Earnings Labs

Phibro Animal Health Corporation (PAHC)

Q2 2023 Earnings Call· Thu, Feb 9, 2023

$51.98

-4.16%

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Transcript

Operator

Operator

Good morning. My name is Jeannie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Phibro Animal Health Corporation Q2 Fiscal Year 2023 Conference Call. [Operator Instructions] Thank you. Damian Finio, Chief Financial Officer, you may begin your conference.

Damian Finio

Analyst · ROTH MKM

Thank you, Jeannie. Good morning, and welcome to the Phibro Animal Health Corporation Earnings Call for our Fiscal year 2023 Second Quarter ended December 31, 2022. My name is Damian Finio, and I am the Chief Financial Officer of Phibro Animal Health Corporation. I'm joined on today's call by Jack Bendheim, Phibro's Chairman, President and Chief Executive Officer; and Daniel Benham, Director and Executive Vice President of Corporate Strategy. Today, we will cover financial performance for our second quarter and share our current thinking on financial guidance for the fiscal year ending June 30, 2023. At the conclusion of our opening remarks, we will open the lines for questions. I'd like to remind you that we are providing a simultaneous webcast of this call on our website, www.pahc.com. Also on the Investors section of our website, you will find links to the earnings press release and second quarter Form 10-Q filed with the SEC yesterday as well as the transcript and slides discussed and presented on this morning's 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 disclosure notice marked forward-looking statements 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. 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, other income expense is separately reported in the consolidated statements of operations including foreign currency gains and losses net. And lastly, income tax effects related to pre-tax adjustments and unusual or nonrecurring income tax items. Now let me introduce our Chairman, President and Chief Executive Officer, Jack Bendheim, to share his perspective on Phibro's second quarter financial performance and guidance for our fiscal year 2023. Jack?

Jack Bendheim

Analyst · ROTH MKM

Thank you, Damian, and good morning, everyone. SP3 Our top line continues to grow. Second quarter net sales of $245 million reflects growth of 5% over the same quarter last year. This improvement was driven by 9% and 27% sales growth of our Animal Health and Performance Products segments, respectively, offset by an 8% decline in Mineral Nutrition. In our core business segment, Animal Health, we reported our seventh consecutive quarter of year-over-year sales growth in each of our three major product categories. On a calendar year basis, this translates into sales growth of more than 20% in 2022 over 2020, which relative to some industry ports puts us in the top tier of animal health companies. Our Mineral Nutrition business was down year-over-year primarily reflected the lower value of the underlying commodity minerals such as copper that drives this business. Our Mineral Nutrition business is also the 1 area where we have exposure to the U.S. speed-line industry, where we are seeing fewer counter placements as compared to the same quarter last year. In terms of sales by region, we realized 12% growth in Latin America and Canada and 7% growth here in the United States. Our markets in Europe, the Middle East, Africa and Asia Pacific declined due primarily to the lingering effect of COVID-19 and persistent economic challenges. Overall, we posted a strong financial performance for the first half of our fiscal year with an even stronger projected second half. I also want to share that we add companion animal experience to our Board of Directors. On Monday we announced Alejandro Burnaud [ph], the newly appointed President and CEO of PCDX, joined our Board. I'll hand over the former executive and Mars Veterinary Health and worked with senior positions at Zoetis. We welcome his insights and believe…

Damian Finio

Analyst · ROTH MKM

Thanks, Jack. Let me start with consolidated financial performance on Slide 4. Then cover segment level financial performance, key capitalization metrics and conclude with a review of our financial guidance for the full fiscal year 2023. Consolidated net sales for the quarter ended December 31, 2022, were $244.6 million, reflecting an $11.9 million or 5% increase over the same quarter one year ago. This increase was driven by improvement in both the Animal Health and Performance Products segments, offset by a decline in Mineral Nutrition. GAAP-based net income and diluted EPS decreased 59% driven by higher SG&A and interest expense, offset partially by lower income tax expense, but primarily due to a $6.6 million charge pre-tax were closer to $4 million after tax charge to the P&L in the second quarter. Most but not all of these charges relate to a tentative settlement of a lawsuit filed in 2014 seeking contribution from Phibrotech and one of our other subsidiaries which are included in our Performance Products segment and several other parties towards past and future costs associated with the investigation and remediation of a regional groundwater plume affected by the Omega chemical site, which is upgrading of our Phibrotech facility in Santa Fe Springs, California. In January 2023, the plaintiffs and the lawsuit, Environmental Protection Agency and certain defendants, including Phibrotech, reached a tentative settlement that would provide for a cash out settlement with contribution protection, which we released Phibrotech and its affiliates from liability for contamination of the groundwater plum affected by the Omega chemical site with certain exceptions. The tentative settlement would also resolve claims asserted by the EPA in August 2022 for its unrecovered past and future response costs related to the Omega groundwater Plume as well as claims for indemnification and contribution between Phibrotech and the…

Operator

Operator

[Operator Instructions] Your first question comes from the line of Brian Wright with ROTH MKM.

Brian Wright

Analyst · ROTH MKM

I have one and a follow-up, if possible. Just -- and I apologize if I missed this, but could you provide a little quantification between the higher SG&A between employee costs and strategic investments? Or any color around that?

