Balchem Corp (BCPC) 2007 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to Balchem Corporation's fourth quarter 2007 earnings. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Frank Fitzpatrick, CFO for Balchem.. Thank you, Mr Fitzpatrick, you may begin.

Thank you. Thank you for joining our conference call this afternoon to discuss the results of Balchem Corporation for the period ending December 31, 2007. My name is Frank Fitzpatrick, Chief Financial Officer. And hosting this call with me is Dino Rossi, our Chairman, President and CEO. Following the advice of our counsel, auditors and the SEC at this time, I would like to read our forward-looking statement.

This release does contain or likely will contain forward-looking statements which reflect Balchem's expectation or belief concerning future events that involve risks and uncertainties. We can give no assurance that the expectations reflected in forward-looking statements will prove correct and various factors could cause results to differ materially from our expectations, including risks and factors identified in Balchem's Form 10-K. Forward-looking statements are qualified in their entirety by this cautionary statement. The financial information that is referenced in this meeting was disclosed this morning in our quarterly press release at 930 a.m. eastern time. I will now turn the call over to Dino A Rossi, our Chairman, President and CEO.

Thanks, Frank. Good afternoon, ladies and gentlemen, and welcome to our conference call. We're pleased to report that the consolidated revenue of the fourth quarter was again a new quarterly record for the Company at $53.7 million. This level was approximately 106% ahead of the $26.1 million result in the prior year comparable quarter and approximately 6.4% ahead sequentially of the third quarter result of 2007. All three segments achieved new fourth quarter record revenue results, with the BCP Ingredients segment extremely strong due to the performance of the previously announced Akzo and Chinook businesses, strong organic growth out of the core BCP business, the human Encap/Nutrition business, the animal nutrition and health business and typical growth levels out of our ARC segment. The acquisitions contributed $23.5 million in the fourth quarter and the balance of the core businesses grew 13% over the prior year quarter.

Consolidated net income closed the quarter at $4.2 million, up from approximately $3.2 million in the prior year quarter, or an increase of approximately 29.3%. This result also reflects net interest expense of $283,000, an increase of $306,000 over the prior year quarter, which was being incurred for the $39 million borrowed to complete the mentioned acquisitions. This quarterly net income translated into diluted earnings per share of $0.22, or a 27.8% increase from the $0.19 we posted in the comparable quarter of 2006. In the quarter, we incurred approximately $734,000 of amortization expense related to the Chinook acquisition, which will continue for the 10 year life of the amortizable assets acquired. Tax affected on a non-GAAP basis, this noncash item alone is equal to $0.025 per share per quarter at today's outstanding share level. Our consolidated gross margins of $12.4 million were 23% of sales in the quarter, down from 32% in the prior year quarter.

This level of profitability reflects the initial impact of the acquisition in the animal grade choline business, which we know carry lower gross margins and which were even lower due to unfavorable variances realized, particularly in Italy, due to dramatic increases in certain key raw materials. We continue to work on integration efficiencies, which should increase the results of this segment by a couple of percentage points. We also realized increased raw material costs that are largely petroleum derivatives, which had not been presented as price increases to our customers in the fourth quarter. These raw material costs continue to rise at a very swift pace in the quarter, and while some were passed on to customers, additional price increases were implemented beginning in the first quarter as our businesses are likely to remain affected by these higher costs early on.

Petrochemically oriented but not directly aligned are the higher costs of key coating materials, such as cotton, soy and palm oil, which are being unfavorably impacted by the high consumption of acreage into corn production for ethanol. At the consolidated operating expense level you will note a 68% increase to $5.4 million for the quarter. This $2.3 million increase was due primarily to $732,000 of additional amortization plus sales and technical personnel expense associated with the Chinook and Akzo acquisitions. We also incurred approximately $206,000 of commercial development expenses towards our pharmaceutical market initiatives in the quarter. With these increases, operating expenses were 10.8% of sales, or 2.5 percentage points less than the operating expenses as a percent of sales incurred in last year's comparable quarter.

This level favorably compares to the 10.7% of sales we incurred in the third quarter of this year, as we continue to leverage off of our existing infrastructure going forward. Overall it was a strong quarter, especially with the unfavorable escalating raw material costs incurred by all business segments. We did realize approximately $8.9 million of EBITDA, earnings before interest, taxes, depreciation and amortization, in the quarter, which translates into $0.47 per share. We are incurring in excess of $2.2 million per quarter of noncash expense. Net interest expense of $283,000 was a full $306,000 higher than the previous year quarter. This was in direct relationship to the long-term debt incurred to achieve the noted acquisitions and is equal to $0.011 per share on a tax affected basis. Noting our strong EBITDA, the long-term debt and the impact of interest expense on our quarterly results, we plan to continue to accelerate our debt reduction.

