Phibro Animal Health Corporation

At this time, I would like to welcome everyone to the Fibro Animal Health Corporation second quarter investor 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 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 Dick Johnson, Chief Financial Officer. Please go ahead.

Thank you, Regina.

And welcome to the Fibro Animal Health Corporation earnings call for our fiscal second quarter ended December 31, 2023. As we said, my name is Dick Johnson. I'm the interim chief financial officer of Fibro Animal Health. I'm joined today by Jack Bentheim, Fibro's chairman, president, and chief executive officer. By Donnie Bentheim, director and executive vice president of corporate strategy. and also by Glenn David, the incoming Chief Financial Officer. Today, we'll cover financial performance for our second quarter and provide an update on our financial guidance for our fiscal year ending June 2024. At the conclusion of our remarks, we'll open the line for questions. I'd like to remind you that we're providing a simultaneous webcast of this call on our website, pahc.com. And also on that investor section of our website, you'll find copies of the earnings press release and second quarter form 10Q, as well as later today the transcript and slides that we're discussing on our call this morning. Turning to slide two, our remarks today will include our standard forward-looking statements and actual results could differ materially from those projections. For a list and description of certain factors that can 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 non-operational or non-recurring items, which would include things like stock-based compensation and in this most recent quarter, Brazil employment taxes item. Also, other income expenses separately reported in the P&L, including foreign currency losses, and also income taxes related to any of those pre-tax income adjustments, and any other unusual or non-recurring income tax items. So with that out of the way, let me introduce our Chairman, President, and Chief Executive Officer, Jack Bendheim, to share his opening remarks. Jack?

Thank you, Dick, and thank you to everyone joining us this morning. Our second quarter showed the resilience of our business and was a positive step up compared with our first quarter. Our core animal health business grew net sales at a healthy 6%, and I was especially pleased to see that adjusted EBITDA also grew at 6%. led by high value new product introductions in our vaccine product line. A strong 31% increase in net sales of vaccines led the way for animal health. We are seeing the uptake of our vaccines across various regions, especially in South America. We have launched new commercial vaccines and have the added benefit of a new attached facility, vaccine facility in Brazil. Looking ahead, we expect continuing growth in animal health business in the second half of the year. We also expect to see significant improvement in our mineral nutrition and performance product businesses as we work through inventory imbalances and as we see a rebound in demand. We have affirmed our guidance for net sales, adjusted EBITDA, and adjusted diluted EPS, as Dick will go into in greater detail at the end of his presentation. We are continuing to invest behind our successes. We are looking to introduce additional vaccines in the Americas and have just had our first sales of a new line of nutritional specialty products for poultry here in the United States. We see vaccines, nutritional specialties, and companion animal as continued growth opportunities when making the necessary investments to enable us to achieve our targets. I'm also pleased to welcome Glenn David to Fibro as Chief Financial Officer. As we recently announced, Glenn brings over 30 years of experience in commercial and financial leadership roles including a wealth of knowledge in the animal health industry. He brings the capabilities needed to contribute to Farber's future success and to bring value to our shareholders. I look forward to hearing your questions following Dick's review of our financials, but before I hand it back to him, I want to express my gratitude to Dick for agreeing to step in as interim CFO. As a company, we did not miss a beat thanks to Dick's quick return to action, and I'm thrilled that Dick will continue to be available to the Sober Glen And the sysfiber was the whole thing.