Damian Finio

Analyst · ROTH MKM

Yes. I could take that question. So on the employee cost, we had more vacancies last year that we were able to fill this year given the free up in the labor market. So that's what's driving the higher employee costs. So it's a combination of the number of people as well as the cost per labor hour. On the strategic investments, as I think we mentioned in our guidance earlier in the year, our intent was to spend about an additional $10 million. A good portion of that is allocated to our companion animal development pipeline, but also our development projects for vaccines and nutritional specialists.

Brian Wright

Analyst · ROTH MKM

And think about that kind of ratably over the new year. Is that kind of the way to think about that?

Damian Finio

Analyst · ROTH MKM

In terms of growth, second half over first half, we expect a slight increase in the second half of the year, but that's baked into our guidance.

Brian Wright

Analyst · ROTH MKM

Great. And then on the follow-up. With the additional Board member on Alejandro is, I understand getting strategic device on competing in the companion animal business. But are there also potential? It seems like there might be synergistic business opportunities between the 2 organizations.

Jack Bendheim

Analyst · ROTH MKM

I mean, we just started, I don't believe so. I think we're obviously more concerned about comfort of interest than we are about synergies. As a matter the more synergies, the more complex.

Operator

Operator

Your next question comes from the line of Michael Ryskin with Bank of America Securities.

Unidentified Analyst

Analyst · Michael Ryskin with Bank of America Securities

This is Wolf [ph] for Mike. So I wanted to start with a high-level one. Phibro's Animal Health business continues to press fairly impressive results relative to the livestock divisions of some of your peers. Can you talk to what's allowing your Animal Health business to do so well in the current environment? Is it a function of portfolio in species mix? Or are there other factors that we should be considering here?

Damian Finio

Analyst · Michael Ryskin with Bank of America Securities

It's just great management.

Unidentified Analyst

Analyst · Michael Ryskin with Bank of America Securities

Fair enough. I can't argue with that.

Damian Finio

Analyst · Michael Ryskin with Bank of America Securities

Yes. But I think it's literally where we're positioned in the market and the products that we've developed; especially concentrating on the changes that happened in the history when antibiotics came out. I said often that animatic came in, but no until that the bacteria. So bacteria is still there, and we've done a great job. Our team has done a great job in developing non-antibiotic mostly national specialties and vaccines that help control that bacteria and help the farm is raise the animals in a healthy way.

Unidentified Analyst

Analyst · Michael Ryskin with Bank of America Securities

Got it. And just as a follow-up, you noted seeing some weaker feedlot placements. Can you talk to what you're seeing more generally in the market? And are you expecting this to kind of persist for as long as we see the drought persist? Or are there other things going on there?

Jack Bendheim

Analyst · Michael Ryskin with Bank of America Securities

Well, there's -- as we mentioned earlier, we don't do a lot of is on the feedlot, but what we are seeing where it has affected us. The drought has forced all the farmers to take animals off the pasture because there wasn't an ability to feed them the pasture and move them [indiscernible] the feedlot. So that has been -- in the early first part of the year, sort of an increase. Now when those animals have been processed, there are pure animals following it, and that will have, I would say, more of an effect next year than even has this year. So it'll have more effect in calendar year 2023 than it had in calendar 2022.

Unidentified Analyst

Analyst · Michael Ryskin with Bank of America Securities

Much appreciated. And then just a last one here. There have been a floor of recent articles on the impact of the bird flu to the global layer slot. I know that you're not super exposed there, but can you talk to your outlook for the poultry market in general? And has this gotten any worse over recent months given how long it's been going on?

Jack Bendheim

Analyst · Michael Ryskin with Bank of America Securities

I think the shock in the industry is how long it's persisted. I mean, normally, we've seen being influenza in the past, but by the summer time, it's gone. And this year, it's not gone in the summertime and it continues to persist. So we will see the effect it's had on the price of eggs given that, that might be -- there might be a consumer pullback and that those prices might start dropping. It's so far, it hasn't really hit the broiler industry, which is the biggest part of our business, the biggest part of the chicken business. But it's out there, and it's scary.

Operator

Operator

Your next question comes from the line of a representative at Barclays. Your line is open.

Unidentified Analyst

Analyst · a representative at Barclays. Your line is open

Hi, good morning. This is Bishal for Balaji. We see that one of the important contributing factor for your growth in the MFA business in the growth in Latin America. Do you expect this trend to continue? Or what is your outlook for your MFA and animal health business in Latin America? Thanks.

Jack Bendheim

Analyst · a representative at Barclays. Your line is open

Thank you for that question. We've been investing a while in Latin America and expanding our presence there. And yes, I think we will continue to see growth in those markets. relative to what we've done in the past.

Damian Finio

Analyst · a representative at Barclays. Your line is open

Is there any more in the queue that we can respond to? You may be on mute. We cannot hear your line. So we will assume there's no more questions for today.

Operator

Operator

Damian Finio

Analyst · ROTH MKM

So we appreciate your time. Thank you for your interest in Phibro Animal Health, and have a great rest of your day.