Balchem Corp (BCPC) 2008 Q2 法說會逐字稿

Greetings late-stage and welcome to the Balchem Corporation second quarter 2008 earning conference call. 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. You may begin.

Ladies and gentlemen, thank you for joining our conference call this afternoon to discuss the results of Balchem Corporation for the period ending June 30, 2008. 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 our likely will contain forward-looking statements which reflect Balchem's expectations or beliefs concerning future events that involve risks and uncertainties we can give to assurance that statements reflected in forward-looking statements can prove correct and various factors could cause results to differ materially from our expectations including risks and uncertainties 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 metering was disclosed this morning on our quarterly press release at 9:30 a.m. Eastern time.

As previously -- as reported previously and effective with the quarter ending March 31, 2008, we have real lined the business segment reporting structure to more appropriately reflect the internal management of the businesses largely due to the impact of the recent acquisitions of 2007. The reporting business segments are ARC specialty products, food, pharma and nutrition and animal nutrition and health. 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 are pleased to report that the consolidated revenue of the second quarter was again a new quarterly record for the quarter at $62.9 million. This level was approximately 42% ahead of the $44.4 million results in the prior year comparable quarter and approximately 11% ahead sequentially of the first quarter results for 2008, all three segments achieved new second quarter record revenue results with the animal attrition and health segment extremely strong up 59% due to the performance of the previously announced acquisitions of Akzo and Chinook businesses and strong organic growth over the core basic choline and specialty animal nutrition and health product . The food, pharma, and nutrition business posted nearly 20% organic growth with particular strength in the human grade choline and pharma-calcium and realized typical growth levels out of the ARC specialty product segment at 5% over the prior year quarter.

Consolidated net income closed the quarter at $4.7 million up from approximately $4.1 million in the prior year quarter or an increase of approximately 16.2%. This quarterly net income translated into diluted earnings per share of $0.25 or a 13.6% increase from the $0.22 we ported in the comparable quarter of 2007.

Looking between the top and bottom line you will see that our consolidated gross profits of $13 million were 6.3% of the prior year quarter in dollars and equal to 20.6% of sales in the second quarter. This level of profitability continues to reflect the impact of the acquisitions in the animal grade choline business which carries lower gross margin. We did realize a 3.1% decrease sequentially from the first quarter 2008 results as we continue to realize increases in key raw material costs in the second quarter that are largely petroleum derivatives. As mentioned in the last conference call 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 in the beginning of the third quarter as our businesses are likely to remain affected by these higher costs over the balance of the year. Petrochemically oriented but not directly aligned are the higher costs of key coating materials such as cotton, soy and Pam oil which are being unfavorably impacted by the higher consumption of acreage in the corn production versus other crops for ethanol which affect our encapsulated products.

We continue to work on operational efficiencies and did achieve improvements in the second quarter but they were more than offset by the raw material cost increases, hence the like sequential decline noted. At the consolidated operating expenses level you will note a 5.9% increase to $5.7 million for the quarter versus the prior year quarter. This $300,000 increase was due primarily to additional sales and technical personnel expense associated with the Chinook and Akzo acquisition. We also incurred approximately $100,000 of commercial development expenses toward our pharmaceutical market initiatives in the quarter and higher G&A expenses due to increased fees associated with audit, tax accounting and non-cash stock based compensation recognition. However, with these increases operating expenses were 9% or 3 percentage points less than the operating expenses as a percent of sales incurred in last year's comparable quarter. This level also favorably compares sequentially to the 10.7% of sales we incurred in the first quarter of 2008 as we continue to leverage off of our existing infrastructure going forward and exercise tight control over variable controllable operating expenses. Overall it was a very good quarter especially with the unfavorable quickly escalating raw material costs incurred, in particular by the, ARC and ANH. commodity feed grade choline business segment.

We did realize approximately $9.1 million of EBITDA in the quarter which translates into $0.48 per share including our non-cash stock based compensation charge we generated nearly $10 million of EBITDA in the quarter. Net interest expense of 239,000 was approximately 180,000 lower than the previous year quarter. This was in direct relationship to the reduction of the long-term debt incurred to achieve the prior year acquisition. And is equal to $0.01 per share on a tax effective basis.

