Q2 2024 Phibro Animal Health Corp Earnings Call
Participants
Richard Johnson; Chief Financial Officer; Phibro Animal Health Corp (Pre-merger)
Jack Bendheim; CEO & President; Phibro Animal Health Corp (Pre-merger)
Erin Wright; Analyst; Morgan Stanley
Michael Ryskin; Analyst; Bank of America Securities
Brian Michael Wright; Analyst; ROTH MKM
Presentation
Operator
Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Phibro Animal Health Corporation second quarter Investor conference call. (Operator Instructions) I would now like to turn the conference over to Richard Johnson, Chief Financial Officer. Please go ahead.
Richard Johnson
Thank you, Regina, and welcome to the Phibro Animal Health Corporation earnings call for our fiscal second quarter ended December 31, 2023. As we said, my name is Richard Johnson. I'm the Interim Chief Financial Officer of Phibro Animal Health. I'm joined today by Jack Bendheim, Phibro Chairman, President and Chief Executive Officer; Jonthan Bendheim, Director and Executive Vice President of Corporate Strategy, and also by Glenn David, the incoming Chief Financial Officer.
Today will 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, CHC.com and also on that investors section of our website. You'll find copies of the earnings press release and second quarter Form 10-Q as well as later today, the transcript and slides that we're discussing on our call this morning.
As Turning to slide 2, 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 could cause results to differ, I refer you to the forward-looking statements section in our earnings press release. My 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 of 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 nonoperational or nonrecurring items, which would include things like stock-based compensation and in this most recent quarter of Brazil, employment taxes item also other income and expenses separately reported in the P&L, including foreign currency losses and also income taxes related to any of those pretax income adjustments and any other unusual or nonrecurring 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?
Jack Bendheim
Thank you, Dake, and thank you to everyone joining us this morning. Our second quarter showed the resilience of our business and was a positive step up. The video was 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% (sic - see press release, 5%), led by high value new product introductions and vaccine product by a strong 31% increase in net sales of vaccines led the way for animal health.
We are seeing the uptake of our vaccines across the various regions, especially in South America. We have launched new commercial vaccines and have the added benefit renewal charges facility as new facilities is up. Looking ahead, we expect in the continuing growth in the MRO business in the second half of the year. We also expect to see significant improvement in our Mineral Nutrition and Performance Products businesses as we work through inventory and balances.
And as we see a rebound in demand, we have reaffirmed our guidance for net sales, adjusted EBITDA and adjusted diluted EPS, as Dave will go into in greater detail for the end of his presentation, we are continuing to invest behind our successes we're looking to introduce additional vaccines in the Americas and have just had our first sales of new line nutritional specialty products for poultry here in the United States. We see vaccines and nutritional specialties and companion animal has continued growth opportunities, and we're 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 commercial and financial leadership roles, including a wealth of knowledge in the animal health industry. He brings the capabilities needed to contribute to fibrosis 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 dig for agreeing to step in as interim CFO and as a company, we did not miss a beat it this quickly transaction. And after that, it will continue to be available to solve with Glenn and assist fibro as a whole day.
Richard Johnson
Thanks, Jack. So let me start with the consolidated financial performance on Slide 4, and then we'll move on to segment level performance, selling some other information. Consolidated net sales for the quarter were just under $250 million and that was an increase of $5.3 million or 2% over the same quarter of 12 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 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 from 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 $1 million, 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.
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 5 and moving to segment level financial performance. 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 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 being introduced into Latin America, plus we saw an increase in domestic demand in our MFAs and other category, net sales grew $4.8 million or 5% due to demand in various international regions and also continuing growth for and demand for our processing aids used in the ethanol fermentation industry.
Nutritional Specialties net sales declined in the quarter by $2.4 million or about 6%, mostly due to a reduced reduced demand from the domestic dairy business. All of that drove the 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 biggest business segments on Slide 6. Starting with Mineral Nutrition. Net sales for the quarter were $61 million, a slight decrease from last year due to a decline in the average selling prices and also some reduction in sales volume.
Yes, 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 products segment, net sales of $15.5 million for the three months reflect a $3.7 million or 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.
As we turn to the capitalization related metrics on page 7, we are 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 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 4.4x at the end of the quarter based on a $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 of the aggregate. And as a reminder, about the As a reminder, $300 million of our debt is at a fixed rate of 61 basis points, plus an applicable margin of 1.75%. 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. So those measures, we have updated our guidance for GAAP measures to reflect recent developments, which would include that Brazil at employment taxes, issue of additional foreign currency losses, again, mostly coming out of a large container devaluation and then some other smaller items and the related income tax effects of those things.
So in closing, we are optimistic as we head into 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 in that
with that, operator much, please open the line for questions.
Thank you.
Question and Answer Session
Operator
(Operator Instructions) Erin Wright, Morgan Stanley.
Erin Wright
Can you give us an update on just underlying demand trends and how you're thinking about fundamentals in some of the key lifestyle categories for you like poultry and dairy? And what are you expecting over the next six to 12 months across those categories?
Jack Bendheim
And I have money and short question long answer. And so we're seeing around the world positive trends. I think the underlying the underlying safety and sort of winds have sort of come back to historic norms positions.
One is demand is Hasaga. We had return on it means the effect of COVID. I think we're finally seeing companies doing in terms of the imbalances and inventory and cost of new inventory and people so that we can into whether it's restaurants or in a school that does have some the normal buyers have return or returning to market the same time, the most important ingredient in raising animals is costs have been, 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. So that's one of the reasons that were part of the same good sales in all regions and increasing down, and we're seeing price increases holding. And so again, it's the reason we're optimistic.
