Phibro Animal Health Corporation

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 followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the conference over to Glenn David, Chief Financial Officer. Please go ahead.

Thank you, Julianne. Good day, and welcome to the Fibro Animal Health Corporation earnings call for our fiscal fourth quarter and full year ending June 30th, 2024. My name is Glenn David, and I'm the Chief Financial Officer of Fibro Animal Health Corporation. I'm joined on today's call by Jack Bentime, Fibro's Chairman, President, and Chief Executive Officer, Donnie Bentime, Director and Executive Vice President of Corporate Strategy, and Larry Miller, Chief Operating Officer. Today, we will cover financial performance for our fourth quarter and full year 2024 and provide financial guidance for our fiscal year ending. June 30th, 2025. At the conclusion of our remarks, we will open the lines for your questions. I would like to remind you that we are providing a simultaneous webcast of this call on our website, pahc.com. Also, on the investor section of our website, you will find copies of the earnings press release in annual form 10-K, as well as the transcript and slides discussed and 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 for 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, including stock-based compensation Other income expense is separately reported in the Consolidated Statement of Operations, including foreign currency losses and gains, and income taxes related to pre-tax income adjustments and unusual or non-recurring income tax items. Now, let me introduce our Chairman, President, and Chief Executive Officer, Jack Bentime, to share his opening remarks.

Thank you, Glenn, and thank you to everyone joining us this morning. We had a strong finish to the year with our animal health business growing sales at 8% of the quarter, led by vaccine growth of 14%, and other growth of 12%. In the quarter, our mineral nutrition segment grew at 6%, and while our performance product segment showed a slight decline, both mineral nutrition and performance products had their best quarter of the year, building on the improvements we began to see in the third quarter. We remain very excited about the acquisition of the Zoetis MFA business. We are moving closer to a closing on the deal. Our team is working very hard together with Zoetis to ensure a transition that is as seamless as possible so that the customers are unaffected by the handoff. We expect the transaction to close in the fourth quarter of this calendar year. As Glenn will further detail, we are also providing guidance for our fiscal year 2025. which shows mid-single-digit growth in revenue and a leveraged P&L on a standalone basis. We anticipate the favorable momentum we saw this past quarter will continue in our new fiscal year. On top of this, our adjusted EBITDA and adjusted net income growth are benefiting from an income growth initiative that we internally called Five Road Forward. This initiative is unlocking additional growth drivers in our business across both revenue and cost-efficiency initiatives. Our guidance also includes one-time costs related to this initiative that are primarily external consulting fees. We expect even greater benefits from this initiative in our fiscal year's 2026 and 2027 results. The guidance provided does not include the pending Zoetis acquisition. Additional guidance on Zoetis will be provided post the deal closing. I look forward to hearing your questions following Glenn's reviews of our financials. Thank you.