Noting our strong EBITDA we plan to continue to accelerate our debt reduction. During the past year we have aggressively reduced our acquisition related borrowings of $39 million to $24 million at June 30, 2008, reflecting accelerated payments of $12.5 million. We will continue to reduce our debt load as aggressively in the coming months and quarters driving off of our strong cash flow, reducing interest expense and improving earnings to generate even more 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 and food pharma nutrition segment.

The ARC specialty product segment posted a new quarterly sales record of approximately $8.8 million or 5.4% over the prior year comparable quarter. This increase in sales was equally derived from improvement in volumes sold and price increases of packaged ethylene oxide and propylene oxide. Our quarterly business earnings however decreased 11% to $2.7 million versus the prior year comparable quarter. This result reflects the impact of the continued and quickly escalating petrochemical raw material increases in this second quarter, especially ethylene oxide. In this segment we did increase some prices to help offset a significant portion of the cost increases, but obviously we did not keep up with the rapid raw material increases. We have implemented additional price increases beginning the third quarter to offset the noted earnings decline. We also continue working on a number of initiatives to broaden and build on the ARC business model. With efforts on a small acquisition and development work on a novel license technology.

For the quarter the food, pharma and nutrition segment realized a 19.6% sales improvement to $9.5 million over the prior year comparable quarter. Business segment earnings of $1.7 million is an improvement of 134% over the same period of last year, improving to approximately 17.6% of sales, up significantly from the 9% level in the prior year comparable quarter. The second quarter over prior year results saw significant improvement in the choline and calcium sectors of the FB&N business. Most notably the human choline nutrient product revenues were up 43% 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. A number of new independent research studies on the benefits of choline have been completed and recently published. We continue to position choline with traditional and pharmaceutical companies as an essential ingredient with excellent therapeutic benefits for all ages, leveraging off of the baby infant formula requirement.

We also saw continued improvement in our calcium line which improved 184% over the previous comparable quarter. More importantly however we generated operating profit of approximately $233,000 in the quarter after posting a $390,000 loss in 2007. 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 beginning the fourth quarter of 2008. Our pharmaceutical delivery systems, commercial development effort continues but as previously noted it's a long process. We do not generate R&D milestone revenue in the quarter but we are confident that these efforts will yield good end results. In the near term this sector is still a net expense to the business segment. We incurred $114,000 of net expense in the quarter for these pharma animals.

Sequentially from the first quarter this entire segment was up approximately 2% in sales and 9% 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. I will now turn the call over to Mr. Rossi for him to discuss the animal nutrition and health segment.

In the animal nutrition and health segment we had a rather interesting quarter. We did set a record in revenue at $44.6 million, an increase of $16.5 million, or 59% over the prior year quarter, and an increase of 14% over quarter one on a sequential basis. Volume growth contributed approximately half or $8.2 million of the quarter over quarter prior year. The operating segment earnings however declined in the quarter. The decline was $172,000 over the prior year comparable quarter, but more comparatively given the timing of the Akzo acquisition, the segment was down $428,000 sequentially from quarter one, and equaled only 6.4% of revenue. This sequential decline was due to our inability to timely pass on the rapidly increasing raw material costs, most notably of ethylene oxide and trymethlymine which are the key components in the manufacture of choline chloride. Sequentially the a price increases totaled $4.4 million or 11%.

Dissecting this segment, the specialty ANH. product increased 14% or approximately $800,000, with simply offset raw material increases of the specialty item. Other choline derivatives grew nicely helping to offset approximately $1.8 million of cost increases while feed grade choline implemented $1.5 million of price increases but lagged cost increases by approximately $1 million.

So price increases averaged approximately 5% in the feed grade choline products but cost increases were closer to 7.5% for the quarter. All of these actions ending up netting the $428,000 sequential decline. However we have implemented price increases again effective July 1, as contracts allow and we have increased our market prices for spot and quarterly bids going forward as well. With the bulk of the feed grade choline going to the poultry market were are very sensitive to the large and mounting losses of the large poultry integrators. Feed ration costs are at all time high largely due to corn costs and high energy costs. We will continue to monitor closely our raw material costs for all segments of our business and implement cost pass throughs. This will likely cause our margin percentages to be pressured, however our gross margin dollars should improve.

As noted in previous calls we still have some roller coater effect quarter to quarter in the various market sectors but we are very pleased with the overall volume and revenue growth in all segments. Adding the acquired Akzo product's European customer base and technology we continue to strengthen our global growth platform and 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 good balance yielding continued growth through the various challenges of any single product line.

