Balchem Corp (BCPC) 2013 Q1 法說會逐字稿

Greetings and welcome to the Balchem Corporation's First Quarter 2013 Earnings Call. At this time, all of the 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. FrankFitzpatrick, CFO for Balchem Corporation. Thank you, Mr. Fitzpatrick. You may begin.

Thank you. Thank you for joining our conference call this morning to discuss the results of Balchem Corporation for the period ending March 31st, 2013. My name is Frank Fitzpatrick, Chief Financial Officer, and hosting this call with me is Dino Rossi, our Chairman, President and CEO.

Following the advice of our counsel auditors and the SEC, at this time, I would like to read our forward-looking statement. This release does contain or likely will contain forward-looking statements which reflect Balchem's expectation or belief concerning future events that involve risks and uncertainties.

We can give no assurance that the expectations reflected in forward-looking statements will prove correct, and various factors to 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 AM Eastern Time.

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

Thanks, Frank. Good morning, ladies and gentlemen and welcome to our conference call. We are pleased to report record net earnings of $10.9 million on record quarterly consolidated sales of $84.7 million, for thequarter ended March 31, 2013. These first quarter sales of $84.7 million were approximately 11% greater than the $76.2 million result of the prior year comparable quarter.

In the quarter, our Specialty Products segment generated record first quarter sales of $12.8 million, a 4.3% improvement over the prior-year quarter. This result was due to increased sales of both packaged Ethylene Oxide and propylene oxide in the quarter.

Animal Nutrition and Health sales of $60.9 million was up 14.4% over the prior year comparable quarter. Sales of choline, choline derivatives and other products for industrial application had a very strong quarter, up approximately $4.4 million from the comparative year quarter.

Sales of choline for monogastric animals, poultry and swine, were up approximately 8.4% and the ANH specialty ingredients, largely targeted ruminant animal market, realized approximately 8.7% sales growth from the prior year comparable quarter, wherestrength in sales of other encapsulated products more than offset the impact of having discontinued the AminoShure product.

Food, Pharma and Nutrition sales of $11 million were up 2.5%, led by strength in VitaShure products and sales of encapsulated products sold into the domestic food markets.

(inaudible) operations of $15.9 millionimproved 16% over the prior-year quarter, equaling 18.7% of sales. As previously noted, consolidated net income closed the quarter at $10.9 million,up from $9.3 million in the prior year quarter.

This quarterly net income translated into diluted net earnings-per-share of $0.36 as compared to $0.31 we posted in the comparable quarter of 2012,an increase of 16.1%.

Looking between the top and bottomline you will see that our consolidated gross profit of $24.2 million increased to 28.6% of sales in the quarter. This increase, as a percent of sales from the prior year quarter, reflects improved plant efficiencies resulting from strong sales volume and some relief on certain raw materials. Increases did however unfavorably affect our FDN product segment again this quarter.

As mentioned in previous conference calls, we continue to monitor raw material prices, which did rise on a sequential basis for certain key raw materials, and seek to adjust prices timely with big contractual guidelines, as our businesses are likely to remain affected by these types of fluctuations going forward.

We continue to work on operational efficiencies. And I'm happy to report that we have efficiently achieved quality production in our shipping product from our new Covington, Virginia plant, effective January of this year. This expansion has doubled production capacity of [rumin-stable] products.

At the consolidated operating expense level, you will note an $884,000 increase, totaling $8.4 million for the quarter, which equals 9.9% of sales versus the prior year metric of 9.8% of sales. This level of spending represents certain increases in staffing, along with increased expenses relating to R&D and marketing programs, which are investments for the future growth of the company. But we will continue to leverage off of our existing SG&A infrastructure and exercise tight control over all controllable operating expenses.

Overall, we are general pleased with our earnings from operations for the quarter, especially considering the continuing tough economic environment occurring in the North American and European markets. Consolidated earnings from operations remains strong, and finished at 18.7% of sales, or $15.9 million for the quarter, up approximately $2.2 million or 16% over the prior-year quarter, and from a 17.9% of sales level in Q1 2012.

Our effective income tax rates for the first quarters of 2013 and 2012 were 31.4% and 32.3%,respectively. This decrease in the effective tax rate is primarily attributable to the availability of certain tax credits. Our annualized effective income tax rate for all of 2013 is currently estimated to be approximately 32.5%.

Net income of $10.9 million equated to $0.36 per diluted common share, which is a 16.1% improvement over the comparative prior-year quarter.