In the quarter we paid $9 million of which $7.5 million was accelerated. We will continue to reduce our debt load more aggressively in the coming months and quarters, driving off of our strong cash flow, reducing interest expense and improving earnings to generate even more accretive results from the recent acquisition. In an effort to detail our consolidated results better for our shareholders, I'm now going to have Frank Fitzpatrick discuss the ARC Specialty Products and BCP Ingredients segments.

The ARC Specialty Products segment posted a new fourth quarter sales record of approximately $8.4 million or 3.5% over the prior year comparable quarter. This increase in sales was primarily derived from improvement in volumes sold of 100% packaged ethylene oxide. Our quarterly business earnings increased 0.6% to $2.9 million versus the prior year comparable quarter. Sequentially, this result is equal to the results we posted for this segment at September 30, 2007. This result reflects the impact of the quickly escalating petrochemical raw material increases. In this segment we did increase prices, as contracts allow, to offset a significant portion of the cost increases. We continue to work on a number of initiatives to broaden and build on the ARC business model.

Next I want to report on the BCP Ingredients segment, which is a segment that manufactures and markets un-encapsulated choline supplements to the animal feed industry as well as other choline derivative products. As Mr Rossi noted, this segment has been significantly impacted by acquisitions. For the quarter, we set another new quarterly sales record of $31.6 million, up 345% over the prior year quarter, and realized segment earnings of approximately $1.1 million, or 36% over the prior year comparable quarter. These increases were driven particularly by sales volumes of the acquisitions, which contributed approximately 96% of the sales revenue increase with additional 13% organic growth in the base. The Chinook acquisition contributed most significantly to this growth at $12.4 million, as we integrated their base of business into our St Gabriel, Louisiana and Verona, Missouri operations, helping to achieve plant operating efficiencies in both.

The Balchem Italia BV operation generated an additional $11 million in revenue, all through the Marano Ticino site, as we continue our global growth strategy. In this fourth quarter, the 2006 acquired choline plant in St Gabrielle, Louisiana produced approximately 27 million pounds of product. This is approximately 80% of the plant's name plate capacity. The additional capacity of this operation gives us the opportunity to continue our growth plans for this business segment, both domestically but especially on the international front. The integration of the Chinook and Akzo businesses highlight significant opportunities to synergize our operating plants, to drive cost out of the logistics, issues and efficiencies into plant operation, which we expect to utilize to strengthen this commodity oriented market for our customers and shareholders.

This is especially critical as we deal with the escalating key raw material costs previously mentioned. To be sure, these raw material cost increases referenced were very significant and not predictable by near history trends. We have taken what we believe are appropriate price increases to the market to help to fray the unfavorable effect on our results, remaining mindful of our end market customers. Numerous choline or choline derivative product opportunities for markets outside of animal nutrition are currently being worked on and look quite promising as well. We are pleased with the immediate accretive impact on our financial results from both of the recent acquisitions, but do expect to post better bottom-line results going forward. I will now turn over the call to Mr. Rossi for him to discuss the Encapsulated segment.

Thanks, Frank. For the quarter, the Encapsulated/Nutritional Product segment realized a 26.7% sales improvement to $13.8 million over the prior year comparable quarter. This quarterly result does reflect sales from the previously noted human choline business of the Akzo acquisition, which contributed $1 million in revenue to this segment for the quarter. Business segment earnings of $2.6 million is an improvement of 128% over the same period of last year, improving to approximately 18.5% of sales, up from 10.3% in quarter four of 2006. This fourth quarter result saw improvement in all sectors of the core business over the previous comparable quarter, and in most sectors sequentially from the third quarter. Most notably, the consolidated human choline nutrient products were up 47% over the prior year quarter. We continue to see increased consumer recognition of the benefits of choline, hence choline inclusion in more supplements and fortified drinks.

We continue to position choline as an essential ingredient with excellent therapeutic benefits for all ages, leveraging off of the baby infant formula requirements. The international food market was very strong in quarter four, up 46% over the prior year. We also saw continued improvement in our calcium line. And while the calcium line was off on an annual basis, it did improve by 63% over the previous comparable quarter and improved 33% on a sequential basis. But more importantly, it moved to a breakeven level in the second half of the year after posting a $600,000 loss for the first six months. A number of new product developments have been introduced into the nutritional supplement marketplace using our calcium platform and we expect to see new product launches by the second quarter of 2008. In the animal nutrition and health sector, the core business recognized $4.8 million of revenue, up approximately 21% when compared to the previous year quarter.