Overall we continue to build the financial strength of the Company as noted earlier. We will continue to manage the asset base aggressively which will also assist in yielding improved financial results. Near term we remain focused on implementing operational improvements and new product development. We also continue to explore alliances, acquisitions and joint ventures to continue building and leveraging our technology and strong human asset base. This now concludes the formal portion of our conference. At this point, I will open the conference call to questions.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of John Putnam with Dawson James.

Good afternoon. I was wondering if you could elaborate a little bit on your strategy to try to offset rising raw material costs particularly in the animal nutrition and health area. Are you trying to find new products to kind of ween yourselves away from or distance yourself from the poultry industry? Or what's your strategy there.

I think in the animal sector for sure, we have a very strong base of business in the poultry segment and that's really driven by the commodity pulling for our business and that's obviously the one that's been I think under the most pressure if you will from a margin standpoint. So I think to that end let me just say we are implementing price increases as we continue throughout the year. We have a fair bit of business that has, is open to bid on the quarter. So we'll be taking prices up. Customers that are under contract, there was a round of increases July 1, to those contract customers that obviously will come into play here beginning in the third quarter. So we are trying to be as aggressive as we can with passing on those price increases. And I think yet sensitive if you will to what's going on in the poultry market.

But on the flip side of the answer to your question I think more important is the growth that we have targeted for the specialty animal nutrition and health products. Products like REASHURE, NITROSHURE, NIASHURE. As I mentioned we had real good growth in that part of that segment as well in the quarter. Unfortunately we had cost increases going on there. The good news is we've pretty much passed those through but we are seeing good volume growth going on there and certainly we expect to kind of restore margins on an incremental basis moving forward let alone continue to see it grow.

With the acquisition that we did of Akzo, we picked up a commercial base if you will in Europe. We've been pretty aggressively training those folks to be able to go into that European market and sell those specialty ingredients. We've had some earnings success. We think we are going to have more continued success there so really just breaking into that geographic marketplace with the specialty with the expectation of fair upside and certainly from the standpoint of pure market penetration in the U.S. market with those specialty, we're certainly under 10%. So I see a lot of head space opportunity there as well. So that's kind of a shift away as you've alluded to there from the pure choline business to really kind of shifting focus on those specialties which typically carry higher margins and that's kind of consistent with what our strategy has been since we grew that choline base.

I just had a couple of technical questions. In the press release you mentioned that the Akzo acquisition contributed $7.8 million of incremental revenue in the quarter. Does that also include the Chinook acquisition?

No, that was just, actually the Chinook acquisition in the second quarter is apples-to-apples comparison. The Akzo one come in part quarter if you will so that's just that piece of quarter that wasn't there.

Okay. And my other technical question is, the BCT ingredients business, where is that now?

That's now in animal nutrition and health, ANH.

Our next question comes from the line of Lawrence Goldstein, with Santa Monica Partners.

Hi,. Two questions. Everybody in the world it seems when they talk about $4 gas lately talks about $4 milk. So why is it I wonder that your REASHURE product isn't selling like more hotcakes than it is?

That's a very good question. It has continued to grow, Larry, but it certainly hasn't taken off any way like the way we had hoped that it would. It still comes down to balancing that ration. Interestingly in the dairy market today there is actually excess milk being produced and actually to the point where milk is being dumped. So the commentary coming out of nutritionists today is that they want to keep the cow healthy and really interestingly enough not have it produce so much more milk. So that's because there's just pressure there because they are not able to get milk prices let alone move the milk. It's kind of an odd dynamic right now.

Excuse me? Not able to get milk prices when the milk prices is going quote through the roof?

Pass through prices today are up a little bit but they adjusted back in the first quarter. So they are coming back a little bit but they are not huge in terms of the prices that the dairy guys are supposed to get.

Sounds like the oil business with the refiners.

Sure does.

Secondly, almost every quarter for the last many years it seems you are always saying, we instituted price increases, they are going to start manana. This time you said they started manana -- back. Isn't it possible to pass them on immediately and make it clear in your arrangements with your customers, that, hey, we charge more, we got, we pay more we got to charge more. Everybody knows everything is going up.

