Balchem Corp (BCPC) 2009 Q4 法說會逐字稿

Greetings and welcome to the Balchem Corporation fourth 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). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Frank Fitzpatrick, CFO for Balchem Corporation. 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, 2009. 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 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 Eastern time.

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

Good afternoon, ladies and gentlemen. And welcome to our conference call. We are pleased to report achieving report net earnings of $7 million on consolidated record fourth quarter revenue of $59.2 million for the quarter ended December 31, 2009. Despite the ongoing challenges in the economy, Balchem delivered a solid operational and financial performance as we continued to benefit from our diversified businesses. Record fourth quarter sales of $59.2 million were approximately 9.5% greater than the $54.1 million result of the prior year comparable quarter. And, on a sequential basis, were 9% greater than the third quarter 2009 result. Disciplined management of our businesses enabled us to improve operating margins and deliver strong profitability and cash flow.

All three segments achieved revenue growth this quarter, with the Animal Nutrition and Health segment up 9%, due to the growth from our basic choline products in the international markets and strong specialty Animal Nutrition and Health sales which were up 27%. The Food, Pharma and Nutrition business posted 24% organic growth, with particular strength in the domestic and international food markets, and human grade choline products. The ARC Specialty Products segment generated quarterly sales of $9.4 million, a modest 1% over the prior year quarter, principally as a result of increase in sales of packaged propylene oxide in the quarter. As previously noted, consolidated net income closed this quarter at $7 million, up from approximately $4.9 million in the prior year quarter, or an increase of approximately 42%. This quarterly net income translated into diluted earnings per share of $0.24, a 41% increase from the $0.17 we posted in the comparable quarter of 2008.

Looking between the top and bottom line, you will see that our consolidated gross profits of $17 million were equal to 28.7% of sales in the quarter. This level is an improvement of 3.8 percentage points from the prior year quarter, as we did on a comparative basis realize increased volumes sold and lower cost levels in certain key raw materials that are largely petroleum based derivatives. However, we have experienced some raw material increases on a sequential basis that did negatively impact margins.

The Animal Nutrition and Health segment equaled 68% of our total consolidated sales in this quarter. It has been our lowest growth and operating profit segment as a percentage of sales, so the improvement of overall gross margin continues to reflect the expected benefits of the 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 2010.

At the consolidated operating expense level, you will note a $242,000 increase to $6.2 million for the quarter, which equaled 10.5% of sales versus the prior year comparable expense which was approximately 11% of sales. Our spending level reflects a modest expansion of sales and R&D employees as compared to 2008, and external R&D programs in support of existing and new products for all segments. In addition, operating expenses in 2008 reflected a reduction of readily controllable spending and certain accruals as compared to 2009, due to the decline in the operating margins that began to occur in late 2008. Overall, it was another strong quarter.

The Human Food, Choline and Animal Nutrition and Health segments generated the margin improvement previously discussed due to increased volumes sold, production and logistic efficiencies. As mentioned above, we did experience some increases in certain petrochemical raw materials during the quarter that did particularly impact our ARC Specialty Products segment although operating margins remained very strong for this segment. Other income of $49,000 compares very favorably to the $175,000 of expense incurred in the previous year quarter. This improvement is related to the reduction of the long-term debt that was incurred for the 2007 acquisition. Net income of $7 million translated to $0.24 per diluted common share, or an increase of 41% over the comparative prior year quarter. This end result was comparable sequentially to the third quarter of 2009, and brings our full year EPS to a record $0.93 per share, exceeding the $0.67 per share we posted for 2008 by 38.8%.

We also realized approximately $12.8 million of EBITDA in the quarter, which translates into $0.44 per diluted share And when including our non-cash stock-based compensation charge, we generated $13.6 million of EBITDA in the quarter. At December 31, 2009, our outstanding borrowings were $6.8 million, but zero net of cash balance of approximately $46.4 million. 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.

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 Products segment posted fourth quarter sales of approximately $9.4 million, or a 1% increase over the prior year comparable quarter. This modest increase was principally a result of an increase in sales of packaged propylene oxide in the quarter. This increase was, however, partially offset by a small decline in volume sold of ethylene oxide products which reflects inventory reduction control and order timing of the medical device sterilization end use markets. ARC quarterly business earnings decreased 10.6% to $3.4 million, versus the prior year comparable quarter. This decline is largely a result of the product mix, increased petrochemical raw material cost, and increased expenses related to the development of the Company's ERC technology.

