Phibro Animal Health (NASDAQ:PAHC) Corporation (NASDAQ: PAHC) has delivered a robust financial performance in its third quarter, with significant growth in its Animal Health division and a strategic acquisition on the horizon. The company has announced a deal to purchase Zoetis (NYSE:ZTS)' medicated feed additive (MFA) portfolio, aiming to enhance Phibro's product diversity and drive earnings growth. Despite this, Phibro expects some financial metrics to decline in fiscal year 2024, including adjusted EBITDA and adjusted diluted EPS. However, overall confidence remains high as the company anticipates strong demand for its products globally.
Key Takeaways
- Phibro Animal Health reported double-digit growth in its Animal Health division in Q3.
- The vaccines segment grew by 26%, while the MFA and other segment saw a 16% increase.
- Adjusted EBITDA for the quarter grew by 9%.
- The acquisition of Zoetis' MFA portfolio is projected to be highly accretive to earnings.
- Phibro reaffirmed its fiscal year 2024 guidance, with net sales expected to grow by 2%.
- The company aims to reduce its net leverage ratio below three by the end of fiscal year 2027.
Company Outlook
- Phibro anticipates a $0.60 accretion from the Zoetis deal in the first 12 months post-acquisition.
- The company is focused on investing in Companion Animal, Vaccines, and Nutritional Specialties sectors.
- Phibro plans to maintain its dividend to shareholders while also reducing net leverage.
Bearish Highlights
- Adjusted EBITDA is projected to decline by 3% in fiscal year 2024.
- Adjusted net income and adjusted diluted EPS are expected to decrease by 9%.
Bullish Highlights
- Strong growth in core segments points to robust demand for Phibro's products.
- The Zoetis MFA acquisition is expected to significantly enhance Phibro's offerings.
- The company is optimistic about its growth opportunities and product demand worldwide.
Misses
- Despite overall growth, Phibro anticipates declines in key financial metrics for fiscal year 2024.
Q&A Highlights
- The growth drivers for the Animal Health segment were discussed.
- The performance of the MFA business and the potential impact of the Zoetis acquisition were addressed.
- The company outlined capital allocation plans following the Zoetis MFA acquisition.
Phibro's strategic moves, including the planned Zoetis MFA acquisition and investment in key growth areas, demonstrate the company's commitment to expanding its market presence and delivering value to shareholders. With the fiscal year 2024 guidance set, Phibro is positioning itself for sustainable growth despite anticipated declines in certain financial metrics. The company's leadership expressed confidence in the face of challenges, underpinning a strategy focused on diversification and innovation in the animal health industry.
InvestingPro Insights
Phibro Animal Health Corporation's (NASDAQ: PAHC) recent performance and strategic initiatives have caught the eye of investors and analysts alike. With a market capitalization of approximately $692.61 million and a significant presence in the animal health sector, the company's stock has been trading at a high earnings multiple, with a P/E ratio of 52.52, reflecting robust investor confidence and expectations for future growth.
InvestingPro Tips indicate that some analysts have revised their earnings estimates downwards for the upcoming period. This could be a signal for investors to watch for potential adjustments in the company's financial outlook. Additionally, the stock is currently in overbought territory according to the Relative Strength Index (RSI), which may suggest a period of consolidation or pullback could be on the horizon after its recent strong performance.
Despite these cautionary signals, the company has shown impressive returns, with a price total return of 54.34% over the last three months, indicating a large price uptick. This aligns with the company's strategic growth efforts, such as the acquisition of Zoetis' MFA portfolio, which could further bolster its market position.
Investors seeking more in-depth analysis can find additional InvestingPro Tips for PAHC, which could provide further insights into the company's performance and potential investment opportunities. Remember to use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, unlocking access to a total of 9 InvestingPro Tips for Phibro Animal Health Corporation.
Full transcript - Phibro Anim (PAHC) Q3 2024:
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 Third 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 Glenn David, Chief Financial Officer. Please go ahead.
Glenn David: Thank you, Regina, and good day everyone, and welcome to the Phibro Animal Health Corporation earnings call for our fiscal third quarter ended March 31, 2024. My name is Glenn David and I am the Chief Financial Officer. I'm joined on today's call by Jack Bendheim, Phibro's Chairman, President and Chief Executive Officer; Daniel Bendheim, Director and Executive Vice President of Corporate Strategy; and Larry Miller, our Chief Operating Officer. Today we will cover our financial performance for the third quarter and provide an update on financial guidance for our fiscal year ending June 30, 2024. At the conclusion of our remarks, we will open the line 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 third quarter 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 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 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. Reconciliation of these non-GAAP financial measures to the most directly comparable US GAAP measures are included in the financial tables that accompany the 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 and Brazil employment taxes. Other income expenses as separately reported in the consolidated statement of operations, including foreign currency losses gains net and income taxes related to pre-tax income adjustments and unusual or nonrecurring income tax items. Now, let me introduce our Chairman, President and Chief Executive Officer, Jack Bendheim to share his opening remarks.
