PAHC - NASDAQ

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 First Quarter 2025 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Glenn David, Chief Financial Officer. Please go ahead.

Thank you, Regina. Good morning and welcome to the Phibro Animal Health Corporation earnings call for our first quarter ended September 30, 2024. My name is Glenn David, and I'm the Chief Financial Officer of Phibro Animal Health Corporation. I am joined today on today's call by Jack Bendheim, Phibro's Chairman President and Chief Executive Officer; Donny Bendheim, Director and Executive Vice President of Corporate Strategy; and Larry Miller, Chief Operating Officer. Today, we will cover our financial performance for our first quarter and provide updated financial guidance for our fiscal year ending June 30, 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 Investors section of our website, you will find copies of the earnings press release and quarterly Form 10-Q 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 or US 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 US 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, gains net. Also 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 Bendheim 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 Animal Health business growing sales at 14% in the quarter led by vaccines growth of 22% and MFA and other growth of 15%. And 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 Products 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 from industry tailwinds and in certain areas increased seasonal disease pressures. Our leverage bottom-line growth also reflects our increased 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 Phibro Forward program. As previously discussed, most of the impact from Phibro 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 close of our acquisition of the

Thanks, Jack. I'm starting with our Q1 performance on Slide 4. Consolidated net sales for the quarter ended September 30, 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 Products segment grew by 27%. GAAP 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 GAAP results including acquisition-related items, foreign currency losses and certain one-off items, the first quarter adjusted EBITDA increased $12 million or 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 posted $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 Products 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 6. 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 year-on-year increase of $0.9 million, driven by higher gross profit. Looking at our Performance Products 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 prior year. Corporate expenses increased $1.7 million, driven by increased employee-related costs. Turning to key capitalization-related metrics on Slide 7. We generated $41 million of positive free cash flow for the 12 months ended September 30, 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 $0.12 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. 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. 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 on 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 3, 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 revolver, 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

[Operator Instructions] Our first question will come from the line of Ekaterina Knyazkova with JPMorgan. Please go ahead.

Thanks you much and congrats on the quarter. So first question is just around gross margins. It 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 mix 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.

Yes. Thanks for the question, Ekaterina. So gross margin. There are a number of factors that drove the positive gross margin that we saw in the quarter. First was mix, 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.

Let me just add to 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 month starts, early day starts. But overall, I think this is going to prove to be an exceptional acquisition for the company.

Thank you so much.

Our next question will come from the line of Michael Ryskin 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

Sure. So when you look at the guidance that you mentioned, right, 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 our 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 destocking related to the deal. And that's just destocking that we 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 customers then had to purchase in advance to make sure that they could satisfy the customer need over that time. 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 in, 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 in still being able to deliver a significant normal 12 months of revenue gain. And in terms of $0.25 in EPS, as you mentioned, we had guided to $0.60 for the first 12 months. If you translate that to eight months, that's $0.40. 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 $0.40.

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 product project. Just curious on any additional color, you could provide there? Was that tied to any of the other developments in the derm 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?

Sure, Mike. This is Larry. I'll take the question. So as you mentioned, the first thing in particular as we look at first quarter performance, it was continuing strong trend that we experienced particularly in the second half of our FY 2024. So that trend continued. Within the first quarter itself, we do certainly have had some favorable seasonality disease challenges particularly in the Southern Hemisphere, their winter months that really added a lot of demand for our products in the fourth quarter of 2024 our FY 2024 and the first quarter of our FY 2025. And we did have a couple of 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.

Yes, Mike. I would just add, right? I think it's products and people, right? 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

Nothing to add. Thanks, Navann

[Operator Instructions] 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 of Phibro Animal Health and hope you have a great day.