The key product lines in this sector are Reashure, Nitroshure, and our chelated minerals product line. The Reashure product has continued the uptrend seen in 2006 with the fourth quarter of '07 up 18% over the previous year comparable quarter and up 11% sequentially over the third quarter. With the integration of the chelated mineral product line, combined sales efforts and favorable field trial results on numerous products, we expect to get better penetration in all markets for all ANH products, both domestically and abroad. Our pharmaceutical delivery system, commercial development effort continues but as previously noted, it is a long process. We did generate $140,000 of R&D milestone revenue in the quarter. We are confident that these efforts will yield good end results but in the near-term this sector is still a net expense to the business segment.

We incurred $206,000 of net expense in the quarter. Sequentially from the third quarter, this entire segment was up approximately $913,000 or 7% in sales and up $366,000 or 17% in earnings. We continue to see some fluctuating results in this growth segment due to product mix and customer order patterns but overall steady growth. Although we still have some roller coaster effect quarter-to-quarter in the various market sectors, we are very pleased with the overall volume and revenue growth in all segments. Adding the acquired Akzo products, European customer base and technology have strengthened our global growth platform. And we are confident that more business will be generated based on the unique platform of products that we offer or soon will offer the market.

Our business portfolio continues to create nice balance, yielding continued growth through the various challenges of any single product line. We continue to build the financial strength of the Company, while we had borrowed $29 million in quarter one and another $10 million in quarter two, we will continue to manage the asset base aggressively, yielding improved results while building our technology base. Near-term we remain focused on completing the integration of our recent strategic acquisitions, however, we continue to explore alliances, acquisitions, and joint ventures to continue leveraging our technology and strong human asset base. This now concludes the formal portion of the conference, at this point, I will open the conference call up for questions.

Thank you. [OPERATOR INSTRUCTIONS]. Our first question comes from the line of Jonathan Lichter with Sidoti & Company.

Hi, guys.

Hi, Jonathan.

Is Chinook still doing toll manufacturing for you?

Well, actually, Chinook themselves are not. We are having dry choline co-manufactured for us up at the Canadian plant that they were using. I say not now because they have since sold that building. We own the equipment but we have struck a new relationship there, if you will, with the new owner and are continuing to produce dry choline up there.

How much longer do you think that will go on?

Well, I will tell you, I think that we have come to a pretty good agreements here on the transaction with the new owner. And for the near-term, we're going to continue.

Okay. And besides the price increases, what kind of margin opportunity do you think there is to or opportunity there is to improve the margins at BCP Ingredients?

Well, obviously the price increases we talked about, I think we have implemented what we thought was appropriate at the beginning of the year. I would say while no customer is ever happy with an increase, that they were generally accepted. I think the other key part of this and we talked throughout this presentation about the escalating raw material costs, which is not unique to us, for sure, but I do think that they have been rather extraordinary in terms of which ones and how much and quite honestly the speed at which they happened. Our expectation is that fourth quarter was a little overheated. And that they should begin to decline. We're starting to see some erosion there, although it's early yet in this first quarter, but I do think that that will happen and get somewhere close back to a more normal kind of rate on a number of those key raw materials.

Okay. And then in terms of I think it might have been Frank who mentioned other uses for choline, can you talk about that?

Well, there are a number of other industrial applications where we are selling the choline into and we -- and that part of the business, I would say, has been steady for sure. You know, steady means steady good. And in the meantime, what we're doing is using some of our human resources to further explore other opportunities, kind of in that same space but some other things that we've become aware of, where choline may be a desirable alternative to some other chemicals that are used in industrial applications and early on it looks promising. It's a bit early to [project] exactly how much growth we could see out of that but certainly it's very positive.

In terms of the Encap area, are you seeing any slowing in the food business, are companies pulling back from new projects there?

I would say that we have not really seen that yet. The food industry obviously is under a loss of pressure right now. Just read the paper and you name it, they're under pressure. I think obviously the end products that we're in today seem to be pretty solidly entrenched. As far as new product introduction, I would tell you that our pipeline -- we think we have a pretty good pipeline of a few million dollars of opportunity that are still on track and based on everything that we're hearing from those customers/prospects, they're -- the food industry is looking to still yet bring some new products to market and we expect to be playing in those.

Okay. And do you have -- what tax rate do you expect for 2008?

I would use 35.75%.

Okay. And CapEx for '08?

CapEx for '08 is about $5.5 million.

Okay. I think that's up a little bit. What are the additions there? Is that related to the Italian plants or --

Part of it, certainly, is the Italian plant down. That, the plant down in Louisiana, I mean, we are picking up more plants as we speak, not that that's our objective. But just stay in business, capital is there and we had some debottlenecking projects under way that we expect to get completed here early this year. So that's taken a little bit more than normal as well.

