Balchem Corp (BCPC) 2009 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Balchem Corporation first quarter 2009 earnings 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). It is now my pleasure to introduce your host, Mr. Frank Fitzpatrick, CFO for Balchem. Thank you. Mr. Fitzpatrick, you may now begin.

Ladies and gentlemen, thank you for joining our conference call this afternoon to discuss the results of Balchem Corporation for the period ending, March 31, 20 09. 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 tim 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 9:30 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 are pleased to report record net earnings of $6.1 million on consolidated revenue of $53 million for the quarter-ended March 31, 2009. It was an interesting and challenging quarter, as one segment, our ARC Specialty Products at $8.8 million, achieved a new first-quarter sales level while our other two segments, Animal Nutrition and Health at $35.9 million and Food, Pharma and Nutrition at $8.3 million closed off approximately 8.3% and 10.6% respectively. Overall, our entire sales level was approximately 6.8% lower than the $56.9 million results in the prior-year comparable quarter, but only off a modest 2% sequentially from the fourth quarter of 2008.

It was a quarter that reflected the considerable volatility in the global economy, including noteworthy changes in foreign currency exchange rates. It was also a quarter where we saw declines in certain key raw materials that are largely petroleum-based derivatives. These volatile changes were most clearly reflected in the Animal Nutrition and Health segment, as well as the Food and Nutrition segment, where we saw declines in volumes sold but improvements in certain product line profitability. As previously noted, consolidated net income closed the quarter at $6.1 million, up from approximately $4.6 million in the prior-year quarter, or an increase of approximately 31.4%. This quarterly net income translated into diluted earnings per share of $0.32, or a 28% increase from the $0.25 we posted in the comparable quarter of 2008.

Looking between the top and the bottom line you will see that our consolidated gross profits of $16.3 million were equal to 30.8% of sales in the quarter. This level is an improvement of approximately seven percentage points from the prior-year quarter, and also an increase of six percentage points sequentially from Q4 results of 2008. This is quite significant, and had been previously suggested, as we began to realize some benefit of the decline in key raw material, that are largely petroleum-based derivatives. Considering at that the Animal Nutrition and Health segment, as a percent of our total consolidated sales equaled 68% in this quarter and it has been our lowest gross and operating profit segment as a percent of sales, the improvement of overall gross margin is beginning to reflect the expected benefits of the early 2007 acquisition and our ability to strengthen our operating and logistic economics for the overall business. We expect this improvement to be carried forward into the balance of 2009.

At the consolidated operating expense level you will note a $900,000 increase to $7 million for the quarter, which equaled 13.2% of sales versus the prior-year quarter expense equal to approximately 11% of sales. Our spending level reflects the modest expansion of employees as well as the accrual of bonus money for certain business objectives having been met or exceeded versus the prior year. In addition, we also increased reserves relating to certain aging receivables for products sold in the Central and South America. Overall it was a strong bottom-line quarter, especially with the softer sales results from the Human and Animal Nutrition and Health segments. ARC and the Animal Nutrition and Health segments realized most of the margin improvement previously discussed due to increased selling prices and some reduction of raw materials. We did realize approximately $11.3 million of the EBITDA in the quarter, which translates into $0.59 per share and when including our noncash stock-based compensation charge, we generated $12.1 million of EBITDA in the quarter.

Other expense of $144,000 was approximately $69,000 lower than the previous-year quarter. This improvement is related to the reduction of the long-term debt that was incurred to achieve the 2007 acquisitions. This reduction in interest expense was partially offset by a foreign currency translation loss, as compared to a gain in the prior-year quarter. In the quarter we reduced our debt by an additional $3.1 million, leveraging off of the previously-noted strong EBITDA of the business. The Company's effective tax rate for the three months ended March 31, 2009, is 33.5% as compared to 35.5% in 2008. This decrease in the effective tax rate is primarily attributable to a change in apportionment 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 have successfully accelerated our debt reduction, we have aggressively reduced our acquisition-related borrowings of $40 million to $9.2 million, and to zero to net of cash at March 31, 2009. We are well positioned to strategically reduce our debt load in the coming months and quarters as we continue to aggressively manage all areas of working capital, driving strong cash flow, reducing interest expense and improving earnings to generate even more accretive results from our core businesses and 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 the Food, Pharma and Nutrition segments.

