Phibro Animal Health Corporation

Good morning, and welcome to the Fibro Animal Health Corporation earnings call for our second quarter ended December 31st, 2024. My name is Glenn David, and I'm the Chief Financial Officer of Fibro Animal Health Corporation. I am joined on today's call by Jack Bentine, Fibro's Chairman, President, and Chief Executive Officer, and Donnie Bentine, Director and Executive Vice President of Corporate Strategy. Today, we will cover our financial performance for our second quarter and provide updated 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 quarterly form 10Q, 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 these 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 room. 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 room 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 as separately reported in the consolidated statements of operations, including foreign currency losses gains net, 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 Benton, to share his opening remarks. Jack.

Thank you, Glenn, and good morning, everyone. By any measure, this is one of the strongest quarters since going public. We successfully integrated the Zoetis Medicaid free added portfolio, a testament to our unwavering customer-centric approach, one that I believe Zoetis shares as well. While no integration is without challenges, our guiding principle remains clear, serving the customer. This focus has ensured seamless execution of our most critical priorities. At the same time, our Fribo Forward initiative continues to drive operational excellence, helping us identify opportunities for growth while improving efficiency and execution. Financially, we delivered exceptional results, driven by strong demand in our animal health business and two months of contributions from the Zoetis MFA portfolio. Total sales climbed 24%, while adjusted EBITDA surged 64%, demonstrating both top-line strength and expanding profitability. Our animal health segment led the way, with MFA and other product sales rising 47%, Even excluding this OS contribution, our legacy animal health business will limit double-digit growth across all three product categories, with MSA and other sales increasing 11%, vaccines expanding 12%, and nutritional specialties up 11%. Rounding out our performance, our mineral nutrition segments grew 3%, while our performance product segment posted a 7% increase. As noted in our press release, these results highlight the strength of our diversified portfolio, our relentless focus on execution, and our commitment to delivering essential solutions to customers worldwide. The momentum we've built positions us well for the remainder of fiscal 2025 and beyond. We remain confident in our ability to drive sustainable growth and create long-term value through the fiber-forward strategic innovation, targeted portfolio expansion, and disciplined financial management. The broader protein industry, both in the U.S. and globally, remains strong. We expect continued growth despite challenges such as emerging diseases like apian influenza and geopolitical factors, including the newly announced tariffs. We are confident that Fribo is well-positioned to navigate these headwinds and capitalize on the opportunities ahead. As Glenn will discuss, we are updating our fiscal year 2025 guidance to reflect this momentum and our strengthening outlook. Glenn.

