Phibro Animal Health Corporation

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 statement 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. Reconciliation 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 gained net. Also, income taxes related to pretax income adjustments and unusual or non-recurring income tax items. Now, let me introduce our chairman, president, and chief executive officer, Jack Bensine, to share his opening remarks.

Thank you, Glenn, and thank you to everyone joining us this morning. We had an extremely strong start to the year with our annual animal health business growing sales at 14% in the quarter, led by vaccines growth of 22%, and MSA and other growth of 15%. In continuing the trend we saw at the end of our last fiscal year, our mineral nutrition segment grew at 5% in the quarter, while our performance product segment grew at 27%. These results reflect successes in many different areas as we look to increase our share of customer wallet, raise prices where appropriate, benefit industry tailwinds, and in certain areas, increase seasonal disease pressures. Our leverage bottom line growth also reflects and will increase attention to operating efficiencies. We anticipate that these gains will be highlighted in the future as we begin to roll out the initiatives of our FIBA Forward program. As previously discussed, most of the impact of FIBA Forward should be seen in the upcoming fiscal years. These results are impressive in their own right, but even more so with the backdrop of the incredible amount of work done by so many of my colleagues preparing for the closing of our acquisition of the Zoetis Medicaid and feed-adding business. As such, I would also like to take this opportunity to thank the many FIBA employees for their part of this work and welcome our new colleagues who have joined us with the closing of the acquisition. As I stated in our press release, we see an extremely bright future for the new FIBA, as we are not only well positioned to grow our MFAs and other categories, but we are now at a much more significant size and scale overall, which we intend to leverage for the benefit of all our portfolio. If Glenn will further detail, we are also providing updated guidance for our fiscal year 2025, which shows -single-digit growth in revenue and a leverage P&L on a standalone basis. We anticipate the favorable momentum we saw this past quarter will continue throughout the fiscal year. The guidance provided is fiber standalone and does not include the Zoetis portfolio. Contliminary estimates for the Zoetis portfolio for the eight-month period in fiscal year 2025 include net sales of approximately $200 million with an adjusted EBITDA margin of approximately 20% and adjusted earnings per share of approximately 25 cents inclusive incremental interest expense. Negative gap earnings per share is driven by required purchase price accounting adjustments on cost of goods sold and one-time deal costs. To give it back to

Glenn. Thanks, Chuck. We're starting with our Q1 performance on slide four. Consolidated net sales for the quarter ended September 30th, 2024, were $260.4 million, reflecting an increase of $29.1 million, or a 13% increase over the same quarter one year ago. The animal health segment grew 14%, while mineral nutrition grew at 5%, and the performance product segment grew by 27%. Gap net income and diluted EPS increased significantly driven by increases in demand in both domestic and international regions, improved gross margin due to favorable mix and lower input costs, offset by increased SG&A due to higher employee-related costs. After making our standard adjustments to gap results, including acquisition-related items, foreign currency losses, and certain runoff items, the first quarter adjusted EBITDA increased $12 million for 64% versus prior year. Adjusted net income and adjusted diluted EPS both significantly increased. 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 segment level financial performance, the animal health segment hosted 182.5 million of net sales for the quarter, an increase of 22 million, or 14%, versus the same quarter prior year. Within the animal health segment, we reported MFAs and other net sales growth of $13.7 million, or 15%, due to demand in both domestic and international regions. Vaccine net sales growth of $5.8 million, a healthy 22% increase, driven by poultry product introductions in Latin America, plus an increase in both domestic and international demand. Nutritional specialty product net sales increased $2.4 million, or 6%, mostly due to higher sales of microbial and companion animal products. Animal health adjusted EBITDA was $40.4 million, a 42% increase due to higher gross profit from increased sales, partially offset by higher SG&A. Moving on to the first quarter financial performance for our other business segments on slide six, starting with mineral nutrition. Net sales for the quarter were $59.1 million, an increase of $3 million, or 5%, due to increased sales volume and price. Mineral nutrition adjusted EBITDA was $3.8 million, reflecting a -on-year increase of $0.9 million, driven by higher gross profit. Looking at our performance product segment, net sales of $18.8 million reflects an increase of $4.1 million, or 27%, as a result of higher demand for the ingredients used in personal care products. Adjusted EBITDA was $2.3 million, and grew $0.9 million versus the same quarter priority. Corporate expenses increased $1.7 million, driven by increased employee-related costs. Turning to key capitalization-related metrics on slide seven, we generated $41 million of positive free cash flow for the 12-month end of September 30th, 2024. We generated $84 million of operating cash flow and invested $43 million in capital expenditure. Cash and cash equivalents and short-term investments were $90 million at the end of the quarter. Our gross leverage ratio was 3.9 times at the end of the first quarter, based on $477 million of total debt and $123 million of trailing 12-month adjusted EBITDA. Our net leverage ratio was 3.1 times at the end of the first quarter, based on $387 million of net debt and $123 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 .51 plus the applicable margin. In addition, in September of 2024, we entered into a new swap arrangement for $150 million at a fixed rate of .18% plus the applicable margin. As of quarter end, the remaining $27 million of our total debt is subject to variable interest rates, although offset somewhat by interest income earned and short-term investments. As of the date of the delayed draw of the $350 million in additional term A loans, the remaining $377 million of our debt is subject to variable interest rates. Effective July 3rd, we refinanced our credit facilities. Our new 2024 credit facility had an initial aggregate principal amount of $610 million, consisting of a $300 million term A loan and a $310 million revolve, included a $300 million term A loan, which replaced the company's existing 2021 term A loan and 2023 incremental term loan, included a $310 million revolver, which replaced the company's existing $310 million revolver. Extended the maturity date of the company's 2021 credit facilities from April 2026 to maturity dates ranging from July 2029 to July 31. It also included a $350 million delayed draw provision that has been exercised with the closing of the ZUETIS transaction. Additional information regarding the terms and conditions of the 2024 credit facilities are contained in our Form 10-Q that was filed yesterday. Let's turn to slide nine, which lays out our guidance for fiscal year 2025. Please note that our guidance is on a standalone basis without giving effect to the completed acquisition of the ZUETIS Medicaid feed-out of the portfolio. 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 GAP guidance and primarily consists of one-time consulting fees. The initiative is focused on unlocking additional areas of revenue growth and cost savings, areas such as potential 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 increased guidance for fiscal year 2025 on a standalone basis is as follows. Net sales of ,000,000 to ,000,000. This represents a growth range of three to 8% and a midpoint of approximately 6%. Growth versus prior year is driven by continued growth in our animal health segment as well as recovery in both our mineral nutrition and performance products. Adjust the EBITDA of $124 to $132 million. This represents a growth range of 11 to 19% with a midpoint of approximately 15%. Adjust the net income of $55 to $60 million. This represents growth of 14 to 24% with a midpoint of approximately 18%. 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 view. Gap net income in EPS assumes constant currency and no further gains or losses from effects movements. Also included in our gap net income in EPS are one-time costs related to our Fibro Forward Income Growth Initiative. As mentioned previously, this guidance does not include the ZUETIS MFA acquisition as we just closed on the business a few days ago. Our preliminary estimates for ZUETIS for the eight months remaining