These results generated approximately $18.5 million of EBITDA in the quarter, which translates into $0.60 per diluted share, and when including our non-cash stock-based compensation charge, we generated $19.5 million of EBITDA in the quarter, equaling approximately $0.64 per share or 22% of sales.

Our balance sheet continues to strengthen and our cash flow remains strong, as we closed out the quarter with $149 million of cash.

We spent $3.4 million of capital for the three months ended March 31, 2013, which includes payments relating to the new manufacturing facility in Virginia. Capital expenditures for all of 2013 are expected to be approximately $10.5 million.

As you can see, we continue to aggressively manage all areas of working capital, citing strong cash flow and improving cash earnings and generating quality organic results from our core businesses.

In an effort to detail our consolidated results better for our shareholders, I'm now going to get Frank Fitzpatrick to discuss the ARC Specialty Products in the Food, Pharma and Nutrition segment.

Thank you, Dino. The ARC Speciality Products segment posted record first quarter sales of approximately $12.8 million or 4.3% increase over the prior year comparable quarter.

This increase in sales was derived principally from increased volumes of propylene oxide, particularly for the synthesis and nutmeat fumigation applications. Sales of 100% Ethylene Oxide for medical device sterilization's were also up in the quarter, even with a soft start in January.

ARC quarterly business earnings increased 3.8% to a first quarter record of $4.9 million versus the prior year comparable quarter. This increase is largely a direct correlation to the improved sales volume of propylene oxide products. Modest price increases to offset rising raw material costs also contributed to the improved sales quarter-over-quarter.

During the quarter, we did realize additional increases in the cost of certain petrochemical commodities. We continue to monitor raw material price volatility closely and seek to implement price adjustments within contractual guidelines.

For the quarter, the Food, Pharma and Nutrition segment realized sales of $11 million, up approximately 2.5% over the prior year comparable quarter. Business segment earnings of $2.5 million were down approximately 7.5% from the prior-year quarter, largely due to raw material costs increases within the various sectors of this segment.

Particular strength in the domestic end cap sales, up approximately 10.5%, were realized in ingredients for baking, prepared food and concession markets. As in the past, results for this segment continue to reflect the roller coaster effect of pipeline fills, inventory level management, and customer marketing initiatives. Our growth drivers do, however, remain intact for this sector, as food sales, both domestic and international, remain strong in the early part of Q2 2013.

On that note, we also realized strong double-digit growth in sales of our VitaShure products for nutritional enhancement. Last quarter we reported that we were working with a large sports nutrition company on the introduction of sustained released amino acid products, and we made our first sales for this launch in Q4. Sales were strong in Q1 and are expected to grow throughout 2013.

In the quarter, we realized a modest decline in sales of our human choline products for nutritional enhancement, although we did realize 8% growth on a sequential basis.

Here we continue to focus on building consumer awareness of the benefits of choline, positioning choline with nutritional and pharmaceutical companies as an essential ingredient with excellent therapeutic benefits for all ages.

We continued to effectively utilize the three structured function claims awarded to Balchem by EFSA in Europe and are excited with the growing number of projects in the pipeline targeting choline inclusion.

Our pharmaceutical delivery development efforts continue. As previously reported, the licensee of our technology, being used for treating autism, concluded a Phase III clinical trial and has recently announced a successful pre new drug application meeting with the US Food and Drug Administration, and will begin filing it's new drug application.

We await the unblinding of this trial as we are working with them in support of their MDA filing. In the near-term, this sector remains as an expense to the business segment.

I will now turn over the call to Dino for him to discuss the Animal Nutrition & Health segment.

Thanks, Frank. In the Animal Nutrition & Health segment we realized record quarterly sales of $60.9 million, an increase of $7.7 million or 14.4% as compared to the prior year comparable quarter. ANH ruminant product sales realized 8.7% growth from the prior year comparable quarter.

As mentioned in this morning's press release, our quarterly results in this sector of ANH were actually much stronger than the 8.7% suggest, as our comparative results were adversely impacted by the previously-announced suspension of sales of AminoShure-L 52% lysine. Sales of non AminoShure products were up 19.7% on a sequential basis, led by strong volume growth of ReaShure and NitroShure. And excellent product performance in dairy economics continued to support greater demand for our product, effectively offsetting the AminoShure-L decision.

With respect to the second quarter 2012 suspension of sales of our Aminoshure-L 52% lysine products, we are diligently working to make the required product improvements and will look to reintroduce this product into the dairy industry once improvements are completed and confirmed with industry experts. At this time, our work continues. However, we are unable to give a precise estimate as to when this work will be completed.