The ARC Specialty Product segment, posted a new first-quarter sales record of approximately $8.8 million, or 4.1% improvement over the prior-year comparable quarter. This increase in sales was derived principally from a combination of increases in volumes and selling price of ethylene oxide products. In particular, our ethylene oxide canister business saw volume improvements of 17.6% in the quarter. These increases were partially offset by declines in volumes sold of propylene oxide, which is more directly affected by general economic conditions.

ARC quarterly business earnings increased 30.4% to $3.4 million versus the prior-year comparable quarter. This improved level reflects the impact of previously-discussed price increases, petrochemical raw material decreases and higher volumes, especially ethylene oxide. We 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 trial results.

For the quarter, the Food, Pharma and Nutrition segment realized a 10.6% sales decline to $8.3 million from the prior-year comparable quarter. Business segment earnings of $1 million is a decrease of approximately $600,000 from the same period of last year. However, on a sequential basis this segment realized a 9.6% increase in sales and a 36% increase in profitability, as we had suggested should happen in our last quarterly conference call. As stated in this morning's press release, the domestic food sector was up in the quarter, as we continue to see growth from the launch of Choline into new food applications, as well as growth in the bakery and tortilla preservation market. We also saw significant uptake of our VitaShure products for nutritional enhancement. This first quarter result did, however, see some economic pull back in the Choline supplement sector and a slow start for calcium, which corrected in March.

The human Choline nutrient product volumes for the supplement marketplace were down approximately 11% from the prior-year quarter. We continue to see many customers aggressively managing inventory levels down by delaying orders 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 foods 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 break-through for Choline is its inclusion in the Pepsi Propel product branded Propel Mind, which launched late in this first quarter and you will now find in the stores.

We also saw a decline in our calcium volume from the prior-year comparable quarter. Our 2008 first quarter sales did benefit from a previously-discussed pipeline sale. Sales for this particular retail product did increase late in this first quarter and we now expect to see consistent reordering of the product monthly for the balance of the year. A number of expected new product launches have been delayed into the nutritional supplement marketplace and our base customers plan to aggressively manage their levels in this area.. Our pharmaceutical delivery systems commercial development effort continues. In the quarter we did not generate any R&D milestones. However, a licensee of our technology has recently been authorized to commence a Phase III clinical trial on a treatment containing our technology. With this progressive step, we are cautiously 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 will 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 sales of $35.9 million, a decline of $3.2 million or 8.3% as compared to the prior-year comparable quarter. Within this segment,specialty AN&H product sales realized 4.1% in growth in sales revenue from the previous-year quarter and 10% growth on a sequential basis. This improvement is primarily due to stronger sales of Reashure, Nitroshure and Niashure, as well as new sales generated from AminoShure L, our rumen protected lysine product. These steady increases were achieved in the face of a challenging dairy market, where class III milk prices have dropped to $9 per hundred. These solid increases were, however, partially offset by softness in international sales of cholated mineral products.

Sales of our largest AN&H product group, aqueous and dry feed grade choline products, declined approximately 10.5%, or $2.8 million over the prior-year quarter, principally from decreases in volumes sold domestically, as well as export sales from the US into the poultry market. Sales of Choline into the North American feed segment continue to feel the pressure of production cutbacks in the boiler poultry market, which have been publicly disclosed to be off 5% to 6%. On the international side, exports of Choline from our North American plants slowed principally as a result of the strengthening US dollar in 2009 versus what was a weakening dollar in quarter one of 2008. Offsetting some of this domestic-based softening our Italian-produced Choline, increased 17% in volume over the prior-year first quarter, with strong sales into Russia and other export markets served by the Italian operation. These volume increases, in combination with similar reductions of petrochemical raw materials as noted in the US, resulted in a 17% improvement at the gross margin level.

