Phibro Animal Health Corporation

Ladies and gentlemen, thank you for standing by. My name is Brent and I will be your operator today. At this time, I'd like to welcome everyone to the Fibro Animal Health Corporation fourth quarter 2023 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session If you'd like to ask a question at that time, simply press star followed by number one on your telephone keypad. If you would like to withdraw your question again, press star one. Thank you. It is now my pleasure to turn today's call over to Damien Finio. Sir, please go ahead.

Thank you, Brent. Good morning and welcome to the FIBRO Animal Health Corporation earnings call for our fourth quarter and year-end of June 30th, 2023. My name is Damian Finio and I am the Chief Financial Officer of FIBRO. I'm joined on today's call by Jack Benheim, FIBRO's Chairman, President, and Chief Executive Officer, and Donny Benheim, Director and Executive Vice President of Corporate Strategies. Today, we will review financial performance for our fourth quarter and fiscal year-ending June 30th, 2023, as well as provide financial guidance for the fiscal year ending June 30, 2024. 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, www.pahc.com. Also, on the investor section of our website, you will find copies of the earnings press release, annual report on Form 10-K filed with the SEC yesterday, as well as the transcripts 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. I refer you to the non-GAAP financial information section in our earnings press release for 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 both a GAAP and an adjusted basis. Our adjusted results exclude acquisition-related items Unusual, non-operational, or non-recurring items, including stock-based compensation and restructuring costs. Other income and expense as 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 non-recurring income tax items. Now, let me introduce our Chairman, President, and Chief Executive Officer, Jack Benheim, to share his opening remarks, which will include his perspective on our fiscal year 2023 fourth quarter and full-year financial performance and guidance for our fiscal year 2024. Jack?

Thank you, Damian, and hello, everyone. For our year ending June 30, 2023, our business delivered both sales and adjusted EBITDA performance in line with the guidance we communicated to the market. On a consolidated basis, net sales were $978 million, a 4% improvement over the prior year, and adjusted EBITDA of $113 million, a 2% improvement. Our largest and core segment, animal health, reported that we believed to be above market performance, posting sales growth of 9% and adjusted EBITDA growth of 10% over the prior year. Within animal health, each product category grew net sales significantly. MFA and other sales were up 7%, while nutritional specialties improved 10%, and vaccines were up 13%, reflected of the double-digit percentage growth expectations we've historically communicated. The impressive financial performance of our animal health segment was somewhat dampened by our mineral nutrition and performance product segments. which when combined accounted for a decline in both net sales and adjusted EBITDA in comparison to their respective strong financial performances delivered in fiscal year 2022. The strength of our animal health segment had helped to fuel our manufacturing capacity innovation. We made investments to expand manufacturing capacity, most notably at our site in Illinois and with the opening of a new autogenous vaccine facility in Brazil. We also introduced new vaccine products, line extensions, and nutritional specialties, and continued to progress our companion animal development pipeline. As we look ahead to the opportunities before us for fiscal year 2024, we are projecting continued top and bottom line growth. From a sales perspective, we are projecting sales of billion to a billion five in fiscal year 2024. From adjusted EBITDA perspective, we are projecting $115 million to $121 million. Both sales and adjusted EBITDA projections reflect roughly 5% year-on-year growth at the midpoint of our guidance range. This growth is driven by animal health, while we expect mineral nutrition and performance product performance in line with fiscal year 2023. Overall, we delivered financial results in line with guidance and are projecting further growth in the coming year. With that, I ask Damien to go through our actual results and projections in more detail before opening the line for questions. Damien.