Dairy economics continue to support strong demand for our product, despite the increasing challenges of production animal feed/ration prices. Milk prices are currently forecasted to remain strong, as tighter worldwide milk supply, along with expected moderation in feed prices are all positive indicators that should support greater utilization of our products, as herd managers look to continue to maximize results of production animals.

As mentioned previously, in order to support this expected growth, our new manufacturing facility in Virginia has been commercially commissioned, more than doubling output capacity for rumin-stable products in January.

Our global feed grade choline product sales were up 8.4% from the prior year comparable quarter, as we saw modest volume growth in both North America and Europe. Products sold in these markets are strongly influenced by the various dynamics of our customers base predominantly, the poultry production industry,but also swine and aquaculture market.

North American choline volumes sold track closely with broiler chick placements and egg sets. The current USDA forecast for broiler meat production continues to forecast modest growth for 2013. However, continued improvement is dependent on more normal crop and grain growing conditions, resulting in steady or declining feed prices for broilers.

We constantly evaluate export choline sales opportunities for the poultry market, but again found Q1 to be a somewhat challenging export when factoring in raw material costs increases and foreign competitor activities. In the coming quarters, we may elect to be more aggressive in seeking to win additional business, depending on the then current cost and market conditions.

Sales of industrial grade products were very strong, as sales were up 29.1% over the prior-year quarter,and sales into the North American fracking market improved 9.6% on a sequential basis,particularly due to volume.

We continue to see sales opportunities for choline and choline derivative products for other other industrial applications, but near-term, especially for the gas fracking opportunities.

We remain confident that these products will continue to show strength in 2013, driving steady to increasing levels of sales of profitability, even at current rate deployment levels.

We continue to evaluate industrial opportunities with other core technology to determine how we may drive innovative solutions into this and other markets to derive the most positive value.

Earnings from operations for this entire segment grew to $8.5 million as compared to $6.2 million in the prior year comparable quarter, principally a result of increased volumes sold.

While these earnings improved nicely, we were still unfavorably impacted by increases in certain raw materials during the quarter. These raw materials continue to be a concern, and as mentioned earlier, we are closely monitoring raw material price volatility and will seek to implement price adjustments within our contractual guidelines.

The profitability of the ANH segment continues to achieved with a constant reevaluation of global raw material costs, product reformulation, currency review and the ultimate ability to economically meet market needs from our various global facilities and transload sites.

The opportunity to capitalize in this fashion has been a direct result of multi-plant operational benchmarking, marketing strategies, and the ability to leverage other operational costs of our business model.

With the bulk of the feed grade choline predominantly going to the poultry and swine market, we remain very sensitive to the uncertain macroeconomic pressures on the large production animal integrators. Feed ration costs stabilized, however remain high in Q4, due to the well publicized US drought situation. And while retail poultry prices have modestly improved, pressure on profitability for this global end market continues.

As noted previously, we continue to see a revenue roller coaster effect quarter-to-quarter within the various products or market sectors. This quarter was no different. We remain committed to organic growth as we look to continually expand our product offerings and move into new geographies.

We will continue to strengthen our global growth platform and are confident that more business can be generated based on the unique portfolio of products that we offer to markets we serve, both domestic and abroad.

Our business continues to create good balance, yielding profitable growth opportunities across the value chain, through the various market challenges of any single segment or product line. We remain focused on helping our customers generate reinvestment level returns while maintaining our own operating discipline.

Overall, we continue to build the financial strength of the company, managing the working capital very aggressively and yielding improved financial results to be quality supplier to the markets we serve.

Near-term we remain focused on implementing operational and logistic improvements, new product development, and new product introduction. We also continue to explore alliances, acquisitions and/or joint ventures to continue building and leveraging on our strategic marketing direction, 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. We will now be conducting our question-and-answer session. (Operator Instructions). Our first question comes from the line of Tim Ramey with D.A. Davidson. Go ahead with your question, please.

Thanks. And congratulations. Dino, the -- you mentioned -- and correct me if I got this wrong, but I think you said industrial products up 29.1% and 9.1%, sequentially. The 9.1% was I think related to fracking. But I wasn't sure if the 29.1%was sequential or year-over-year. Sorry for the confusion.

Yes. Sorry -- the 29.1% is year-over-year.

Okay.

And 9% was sequential. And a lot of that is fracking but also some other industrial products that we sell in the European market, as well.

Okay. So the 29.1% would also include fracking products?

Yes.

Okay. I'm sorry. I was trying to parse that and I didn't -- and I shouldn't have. And would fracking products have been the main driver, I assume, of that improvement?