Jack Bendheim: Thank you, Glenn, and thank you to everyone joining us this morning. We had a very strong third quarter performance led by our Animal Health division, which delivered double-digit top line growth. Within Animal Health, our vaccines segment achieved 26% growth and we delivered an exceptional 16% growth in our MFA and other segment. This translated to an overall growth of 9% in adjusted EBITDA. As I'm sure you can all imagine, it has been a busy few months for all of us here at Phibro and I am glad to reflect that this growth was achieved while at the same time my team was heavily involved in the process that led to our announcement last week of our signed agreement to purchase Zoetis medicated feed additive portfolio. We are excited to onboard new colleagues and products of Phibro and we are very confident that we have the operational strength and focus to ensure a smooth transition. This acquisition will also serve to enhance, diversified and broadened Phibro species and product offerings, and we are confident in our ability to maximize the opportunity related to this portfolio. We anticipate this transaction will lead to strong earnings accretion and debt pay down and will also serve as the engine that will continue to power our investments in the faster growing vaccines, nutritional specialties and companion animal product segments where we continue to see and invest in both short and long-term opportunities. Looking ahead, we expect continuing growth in the Animal Health business as we close out our fiscal year. We also expect to see continued improvements in our Mineral Nutrition and Performance Products businesses as we work through inventory imbalances and now see a rebound in demand. We have affirmed our guidance for net sales adjusted EBITDA and adjusted diluted EPS, and then will go into greater detail in this presentation. I look forward to hearing your questions following Glenn's, review of our financials.
Glenn David: Thanks Jack. I'm also really excited about the strong results in the quarter. Total company sales for the quarter grew 7% and our adjusted EBITDA and our adjusted net income grew 9%. As Jack mentioned, our Animal Health sales grew 10% with Vaccines growth of 26%, MFA growth of 16% offset by declines in our Nutritional Specialties. In the quarter, our Mineral Nutrition segment grew 2%, offset by a decline in our Performance Products. The performance of both Mineral Nutrition and Performance Products improved in Q3, versus the first half of the year as we expected. On a fiscal year-to-date basis, we have seen revenue growth of 3% and adjusted EBITDA growth of negative 3%. Year-to-date performance is led by Animal Health, with 7% growth in revenue with Vaccines sales growth of 23%, our MFA business at 7% and declines in Nutritional Specialties. Growth in Animal Health is partially offset by declines in both the Mineral Nutrition and Performance Products segments. As we spoke last week, we are also excited about the acquisition of the Zoetis MFA business. These products are a strong strategic fit with our existing Phibro core competencies and capabilities. And we expect to deliver a rapid deleveraging profile and significant adjusted EBITDA accretion. As discussed, we expect this transaction to close in the second half of calendar year 2024. For guidance, we are affirming our guidance on net sales, adjusted EBITDA and adjusted EPS. We have updated our GAAP net income and diluted EPS to reflect one-time costs related to the Zoetis MFA acquisition. I'll start with consolidated financial performance on Slide 4, then cover segment level performance, capitalization metrics and conclude with a review of our affirmed or updated financial guidance for the full fiscal year 2024. Consolidated net sales for the quarter ended March 31st 2024 were $263.2 million, reflecting an increase of $17.6 million or a 7% increase over the same quarter one year ago. The Animal Health segment grew 10%, while Mineral Nutrition grew at 2% and the Performance Products segment declined. GAAP net income and diluted EPS decreased, driven by increased SG&A due to higher employee-related costs, higher interest expense and higher foreign currency losses partially offset by favorable gross profit as a result of higher product demand in the Animal Health segment, Income tax expense also decreased by $0.5 million. After making our standard adjustments to GAAP results, third quarter adjusted EBITDA increased $2.3 million. Animal Health improved by $2.3 million or 7%, due to gross profit from increased sales partially offset by higher SG&A. Mineral Nutrition increased $0.8 million, driven by higher gross profit. Performance Products adjusted EBITDA remained relatively the same. Corporate expenses increased $0.7 million driven by increased employee-related costs. Adjusted net income and adjusted diluted EPS both increased 9%. Increased gross profit driven by sales growth was partially offset by higher adjusted SG&A and higher adjusted interest expense with a partial benefit from the reduced adjusted provision for income taxes. Moving to segment level financial performance on Slide 5, we'll cover the third quarter performance of our largest segment Animal Health. The Animal Health segment posted $181.3 million net sales for the quarter an increase of $16.9 million or 10% versus the same quarter prior year. Within the Animal Health segment we reported MFA and other net sales growth of $15 million or 16%, due to demand in both Domestic and International regions. Vaccine net sales growth of $6.7 million a healthy 26% increase driven by product launches in Latin America plus an increase in domestic demand. Nutritional Specialties net sales declined $4.8 million or 11%, mostly due to lower demand for microbial and dairy products. Animal Health adjusted EBITDA was $36.5 million a 7% increase due to higher gross profit from increased sales partially offset by higher SG&A. Moving on to the third quarter financial performance for our other business segment on Slide 6. Starting with Mineral Nutrition. Net sales for the quarter were $64.2 million, an increase of $1.3 million, due to increased sales volume, partially offset by decreased average selling price. Mineral Nutrition adjusted EBITDA was $4.7 million reflecting a year-on-year increase of $0.8 million, driven by higher gross profit. Looking at our Performance Products segment. Net sales of $17.7 million for the three months ended March 31, 2024 reflects a decrease of $0.7 million or 4%, driven by decreased demand for personal care product ingredients and industrial chemicals. Adjusted EBITDA was $2.4 million and declined 2% versus the same quarter prior year. Corporate expenses increased $0.7 million, driven by increased employee-related costs. Now turning to key capitalization-related metrics on Slide 7. We saw $40 million [ph] of positive free cash flow for the 12 months ended March 31, 2024. We generated $79 million of operating cash flow and invested $39 million in capital expenditures. Cash and cash equivalents and short-term investments were $99 million at the end of the quarter. Our gross leverage ratio was 4.4 times at the end of the third quarter based on $487 million of total debt and $110 million of trailing 12-month adjusted EBITDA. Our net leverage ratio was 3.5 times at the end of the third quarter based on $388 million of total debt and $110 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 0.61% plus the applicable margin. The remaining $187 million of total debt is subject to variable interest rates, although offset somewhat by interest income earned on short-term investments. Let's turn to Slide 8, which lays out our updated guidance for the fiscal year ending June 30, 2024. We have affirmed our guidance for net sales, adjusted EBITDA and adjusted diluted EPS. We have updated our guidance for GAAP net income and GAAP diluted EPS. The updated guidance includes one-time costs related to the integration of Zoetis products. This is reflected in our GAAP guidance but are excluded from adjusted measures. Our affirmed or updated fiscal year 2024 financial guidance is shown in the table. Comparisons are to the prior fiscal year and year-over-year percentages are calculated using the midpoint of the guidance ranges. Net sales of $980 million to $1.02 billion with growth of 2%. Net income of $7 million to $12 million. Diluted EPS of $0.17 to $0.30. Adjusted EBITDA of $106 million to $112 million, a decline of 3%. Adjusted net income of $42 million to $47 million, a decline of 9%. Adjusted diluted EPS of $1.04 to $1.16, a decline of 9%. And our adjusted effective tax rate range of 28% to 30%. In closing, we are optimistic as we enter the final quarter of our fiscal year. We are confident in demand of our products around the world and look forward to seeing continued improvement in our business as we move forward. And we are very excited about the pending Zoetis MFA acquisition. With that Regina, could you please open the line for questions?
Operator: [Operator Instructions] Our first question will come from the line of Erin Wright with Morgan Stanley (NYSE:MS). Please go ahead.
Erin Wright: Great. Thanks. So on the MFA side of the business what drove some of the strength I guess even on the comp? And does this continue? And whether there are any kind of onetime dynamics we should be thinking about? And how do we think about kind of the normalized underlying growth rate for the MFA business now? And then once you fold in Zoetis, their MFA portfolio kind of what is the underlying growth look like for that MFA other segment. Thanks.
Larry Miller: Hi, Erin. Thanks for the questions. This is Larry. I'll address the first part of your question having to do with what drove the growth. And it's really strong growth in our Animal Health segment, as Glenn stated, very strong growth in our Medicated Feed Additives and in our vaccines in particular. And so those were the key growth drivers. We experienced that growth geographically in North America and also in South America. Those were the highest-growing areas of our business.
Glenn David: Yeah. Erin, just to add some context to it, right? So we said the MFAs grew 16% in the quarter, which is obviously above the run rate that we would expect. There were some onetime dynamics in the quarter with some larger customers based on the timing of their purchases as well as some strong performance, right? We call it MFA and other there was some strong performance in the other category as well, which is related to our EPG group. On a year-to-date basis, though, we have seen 7% growth in our MFA business. So, a strong performance throughout the year as well. And related to the terms of when we are able to integrate the Zoetis MFA products, we do expect those products after we bring them onto our hands to get to a growth rate probably in that low single -- middle digit range.