Thank you, Jack. Let me start with our consolidated financial performance for the fourth quarter ended June 30th, 2023 versus the same quarter one year ago. On a consolidated basis, fourth quarter net sales were $255 million, reflective of a less than 1% decline versus prior year, driven by a decline in mineral nutrition offset by growth in animal health and performance products. Despite flat sales, gap-based net income and diluted earnings per share both increased 54% versus the same quarter a year ago. The increase was driven primarily by lower selling general and administrative expenses and favorable currency movements, offset partially by lower gross profit due to lower demand for trace minerals and higher interest and income tax expense. After adjusting our gap results for acquisition-related adjustments, foreign currency movements, and one-offs, fourth quarter adjusted EBITDA of $32.3 million reflects an increase of $0.8 million, or 3%. driven by growth in animal health, offset partially by declines in mineral nutrition and performance products. Adjusted net income and adjusted diluted earnings per share were both up 5% respectively, driven by decreases in SG&A and a lower tax provision, partially offset by lower gross profit and higher interest expense. On slide five, looking at the same financial metrics but now for the full year, on a consolidated basis, our full year financial performance improved over the prior year. Net sales were $978 million, reflecting an increase of $35.6 million, or 4%, driven again by strong growth in our core segment, animal health, offset by declines in mineral nutrition and performance products. Gap-based net income and diluted earnings per share for the full year declined 34% versus the prior year, driven primarily by higher selling general and administrative expenses due to environmental remediation costs, higher employee-related costs, strategic investments, currency movements, and interest expense, offset partially by higher gross profit and a reduction in income tax expense. After adjusting GAAP results for one-offs, acquisition-related items and foreign currency movements adjusted even at improved 2%, driven by sales and gross profit growth partially offset by an increase in selling, general, and administrative expenses and strategic investments. Lastly, adjusted net income and adjusted diluted earnings per share declined 8%. Driven by higher selling general and administrative expenses, interest and income taxes, partially offset by higher gross profit. Turning to business segment performance, starting with fourth quarter financial performance of our largest segment, animal health, which is comprised of the MFA's and other nutritional specialties and vaccine product categories. Net sales increased $10.2 million or 6% versus the same quarter prior year. The increase in our animal health segment net sales was driven by improvements in all product categories. First, the 2.4 million or 2% increase in MSAs and other versus the prior quarter, driven by increased sales of processing aids used in the ethanol fermentation industry. Second, The 2.1M or 5% improvement nutritional specialties net sales driven by higher average selling prices and increased demand for microbial products. And 3rd, a 5.7M or significant 25% improvement in vaccine net sales driven by increased demand globally coupled with new product launches in Latin America. In terms of profitability, animal health adjusted EBITDA was $37.9 million, an increase of $4.4 million, or 13% over the prior year quarter, while adjusted EBITDA margin improved 130 basis points. The improvement was driven by higher revenue driving incremental gross profits and a decline in selling general and administrative expenses. Moving to slide seven, which reflects full-year fiscal financial performance for our animal health segment, Net sales were up $52.8 million or 9% versus the prior year. The increase in animal health full-year net sales was driven by a 25.8 million or 7% increase in MFAs and other versus the prior year, driven by increased demand for MFAs, particularly in the U.S. and Latin American regions, coupled with strong demand for processing aids used in the ethanol fermentation industry. Also, a 15.3 million or 10% growth in nutritional specialties, Driven by stronger demand for dairy products, coupled with growth and our companion animal product. And lastly, 11.7, or 13% increase in vaccine net sales driven by strong demand globally and new product launches in Latin America. In terms of profitability, animal health adjusted, even it was 136.1M dollars to 12M or 10% improvement over the prior year. While the adjusted EBITDA margin improved 20 basis points as stronger sales and gross profits were partially offset by higher selling general and administrative expenses. Moving on to the fourth quarter financial performance for our other segments on slide 8, starting with mineral nutrition, net sales for the fourth quarter were $58.4 million, a decrease of $10.9 million, or 16%. versus the same quarter prior year, driven by a decrease in demand for trace minerals, partially offset by higher average selling prices. The increase in average selling prices is correlated to the movement of the underlying raw material costs. Mineral nutrition adjusted EBITDA was $3.9 million, a decrease of $2.8 million, or 42%, driven by lower gross profit partially offset by a decline in selling general administrative costs. resulting in a 300 basis point adjusted EBITDA margin decline versus the same quarter one year ago. Moving to our performance product segment, net sales were $19.9 million for the three months ended June 30th, 2023, reflecting an increase of $500,000 or 3% over the prior year, same quarter, driven by slightly stronger demand and pricing for copper-based products. Adjusted EBITDA for the quarter was relatively flat and reflected an 80 basis point adjusted EBITDA margin decline on lower gross profit. Lastly, corporate expenses increased 600,000 or 6% versus the same quarter of the prior year, primarily driven by an increase in investments relating to strategic initiatives. Now looking at full year financial performance for these segments on slide nine, mineral nutrition. Net sales for the full year were $242.7 million, reflecting a decline of 6% versus the prior year, driven by a decrease in demand for trace minerals, partially offset by higher average selling prices. The increase in average selling prices is correlated to the movement of the underlying raw material costs. Mineral nutrition adjusted EBITDA was $17.4 million, a decline of $6.6 million, or 28%, driven by lower sales volume and higher raw material costs. And adjusted EBITDA margin for the year was 7.2%, with a decline of 210 basis points versus one year ago. Turning to full fiscal year results for our product, our performance product segment, net sales were $75.4 million, just slightly behind the prior year, driven by decreased demand for both personal care product ingredients and copper-related products, partially offset by higher average selling prices. However, adjusted EBITDA of 9.3 million for the full year represented a 7% improvement due to higher gross profit, partially offset by an increase in selling general and administrative expenses. Lastly, corporate expenses increased $4.4 million, or 10%, versus prior year. The increase was driven primarily by increased employee-related costs and strategic investments. Let's turn our attention to key capitalization-related metrics on slide 10. On a trailing 12-month basis, free cash flow was at negative $24 million as capital expenditures exceeded operating cash flow generated by business. However, as projected on previous calls, both operating and free cash flow continued to improve throughout the year, posting three consecutive quarters of growth with the delivery of a really strong fourth quarter. The trailing 12 months free cash flow of minus $24 million was driven primarily by the $18 million inventory bill over that same period of time. We had $248 million of liquidity at year end. This includes cash and short-term investments of $81 million and $167 million of unused and available revolving credit. During the fourth quarter, we secured a $50 million incremental term loan and negotiated an increase in the leverage ratio covenant to 4.25x for all fiscal year 2024 quarters, providing liquidity in the event the economy worsens. Upon executing the transaction, the funds were used to pay down our revolving credit facility. The accessibility of revolving credit is subject to leverage ratio limitations as defined in our 2021 loan agreement. Consistent with the past several quarters, we also announced a quarterly dividend of $0.12 per share, or $4.9 million. Moving on to our gross leverage ratio, it was 4.2 times at June 30th. This is calculated by dividing total debt of $476 million by trailing 12 month adjusted EBITDA of $113 million. Please note, we use net debt and adjusted EBITDA as defined by our existing loan agreement to calculate the net leverage ratio used for covenant-compliant purposes. Lastly, We had $300 million of our total debt is covered under an interest rate swap agreement, which in essence converted the floating portion of our interest expense obligation to a fixed interest rate of 0.61% through June of 2025. In summary, we reported three consecutive quarters of improved operating and free cash flow. The negative $24 million of trailing 12-month free cash flow was driven primarily by the $18 million bill of inventory over the same period. The improving trend is a direct consequence of steps we've taken to manage working capital more tightly, best reflected in the $15 million reduction of inventory realized in the fourth quarter of fiscal year 23. That concludes our perspective on both fourth quarter and full year financial performance, so let's now turn our attention to the outlook for fiscal year 2024.

