Balchem Corp (BCPC) 2008 Q4 法說會逐字稿

Greetings, ladies and gentlemen and welcome to the Balchem Corporation fourth quarter 2008 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. Ladies and gentlemen, thank you for joining our conference call this afternoon to discuss the results of Balchem Corporation for the period ending December 31, 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 statements. This release does contain or likely will contain forward-looking statements,which reflect Balchem's expectations or beliefs 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 risk 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 9:30 a.m. Eastern Time.

I will now turn the call over to Dino Rossi, our President, Chairman and CEO.

Thanks, Frank. Good afternoon, ladies and gentlemen and welcome to our conference call.

We are pleased to report record net earnings of $4.9 million on record consolidated revenue of $54.1 million for the quarter ended December 31, 2008. This sales level was approximately 1% ahead of the $53.7 million result in the prior year comparable quarter. It was an interesting and challenging quarter as two segments, our specialty products at $9.3 million and animal, nutrition and health at $37.2 million both achieved new fourth quarter sales levels, but our food, pharma and nutrition segments closed off approximately 16% at $7.6 million, still having us set a new consolidated sales record for the quarter. There was a quarter that reflected some of the known difficulties of the economy in general, most clearly reflected in the food and nutrition segment, where we saw declines in volumes of all product lines but actually improvements in product line profitability in domestic food and Vitashure products due to product mix, selling price increases and some raw material cost decreases. This combination of factors impacted the other segments as well, which did not see a revenue decline, there for did post improved profitability.

As previously noted, consolidated net income closed the quarter at $4.9, million up from approximately $4.2 million in the prior year quarter, or an increase of approximately 18%. This quarterly net income translated into diluted earnings per share of $0.26 or an 18% increase from the $0.22 we posted in the comparable quarter of 2007. Looking between the top and bottom line, you will see that our consolidated gross profit of $13.4 million were equal to 24.8% of sales in the quarter. This level is an improvement of approximately 1.7 percentage points from the prior year quarter but more impressive an increase of 3 percentage points sequentially from Q3 results of 2008. This is quite significant and has been previously suggested as we began to realize some benefit of the decline in key raw materials that are largely petroleum based derivatives. Considering that the animal nutrition and health segment as a percent of our total consolidated sales increased to 69%, it has been our lower gross and operating profit segment as a percent of sales, the improvement of overall gross margin is beginning to reflect the expected benefit of the early 2007 acquisitions and our ability to strengthen our operating and logistic economics for the overall business. We expect this improvement to be carried forward into 2009.

At the consolidated operating expense level, you will note a very modest $138,000 increase to $6 million for the quarter, which equaled 11% of sales versus the prior year quarter expense equal to 10.8% of sales. This spending level is rather consistent with earlier 2008 quarters. except we did accrue bonus money through certain business objectives having been met or exceeded versus our plan for the year. Overall, it was a strong quarter, especially with the softer results of the food, pharma and nutrition segment. ARC and animal nutrition and health realized some of the margin improvement previously discussed due to volume growth, increased selling prices and some reduction of raw materials. We did realize approximately $9.7 million of EBITDA in the quarter, which translates into $0.51 per share, and when including our non-cash stock based compensation charge, we generated $10 million of EBITDA in the quarter.

Other expense of $175,000 was approximately $35,000 lower than the previous year quarter. This is a direct relationship to the reduction of the long term debt that was incurred to achieve the prior year acquisition. In the quarter, we reduced our debt by an additional $5.5 million, leveraging off of the previously noted strong EBITDA of the business. The company's effective tax rate for the 12 months ended December 31, 2008, is 33%, as compared to 35% in 2007. This decrease in the effective tax rate is primarily attributable to the change in portion factors relating to state income taxes as well as a change in the income proportion towards jurisdictions with lower tax rates.

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 $40 million to $11.6 million at December 31, 2008, reflecting accelerated payments of $17.5 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 accretive results for the noted 2007 acquisitions. 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 food, pharma and nutrition segments.