Erin Wright: Okay. And then as we think about the $0.60 accretion from the Zoetis deal and -- and that's obviously a notable accretion number. So what's the jumping-off point? I think consensus EPS is at about $1.25 for 2025 or your -- your fiscal 2025. So is that the right ballpark that we should be at from a jumping-off point? Are there other dynamics we should be modeling out for the underlying business in 2025?
Glenn David: Yes, Erin, obviously, for our own guidance for 2025, we'll be providing that on our next call as we update guidance. In terms of the $0.60 accretion that we referenced on the call last week that we do see in the first 12 months of acquiring the business. So depending on the timing of close, whether we have a full fiscal year or not that might impact the $0.60. But I do also want to mention that we do see that accretion growing over time as we continue to pay down debt and lower our interest expense related to the -- to the deal.
Erin Wright: Okay. Great. Thank you so much.
Operator: Your next question will come from the line of Navann Ty with BNP Paribas (OTC:BNPQY). Please go ahead.
Navann Ty: Hi. Good morning. Thanks for taking my question. I wanted to ask if you could discuss the Companion Animal pipeline and your capital allocation after the Zoetis acquisition? Thank you.
Daniel Bendheim: Good morning. It's Donny Bendheim. Thanks for the question. No real new update on the Companion Animal pipeline. We continue to make progress, nothing in the short term to announce. But we do see that overall, this acquisition of the MFA -- or the Zoetis MFA business as furthering our ability -- along with de-leveraging but furthering our ability to invest in Companion Animal. There's no shortage of pipeline ideas brought to us. And to date, I think we've been fairly judicious, and we'll continue to be judicious but this will definitely allow us to ramp up our first within Companion Animal.
Glenn David: Yeah. And so the second part of your question related to capital allocation. Obviously, the first priority will continue to be to invest in our business. And as Donny mentioned, areas such as Companion Animal, Vaccines, Nutritional Specialties as well will be the key areas to focus. Second, obviously, we'll always continue to look for opportunities outside. But obviously, this is a large deal for us with the Zoetis MFA acquisition. So I expect those to be small in nature. And then we'll look to continue to delever over time. And I think we've committed that we will get to a net leverage ratio below three before the end of fiscal year 2027. And then we'll continue to return capital to our shareholders in the form of our dividend. We remain committed to the dividend. We are in the process of refinancing all of our debt to support this deal. There may be some covenants related to the dividend, but our projections show us well below those covenants, and we understand the importance of the dividend to our shareholders and plan to maintain them.
Navann Ty: Thank you.
Operator: Our next question will come from the line of Balaji Prasad with Barclays (LON:BARC). Please go ahead.
Balaji Prasad: Hi. Good morning. Thanks for the questions. Two from me. Getting back to the deal, can you help me understand what this means to you incrementally in terms of your focus on Companion Animal and the appetite for potential business development deals of the site? Second, could you also comment on the shift in the veterinary feed directives on the change from no antibiotics ever to no human antibiotics? And what does this mean to you in terms of market opportunity opening up? Thanks.
Daniel Bendheim: Donny again, I'll take the first question. Again, I think as was stated in the opening comments, we view this as the opportunity to invest even stronger or even more in Companion Animals in Nutritional Specialties and Vaccines. This will be -- we anticipate a lot of cash being generated from the combined business. And we recognize that the larger growth opportunities are in those areas that I just highlighted. So, I do anticipate -- or we do anticipate that we will redouble our efforts and continue to invest in those areas.
Larry Miller: It's Larry. On the second part of your question, the Zoetis MFA business actually has a significant weighting of products that are not considered medically important for human medicine by the World Health Organization. These include ionophores, no products in this class are used in human medicine. Anticoccidials, no products in this class are used in human medicine. And the bacitracins are regarded -- are not regarded as medically important. Therefore, the combined Zoetis MFA and Phibro portfolios of Medicated Feed Additives Nutrition Specialties and Vaccines offer several choices to livestock producers including those who produce an antibiotic-free and/or no antibiotics use in human medicine. As to your question about the poultry industry and some of the changes we've seen there however, it refers to the reintroduction of ionophores, which again are not medically important antimicrobials. They are used to control coccidiosis and other enteric diseases. Phibro does not currently have ionophores in the US. So we really haven't seen impact on our business. However, the Zoetis MFA business does contain ionophores which will allow us to serve customers with the -- with products in this -- in this class.
Balaji Prasad: Thank you.
Operator: And that will conclude our question-and-answer session. I'll hand the call back to Glenn David for any closing remarks.
Glenn David: Thank you, Regina and thank you everyone for listening in to today's call. We really appreciate your time attention.
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