Thanks, Jack, and starting with our Q4 performance on slide four. Consolidated net sales for the quarter ended June 30, 2024, for $273.2 million, reflecting an increase of $18.1 million, or a 7% increase over the same quarter one year ago. The animal health segment grew 8%, while mineral nutrition grew at 6%, and the performance product segment declined by 1%. Gap net income and diluted EPS decreased significantly, driven by foreign currency losses in the quarter due to the weakening of the Brazilian real and increased SG&A due to higher employee-related costs, partially offset by favorable gross profit as a result of higher product demand in the animal health segment. After making our standard adjustments to gap results, including acquisition-related items, foreign currency losses, and certain one-off items, Fourth quarter adjusted EBITDA increased $1.1 million, or 3%, versus the prior year. Adjusted net income and adjusted dual rate EPS both increased 10%. Increased gross profit, driven by sales growth, was partially offset by higher adjusted SG&A and higher adjusted interest expense, with a benefit from a reduced adjusted provision for income taxes. Moving to the full year. Consolidated net sales for the year ended June 30, 2024, were $1,017,000,000, reflecting an increase of $39.8 million, or a 4% increase over the prior year. The animal health segment grew 7%, while mineral nutrition was flat, and the performance product segment declined by 10%. Gap net income and diluted EPS decreased significantly, driven by foreign currency losses in the Argentinian peso and Brazilian real, increased SG&A due to pension settlement costs, and higher employee-related costs and higher interest expense partially offset by favorable gross profit as a result of higher product demand in the animal health segment. Income tax expense decreased by $13 million. After making our standard adjustments to GAAP results, including acquisition-related items, foreign currency losses, and certain one-off items, Full-year adjusted EBITDA decreased $1.5 million, or 1%. Adjusted net income and adjusted diluted EPS both decreased by 1%. Higher adjusted SG&A and higher adjusted interest expense was partially offset by increased growth profit driven by sales growth and a benefit from a reduced adjusted provision for income taxes. Now moving to segment-level financial performance. The animal health segment posted $191.5 million net sales for the quarter, an increase of $14.8 million, or 8%. Within the animal health segment, we reported MFA's and other net sales growth of $12.5 million, or 12%, due to demand in both domestic and international regions. Vaccine net sales growth of $4 million, a healthy 14% increase. driven by poultry product introductions in Latin America, plus an increase in domestic demand. Nutritional specialties net sales declined by $1.7 million, or 4%, mostly due to lower demand for microbial and dairy products. Animal health adjusted EBITDA was $41.3 million, a 9% increase due to higher gross profit from increased sales, partially offset by higher SG&A. Moving to full-year performance for animal health on slide 7. The animal health segment posted $706.5 million of net sales for the year, an increase of $46.6 million, or 7%, versus the prior year. Within the animal health segment, we reported MFAs and other net sales growth of $33.6 million, or 9%, due to demand in both domestic and international regions. Vaccine net sales growth of $20.9 million, a healthy 21% increase driven by poultry product introductions in Latin America, plus an increase in domestic demand. Nutritional specialties net sales declined $7.8 million, or 5%, mostly due to lower demand for microbial and dairy products. Animal health adjusted EBITDA was $145.6 million, a 7% increase due to higher gross profit from increased sales offset by higher SG&A. Moving on to fourth quarter performance for our other business segments. Starting with mineral nutrition, net sales for the quarter were $62.1 million, an increase of $3.6 million for 6% due to increased sales volume and price. Mineral nutrition adjusted EBITDA was $5.4 million, reflecting a year-on-year increase of $1.5 million driven by higher gross profit. Looking at our performance product segment, net sales of $19.6 million reflects a decrease of $0.3 million or 1% driven by decreased demand for personal care product ingredients and industrial chemicals. Adjusted EBITDA was $3.1 million and grew $0.8 million versus the same quarter prior year. Corporate expenses increased $4.6 million driven by increased employee-related costs related to the annual incentive bonus. Moving on to full-year performance for our other business segments. Starting with mineral nutrition, net sales for the year were $243.7 million, an increase of $1 million due to increased sales volume. Mineral nutrition adjusted EBITDA was $16.4 million, reflecting a year-on-year decrease of $1 million driven by lower gross profit. Looking at our performance product segment, Net sales of $67.5 million for the year reflects a decrease of $7.8 million, or 10%, driven by decreased demand for personal care product ingredients and industrial chemicals. Adjusted evens over $7.7 million, a decline of $1.7 million versus the prior year. Corporate expenses increased $8.3 million, driven by increased employee-related costs due to the annual incentive bonus and incremental strategic investments. Turning to key capitalization related metrics. We generated more than $46 million of positive free cash flow for the 12 months ended June 30th, 2024. We generated $88 million of operating cash flow and invested $41 million in capital expenditures. Cash and cash equivalents and short-term investments were $115 million at the end of the year. Our gross leverage ratio was 4.4 times at the end of the fourth quarter based on $489 million of total debt and $111 million of trailing 12-month adjusted EBITDA. Our net leverage ratio was 3.4 times at the end of the fourth quarter, based on $375 million of net debt and $111 million of trailing 12-month adjusted EBITDA. Turning to dividends, consistent with our history, we paid a quarterly dividend of 12 cents per share, or $4.9 million in aggregate. As a reminder, $300 million of our debt is at a fixed rate of 0.61% plus the applicable margin. The remaining $189 million in total debt is subject to variable interest rates, although offset somewhat by interest income earned on short-term investments. Effective July 3rd, we refinanced our existing credit facilities. Our new 2024 credit facilities have an initial aggregate principal amount of $610 million. It contains a delayed draw provision to allow the company to draw an additional $350 million Term A loan applying closing of the Zometas transaction. It also includes a $300 million Term A loan that replaces the company's existing 2021 Term A loan and 2023 incremental term loan. It also includes a $310 million revolver replacing our existing $310 million above. The new facilities extend the maturity date from our current facilities of April 2026 to maturity dates of July 2029 and July 2031. Additional information regarding the terms and conditions of the 2024 credit facilities are contained in our 410 that was filed yesterday. Now let's turn to slide 11, which lays out our guidance for fiscal year 2025. Please note that this guidance does not include the ZOETIS MFA acquisition, as the timing for close is still not final. Included in this guidance for fiscal year 2025 are early benefits related to our FIBRO Forward Income Growth Initiative that will help drive additional EBITDA and margin growth. One-time costs related to this initiative are also included in our GAAP guidance and primarily consist of one-time consulting fees. The initiative is focused on unlocking additional areas of revenue growth and cost savings. Areas such as incremental price increases, expanded product offerings, procurement initiatives, and other cost savings initiatives. Please note, we do not anticipate significant headcount reductions as part of this initiative. Our guidance for fiscal year 2025 on a standalone basis is as follows. Net sales of $1.4 billion to $1.9 billion. This represents a growth range 2% to 7% and a midpoint of approximately 5%. Growth versus prior year is driven by continued growth in our animal health segment, as well as a recovery in both our mineral nutrition and performance products. Adjusted EBITDA of $118 to $126 million. This represents a growth range of 6 to 13% and a midpoint of approximately 10%. Adjusted net income of $50 to $56 million, which represents growth of 3 to 15% with a midpoint of approximately 9%. This growth is driven by growth in EBITDA and an improvement in our adjusted effective tax rate, partially offset by incremental interest expense due to our new debt ceiling. Gap net income in EPS assumes constant currency and no gains or losses from FX movements. Also included in our gap net income in EPS are one-time costs related to our FIBRO Forward Income Growth Initiative. As previously mentioned, this guidance does not include the pending Zoetis MFA acquisition as the timing for closing remains uncertain. We hope to provide guidance on Zoetis in our Q1 earnings call in November. We remain confident in our previous estimates of an incremental 60 cents in adjusted VPS in the first 12 months of the close date and our ability to view lever post-close. In closing, we're excited about the strong performance we saw in the second half of fiscal year 2024 and the momentum we're carrying into fiscal year 2025. We're confident in the demand for our products around the world and look forward to seeing continued improvement in our business as we move forward. We also look forward to welcoming Zoetis MFA employees in the coming months. With that, Julianne, can you please open the line for questions?