Thanks, Jeff. So let me start with the consolidated financial performance on slide four, and then we'll move on to segment-level performance and some other information. Consolidated net sales for the quarter were just under $250 million, and that was an increase of $5.3 million in were 2% over the same quarter of a year ago. The animal health segment grew 6%, while both mineral nutrition and performance products saw sales decline. GAAP net income and GAAP diluted EPS decreased, driven by a substantial increase in foreign exchange losses, mostly from a major devaluation in Argentina. Also driven by higher operating expenses that we refer to as selling general and administrative expenses. That included a $4.2 million charge for a Brazil employment tax issue. And third, increased interest expense driven by higher variable interest rates. Income taxes were a partial offset as they decreased $2.6 million. After making our standard adjustments to GAAP results, including the items I named earlier, overall adjusted EBITDA decreased $1.5 million compared to the year earlier. Animal health adjusted EBITDA improved by $2.2 million, or 6%, driven by gross profit from increased sales, but partially offset by higher operating expenses. Mineral nutrition decreased almost a million dollars driven by unfavorable inventory costs and a slight decline in volumes. Performance products decreased 1.5 million year over year due to lower product demand and unfavorable product mix. And finally, we spent more in our corporate expenses of We spent $1.3 million more than last year, which was driven by a planned increase in strategic investments. Adjusted net income and adjusted diluted EPS declined 2% respectively, reflecting the changes in adjusted EBITDA and the higher interest expense due to the higher variable interest rates. The effective income tax rate improved, and it was a partial offset to the negatives. Now looking at slide five and moving to segment-level financial performance, and let's first look at animal health. The animal health segment posted sales of about $173 million. That was an increase of over $9 million, or 6%, over the prior year. And within that animal health segment, we saw sales increase, especially in vaccines, as vaccine sales grew $7 million, a healthy 31% increase, driven by product launches in poultry products introduced into Latin America, plus we saw an increase in domestic demand. In our MFAs, another category, net sales grew $4.8 million, or 5%. Due to demand, in various international regions, and also continuing growth in demand for our processing aids used in the ethanol fermentation industry. Nutritional specialty net sales declined in the quarter by $2.4 million, or about 6%, mostly due to reduced demand from the domestic dairy business. All of that drove animal health adjusted EBITDA of about $39 million, also a 6% increase as the higher gross profit from increased sales was partially offset by increased SG&A. Now moving to the other big business segments on slide six, starting with mineral nutrition. Net sales for the quarter were $61 million, a slight decrease from last year due to a decline in average selling prices and also some reduction in sales volume. Mineral Nutrition adjusted EBITDA was $3.5 million, reflecting a year-on-year decrease of $900,000 as we worked through some unfavorable inventory positions. Looking at our performance product segment, that sales of $15.5 million for the three months reflect a $3.7 million or a 19% decline driven by reduced demand for personal care product ingredients and for industrial chemicals. Adjusted EBITDA was $800,000 for the quarter. a decline of $1.5 million compared to the prior year, largely reflecting reduced sales and also reflecting unfavorable product mix. Corporate expenses increased $1.3 million, driven by the planned increased strategic investments.

Now, if we turn to the capitalization-related metrics on page 7, we saw

positive free cash flow and for the trailing 12 months, we now have generated positive free cash flow of $37 million, which is comprised of $74 million from operating cash flow and then invested $37 million in capital expenditures. And as a result, we ended December with cash and cash equivalents and short-term investments with $92 million on the balance sheet at the end of the quarter. Our gross leverage ratio was 4.4 times at the end of the quarter, based on $476 million of total debt and $108 million of trailing 12-month adjusted EBITDA. Consistent with our history, we paid a quarterly dividend of $0.12 a share, or $4.9 million in the aggregate. And as a reminder, As a reminder, 300 million of our debt is at a fixed rate of 61 basis points plus an applicable margin of 1.75 percent. The remaining amount of our debt, or $176 million, is subject to variable interest rates, although offset somewhat by interest earned on our excess cash and short-term investments. Now, looking at our guidance and our guidance for the full year, we have affirmed our guidance for net sales, for adjusted EBITDA, and for adjusted diluted EPS. So, no changes to those measures. We have updated our guidance for The gap measures to reflect recent developments, which would include that Brazil employment taxes issue, additional foreign currency losses, again, mostly coming out of an Argentinian devaluation, and then some other smaller items and the related income tax effects of those things. So in closing, we are optimistic as we enter the second half of our fiscal year. We're confident on our demand for our products around the world and look forward to seeing continued improvement in our business as we move forward. And with that, operator, let's please open the line for questions. Thank you.