Thank you.

Sure.

Thank you. Our next question comes from [Terry Lenhoff] with Iron Works Capital.

Thanks. Can you provide a little bit more detail, what do you think the impact specifically of methanol was in the quarter and can you give us some sense of where you see methanol pricing going the next several months?

Well, order of impact in the quarter was -- in particular, we buy methanol in Italy because we're a basic manufacture of a means and that's where the methanol is consumed. So in the fourth quarter alone, we saw -- we realized in excess of about $1.4 million of expense just for methanol. That's excess expense for methanol. And it was a very, very quick escalation of the price, certainly over more than doubling, if you will. And I guess the more key part of the question is projection going out here. We're seeing a little bit of softening.

We've looked at the historical trends of the product and certainly this, while there have been occasional peaks, near-term they haven't been this extreme nor this rapid, if you will. So we expect the number to decline. The base feed stock for methanol is natural gas. Natural gas is nowhere accelerating near like the price of a barrel of oil has. As a matter of fact, it's moved up rather modestly these last few months. Connecting the dots here between natural gas and methanol is a real stretch and I would tell you that there was never really a situation from any of the intelligence that we could gather where there was a real shortage.

My understanding is the largest producer has -- is suffering outages in two of their larger plants. I'm not sure if you have any sense of whether they're back online or when they're coming back online. My sense is that was like 5%, 6%, 7% of world supply and that was the reason.

Well, I would tell you that depending on the articles you read and the intelligence that you gather, there was definitely reference to the fact that they could not run two of their units down in South America. But the reality is those two units have not run for probably the better part of nine months. So that outage that was cited, while I think real, had been there for a period of time, a rather long period of time in advance of the escalation of the price. So we hear that they have now started the third -- they have four units there. We hear that they have started the third unit and so I think the key is their ability to get natural gas, quite honestly, out of Chile. And so I think that the opportunity is there to get the product. I know there have been some new natural gas fields or close to being open down in South America. So I think there will be some relief there and hopefully this problem will go away. I don't think it's going to necessarily go away from that standpoint near-term, but I also think that there's adequate supply in the marketplace and explaining the price escalation is a little difficult. I wish I had a better answer, but I don't.

That's helpful. Second question, you refer to double-digit improvement in sales and earnings in '08, assuming that global economy doesn't come further unglued. How much of that do you expect to be organic versus anniversarying the acquisition?

Probably I would say not, certainly not half of the growth will come from the acquisitions, but perhaps maybe 30%, if you just look to annualize some of these numbers, and then the balance should come from right now the plan is organic growth.

So 30% of the growth will be the acquisitions and the rest will be organic?

Yes.

Okay. Great. Thank you very much.

Thank you.

Thank you. Our next question comes from the line of [Greg Gardner] with [Ingler Research].

Hello.

Hi, Greg.

Good quarter. It was better than what I expected. Really like to see that organic growth. A question though I have is on the gross margin in the BCP Ingredients, you mentioned that believe there could be a few percentage point improvement and this was beyond the raw material cost improvement there. And then I believe there was a connection there to what was mentioned about some of the synergistic improvements in the operating plants and basic issues. I just want to make sure if I'm connecting the dots correctly and if you could add a little clarity on how that could occur and what kind of timeframe that might occur, given -- assuming that prices would even stay the same, where they are right now.

Yes, I think your read and connecting the dots from the conversation are pretty accurate. We do think that there is an opportunity to improve the margins a couple percentage points based on, I'll say, improving logistics, i.e. balancing where shipments are made. We are now running three choline plants, one in Italy, two here in the states. We also have the dry operation up in Canada, so actually four if you count that. So I think as we continue to get the plants lined out as efficiently as possible and drive true plant efficiencies through there, we're kind of rebalancing how we're servicing the market from a logistic standpoint. We're pretty confident we'll be able to take some of the distribution dollars out of the formula and certainly achieve the maximum efficiencies of all the locations.

And do you perceive this as a one year project at this point.

I think not even one year. I think we should be at that point certainly in the second quarter of this year.

On a run rate basis?

Yes.

Okay. Good. Thank you.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) There appears to be no further questions in the queue. I would now like to turn the conference back over for any closing comments.

Thank you. I just want to thank everybody for attending the conference call. And again, I would like to reiterate, I think it was a strong quarter, especially in light of what happened with raw materials. We're doing everything we can to, I think, deal with those issues, having passed on the price increases into the market. Certainly expect to see better bottom-line results out of those here in the first quarter. So I'll say thanks for attending the call and look forward to talking to you all soon. Thanks.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.