Sales of industrial derivatives also declined in the quarter. Sales of methylamines from our Italian operation, specifically into Europe, are lagging as key industrial customers continue to take reduced volumes due to the current economic climate. We are also beginning to see some softness in sales in Choline-derivative products being sold for various industrial applications in North America. This group of products on a consolidated basis realized a net modest volume decline of 2%, but gross margins were effectively flat with the prior-year quarter. Earnings for operations for this entire segment, however, did improve to $5 million as compared to $3.3 million in the prior-year comparable quarter, largely due to the product mix, price declines in petrochemical raw material commodities, certain favorable production efficiencies and increases in average selling prices.

Improved profitability of the AN&H segment was achieved with a constant re evaluation of raw material costs, currency review, logistics shuffling and our ultimate ability to meet market needs from our various global facilities, in combination with select price increases. The opportunity to capitalize in this fashion is a direct result of our recent acquisitions and the ability to drive costs out of our business model. With the bulk of the feed grade choline going to the poultry market we are very sensitive to the large and continued losses of the poultry -- large poultry integrators. Feed ration costs have corrected to some degree, but retail poultry prices remain very low, keeping significant downward pressure on the profitability for this global end market. We will continue to monitor closely our raw material costs for all segments of our business, and implement cost pass throughs. We will, however, be cog -- very cognizant of our end-market customer economics.

As noted in previous calls, we continue to see some roller coaster effects quarter to quarter in various market sectors, but we are pleased with the overall 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 in the market. Our business portfolio continues to create good balance, yielding growth opportunities 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 and logistic improvement, new product development and new product marketing. We also continue to explore alliances, acquisitions, 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 coming from Lawrence Goldstein from Santa Monica Partners. Please pose your question.

Hi. The ARC Specialty, you raised prices and that's what gave you the 4% increase?

No. We mentioned that the ethylene oxide sales volumes actually were increasing, as well. So, what you do see there is definitely we had passed through a price increase about the middle of last year, so first quarter of '08 versus first quarter of '09 certainly would reflect some of that increase, but also there was an impact of volume, as well.

Okay. So the 4% increase got close to eight percentage point increase in the profit. Wow. Is that correct?

Yes. Well, certainly, too, I think as we mentioned through the conversation, raw material costs have continued to come down, as well, so that's also helpful.

Thank you.

Thank you. Our next question is coming from Keith Markey from Griffin Securities. Please pose your question.

Hi. Thank you for taking it. First of all, congratulations on the cash management. Terrific to see the increase there in cash. I was wondering, with the economic environment being what it is, do you have -- do you think you are going to be launching many new products in the next nine months or so?

Well, I think certainly we have a number of products already out there that have been introduced and I would say are in the -- our ingredients, at least, are in products to be launched. Whether or not those end customers change their mind and don't launch, I think that's really a question of their marketing department. But right now we do have a number of products that are in place, in products to be launched. So -- and I think that based on everything we are hearing, at least from those customers, we believe certainly there are going to be a number launched.

Okay, thanks. And then one other question. I was just wondering, do you think you have many opportunities for geographic expansion?

There's certainly areas of the geography on a global note that we're very interested in, where there's market intelligence that says there's going to be better growth than, perhaps, here in the states. So we are certainly targeting, those, I would say, initially from an export standpoint, but perhaps, too, from an acquisition or JV standpoint.

Great. Thank you very much.

Thank you.

Thank you. Our next question is coming from Greg Garner from Singular Research. Please pose your question.

Hello, gentlemen.

Hi, Greg.

A couple of items. On the ARC, the volume, did I get that right that EO volume was up 17.6% in the quarter?