Erin Wright
an adjusted EBITDA margin was strong in animal health.
Was that just a function of the mix dynamic with the strength in vaccine there or what drove that? And you mentioned price a second ago, you kind of quantified 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?
Yes.
Richard Johnson
Yes, it's all those things there. I mean, certainly, we're seeing favorable product mix within node within animal health vaccines in general, have the they have the highest margins. So as we grow that part of our business, we're getting that favorable benefit. And that's that's allowing us to continue to build the business with by making very targeted on expense investments in people mostly in certain markets, but but we're able to offset that that expense improvement. So that that's that's why the that's why the improvement in. And I think you know, as we grow going forward, it's reasonable to expect the kind of bottom line growth, at least equal and as in percentage terms to the top line growth.
Erin Wright
Okay.
That's helpful. And then just if I could sneak one more in here. Like there was a recent deal on the tape for a long goes ag business. To Merck and Merck 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 ag business or how big is that now?
Richard Johnson
So we are committed, but it's a small business. So it has to be the movement of the products from the land go to bear it will have no effect on our business.
Erin Wright
Thank you.
Operator
Balaji Prasad, Barclays.
Hi, this is on for Bellagio. Thanks for taking our question.
Just two for me. Can you first just remind us of how Regency 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.
Richard Johnson
I mean, I don't think it was just a question, and we actually did not call out this year.
Specific guidance with regard to Magento, in our opinion are annual. So Tom, it is part of the official specialties. It continued to grow nicely double digit growth.
But other than that, for competitive reasons, we don't call out more specifics and dams, species and geographies that we operate 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 increasing the focus on the cattle business so Catalyst will make a more important part of our business, but still small relative to us anyway, and it's dairy relative to the United States.
Thanks so much.
Operator
Michael Ryskin, Bank of America Securities.
Michael Ryskin
I was involved for my picture question. I'm wondering, beyond the hit to the P&L. Are you seeing any changes in customer behavior related to the drop in the Argentine peso? Do you have any expectation for how the impact operations could play out based on Viper's history in the country.
Richard Johnson
Well, the good news is Argentina has many decades of experience with economic chaos. So those folks know how to They know how to manage their business bottom, whether their currency is up down or sideways. And so I think we we have not seen any change in customer behavior since the devaluation, which was the middle of December.
But I think our customers and the industry in Argentina view this as a very positive step toward fiscal sanity and normality in Argentina. So I think together, we took some pain that are both from. We're all hopeful that it's going to be that good. The gain is going to be worth paying as as the business goes forward. Argentina is an agricultural powerhouse and there's a lot of opportunity there. We like the market.
Michael Ryskin
Got it.
Makes sense. And then a pop in across the world, can you give us an update on your operations in Israel and maybe a ballpark for the headwind you're facing and some were drags on And has it changed at all since the Red Sea shipping has become more of an issue?
Richard Johnson
So as you just read the papers, it's Sam. Not the easiest time to be operating in Israel enough. We have been successful operating our facilities and meeting our shipment shipping commitments on clearly, it's been more expensive and is some of our people have been caught up. But overall in our we've slog through this time and a hopeful of this comes on its own and then things will return to normalcy.
Michael Ryskin
Much appreciated.
Operator
Brian Michael Wright - ROTH MKM.
Michael Ryskin
Thanks.
Good morning. Still help us get a feel for how much of the vaccine growth year over year hurt us from the outcomes adoption of vaccines, we don't break it out.
Richard Johnson
And so again, for us sort of competitive reasons as a overall, the attachments business is small compared to the regular vaccine business. It is with our other main product types and customer benefit. And I don't know if you want to sound what happens, but maybe will be spoken in the past literally we got refunds and we take can blood samples have been that have been basically if things are not responding well to the normal, the normal band, same regular vaccines and we develop a custom vaccine for that bond. It will respond to the RISSA. to the bacteria is saying we created a custom-made vaccine is much more expensive, but more effective and we go back and sell it. So it's a retail effectively. It's a retail ways. Fonterra farm as opposed to the wholesale well, have a way of I have a vaccine and cover appetite.
Brian Michael Wright
So we mainly your since you when you're talking about the poultry product introductions in Latin America, that that's not a customer back samples from the culture
Richard Johnson
correct.
Brian Michael Wright
Okay. Thank you.
And then on can you just remind us on the seasonality of the vaccine business?
Richard Johnson
So overall, there's no seasons and now you're talking about viruses in I'm talking about criteria, the Brexit. So it's a it's year-round.
Brian Michael Wright
Great.
Okay, perfect. And then lastly, if I could, just with the quarter you're going on as CFO.
Richard Johnson
Is there a kind of are you envisioning the role changing energy at all from what it has been in the past and so on and on and on the other hand, I'm sorry, as you see yourself in the banks. Every individual has their own way of doing things. So they have a glance on the move and you can answer it, but I actually expect places like that. Like that say, with news said, it was standing on shoulders of giants. So everyone will make their changes and all the changes in together make for a better manager Great.
Brian Michael Wright
And then if I can ask one last one since you to take one from the room from and this might be a little early, but just early thoughts, Glenn, as far as like your top four priorities as you comment and now thanks to a 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 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,
Brian Michael Wright
we'll save that one for next quarter to that fixed charge.
Thank you.
Operator
We have no further questions at this time. I'll turn the call back to Dick Johnson for any closing remarks.
Richard Johnson
All right, Tom?
Well, I'll add my let me add my welcome to Glenn and I wish him wish him well. And as Jack said, we'll we'll we'll keep working together. I'll be available for questions as needed. And not 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.
Operator
That concludes today's conference call. Thank you all for joining. You may now disconnect.