Yes, and I think that in the contracts that we had structured, Larry, that wasn't the case at the beginning of the year, it's now beginning to be the case, as in particular in the animal health space where because of the rapid level of increase, to be honest, we thought we were reaching peaks along the way here and weren't going to end up kind of playing catch up constantly but that certainly hasn't happened but we in this round of increases that we took to the market in July, we have now instituted where we can pass through cost increases within the next thirty-day window. So we are going to look to start changing that in this market, but certainly that's contrary to the way the market has worked in the past.

And so in the ensuing periods, are there any periods, might this next period be one where you say, well, we improved our margins because we passed along the costs earlier in the quarter. Because I think last time you said it you were going to put price increases in, in fact, this time you said you did it, July 1.

Well, we did. We did even in the -- I mean we felt the impact of the price increases here in the second quarter but the problem was that their raw material costs just totally outpaced those increase. Maybe my crystal ball wasn't good enough to project the kind of increases that we saw. But in fact for instance like in ethylene oxide the increase was 26% quarter over quarter. Larry, I will tell you, I wouldn't have dreamed that could happen, but in fact it did. So it's those kinds of increases that have been just extraordinary and that's kind of made.

That's news coming from you, if you follow the various industries, chemical industry in particular, it's routine to hear we're raising prices by huge amounts.

What you got to come back to is the kind of contract pricing that we had going into the animal nutrition and health space which as I said historically and I would also remind you of the acquisitions and our growing position in this market which at one point early last year was being challenged. I think we were very cognizant of that view in the market of us.

Okay. Thank you.

Thanks, Larry.

Our next question comes from the line of Jonathan Lichter with Sidoti & Company.

Hi, guys. Can you talk a little bit about the acquisition pipeline?

Sure. I think that it's fair to say we are looking at a couple of targets, one that we were probably a bit more excited about last quarter. I would say kind of moved to the back burner for sure, maybe off the stove. So maybe a little disappointing from that standpoint but there's no question I think valuations were not in the same league with us. So we are focusing on the other ones right now. We have two or three for sure that I think are solid candidates and we will continue to push those along. Do I think we'll get any one of those done this year? Probably not.

What sectors would those be in?

Actually in particular animal.

Domestic or international?

Both of them have I would say are domestic but have an international flavor to them as well.

Can you talk about when the new application for ethylene oxide might be available or?

Yes. Actually we are going to be doing some trials with the products here in September. And I think within probably 30 days like somewhere in October, end of October we'll have a pretty good indication of a success level there that could probably accelerate and we certainly expect that it will.

Could it be introduced in the beginning of '09, is that reasonable?

Maybe a little bit in the fourth quarter, late fourth quarter but certainly we would target the first quarter.

And then finally the pharmaceutical milestone payments, do you expect to receive those in the current quarter and the fourth quarter?

Yes, right now we expect to see third and fourth quarter milestone payments come in. Again they won't be huge but maybe a couple hundred thousand dollars.

Thank you.

Okay.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from the line of [Tony Polag] with the Maxim Group, L.L.C..

Can you talk about the new calcium product you are going to launch in the fourth quarter?

Well, actually it's not really us launching but it's a customer launching. I will tell you that in the second quarter there was a launch done by Walgreen and it's, it's their brand called Creamy which is a calcium tablet that they came out promoting pretty aggressively and they did that on a national level. So early on we've seen real good success out of that product and it's a straight up calcium supplement chewable. It's a pretty nice product actually. So we see the success of that product continuing. And then I would say continuing to work with the likes of Walgreens and a few other people in that same kind of marketing space we expect to launch at least two more products here beginning late, probably late third quarter, early fourth quarter. And those are likely going to be calcium plus some other ingredient. I won't say more than that just to kind of, I think they want to come to the market pretty quickly with those. And have the first market kind of position. So those are the two that are being worked on right now. Can you give us depreciation, amortization in the quarter? Yes.

Four the quarter, depreciation amortization was one point -- $1.875 million.

Thank you.

Thank you.

Follow-up question from Lawrence Goldstein.

That's it. Thank you.

Thank you. At this time there are no further questions. Gentlemen, do you have any closing comments?

No, other than, again, kind of reiterate I think it was a pretty strong quarter for sure from the top line. Obviously good revenue growth from a volume standpoint and while I think we were pretty successful passing on price increases we did lag a bit but we expect to get that cleaned out and I'd say knock on wood, hopefully there is going to be some relief here in raw material costs going forward; especially with Exxons announcement today. So with that, thanks everybody for listening in and we will talk to you again next quarter. Thanks.

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