Thank you, Jack. Starting with our Q2 performance on slide four. Consolidated net sales for the quarter ended December 31st, 2024 were $309.3 million, reflecting an increase of $59.3 million, or a 24% increase over the same quarter one year ago. The animal health segment grew 33%, while mineral nutrition grew at 3%, and the performance product segment grew by 7%. Gap net income and diluted EPS increased significantly driven by the integration of the new MFA business, increases in demand in both domestic and international regions, improved gross margins 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 GAAP results, including acquisition-related items, foreign currency losses, and certain one-off items, the second quarter adjusted EBITDA increased $18.7 million, or 64% versus prior year. Adjusted net income and adjusted diluted EPS both significantly increased as well. Increased gross profit driven by sales growth was partially offset by higher adjusted SG&A and higher adjusted interest expense. Now moving to segment level financial performance. The animal health segment posted $229.4 million of net sales per quarter, an increase of $56.3 million or 33% versus the same quarter prior year. Within the animal health segment, we reported legacy MFA and other net sales growth of $11.7 million, or 11%, due to demand in both domestic and international regions. The new MFA business contributed two months of sales, or $36.7 million in the quarter, driving the total MFA and other growth to 47%. Please note, that November sales for the Zoetis MFAs were impacted by blackout periods and other transition factors. We saw a nice acceleration of sales in December, with sales approximately double that of November. Nutritional specialty products net sales increased $4.5 million, or 11%, mostly due to higher sales of microbial and companion animal products. Vaccine net sales growth of $3.4 million, a healthy 12% increase, driven by vaccines in Latin America, plus an increase in both domestic and international demand. Animal health adjusted EBITDA was $58.2 million, a 48% increase driven by the new MFA business, higher gross profit from increased legacy sales, and partially offset by higher SG&A. For comparison purposes only, we are providing a rough estimate of Zoetis EBITDA contributions. Please note that many expenses are not easily attributed to the new business. Our estimated EBITDA of $12 million includes only those expenses that can be directly attributed to the new MFA business. Moving on to the second quarter financial performance for our other business segments on slide six. Starting with mineral nutrition, net sales for the quarter were $63.3 million, an increase of $1.9 million, or 3%, due to increased sales volume and price. Mineral nutrition adjusted EBITDA was $5.7 million, reflecting a year-on-year increase of $2.2 million, driven by higher gross profit and improved cost positions. Looking at a performance product segment, net sales of $16.6 million reflects an increase of $1.1 million, or 7%, as a result of higher demand for the ingredients used in personal care products. Adjusted EBITDA was $1.9 million and grew $1.1 million versus the same quarter prior year. Corporate expenses increased $3.4 million driven by increased employee-related costs. Turning to key capitalization-related metrics on slide 7, we generated $15 million of positive free cash flow for the 12 months ended December 31, 2024. We generated $55 million of operating cash flow and invested $40 million in capital expenditures. Cash and cash equivalents were $67 million at the end of the quarter. Our gross leverage ratio was 3.1 times at the end of the second quarter based on $760 million total debt and $242 million of trailing 12-month adjusted EBITDA. Please note that the trailing 12 months of adjusted EBITDA includes 12 months from the ZOEBIS medicated fee debt portfolio. 10 months of Zoetis history and two months from Fibro ownership. Our net leverage ratio was 2.9 times at the end of the second quarter based on $693 million of net debt and $242 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 0.51% plus the applicable margin through June 2025. In addition, in September of 2024, we entered into a new swap arrangement for $150 million at a fixed rate of 3.18% plus the applicable margin. Let's turn to slide 8, which lays out our guidance for fiscal year 2025. Please note, that our guidance now includes the acquisition of the Zoetis Medicaid FDAT portfolio. Included in this guidance for fiscal year 2025 are early benefits related to our FIBO 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 potential price increases, expanded product offerings, procurement initiatives, and other cost savings initiatives. Please note that we do not anticipate significant headcount reductions as part of this initiative. Our increased guidance for fiscal year 2025 updated to include the acquisition of the Zoetis Medicaid Feed Additive Portfolio is as follows. Total net sales of $1,250,000,000 to $1,300,000,000. This represents a total growth range of 23 to 28 percent and a midpoint of approximately 25 percent. Total adjusted EBITDA of 172 to 180 million dollars. This represents a growth range of 55 to 62 percent and a midpoint of approximately 58 percent. Total adjusted net income of 76 to 82 million dollars. This represents growth of 57 to 70 percent approximately 63%. The preliminary estimates for the ZOETIS MFA contribution to fiscal year 2025 include some of the usual impacts you would expect during an integration, such as destocking of inventory, the impact of blackout periods, and incremental costs related to transition service and distribution agreements. GAAP Net Income assumes constant currency and no further gains or losses from FX Also included in our gap net income in EPS are one-time costs related to our Fibro Forward Income Growth Initiative and acquisition-related costs from the new MFA products. We are confident in our ability to deliver a total adjusted diluted EPS between $1.87 and $2.01 for the full fiscal year of 2025, which represents a growth of 57% to 69%, with a midpoint of approximately 63%. In closing, with our updated financial guidance, we reaffirm our commitment to strong performance and enhancing shareholder value. We are excited to include the new MFA portfolio in our guidance, which reflects our confidence in seamless integration and strong performance alongside improving profitability in our legacy business. With that, Regina, could you please open the line for questions?