We continue working on a number of initiatives to broaden and build on the ARC business model with particular application development work on the ERC licensed technology to repackage, distribute and deliver another chemical for the fruit ripening industry. As disclosed in the previous quarters, a number of tests with large fruit producers and wholesalers 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 23.7% sales increase to $9.4 million, from the prior year comparable quarter. Business segment earnings of $1.4 million were more than double the same period of last year, and also improved 7.7% on a sequential basis. As stated in this morning's press release, the domestic and international food sectors were up this quarter as we continued to see solid double-digit growth of encapsulated ingredients for baking, preservation and confection markets. In the quarter we also realized double-digit growth of our human choline products, targeting new food and beverage applications. We also saw some rebound in sales into the supplement marketplace.

In 2009 we saw many customers aggressively managing inventory levels down by delaying orders in response to certain retail product line slowness, or in certain large retail chains the elimination of multiple SKUs, some that previously included choline. In addition, our prior year choline sales included a pharmaceutical grade choline specialty product pipeline sales. Final approval of this product was delayed and we saw no additional orders in 2009. However, we are expecting orders to return in 2010. We continue to focus on building consumer recognition of the benefits of choline, hence, choline inclusion in more foods such as Gerber baby food and fortified beverages. More independent research on the benefits of choline have been completed, recently published and available through our choline web page. We continue to position choline with nutritional and pharmaceutical companies as an essential ingredient and excellent therapeutic benefits for all ages.

This fourth quarter result did see continued economic slowness in calcium product sales into the over-the-counter pharmaceutical markets, as our sales for this particular retail market declined 3.4% from the prior year quarter. While we have on a sequential basis seen some improvement in reordering of product, we do not expect to see a significant upturn until the second half of 2010. A number of new calcium products are under development for the nutritional supplement marketplace, while our base customers continue to aggressively manage their inventory levels in this area.

Our pharmaceutical delivery system commercial development efforts continue. In the quarter, we did not generate any significant R&D milestone payments. However, as previously reported, a licensee of our technology has been authorized by the FDA to commence a Phase III clinical trial containing our technology. Patients have been enrolled and the trial is currently underway. 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 over the call 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 $40.4 million, an increase of $3.2 million or 8.7% as compared to the prior year comparable quarter. Within this segment, specialty ANH products sales realized 27% growth from the prior year comparable quarter, as some improvement in the dairy economics created greater demand for our products. These increases are principally a result of increased sales of Chelated Minerals, NutraShure, and new sales generated from AminoShure L, our rumen-protected lysine product. We continue to be pleased with progress we have made with the AminoShure L launch as more prospective customers trying the product are realizing positive experiences.

These quarterly increases were partially offset by lower sales of Reashure but sequentially even Reashure a 12% revenue increase over Q3. These overall increases coincided with a dairy economy that has improved over the past several months. However, futures currently point toward prices that are at levels which will continue to challenge the economics for producers.

Sales of our largest AN&H product group, aqueous and dry feed grade choline products, increased approximately 7% or $1.7 million over the prior year quarter, and also grew 12% on a sequential basis. This increase in the quarter was from a number of factors including slightly improved sales of choline into the North American feed segment, reflecting poultry production levels that appear to have stabilized and even some modest growth. Exports of choline from our North American plants grew with improved sales into South America. Sales of our Italian produced choline also improved with export volumes sold outside of Western Europe. Sales of industrial derivatives were essentially flat with the prior year quarter. Sales of methylamines from our Italian operation specifically into Europe lagged as key industrial customers continued to take reduced volumes due to the poor economic climate. This decline was substantially offset by improved sales of choline derivative products being sold for various industrial applications in North America. Earnings from operations for this entire segment improved to $5.9 million, as compared to $2.9 million in the prior year comparable quarter largely due to improved volumes sold, product mix, and certain favorable production and logistic efficiencies.

Improved profitability of the AN&H segment was achieved with a constant re-evaluation of global raw material cost, product reformulation, currency review, logistics optimization 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 acquisitions and growth strategies and the ability to drive costs out of our business model. With the bulk of the feed grade choline predominantly going to the poultry and swine markets, we are very sensitive to the large and continued economic pressures on large production animal integrators. Feed ration costs have corrected, to some degree, but retail poultry and swine prices remain very low, keeping significant downward pressure on 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 as appropriate.

As noted in previous calls, we continue to see a slow and uneven recovery of the global economy, quarter to quarter, in the various market sectors, but we are very pleased with our overall quarterly consolidated earnings 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 profitable growth opportunities through the various challenges of any single segment or product line. We continue to deliver solid revenue and operating income growth by staying focused on helping our customers save and make money in this tough economy, while maintaining our own operating discipline. Overall we continue to build the financial strength of the Company, managing the asset base aggressively, reducing debt and interest expense which also assists in yielding improved financial results. Near term we remain focused on implementing operational and logistic improvements, new product development, and new product marketing. We also continue to explore alliance, 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 ask the Operator to open the conference call for questions.