in

our fiscal year 2025 are as follows. Approximately $200 million in revenue, approximately 20% EBITDA margin, approximately 25 cents adjusted EPS impact. We will incorporate ZUETIS into our fiscal year 2025 guidance in our Q2 earnings release. The preliminary estimates for the ZUETIS MFA contribution to fiscal year 2025 includes some of the usual impacts you would expect during the integration, such as destocking of inventory, the impact of blackout periods, and incremental costs related to transition service and distribution service agreements. We remain confident in our ability to deliver over 60 cents adjusted EPS in our first full fiscal year 2026, and our ability to deliver below three times net leverage by fiscal year 2027. In closing, we're excited about the strong performance in the quarter and the momentum for fiscal year 2025. We are confident in the demand for our products around the world and look forward to seeing continued improvement in our business as we move forward. With that, Regina, could you please open the line for questions?

At this time, I'd like to remind everyone in order to ask a question, press star, followed by the number one on your telephone keypad. Our first question will come from the line of E.Katerina Niaskova with JP Morgan. Please go ahead.

Hey, thank you so much, and congrats on the quarter. So first question is just around gross margins. Seems that that was particularly healthy, especially relative to last year. Can you talk a little bit about what drove that? Is that coming mostly from price or product or something else? And then second question is just on the acquisition. Just any surprises as you've gone through the process of closing that transaction, any areas of the portfolio where you're seeing any incremental opportunities or any areas where you think you will need to put additional investment behind? Thank you so much.

Yeah, thanks for the question, Katerina. So gross margin, there are a number of factors that drove the positive gross margin that we saw in the quarter. First was mixed, starting very strong performance in our vaccine portfolio with 22% growth. And also even within the MFA and other category, there are certain products that have higher gross margin performed very well in the quarter. We also saw a benefit from input costs in some of our products being favorable, and also foreign exchange had some favorability as well in terms of the overall gross margin. In terms of surprises from the acquisition, as I mentioned, we're only a few days in at this point, and we're obviously working through additional information that we got at closing, but nothing initially poses any big surprises that we've seen.

Yeah, let me exaggerate that. That our sales force, both domestic and internationally, continue to be very, very optimistic about the portfolio that we acquired. And obviously we'll work through some early, early month starts, early day starts, but overall I think this is gonna be proved to be an exceptional

acquisition for the company.

Thank you so much. Our next question will come from the line of Michael Riskin with Bank of America. Please go ahead.