On slide 12, looking ahead to fiscal year 2024 highlights,

We are projecting another year of profitable growth. Our projected growth is driven by animal health while we anticipate mineral nutrition and performance products financial performance in line with last year. From a sales perspective, we are projecting sales in the range of $1 to $1.05 billion, reflecting approximately 5% growth at the midpoint of the range versus last year's sales of $978 million. From an adjusted EBITDA perspective, we are projecting adjusted EBITDA in the range of $115 to $121 million, reflecting approximately 5% growth at the midpoint of the range versus last year's adjusted EBITDA of $113 million. This projection also assumes a modest increase in animal health-related strategic investments. So turning to slide 13, in summary, on a consolidated basis, the company's full financial guidance for the year ending June 30th, 2024, with year-over-year percentage growth estimates calculated using the midpoint of the ranges provided, is as follows. Net sales of $1 billion to $1.05 billion, reflecting 5% growth. Net income of $31 to $36 million, reflecting 2% growth. Diluted earnings per share of 76 cents to 90 cents, or 2% growth. Adjusted EBITDA of 115 to $121 million, representing 5% growth. Adjusted net income of 45 to $51 million, representing 2% decline. Adjusted diluted earnings per share of $1.12 to $1.27, also a 2% decline. and an adjusted effective tax rate of 33 to 35%. Overall, we delivered financial performance in line with our guidance in fiscal year 2023 and are projecting continued top and bottom line growth as we look ahead to fiscal year 2024. With that, Brent, 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 follow button number one on your telephone keypad If you would like to withdraw your question again, press star 1. Your 1st question comes from the line of Brian, right? With Ross, your line is open.

Thank you. Good morning. Thanks for for my question. I wanted to just dig in a little further. Can you help us understand? The vaccine growth and maybe quantify, you know, how much of that in the quarter year over year was from the autonomous vaccine business in South America.

Thanks and good morning. The, we, on the, the charges factor, we just built that we just had an opening a few months ago. So sales are de minimis, hopefully by the end of the year, we will have reported. You know, nice sales growth, it takes that cycle to get the vaccines approved on the farms and then make what's called a custom vaccine takes a while. The other growth in South America is our response to disease pressures. And there is certain diseases that are growing down in the poultry industry. And, you know, it's literally responding to the market.

Great. So, that's additional growth on top of what we've seen in the fourth quarter. That's great. I did have a follow-up as well. Could you talk to the potential benefit of Tyson reintroducing certain antibiotics for poultry?

Right. You know, a lot of people are talking about it. So, Tyson's after about I think maybe over five years of working with something called NAE, which is no antibiotics ever, and come back to what is more standard for the industry around the world and are using no antibiotics that are used by humans. And going back to antibiotics, in our industry, what they call ionophores, which has been in the market for 25, 35 years, some in that range. Overall, we see very little effect for our business. And, you know, it will have some effect on some people, but overall I think the effect will be quite small.

Okay. Thank you. And then if I could just add one last one. Just wanted to think about like inventory levels, Damian, or we've seen some improvement here in the fourth quarter. Saw some nice improvement. Or should we see some further improvement in 24, or are we comfortable where we're at now? Just kind of how to think about that in terms of cash flow dynamics.

Yeah, we are targeting additional improvement in fiscal year 24. We ended the year a little north of four months of inventory on average across all products across the world. Our target is still to get down to 4 million. So, we hope we will see that in fiscal year 24 and it will help to improve free cash flow as it did in the fourth quarter. We'll say we typically start off the year slow in the first quarter, so we may not see that improvement at the end of September 30th, 2024 or 23, but we do expect to see it as the year progresses.

Great. Thank you so much.

Your next question is from the line of Michael Riskin with Bank of America. Your line is open.

Hey, guys. Thanks for taking the questions. I'm going to start on the margins and sort of what's implied in fiscal year 24 guide. By my math, you're sort of guiding some, you know, slightly down operating margins year over year, and you call it out that incremental, you know, $3 million strategic investment. Can you add a little bit more color on the way that's going? You know, assume that's going towards the companion business, but any additional color there, and then also a little bit on, you know, what are your expectations for gross margins? What are your expectations for input costs that go into the model right now? Thanks.