The ARC specialty products segment posted a new fourth quarter sales record of approximately $9.3 million or 10.6% over the prior year comparable quarter. This increase in sales was derived from a combination of increases in volume and selling price of ethylene oxide, propylene oxide and methyl chloride. Our quarterly business earnings increased 31% to $3.8 million versus the prior year comparable quarter. This improved level reflects the impact of increased volumes, some price increases and petrochemical raw material decreases, especially ethylene oxide. We do have an expectation that we will see more relief from these key raw material costs as we enter 2009. We also continue working on a number of initiatives to broaden and build on the ARC business model with particular development work on the ERC license technology to repackage, distribute and deliver another chemical for the fruit ripening industry. A number of tests with large fruit producers have continued to take place and our confidence level is building with continuous positive results.

For the quarter, the food, pharma and nutrition segment realized a 16% sales decline to $7.6 million from the prior year comparable quarter. Disappointing business segment earnings of $700,000 is a decrease of 62% from the same period of last year, dropping to approximately 9% of sales. This fourth quarter result noted significant economic pullback in the food, choline and calcium sectors of the food, pharma and nutrition business. Most notably, the food and human choline nutrient product revenues were down approximately 14% from the prior year quarter. We saw many customers aggressively managing inventory levels, pushing orders into 2009 in response to certain retail product line slowness. We did not lose any customers, and we continue to focus on building consumer recognition of the benefits of choline, hence choline inclusion in more supplements and fortified drinks.

More independent research on the benefits of choline have been completed and recently published. We continue to position choline with nutritional and pharmaceutical companies as an essential ingredient with excellent therapeutic benefits for all ages. In fact, the most recent breakthrough for choline is its inclusion in the Pepsi Propel product branded Propel Mind. which you will now find in the stores. We also saw a decline in our calcium volume of approximately 9% from the prior year comparable quarter. A number of new product launches have been delayed into the nutritional supplement marketplace, and our our base customers aggressively managed their year-end inventory levels down at year-end. Our pharmaceutical delivery systems commercial development effort continues, and in the quarter we did not generate any R&D milestones which resulted in $140,000 shortfall from the prior year quarter. We remain confident that these efforts will yield good end results, but in the near term this sector remains a net expense to the business segment.

I'll now turn the call over to Mr. Rossi for him to discuss the animal nutrition and health segment.

Thanks, Frank. In the animal nutrition and health segment, we realized a 2.3% sales improvement to $37.2 million over the prior year comparable quarter. This improvement was led by strong sales of aqueous choline, choline derivatives for specialty industrial applications and also strong sales of specialty animal health products, notably Reashure, and initial sales of the newly-launched AminoShure products. Specialty A& H product sales realized 11% growth in sales revenue from the previous year quarter. Dry feed grade choline product sales declined approximately 10% or $1.4 million over the prior year quarter, from decreases in volumes sold domestically, but most significantly from lack of international sales into the poultry market.

Sales of choline into the North American seed segment have begun to feel the pressure of production cutbacks in the broiler poultry market. The international poultry market was not participated in, due to two Gulf Coast hurricanes, Gustav and Ike, which caused raw material supply chain interruption until late in Quarter Four. These interruptions effectively stopped Balchem from pursuing the international markets as we had limited production and chose to service the North American market from the US plants. The interruptions of raw material supply caused us to realize a very unfavorable operating condition of taking our plants up and down due to the unanticipated supply situation well into the fourth quarter. It also caused us to alter efficient shipping patterns as we diligently served the North American customer base from available, albeit not ideal, inventory locations. By mid December we finally returned to a normal supply state allowing us to return to efficient production and logistics scenario and to refocus on export opportunities.

Ironically, earnings from operations for this entire segment improved to $2.9 million as compared to $1.8 million in the prior year comparable quarter largely due to the product mix, price declines in petrochemical raw material commodities, and strong derivative sales which increased 17% in volume over the prior year quarter to equal 19% of the total revenue in this segment for the quarter. Improved profitability of the animal nutrition and health segment was achieved with near heroic measures by many employees, suppliers and customer cooperation in the quarter, product mix, favoring more profitable products, and declining raw material costs were partially offset by the noted unfavorable plant operations and logistic efforts. I want to take this opportunity to thank them all for their diligent efforts through this uncharacteristically troublesome quarter.