Thank you. 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. Our first question comes from Michael Riskin from Bank of America. Please go ahead, your line is open.

Great. Thanks for taking the questions. First, Glenn, you just went through it right there in terms of the components of the guide for fiscal year 24. But I was wondering if you could provide a little bit more color on MFAs, nutritional specialty vaccines, just what are the various drivers of each? You know, what are the puts and takes that sum up to that overall 5% revenue guide?

Sure. So when you look at the performance for next year, Mike, for fiscal year 2025, We're excited about continued growth in animal health and also improvement that we expect to see in both mineral nutrition and performance products, which struggled a bit in the first half of fiscal year 2024, and saw a recovery in fiscal year 2025. Specifically to your question on animal health, again, we see that continuing to perform well in 2025, still growth in our MFA business, a recovery in our nutritional specialty, and still growth in our vaccines for probably a little less than we saw in 2024 as we had the introduction in Brazil, particularly, of our live EVR problems.

Okay. Okay. And then another question on FibroForward. You flagged this a couple times in the PR and the prepared remarks. Just a little bit more color on the magnitude of the cost efficiencies and any, you know, what are the growth drivers in particular you're focusing? How should we think about the timing of this being rolled out?

Yeah, so I'll start a little bit, and then I'll ask Donnie to comment. as well. So we're in the early stages of this initiative right now. We do expect benefits in fiscal year 2025, but we expect those to expand as we move into fiscal year 2026 and 2027. And the initiatives go across a number of areas, as I mentioned, both revenue growth drivers as well as cost savings initiatives that we're looking at in areas such as procurement and other areas as well. You know, we do expect that, you know, in 26 and 27, this initiative will allow us to provide EBITDA and adjusted net income growth beyond our historical levels. And as we get further into the process, we'll provide more guidance for those future years. And Donnie, I don't know if you want to add.

Thanks. Not much to add. You know, focused on deliverable performance, focused on both, you know, recurring EBITDA as well as, you know, cash flow. So we do see some is there as well this year as well as in the future years and you know as glenn said there's you know literally dozens of initiatives that that you know some of them very small some of them are larger than some of the kind of where we hope to be in a couple of years okay and then one last if i could squeeze in on the zoetis um mfa deal um just around the the deal itself um are there any um

regulatory steps or antitrust requirements we should be aware of from an HSR perspective? Are there any geographies where you need regulatory approval? Just walk us through that part of it.

Sure. So there were two markets where we required regulatory approval, Mike. One in the U.S., one being the U.S., obviously, and then one outside of the U.S. We've already cleared all the requirements for the U.S., so we're very excited about that. There's one additional market. We're very confident in the ability to get approval there. It's just more of a timing know with their existing processes and that's what drives our expectation that we will close the deal in q4 calendar year this year great thanks so much as a reminder to ask a question please press star one our next question comes from nevin t from bnp paribas please go ahead your line is open hi good morning

About the Zoetis deal, can you discuss your integration plans and the integration work you have been doing before the deal closes? And then a question on refinancing, if you have completed all of it and you have higher covenant headroom as you anticipated. Thank you.

Sure. In terms of the integration plans, obviously we've been working diligently as an organization to be prepared to bring the business forward. into Fibro and be effective when we take over the business and make sure that we could effectively support our customers. We are working with third-party consultants to help us to do that. As well, we're very confident in our ability to take over the business on day one. And we are building additional resources internally in markets where we may not have, you know, the level of presence to support the magnitude of the business that we are acquiring from Zoetis. As we mentioned, we're very excited about what that adds to us in certain areas in particular. particularly the expansion that provides to us in China, as well as the expansion in the U.S. beef market. Related to the refinancing, we are done with the refinancing. As I mentioned in the prepared remarks, it does also provide for an additional delayed draw loan on the closing of the Zoetis acquisition of $350 million to help us finance that acquisition. So that is pending the deal close.

Thank you.

There are no further questions at this time. I would like to turn the call back over to Glenn David for any closing remarks.

We thank you all for your interest in fiber animal health, and we appreciate the questions and hope everybody has a great day. Thank you.

This concludes today's conference call. You may now disconnect.