Certainly the main -- I think that's a fair conclusion. But we did see really good growth as well even in the poultry space, domestic and Europe. Which I know is kind of contrary to where we've been talking how that poultry market is going to go.

But it actually was a very good quarter for the poultry space as well, and also on the specialty animal side. That -- actually there was all very good growth there. I think the specialty side it was a little bit less in straight percentages because of the AminoShure issue. But short of that I think all of them contributed pretty nicely to it.

Okay. And then I think on the last call you mentioned that Covington was running at 24-5 or something like that. And you mention the commercial shipments began in January.

Can you give us an update on that? Because it sounds like that could be a real meaningful contributor to sales this year, particularly if you get the AminoShure-L product back re-launched.

Oh, yes. I absolutely agreement. So we continue to run probably 2455, 24-6, we're running different products through there and they run at different rates.

So that changes what the total output is, but net-net through the transition of those products, it's been a very, very nice contributor early on. We did in fact transition some production that we had from our you New York operation over there.

So a little bit of that activity early on certainly was transition. But quite honestly that freed up capacity in the New York operation for the food business. So you're right, I think our view and if we get the AminoShure-L product back out there, it certainly would be a significant step change going forward.

Terrific. Thank you.

Thank you.

Your next question is from the line of from the line of Andrew O'Conor with BMO Asset Management. Go ahead with your question, please.

Dino, Frank, congratulations on your progress.

Thanks.

I wanted to know if you could better characterize the pricing environment for choline products, and for feed grade choline in particular? How has pricing changed from the beginning of the quarter to today? And then how would you characterize the outlook for the rising environment over the next quarter or two? Thanks.

Yes. Thank you. Well, I think the pricing situation on the poultry side still remains very competitive. We tend to run this on a model that I've talked about before, to give us some protection on the raw materials.

And with that said, we did have a modest increase in price passing on raw material costs increase here in Q1. The key raw materials, and I have kind of alluded to at different points in the conversation here, a couple of the raw materials have gone up, a couple of the raw materials have done down.

But net-net it's still yet up -- I think a little bit to our disappointment, up as it relates to that end product. So we would look to pass that on into the market.

So I don't see that there's going to be, hopefully, a whole lot of movement -- hopefully not up for sure. As I think we remain sensitive to that marketplace and kind of the pressures that are there as it relates to the poultry market itself.

So our view -- and a little bit kind of runs into our view of what's going to happen with really raw materials, given the sensitivity of the pricing via the model is to see -- we think stabilize, would like to think stabilized down.

But, again, there's a couple moving up, a couple moving down. Again, not huge, but in any given quarter, it is likely to see a little bit of fluctuation there.

And I think through the balance of the year -- again, if you follow the forecasts that are out there in the chemical industry, it would certainly suggest a modest decline through the balance of the year. So we'll wait and see. These guys aren't always so very predictable in terms of their forecast.

All right. Thanks for the color. And then secondly, what's your outlook for CapEx spend in 2013?

Yes. First quarter we spent a little over $3 million. The forecast right now is about $10.3 million. Which is up a little bit over our normal trend. But, again, with more plans just some projects there. Actually part of that, too, is some nice return on investment projects that we have sketched out, and hope to have well on their way this year.

So the $10 -- of the $10.3 million, how much is growth CapEx and how much is maintenance?

Yes. I would say it's almost 50/50.

Got you. Okay. Thanks again.

Thank you.

(Operator Instructions). Our next question comes from the line of Greg Garner with Singular Research. Go ahead with your question, please.

Sure. Thanks for taking my question. Good, gentlemen.

Hi, Greg.

Nice quarter, too.

Thanks.

So first I wanted to ask you about feed grade choline sales. Are you seeing any effects from that plant that blew up in China? Is this contributing to the -- what seems to be a larger than normal increase in the choline sales for ANH?

Yes. Great question. The answer is really no. I think a little bit to our surprise. I think when we talked about this at the last quarterly call, mentioned that this had happened and we would wait and see what the outcome was.

At that time I speculated maybe that there was additional capacity within China that may have absorb that shortfall. And I think our read of that is that that's been the case. Although the little cloudiness there, too, is that they had this Avian flu outbreak in China that probably has increased the internal demand of choline.

So it's a little bit of a difficult read here in Q1. I would say early on, we were getting some calls from some concerned customers and/or some people that were buying some Chinese material. But it did not -- we can't point to that as being the reason that we saw improved results here in North America.

The Avian flu situation -- or I mean the Avian -- that generally in the past has resulted in, for lack of the best terms, the killing of the fleet. And so then consequently, their demand for choline comes back just to build that chicken fleet back up.