Yeah, thanks, Michael. Let me start with strategic investments. So, as we mentioned, there's a $3 million assumed increase in fiscal year 24, so $32 million in fiscal year 23, $35 million in fiscal year 24. I would say that there's no significant additions or deletions within within that estimate. It's really just the timing of the spend on multiple projects across multiple project categories. We'll say that the majority of the spend is going to vaccines, which, as you can see in our fiscal year, 23, 4th, quarter results is delivering returns and it's in our guidance as well next year that we expect continued growth that vaccine strategic investment will continue to rate returns into the medium term as well. And behind that, I would say we continue to invest in companion animals as we've said on previous calls. Not a short term return on that for the medium term opportunity, but overall, I'd say the delta is more related to timing of spend than anything. And we continue to invest in vaccines and companion animals. In terms of gross margin, Jack, you may want to speak to this a bit too. We continue to see rising input costs with change in currency movements. product mix, et cetera. So there is a slight change in the assumption, I guess, going forward in fiscal year 24. But again, nothing major. It's more product mix than anything else.

Thanks. I think it's a combination of product mix. It's also a settling out. You know, everyone's aware, and we've spoken about it, that, you know, in the previous two years with very, very high freight rate changes because of what happened through COVID, also input costs in terms of labor, the unavailability of labor here in the United States. And, you know, we, like other people, being, you know, basically paying a lot more to get people to come to work. That is all sort of, that has impacted the gross margins. And it's mostly stabilized. I'd say on the freight side, there is some, problems brewing with the lack of water in the Panama Canal, forcing rates to be up for products that are shipped through the Panama Canal. But the labor rates have sort of stabilized, and we're sort of going to start clawing back on our margins. We did a bit at the end of this last year. We have more planned for this year, and I think we will get back to the margins we had, you know, in the past.

Okay, that's really helpful and then on the just on the, the top line guide and the volumes that are implied, you know, you're forecasting another strong year for for the animal health business. You talked about some of the strength, just seeing a vaccine and new products stuff about the new launches. Is there anything else that's noteworthy? That's that's sustaining this growth 5 to 11%. Maybe you could comment a little bit on underlying market conditions, underlying demand, any geographies or species that are standing out. Thanks.

I think we had called out some of the growth we're seeing in South America on the vaccines. We're seeing some other growth around the world. We've made investments, and some of the investments in terms of plant capacity will be coming on stream. early January of 24, and that gives us the ability on some of the nutritional products to respond to market demand that we have created.

So I think that's, between those two things, I can account for the majority of the growth. That's helpful. Thank you. Your next question is from the line of

Balaji Praza with Barclays. Your line is open.

Good morning. This is Xiao An for Balaji. Thanks for taking our question. You highlighted the choppiness of the U.S. beef cattle feedlots in the last few quarters and wondering do you have any updates in terms of the feedlot dynamics? Thank you.

I think as we've said often, we do

basically no feedlot business in the United States. But overall, you know, just sort of preparing for this call, the cattle supplies have tightened as drought remains a concern across North America. So I think we're still not going to see a rise in feedlots. I think we'll see some continuing decline.

But then we'll get to some sort of equilibrium and some stability. Thank you. Very helpful. There are no further questions at this time.

I will now turn the call back to Mr. Damien Sineo.

Okay. Thank you, Brent. And on behalf of Jack and the rest of the FIBRO management team, thank you all. We are excited about the year ahead and appreciate you taking the time today to join our call to learn more about the exciting things taking place here at FIBRO. Thank you again and enjoy these last few days of summer. Ladies and gentlemen, thank you for your time today to join our call to learn more about the exciting things taking place here at Fibro.