At this time, I'd like to remind everyone to ask a question. Press star 1 on your telephone keypad. Our first question will come from the line of Aaron Wright with Morgan Stanley. Please go ahead.

Great, thanks. Can you give us an update on just underlying demand trends and how you're thinking about fundamentals and some of the key livestock categories for you, like poultry and dairy? And what are you expecting over the next, you know, six to 12 months across those categories? Thanks.

Hi, good morning, Erin. Short question, long answer.

So, with seeing around the world positive trends, I mean, the underlying, the two underlying things

for wines have sort of come back to historic positions.

One is demand has sort of returned. I mean, the effect of COVID, I think we're finally seeing coming to the end in terms of imbalances and inventory and cost of inventory. People sort of returning to, whether it's to restaurants or, you know, schools, et cetera, et cetera. So the normal buyers have returned or returning to the market. Same time, the most important ingredient in raising animals is cost of feed, and we've seen a decline in both the cost of soybeans and corn, which has returned profitability pretty much across the board. I mean, there's still some outliers, which will take some time, like the dairy industry in the States, but even that, the trend is in the right direction. And that's one of the reasons Vic said we're positive. We're seeing good sales in all regions, increasing sales. We're seeing price increases holding.

So, again, it's the reason we're optimistic.

Okay, thanks. And then adjusted EBITDA margin with strong and animal health, is that just a function of the mixed dynamic with the strength in vaccines or... Or what drove that? And you mentioned price a second ago. Can you quantify what you're realizing in terms of price? Did you take another price increase at the beginning of the year in terms of your animal health business?

Yeah, it's all those things, Erin.

Certainly, we're seeing favorable product mix within animal health vaccines. in general, have the highest margins. So as we grow that part of our business, we're getting that favorable benefit, and that's allowing us to continue to build the business by making very targeted expense investments in people, mostly, in certain markets. But we're able to offset You know, that's why the improvement, and I think, you know, as we grow going forward, it's reasonable to expect the kind of bottom line growth at least equal in percentage terms to the top line growth.

Okay, that's helpful. And then just if I could think one more in here, like there was a recent deal on the tape for Alonco's aquaculture business to Merck, and Merck's already larger in that space, obviously, but does this change anything from a competitive standpoint for you? How big is or what's your commitment to your aquaculture business or how big is that now? Thanks.

We are committed, but it's a small business.

So, the movement of the products from Milanko to Merck will have no effect on our business.

Got it. Thank you. Your next question comes from the line of Balaji Prasad with Barclays. Please go ahead.

Hi. This is Mikaela on for Balaji. Thanks for taking our question. Just two for me. Can you first just remind us of how Regenza has been tracking And following up on the previous question, I guess, could you just talk a little bit more specifically about geographies and species that are standing out and outlook for the rest of the year? Thanks so much. Hi.

Hi, it's Donnie. I'll take a regenta question.

We actually did not call out this year specific guidance with regard to regenta in our annual.

So it's part of nutritional specialties. It continues to grow nicely, double-digit growth.

But, you know, other than that, for competitive reasons, we don't. pull out more specifics. And species and geography.

Species and geography, in general, poultry accelerates always across the world for economic, for religious reasons. And we're seeing that in most of the geographies that we're in for ourselves. We are increasingly focused on the cattle business, so cattle is forming a more important part of our business, but still it's small relative, ex-U.S.

anyway, and ex-dairy relative to the United States.

Thanks so much. Your next question comes from the line of Michael Riskin with Bank of America Securities.

Please go ahead.

This is Wolfhahn from Mike. Thanks for taking the question. I was wondering, beyond the hit to the P&L, are you seeing any changes in customer behavior related to the draw in the Argentine peso? Do you have any expectation for how the impact operations could play out based on FIHR's history in the country?