While we did implement some price increases, where contract allowed, this positive was easily overwhelmed by some of the noted negatives. Additional price increases have been and will be implemented where we are contractually able to do so in the first quarter of 2009, and we do have an expectation that we will see some additional relief from raw materials as we open 2009. With the bulk of the feed grade choline going through the poultry market, we are very sensitive to a large and continued losses of the large poultry integrators. Feed ration costs have corrected to some degree, but retail poultry prices remain very low, keeping significant downward pressure on profitability for this market segment. We will continue to monitor closely our raw material costs for all segments of our business and implement cost pass throughs. This should cause our margin percentages and gross margin dollars to improve near term, but we will be very cognizant of our end market customer financials. As noted in previous calls, we certainly keep some roller coaster effect quarter to quarter in the various market sectors, but we are pleased with the overall revenue growth in the consolidated results.

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 of revenue and operating income through the various challenges of any single segment or product line. Overall we continue to build the financial strength of the Company, managing the asset base aggressively, reducing debt and interest expense, which will also assist in yielding improved financial results. Near term, we remain focused on implementing operational improvements, new product development and new product marketing. We also continue to explore alliances, acquisitions, and/or joint ventures to continue building and 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 for questions.

Thank you. (Operator Instructions). Our first question is from the line of Jonathan Lichter with Sidoti & Company. Please state your question.

Hi, guys. Can you talk about. in the food pharma and nutrition segment. how things looked in January and February?

Yeah. Certainly I think we saw a little bit of improvement from the pullback that we saw towards the end of the fourth quarter, so certainly, I think a little bit of bounceback. I think consistent with what we said we didn't really lose any customers but we saw aggressive management there in that food sector which I think is something that's pretty well publicized right now so I don't think we were immune from that but certainly did see some bounceback here early on into Q1.

Was it in all of the categories or just do you recall?

I think probably with the exception of calcium and we've had a lot of discussions with that customer base, and they are really kind of queued back up here to begin end of February, first of March pretty aggressively again, so again, I think with the Management of their inventory levels, and we've shared forecasting with them and expect that to pick back up and them to be right back on track for the year.

Okay. Was there any difference between the food products there and whether there was international or US?

Again, a little bit of pick up, I think we saw the fourth quarter actually got a little soft on the international, bounceback here again starting in Q1. Domestic is kind of hung in there pretty nicely and I mentioned too, the one product, the choline product that got launched here actually just a couple days ago, so we expect to see that to start to pick up more aggressively and that was the Pepsi Propel product.

Can you also talk about how you foresee commodity prices acting through another year?

Well it's kind of interesting. There's been tremendous pull back in production in general in commodity chemicals. I've commented to a couple people that I almost think there's a point of being unhealthy because there's been a lot of capacity idled in the market, which will then only turn and probably tighten things up and push prices up, so I would say it's almost to the point of probably being almost too low, and making it difficult for the larger companies to take a decision to stay in the businesses, so I think that we're probably close to being at the bottom there for sure, and would expect that there was certainly a little bit more giveback here in the quarter from where we ended Q4, but I'd say we're probably close to being at the bottom.

Okay, and chelated minerals, how did that do in the fourth quarter?

Yes, fourth quarter was actually a pretty good quarter for chelated minerals. We were a little soft in the Chinese market there, but again, kind of there were some inventory builds that took place right before the quarter which led to a little bit of a soft quarter, and but certainly it's starting to come on again pretty strong here in Q1 and again, we landed another nice new account, a rather large account domestically with that product line so we expect it to continue its growth.

The new account you landed was that in Q1?

Yes, it was.

Okay, thank you.

(Operator Instructions). Our next question is from the line of Tony Pollack with Maxim Group. Please state your question.

Good afternoon.

Hi, Tony.

In terms of the pharmaceutical could you give us a little more color on what you expect in the future and when or if it will anything be significant?

I think the stuff near term future being 2009, I think our expectation is that we'll probably incur some milestone payments, by the ballpark, a number I think it's going to be less than $1 million so on the surface I would say that 2009 looks to be a continued net expense for that but we've got a couple of projects there that we are, we feel pretty good about and there's one that hopefully and this is not in our control but hopefully we'll be going into clinical trials here maybe mid year this year, so we should have a much better read by late or end of the year.

Okay. Could you give us an idea of the hurricane cost in terms of sales and earnings?

