Phibro Animal Health Corporation (NASDAQ:PAHC) Q2 2024 Earnings Call Transcript February 8, 2024
Phibro Animal Health Corporation isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
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. 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 Dick 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 Dick Johnson, I'm the Interim Chief Financial Officer of Phibro Animal Health. I'm joined today by Jack Bendheim, Phibro's Chairman, President and Chief Executive Officer; by Daniel Bentheim, Director and Executive Vice President of Corporate Strategy and also by Glenn David, the Incoming Chief Financial Officer. Today, we'll 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, pahc.com and also on the 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. 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. 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 on 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 nonrecurring items, which would include things like stock-based compensation and in this most recent quarter, Brazil employment taxes item. Also, other income and expense is separately reported in the P&L including foreign currency losses and also income taxes related to any of those pre-tax 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, Dick, and thank you to everyone joining us this morning. Our second quarter showed the resilience of our business and was a positive step-up compared with 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%, led by high-value new product introductions in our vaccine product line. A strong 31% increase in net sales of vaccines led the way for Animal Health. We are seeing the uptake of our vaccines across various regions, especially in South America. We have launched new commercial vaccines and have the added benefit of a new attached facility -- vaccine facility in Brazil. Looking ahead, we expect the continuing growth in the Animal Health 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 imbalances and as we see a rebound in demand. We have affirmed our guidance for net sales, adjusted EBITDA and adjusted diluted EPS, as Dick will go into in greater detail at 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 best sales of a new line of nutritional specialty products for poultry here in the United States. We see vaccines, nutritional specialties and companion animal as continued growth opportunities and we're making the necessary investments to enable us to achieve our targets. I'm also pleased to welcome Glen David to Phibro as Chief Financial Officer.
As we recently announced, Glenn brings over 30 years of experience in commercial and financial leadership roles, including a wealth of knowledge in the animal health industry. He brings the capabilities needed to contribute to Phibro's future success and to bring value to our shareholders. I look forward to having your questions following Dick's review of our financials. But before I hand it back to him, I want to express my gratitude today for agreeing to step in as interim CFO. As a company, we do not miss a beat. Thanks to Dick's quick return to action, and I'm thrilled that Dick will continue to be available [indiscernible] Glenn and assist Phibro as a whole. Dick?
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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 and 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 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 a substantial increase in foreign exchange losses, mostly from a major devaluation in Argentina, also driven by higher operating expenses that we referred 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, 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 cost and 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. And 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 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 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% and due to demand in various international regions and also continuing growth for in 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 reduced demand from the domestic dairy business. All of that drove 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 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 average selling prices and also some reduction in sales volume.
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 a 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. Now if we turn to the capitalization-related metrics on Page 7, 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 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 4.4 times at the end of the quarter based on $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 in the aggregate. And as a reminder, about -- 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 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 measures. We have updated our guidance for the GAAP measures to reflect recent developments, which would include that Brazil employment taxes issue additional foreign currency losses, again, mostly coming out of Argentina devaluation and then some other smaller items and the related income tax effects of those things. So in closing, we are optimistic as we enter 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.
And with that, operator, let's please open the line for questions. Thank you.