Thank you. (Operator Instructions). Our first question comes from Daniel Rizzo of Sidoti &Company.

You mentioned you're still doing trials with the fruit ripening, the banana ripening new product. Do we know when it's going to move past the trial phase? Do we have a time frame or anything like that?

I certainly think that it's going to begin here very shortly. We're waiting for some final approvals from the DOT to move the product around the country. I think once that is finalized, we're certainly going to be in a position to move forward and start the ramp-up of that product. And certainly I would say we continue to feel very, very good about the state of the trials, the results of the trials, and what that opportunity means for us.

Thanks, guys. I know acquisitions have been a strong part of your growth strategy in the past. Is that still the case or is there anything you can tell us about?

Certainly I'd say it definitely continues to be part of our strategy going forward, and as we sit here today we actually thought we were going to have one transaction done, maybe be talking about it today, but in fact we have not concluded it. I'm confident we will get it concluded perhaps as early as the beginning of Q2. It's a relatively small kind of a tuck-under, if you will, but still will nicely leverage the asset base that we have. We have a couple others that I would say are front burner and we continue to work those and are optimistic that we'll complete more than one this year.

Okay. Thank you, guys.

Thank you. Our next question comes from the line of Greg Garner of Singular Research. Please proceed with your question.

Hello, gentlemen. Nice quarter, first of all. A few items here. On the Food, Pharma and Nutrition, I just want to get a sense for the improvement in the quarter, how much of it might have been as a result of just the inventory in the distribution channels being replenished, or is there really that strong a demand, when you're up almost 24%, yet, this was the first quarter this year for that segment to have a positive year to year comparison. So I'm just trying to get a sense for what was driving that and how that may continue.

Okay. Certainly I would tell you our Food, both domestic and international end cap business has continued to see nice double-digit growth and that's not really any kind of pipeline fill or reaction to inventory levels. I think what you're seeing in this quarter is that there wasn't a negative offset per se, as we've had in previous quarters, in particular for the calcium business which tended to drag some of the revenue growth that was going on in those segments down. The other nice contributor here was the choline business, human grade choline business, and certainly we've talked about continuing to broaden, I think, the understanding of the product, the benefits of that product, and seeing growth of that product being included in other foodstuff. And as Frank mentioned, one of the newest ones now is that we now have choline included in Gerber Baby Food. And if you go to the store, you'll actually see choline mentioned on the outside label of the product which is very encouraging, just to get the name out there more.

So it's a mix issue for sure, even within that segment. But you certainly had food end caps again outperforming very nicely. Choline bounces back, I think, for the year and looking up with new products that we continue to get into. So it's a little bit of that product mix that was going on there that led to that. And even when I talk about that and we talk about the profit improvement too, when the calcium business is off, the plant doesn't run, it gets pretty expensive from an unfavorable variance standpoint. So again, when you start getting I'll say six, seven, eight of the cylinders all hitting there, the profitability bounces back pretty quickly.

Okay. And the choline in some of the beverages, before, I think it was about a year ago that you first went into Pepsi Propel. Is there anything you can report on how well that's doing or discussions about other beverages you may be able to have choline be a part of?

Yes, I would tell you that certainly we continue to be in that Propel line and I know that they're looking to actually broaden and enhance and change the marketing of that overall Propel line. I'll leave that conversation for the Pepsi people to talk about. But certainly more and more we're seeing that choline is being trialed in a number of other, I'll say, quote/unquote, competitive type products out there. We know because we're supplying the product for those trials. And it continues to track pretty nicely. So whether it's in beverages, which again is proving a nice place for the product, or these other foodstuffs, we're looking to go down all of these paths, if you will, obviously being the sole producer here in the States and a keen vested interest in seeing that product grow.

Okay. And in the Animal Nutrition and Health, is this the level of margins we should expect going forward, even as raw material pricing may increase with an economic expansion?

I think that on any given quarter, you might see a little movement. I'm going to say up or down. Obviously this was a very good quarter from a profitability standpoint. I say that because of some of our pricing models that we have where you could have a quarter lag in a correction. Also, what I would tell you is on the export business, and that continues to grow for us, it's more bid oriented and depending on how aggressive some of our other global competitors there are, could change those percentages in any given quarter. But again, that bid business is typically a quarter to quarter business, either you get it at a price you want or you pass on it. But the good news is it typically comes back up for bid again next quarter. And again, currency rates will start to play through there, too, as we look to supply some of that business either from Italy and/or from the States.