Well, I think for sure, in terms of sales it was probably, I mean rolling up probably Q3 and Q4 combined, probably affected us by 6 or $7 million in sales, and most of that would have been affecting our choline business, which probably 10 to 12 points off of that sales number, so it was pretty significant.

Could you tell me what depreciation amortization was for the quarter?

D & A was about $7.8 million for the quarter.

Okay, thank you very much.

Thank you.

Thank you. (Operator Instructions]. Our next question is from the line of Greg Garner with Singular Research. Please state your question.

Good afternoon, gentlemen.

Hi, Greg.

A question about the new specialty ARC product. Any sense for when that would be introduced? Is that a 2009 event? Is that going to be here for the fruit ripening season this year?

Well, I guess we do think that there's going to be some impact here in 2009. I think it will be late 2009, if we're lucky maybe a little bit here in Q3 and then hopefully Q4. It really is not so much, there's no real seasonality to this. Most of this product is the food itself is grown in Latin America and it's produced year around, so that's kind of a nice piece of it is that it is not seasonal, but certainly, we continue to run trials with our product on the fruit and actually there's a couple other fruits that we're looking at as well that require this same chemical and all of them have been progressing pretty nicely, so we feel pretty good about the way it's developed and certainly I would say probably within the next I'm going to say two to three months, certainly by the end of quarter two, we should have a very good idea about maybe how quickly we may be able to ramp this up.

This is a product that would enhance the ripening process or slowdown the ripening process when the fruit is being shipped from Latin America to the US, is that it?

Yeah. It actually enhances the ripening process. It does speed it up but in a very controlled fashion.

So it's mainly for international shipping versus domestic?

That's correct.

Okay, and in the food, pharma and nutrition, you've mentioned in previous quarters about how the European business was a real growth vehicle with your pleasure over the new distributors there. Can you give us any color on how things have been in the fourth quarter for that segment and how they are progressing so far in the first quarter?

Yeah. I think again, as you mentioned, I've previously noted that we put some new distributors in place and we were real pleased with the uptake of the product. That was mostly geared for the baking marketplace and so that has continued to do rather nicely. In the fourth quarter, there's, typically with us there's an opportunity to do some business in processed meats. That was one that didn't do as well this fourth quarter but overall, again, product is in the application and I think that we see this continuing to grow and actually we're studying right now the idea of putting our own person on the ground in Europe to work more closely with those distributors from a technical standpoint because we believe there is significant growth opportunity there, so we still feel pretty bullish about the opportunity to grow in that space.

So Europe did in line with the US in the fourth quarter in that segment?

It did, yes.

Okay. So there is still some inventory adjustments from your customers in Europe also?

Yeah. I would definitely say so. It was the same kind of a little bit of pullback that we saw. We actually saw orders placed and then deferred, so same pattern.

And to the choline business in serving the poultry business domestically, first of all you're all geared up to focus back on the international market; is that correct?

Well, yes. Absolutely. Not to say that we're going to take our eye off the domestic market but certainly we look at that export market as where we're going to achieve real growth.

Can you give us a flavor for the health of the poultry companies, are they purchasing less because their volumes are low or a sense on that since choline is such a large part of the total revenue for Balchem.

Yes, for sure the North America market and a lot of this is publicized, placements of new birds are down probably 6% to 7% and I think the near term outlook is that's going to continue. Maybe it will start to turn more positive come Q3 but right now, there's a lot of press out there, the big bird producers, Pilgrims and Tyson have posted a lot of red ink here lately, and I think the key drivers there are really the retail price that they are able to get for birds now versus the fact that feedstock that's come down rather dramatically but still yet they haven't been able to get prices for the finished products, so I think that's what's really still hurting them and again pulling back placements will reduce inventory and probably snug up the requirement. I mean that's the approach we're sure to try and get those prices back up, so that's North America and then still definitely seeing growth out of other international markets, particular South America.

We know China's market is growing pretty nicely internally, not that we participate in that, but again, just kind of keeping the pulse on the poultry market, even Russia and Russia has definitely been a good export market for the larger bird producers, and political reasons what not there's been a pull back on that and actually Russia within the last probably six months has announced that they are going to really try to build up their poultry production infrastructure so that they import less and produce more locally. Again, but that's still could well be an opportunity for us to sell choline into Russia. There's no producers of choline in Russia today.