Well, the good news is Argentina has many decades of experience with economic chaos. So those folks know how to manage their business, whether their currency is up, down, or sideways.

And so I think we have not seen any change in customer behavior since the devaluation, which was the middle of December. I think our customers and the industry in Argentina view this as a very positive step toward fiscal sanity and normality in Argentina. I think we took some pain there, but we're all hopeful that the gain is going to be worth the pain as the business goes forward. Argentina is a an agricultural powerhouse and there's a lot of opportunity there and we like the market.

Got it.

That makes sense. And then hopping across the world, can you give us an update on your operations in Israel and maybe a ballpark for the head when you're facing more drags on and has it changed at all since the Red Sea shipping has become more of an issue?

So, you know,

You can tell just reading the papers, it's not the easiest time to be operating in Israel. You know, we have been successful operating our facilities and meeting our shipping commitments.

Clearly, it's been more expensive as some of our people have been called up.

But overall, you know, we've slogged through this.

And, you know, hopeful that this comes to an end soon and then things will return to normal soon. Much appreciated. Thanks for the time.

Again, for questions, press star 1. And your next question will come from the line of Brian Wright with Roth MKM. Please go ahead.

Thanks. Good morning. Can you help us get a feel for how much of the vaccine growth year-over-year goes from the autonomous vaccines?

We don't break it out.

So, again, for competitive reasons. Overall, the autonomous business is small compared to the regular vaccine business. It is, you know, I wrote the name for autogenous. It's a custom vaccine. And I don't know if you understand what happens, but maybe we've spoken in the past. Literally, we go to farms, and we take blood samples. If they're not, if they're basically, if things are not responding well to the normal vaccines, the regular vaccines, and we develop a custom vaccine for that farm. that will respond to the viruses they're seeing, to the bacteria they're seeing. We created a custom-made vaccine. It's much more expensive, but it's more effective, and we go back and sell it. So it's a retail, effectively. It's a retail way. It's farm-to-farm, as opposed to the wholesale way. If I have a vaccine, it can cover half the country.

So when you're talking about, you know, the poultry product introductions in Latin America, that that's not a custom vaccine for the poultry.

Correct.

Okay. Thank you.

And then, can you just remind us on the seasonality of the vaccine business? So, overall, there's no seasons.

You know, you're talking about viruses. You're not talking about bacterial oppression. So, it's year-round.

Great. Okay, perfect. And then lastly, if I could, just, you know, with what's going on as CFO, is there kind of, you know, are you envisioning the role changing at all from what it has been in the past?

So I'm not. On the other hand, you know, I'm sure as you see yourself in the banks, every individual has their own way of doing things. So, you know, and Glenn's in the room. He can answer.

But, you know, I surely expect, like they said, all standing on the shoulders of giants. So everyone will make their changes.

And all the changes, you know, together, you know, make for a better job.

Great. And then if I can ask one last one since you did take one that was in the room. And this might be a little early, but just, you know, early thoughts, Glenn, as far as, like, your top priorities as you come in.

Yeah, no, thanks. And, you know, first, really excited to be here and joining Fibro. Obviously, I have a real passion for the industry and glad to join one of the key players in the industry again. And I've been really impressed with the management team so far. And it's really just, you know, two or three days in, so really no – ongoing hypotheses yet, but really look forward to working with the team, getting to understand Fibro in more detail, and then looking to work with the team to really drive profitable growth moving forward. So more to come and really look forward to working with the analysts and communicating with you over the next weeks and months.

Great. We'll save that one for next quarter, too. Perfect. Thank you. Thank you.

We have no further questions at this time. I'll turn the call back to Dick Johnson for any closing remarks.

All right. Well, let me add my welcome to Glenn and wish him well.

And as Shaq said, we'll keep working together. I'll be available for questions as needed. And with that, I wish everyone well. Thank you very much for joining us today.

And take care and talk to you next time. Bye now.

that concludes today's conference call thank you all for joining you may now disconnect