And the color is around our business.

Latin America.

Where which is generally into that high cost of grain when.

This has put pressure.

And some of these businesses and some of the production of beef into loss businesses.

So we've seen drop in volume.

And fewer and fewer cows on the feedlot, which translates for us into fewer products. So.

We see corn prices to drop.

In other words, the sevens and now down into the fixes.

The USDA is.

Being higher.

Hi, Ed.

The higher production of Columbia in the United States. So the prices to drop further and when we get through the ramp that's basically been the driver.

Okay. So it sounds like it's primarily.

Macro driven and tied to input costs, especially feed costs.

Hopefully that will be relatively quick to turn around is that the right interpretation.

Great.

Exactly I mean, that's that's what we're saying and that's what we're seeing also in the dairy business.

Okay, Great Dario was actually that would be not all my questions.

So then if I could ask on the vaccine strengths I mean, that's been a really good business for you for a while now but you you really emphasized that this quarter that vaccines, especially in Latam was doing really well is that any particular product introduction there should be called out or is it a broad portfolio of FX I know you guys did.

Acquisition, a couple of years ago, where you brought in.

Some some novel vaccine technology is that what we're seeing the benefits of if you could just dive into the vaccine strikes that'd be great.

So it's a it's a few products.

We have developed.

The novel Technology.

We've been using is the <unk>.

Our ability to tablet.

Tablet ties a vaccine, which makes it easier to use in the field.

And the combination of both those things we're seeing.

We're seeing growth in markets you always remember you also need to see the virus and we are seeing the vivus to these markets. So the virus is spreading and with a lot of spreading.

We have a very effective product.

Vaccine toddlers.

Okay.

Great if I can squeeze in one last one.

Some comments again on.

I think you mentioned do you want to control cost or control the spend just a little bit and companion.

On the companion business could you expand on that is that new product development is that.

Any promotions or sales efforts tied to <unk>, just kind of like where are you pulling back a little bit.

And that in that.

Part of the business.

Yes, I'll take that Tony again.

So it deals with our pipeline I think we've.

We have strong stage gates throughout.

When the product.

Mrs. A stage gate, we kind of look at it again, one of our products and our pipeline.

Dealing with one of our ortho products, we have two oral care products in our pipeline one for dog man for cats, the dog product, we've decided to slow down our spend there because it doesn't work.

We're looking at the opportunity in light of the results. We're getting so we are curtailing our spend in that respect.

Okay really helpful. As always thanks, a lot guys.

Your next question will come from the line of Brian <unk> with Roth MKS. Please go ahead.

Thanks, Good morning.

Real quick questions.

Just was trying to get a little more understanding of detail about the pension settlement.

Okay.

The 10-Q, but.

Just trying to understand what exactly happened there.

Sure.

So I think first.

Let me say that for the Corporation. This was a noncash event in other words.

We funded we put money into the pension plan years ago. So this was a transaction that happens inside the pension plan and it's something that.

Many many corporations have been doing we essentially.

Got in and shortly and insurance company agreed to irrevocably assume the liability for paying those future benefits for.

A group of people that are in the pension plan.

So.

Basically.

On a present value basis, the insurance company took over.

On that note was a precise numbers there, but it was $24 million the insurance company took over a $24 million present value of a liability and.

The pension plan 20.

$24 million of its assets and paid the insurance company.

To take over that liability so.

And then from there on you get into some accounting recognition rules were.

We had to recognize this $10 million charge.

But again a noncash item.

So the preparation to fiber.

Okay. So that.

That's still off the books as far as the insurance company has that obligation there is no counterparty risk.

Impact that's being recorded here in the in that $10 million charge.

No Theres, no counterparty risk and the insurance company, where.

We were very.

Careful too.

<unk> only.

Consider transferring this liability to very highly rated insurance company and so this is <unk>.

I forget how the rating system works, but this is.

A very highly rated very financially stable an insurance company, who is irrevocably assumed.

The obligation to pay these benefits over overtime in the future.

Okay. Thanks, and then.

Just one detail.

A follow up.

All of that.

The gross debt.

How much is characterized as first lien.

Fundamentally all of it.

With the exception of.

Of our small.

I think it's around $11 million every.

The remainder of the gross debt is all within one credit facility, it's broken into various pieces, there's a revolver piece and a term loan piece, but that's all.

It's all supported by the same collateral package.

Okay. Thank you so much.

Your next question will come from the line of Erin Wright with Morgan Stanley. Please go ahead.

Hi, Thank you this isn't a pullback on for Erin So we have two questions.

Can you speak to the dynamics, you're seeing across the core EMEA business.

How are you thinking about that dynamic to the bonds at this year.

Alright.

The first question.

Yes.

Can you please speak to the dynamic.

Okay.

Alright.

Thanks, Dan.

How are you thinking about that dynamic for the balance of the year.

Sorry, you cut out on that.

Your question is something about the dynamics of the MSA sector.

And what was the rest of the question.

And how you're thinking about <unk> for the balance of this year.

So the <unk>.

The MFA business, which.

Translates to mean medically.

Feed additives.

Sure.

It's a very very big category.

Louis.

Any product that is.

That is registrations.

Is plugged into that category.

And it's.

I would say it's worldwide as a $3 billion to $4 billion business.

And.

The change by a few of the good citizen that few generic <unk>.

And it's a very strong business.

And the most efficient way to get.

Correct.

Into into the animal whether it's a chicken and the pig or cow.

And we've seen.

And depending on disease pressures, but we've seen that can be always a steady business and we see that growing in line with what we've always talked about population and economic growth.

That's been our history to this product and that's what we stated going forward.

Thank you that's helpful and one quick follow up on performance products can you remind us of any key drivers there and your overall commitment to that business.

We are our key products are.

There is a couple of smaller segments within.

Kind of businesses within that segment.

One of the important categories is.

We.

We represent.

Market ingredients for personal care products. So.

Importantly, some ingredients for.

Sell the toothpaste manufacturers ingredients that.

Go into shampoo as other other.

Other products like that.

And then the second piece of that business is.

Copper based products, where that's.

Right.

Our legacy business that <unk> has had for a long time.

We have said.

The business is opportunistic it's not core.

And so relatively.

Small part of the company.

It's cash flow positive.

Yes.

It's not something that is terribly distracting so.

Up until this point leads we've retained in the business.

Thank you.

With that I'll hand, the call back to <expletive> Johnson for any closing remarks.

Well it is nice to be back on the phone with <unk>.

With folks and enjoying.

The Q&A. This morning, we thank you for your time and your interest in <unk> and we will talk to you again on our next earnings call. So.

But he has.

A nice day.

Hope Youre doing well take care bye now.

Okay.

That will conclude today's call and we thank you all for joining you may now disconnect.

Please wait the conference will begin shortly.

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