Great, thanks for taking the question guys, and congrats on a great start to the year. Let me fire some of these off in rapid succession. First on the Zoetis MFA acquisition, the 200 million in revenues, 20% EBITDA margin. I think you previously talked, and 25 cents of EPS, right? I think you previously talked about full year, first 12 months, 400 million in revenues, and 60 cents in EPS. Is this just timing? Is there some seasonality? I mean, I guess, I realize it's eight months versus 12 months, but I would have thought that the eight month contribution would be a little bit higher. So just kind of, can you walk me through the bridge there?

Sure, so when you look at the guidance that you mentioned, we had talked about a trailing 12 months revenue initially at the time of the deal of about $400 million. We updated that in one of the future calls that the trailing 12 months was around $375 million. And I'll say all deal terms did not necessarily translate that exactly into what the future revenue would be. When you look at the revenue of $200 million, obviously that's lower than what we'd expect for a normal eight month period. Within the first eight months, there is de-stocking related to the deal. And that's just de-stocking that you sort of required as part of the transition. There are certain markets where, due to the regulatory transition, you're not allowed to sell, call it six months to a year, and the customer then had to purchase in advance to make sure that they could satisfy the customer needs. And then in a lot of our larger markets as well, there are certain blackout periods as we transition to us providing new orders as well. So those are all normal things that you'd expect. And those hit most impactfully, you can call it the first three to six months of the deal. So it's really more transitionary impact and not a reflection of lack of confidence and still being able to deliver a significant normal 12 months of revenue gain. And in terms of 25 cents in EPS, as you mentioned, we've guided to 60 cents for the first 12 months. If you translate that to eight months, that's 40 cents. Some of these impacts that we're talking about at revenue, which again, are just transitionary in nature, did impact that delivery of what would have been a straight 40 cents.

Okay, okay, all right, that's helpful. In the press release, I think you also called out that, as you're curating your portfolio, you discontinued the Atopic Derm project. Just curious on any additional color you could provide there, was that tied to any of the other developments in the derma space that you've seen from others in the last couple of months? And just sort of how should we think about the companion animal investment going forward? Is that money just directly being shifted somewhere else? Is there, just how do we think about the pipeline there?

Michael, I'll take it, Donnie. So we've always had a very strong target product profile for that product as well as all of our products, and we stick to it. We have quarterly updates where we look at where we're doing and how we're doing versus our TPP, and frankly, it missed the mark. And so we discontinued it. I'm not gonna get into it specifically, where it missed, because it's not fair to our licensure. But we are continuing to be bullish about our overall pipeline and continue to invest in it. As far as where the dollars from Dermacare, what we call the Atopic Dermatitis product go, I think that's still to be determined. But we will continue with that

going forward. Okay, and if I can squeeze in one last one, and just a high level question on the MFA business, on the legacy on your existing MFAs and other business, 15% growth in the quarter. You guys have honestly had a really impressive stretch here, multiple quarters in a row. I mean, going back to the last couple of years, what I would think to be above market growth or above what we would have historically thought of MFAs, you called out a couple of drivers in terms of just demand, some new products, but just maybe take a step back and put that MFA performance for fiber over the last year or two in context. Just how sustainable is that? Is this meaningful share gains from others? Is this the market is sort of, take an incremental step higher and now it's a better performing market? Just big picture thoughts on the strength that MFA is for you.

Very much, this is Larry, I'll take the question though. So as you mentioned, first thing in particular as we look first quarter performance, it was continued, a strong trend that we experienced, particularly in second half of our FY24. So that trend continued within the first quarter itself. We do certainly have had some favorable seasonality disease challenges, particularly in Southern hemisphere. There are winter months that really added a lot of demand for our products in the fourth quarter of 2024, our FY24 and the first quarter of our FY25. And we did have a couple timing pattern orders that took place in our first quarter, that were favorable to the first quarter of last year. But I guess, overlying, we just see very strong continued demand for our products. And I think that's how we see it.

Yeah,

Mike, I would

just add, right? I think it's products and people. We have strong focus on these products and we are dedicated to going out and discussing these products with our customers and really sharing the benefits. And that's what gives us additional confidence in acquiring the Zoetis MFA portfolio, believing that we can have better performance and perhaps they've had some fast.

And within our animal health products, certainly MFAs, but also we had very strong performance that our nutrition specialty products as well as our vaccines.

Great, thanks so much. Congrats again,

guys. Our next question will come from the line of Lynn Schultz with Morgan Stanley. Please go ahead.

Lynn, you might be on mute. Our next question will come from the line of Anavanti with BNP

Periba. Please go ahead.

Oh, hi, actually my question has been answered. I have the same question about the different numbers on the Zoetis MFA and maybe on the strategic priorities after the discontinuation of AD. Yeah, I think my

question will work. And so unless you have anything to add, thank you.

I think that, thanks, Mellon.

Again, for any questions, please press star followed by the number one on your telephone keypad. And with that, I will now turn the call back to Glenn David for any closing remarks.

Thank you, Regina. And thank you everyone for listening in on today's call. We really appreciate your time, attention, interest, and support. We'll find Ron and help and hope you have a great day.

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