No, not 17.6%. I think the EO volume was probably -- the volume was up around 2T or 3%.

Okay.

Yes.

So just for the particular packaging of EO that was up 17.6% that you quoted, is that right then?

Yes. That would have been a product line, the ethylene oxide canisters.

Okay. So we think EO was up 2% to 3% and total revenue was up 4.1% and we're talking pricing up a percent or two --

Right.

-- year over year? Okay.

Right.

Okay. And for the new product in the ARC, the ERC license technology, any timeframe for when that would begin to generate revenue?

I -- yes, that's a question that we've gotten a lot lately. I would tell you that the trials that we're continuing to do have continued to look good, so -- and look, I would say, very promising. Right now we have more trials set up. I think to still yet test out a couple of variables maybe that need to be totally vetted. Optimistically, perhaps a little bit the end of this year, but at best it will be a little bit the end of this year.

Okay. And, again, new product, more on the pharma side, you mentioned a Phase III clinical trials beginning, this is for a compound -- the base compound has already been in the market; is that correct? That's what's been mentioned before, I wanted to verify that.

Yes, the base compound is out there and it's known, certainly. I think basically our technology is in there to modify or change, if you will, the delivery system of that ingredient.

So in which case it would seem to me a Phase III testing clinical trial here would not last nearly as long as a typical Phase III as a result. Is that a good assessment or correct assessment?

I'd say that's a correct assessment.

And any sense for how long that might be. Is it only like a six month, nine month, versus the typical multi year?

Yes, our -- all the indications are, talking to the party that's been approved here, is nine months to a year.

Okay. Okay. And one last data point. I didn't quite catch it. In Food Nutrition and Health there was a mention that -- was it human products were down 11% year over year? Did I catch that right?

No. Well -- let's not -- I don't -- I wouldn't jump to a category of human. In total it was off about 11%, that's correct, but there definitely were segments in there that were up pretty nicely, so there's probably two or three that are up and one or two that are down.

Okay. And are you still seeing some increased acceptance in the human products there overseas? Is that still --?

Oh, absolutely. Yes. Our -- the international food business certainly is going actually quite strong and near double digits.

Okay. Very good. Thank you.

Thank you.

Thank you. (Operator instructions). Our next question comes from Tony Pollack from Maxim Group. Please pose your question.

Good afternoon.

Hi, Tony.

Could you quantify the accounts receivable reserve for international accounts?

Yes. In total, we probably reserved close to $500,000.

And could you expand on that a little?

Well, I think in particular what we've -- it's been a situation where a number -- probably three or four accounts, in particular in South America, that have gone, at this moment, well beyond their terms that we extended, which are typically 60, no more than 90 days. So we obviously just had a concern about the ultimate collectability at 100% level so we've established this reserve. We are still going to work real hard to get the monies in and actually the accounts are still customers and we've even made some special arrangements with them on a cash-in-advance basis to continue to do business with them. So it's not as if they're out of business or anything like that. And probably the single largest country affected here is Venezuela.

Have any of them declared chapter 11?

No.

And could you quantify the loss on the pharmaceutical R&D?

Yes, Frank is going to pull that number up here in a second.

Yes, so in the quarter it was just shy of $250,000.

Okay. And do you have an R&D number for the whole quarter, regular R&D number?

Yes, we do. About $800,000.

Okay. Thank you. Great quarter.

Okay. Thank you.

Thank you. At this time, we have no further questions. I'd like to turn the call back over to Dr. Ros -- to Mr. Rossi for any closing comments.

Thank you. And again, ladies and gentlemen, thanks for listening in to the conference call. I will reiterate, I think it was a pretty good quarter in light of everything that's going on. A lot of kind of exciting things in our pipeline so we feel pretty good about the near-term outlook of the business. So with that I'll wrap it up and say we look forward to discussing the next quarter with you here shortly. Thanks. Bye.

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