Okay. And on the ARC Specialty Products, especially that new product, just as a follow-up to the prior question, you're looking for some DOT approval, is this for Balchem to transport to location, customer's location or is this for customers need to have DOT approval?

This is for Balchem's approval to transport the product to those locations.

Do you need any infrastructure built at these locations to distribute it?

No. Actually at those locations is where the the product typically would be used.

Okay. And just finally, on the Phase III pharma product, when did the Phase III start? Wasn't that a few months ago? I'm just wondering where we are in that.

It certainly did. We talked about it here actually at the last conference call. But I will tell you, we don't know for certain. And I think this is part of the way these programs work, is you don't get clear insight into the state of the trial until it's completed. And what I will tell you is that there's been a fair bit of press out there about what's going on with that company and with, in particular, this product. And so, I'd say in general, it appears to be tracking very nicely, and so we continue to, I'd say, support it because we're not going to be the end marketer of that product but it continues to move pretty nicely through trials, for sure, it appears.

Okay. Very good. Thank you.

(Operator Instructions). Our next question comes from the line of Jack Balsam, a private investor. Please proceed with your question.

Gentlemen, I've been an investor with Balchem for 15 years now. To say that I'm pleased with the results over this period is an understatement. You've done a tremendous job and I appreciate it.

Thank you.

Having reached retirement age, I would certainly appreciate, perhaps, the institution of a regular quarterly dividend, maybe a modest $0.04 or $0.05 a quarter, well within the earnings range that you're displaying. And I was wondering if you have any intention about that?

I would tell you, Jack, that we currently, as you know, we just announced a dividend consistent pretty much, short of the effect of the split itself, as a dividend, at the end of the year. And I would tell you that we really are not contemplating going to a quarterly dividend, not to say that we never will or won't. We're looking at the cash position that we have today. We're looking at the acquisition opportunities that are in front of us and figure that the opportunity to leverage on those acquisitions will likely hopefully bring a better return than declaring an improved dividend. And perhaps with that then it will fuel a bigger dividend, as well. That's our position today. Doesn't mean it won't change and but I'd say for the time being we're probably going to stick with the annual dividend and see how the acquisition opportunities shake out and quite honestly how cash continues to build.

Okay. I just hope that the stock improves again to $30 so you can split it again and increase the dividend.

We do too.

Thank you very much.

Thank you.

Our next question comes from the line of Tony Pollack of Maxim Group. Please proceed with your question.

Good afternoon. In terms of your increased R&D investment, could you tell us what that number was?

Frank's going to pull that out, Tony, so we'll have it here in a second.

Okay. In terms of the potential on this pharmaceutical product, am I right that you're going to be manufacturing it?

We will be manufacturing the encapsulated Ingredient itself, that's correct. There's a finished product package that we will not do, but the ingredient itself we will.

So I assume there will be a profit in that?

I believe so.

Okay. And you'll also be getting a royalty?

No, in this case we're going to be the product supplier and what we built is a margin into that accordingly, but not a license agreement. We have structured it that we would be the exclusive supplier, though.

In terms of future products, whether with this company or other people, will that be the same case?

We like the model, is what I would tell you. Depending on what the opportunity might be or how else we may fit into what it is these others might be looking for, could dictate a slightly different model but I think for the time being, if we're successful with this one, it will probably be a model that we would look to continue.

Are you working with other pharmaceutical companies?

Actually, I would tell you that there's not any that are on the front burner. We're having discussions about opening some projects, probably another two or three companies, on totally different ingredients. But certainly nowhere near as far along as this one.

Could you give us the depreciation and amortization in the quarter?

Yes. Tony, it's Frank. Total R&D for all of 2009 is about $3.3 million.

Okay. So the fourth quarter was a quarter of that or was it more?

It's about $870,000. D&A for all of 2009, depreciation is about $4.5 million, amortization, about $2.7 million.

Okay. Thank you very much.

Thank you. There are no further questions in the queue at this time. I would now like to turn the floor back over to management for closing comments.

Okay. Thank you. I want to thank everybody for attending the conference call. I do think that we're pretty pleased with the results of the quarter, obviously the records achieved. I think it's fair to say we're staying pretty focused with what's going on with our businesses and like the way things are developing in general. So thanks to everyone for listening in. Thanks for all your support and we look forward to reporting to you again at the end of the first quarter. Thank you.

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