Appreciate the color, but just want to make sure I understand the choline business here. I thought it was more dependent upon volumes to convert what their prices are, particularly since choline is a small component to the feed process for the chickens and very critical for their health.

Yes.

So should I look at it more as a volume related item regardless of what pricing may be for Pilgrim or Tyson?

Well I think there's a hook but volume is key. What I'm saying is their production volume is down in response to the fact that they can't get price in the end market, so yeah.

Okay, very good. Thanks.

Sure.

Thank you. Our next question is from the line of Lawrence Goldstein, a Private Investor. Please state your question.

You have gone out on a limb, are very optimistic talking about expected growth this year. If you were to think about this depression just continuing as it has straight down in the last 15 months , what would make you revise that

Well, I think, I suppose at a certain moment we'll get to a bottom here, I'm optimistic that we are, and I do think that people are going to continue to eat. I think chicken is the lowest priced protein meat out there, so that should bode well versus beef or pork for us, and you look at our specialty products, the healthcare aspect, I do think people are going to continue to need healthcare and get healthcare even though there's maybe a question about benefits, but somehow something is going to have to happen there I think to correct that in terms of available healthcare for individuals, I don't think the government is going to walk away and not have people dying in the streets if you will, so I think there will be some steps taken here.

People are going to continue to eat. I think we supply uniquely into that space both as I say with the cheaper protein meat out there, a large consumer of our product as well as our food and nutritional supplements as well fit nicely into those kinds of foods that people are going to eat while they are eating at home versus out in a restaurant. So again, I think that that should play nicely into our hand as well.

I'm glad you are very very positive and I didn't want to make you change your view, but I said if the trend which has been downhill, even in the world of healthcare, it's been down, people are buying fewer drugs, postponing visits and so forth, and in the food areas, people are eating differently. You may have seen that Spam has become a big seller and so on and so forth so I'm not asking, I'm glad you think the way you do, but supposing the trend which has been down really straight down continues, what has to change for you to not be so expectant of growth?

Larry, I think that--

Come hell or high water you think you'll grow? I hope that's the case.

You know, I don't know that you look at what happened this quarter and yes, our sales numbers were up but they were up marginally, I think from a profitability standpoint you saw significant improvement there, so I think we're positioned to capitalize on kind of everything that's happening between the lines. We'll continue to aggressively manage our cost structure both at our plant operations, our supply chain operations, our SG&A, we can pull back on doing outside research, there's a number of things that we can do, if in fact the top line growth were to really turn the other way here and affect us in a larger way. We're not immune, that's for sure, but I think eyes wide open, and we'll look to aggressively manage it and try to keep that up.

That's good. I'm glad to hear that. Makes me feel good as a shareholder. The gas increase, you mentioned that it was partly in price.

Yeah.

What's in volume? What happens?

Well, you mean in the quarter?

Yeah, well, the quarter or the trend.

Yeah, I mean, we have continued to see the kind of modest volume growth and that's why even with the comments about healthcare and the fact that certainly there's some declines we're aware of decline in admissions and what not but got to be very careful. It's not just hospitals. It's outplacement opportunities but we saw, I'm going to say volume growth about 3%.

Well that's been the history of it hasn't it?

Yeah, and right now that has continued in the face of what we've already seen, so it gives me a little confidence to stick my neck out a little bit.

What amount of that goes to other than healthcare? Fumigating, and the comics?

A very small piece goes into fumigation. It's mostly medical care.

Thank you.

You bet.

I hope you don't have to say I'm sorry.

Me too. Thanks.

Thank you. Our next question is from the line of Jonathan Lichter with Sidoti & Company. Please state your question.

What are your expectations for CapEx for this year?

About $5 million, John.

And do you have the break down of the operating expenses from Q4?

Yeah, John, I'll give you a call with that. I don't have it in front of me.

Okay, thanks.

Thank you. There are no further questions at this time.

Okay. Well, thanks, ladies and gentlemen, for listening in to the conference call and thanks for all your support. Again, as I noted a challenging quarter but hopefully I don't come across too bullish but I do feel pretty good about what we've achieved in the near term outlook so look forward to talking to you at the end of the next quarter. Thanks.

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