Yes.

Is that the normal -- ?

Yes. You're absolutely right. They will repopulate those hen houses and grow. And the buzz out there right now is that that's likely not going to happen so much in China, probably until May, is what they were saying. So we will see if that really happens.

But, again, I would sit here today and tell you that we haven't seen an expected increase here as we go into Q2. We have seen steady volume, but not like people planning for there to be a shortage there because they're redirecting choline of Chinese production or sourcing back to and within China. Not seeing that right now.

So safe to assume then that's what is really driving the ANH choline sales is the increased broiler activity or increase -- ?

Yes. I think egg sets, but also they're growing out more breast meat as well. So you have an extended period there of growth going on within those birds that, again, is a period where choline would be fed as well.

And how that works in the industry, is this is sort of a step-up, wouldn't it be, for the volume demand?

Yes. There's some modest increase that's gone on here. Again, that can change month-to-month, quarter-to-quarter, for sure. Yes.

Okay. And on the dairy side, as I remember -- it was mentioned before that with this new production facilities, it was going to lower cost, and you were going to pass some of that on to customers.

I'm wondering if that is was still the strategy, and that would be helping to drive market share. Is that the dynamics that's working here -- or in combination with the milk industry having some favorable parameters?

I would say not. I think if you went to the industry, they will tell you Balchem not dropping prices. I'm not saying that. Probably --

Okay.

I think that if anything, we're probably raised prices. And part of that is in response to what's going on with raw material costs. So no. That's not what's really driving it. It is volume.

We had very, very nice volume growth in these markets. So that did lead to some efficiency for sure in manufacturing costs, but it wasn't because we were out there raising prices.

Okay. And for the FP&N, the [rum chill] price is there. You can't -- it seems like that's an area where you can't really pass it on so easily. Is that the right way to look at that?

Yes. I think that's a fair appraisal. In particular, there's one key, we alluded to at last quarter as well. This is natural tartaric acid that's consumed when we manufacture choline by (inaudible). But it is one that has seen the raw material costs increases due to tightness in supply.

And we don't see any real relief there. There's some discussion about transitioning from natural tartaric to a synthetic. Having open discussions with customers along those lines to try to take some of the compression off of the margins there, but also to not look to have to aggressively pass on that raw -- that costs increase to those customers as well.

So you're saying -- I'm not totally getting it. The synthetic would be a lower cost?

That's correct.

Okay. I thought I -- okay. I wanted to verify that. And one last question and I will go into the queue. You hear it from one person or another each quarter; with the build-up in cash is there anything you can tell us about your activity on the acquisition front? Or what you might do with the cash?

Yes. I think as far as what we're looking to do it is -- it continues to be strategically in support of acquisitions or joint ventures or partnerships.

We're, in the background, probably working on four or five different things, some small, a couple mid-size, I would say. So our expectation is that we will get a transaction or two done here this year that hopefully I'm not being too optimistic. But certainly that's the view and the expectation, internally.

Okay. Great. Thanks. Nice quarter.

Thank you.

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

Alright. I think you just answered my question. But I might make and observation then if you don't want to comment, I won't be concerned. But it appears your tangible net worth is $140 million -- I forgot -- about $165 million, something like that.

And the cash is 60% odd of that or more --maybe it's more than 60%and earning nothing. And a couple of conference calls back, I think you mentioned -- your hope, your plan, your goal, your objective was to earn 15% to 19% on whatever you put it into someday. And that would add $20 million odd, almost $30 million.

Well, certainly, yes -- yourmemory is correct, Larry. That's what we said and certainly that's the expectation as we look to do the transactions. So I can only assure you that we continue to work on those. And like I say, we do have some very real targets. The process seems to always take longer than you want or expect, but we're still in the hunt.

I would like to say one more thing. Please don't let the cash burn a hole in your pocket. It hasn't -- and I hope it doesn't. And last call I recall you said a few words like well, maybe we're trying -- maybe ought to adjust our -- what we will pay for things. Don't adjust.

Okay. Thank you.

There are no further questions at this time. I would now like to turn the floor back over to Mr. Rossi for some closing comments.

Thanks. Yes, I appreciate all the questions that everybody logged out here today. We are pretty pleased with this first quarter.

I think it's been a great start to the year. And certainly our expectation is that -- continuation throughout the year. So appreciate all the support and look forward to the next quarterly call. Thanks.

Thank you. This will conclude today's teleconference. You may disconnect your lines at this time. We thank you for your participation. Have a great day.