Balchem Corp (BCPC) 2013 Q2 法說會逐字稿

Greetings and welcome to the Balchem Corporation's second quarter 2013 earnings call. (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 morning to discuss the results of Balchem Corporation for the period ending June 30th, 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 expectations or beliefs concerning future events that involves 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 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 quarterly net earnings of $11.6 million on consolidated net sales of $83.3 million, achieving a new record for the quarter ended June 30th. These second quarter sales of $83.3 million were approximately 5.4% greater than the $79 million result of the prior year comparable quarter. In the quarter our Specialty Products segment generated record second quarter sales of $13.2 million, a 6.1% improvement over the prior year quarter. This result was due to increased sales of both packaged ethylene oxide and propylene oxide in the quarter, and with nutrition and health sales of $58 million was up 5.8% over the prior year comparable quarter.

Sales of choline, choline derivatives and other products for industrial applications had a very strong quarter, up approximately $5 million from the comparative year quarter, despite a disruption to production and sales in June due to the declaration of force majeure by a key supplier. Sales of choline for monogastric animals, poultry and swine were down approximately 3.5%, largely due to the force majeure issue.

The ANH specialty ingredients, largely targeted to the ruminant animal market, realized an approximately 8.6% sales decline from the prior year comparable quarter. These comparative results in the sector were adversely impacted by the previously announced suspension of sales of AminoShure- L 52% lysine, which were realized in Q2 of 2012. Sales of non AminoShure products were up 11.4% in the quarter, led principally by strong volume growth of NitroShure.

Food, Pharma & Nutrition Sales at $12.1 million were up 3.1%, led by strength in VitaShure products and sales of encapsulated products sold into the international food markets.

Earnings from operations of $16.6 million improved 12.1% over the prior year quarter, equaling 19.9% of sales. As previously noted, consolidated net income closed the quarter at $11.6 million, up from $10 million in the prior year quarter. This quarterly net income translated into diluted net earnings per share of $0.38 as compared to the $0.33 we posted in the comparable quarter of 2012, an increase of 15.2%.

Looking between the top and bottom line you will see that our consolidated gross profits of $24.9 million increased to $29.9% 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 a favorable product mix. Raw material increases did, however, unfavorably affect our Food, Pharma & Nutrition and choline products again this quarter.

As mentioned in previous conference calls, we continue to monitor raw material prices and seek to adjust prices timely within contractual guidelines as our businesses are likely to remain affected by these types of fluctuations going forward.

At the consolidated operating expense level you'll note a $510,000 increase totaling $8.3 million for the quarter, which equaled 9.9% of sales versus the prior year metric of 9.8% of sales. This quarterly spend is comparable to the Q1 level sequentially. This level of spending represents certain increases in staffing, along with increased expenses relating to recruiting, relocation and certain marketing programs, which are investments in the future growth of the Company. We continue to leverage off of our existing SG&A infrastructure and exercise tight control over all controllable operating expenses.

Overall we're generally pleased with our earnings from operations for the quarter, especially considering the challenging economic environment in North American and European markets, in addition to the production issues we've experienced due to the above noted shortage of raw materials.

Consolidated earnings from operations remained strong and finished at 19.9% of sales or $16.6 million for the quarter, up approximately $1.8 million or 12% over the prior year quarter and from an 18.8% of sales level in Q2 2012.

Our effective income tax rates for the second quarters of 2013 and 2012 were 30.6% and 32.7%, respectively. This decrease in the effective tax rate is primarily attributable to the timing of certain tax credits and deductions. Our annualized effective income tax rate for all of 2013 is currently estimated to be approximately 31.75%.

Net income of $11.6 million equated to $0.38 per diluted common share, which is a 15.2% improvement over the comparative prior year quarter. These results generated approximately $19.2 million of EBITDA in the quarter, which translates into $0.62 per diluted share, and when including our noncash stock based compensation charge we generated $20.1 million of EBITDA in the quarter, equaling approximately $0.65 per share or 24% of sales.

Our balance sheet continues to strengthen and our cash flow remains strong as we closed out the quarter with $171 million of cash. We spent $5.2 million of capital for the six months ended June 30th, 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, driving strong cash flow, 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 have Frank Fitzpatrick discuss ARC Specialty Products and Food, Pharma & Nutrition segments.

Thanks, Dino.

The ARC Specialty Products segment posted record quarterly sales of approximately $13.2 million or a 6.1% increase over the prior year comparable quarter. This increase in sales was derived principally from increased volumes of propylene oxide, particularly for the [sys] and nutmeat fumigation applications. Sales of 100% ethylene oxide for medical device sterilization were also up in the quarter.

ARC quarterly business earnings increased 8.9% to a record of $5.3 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 & Nutrition segment realized sales of $12.1 million, up approximately 3.1% over the prior year comparable quarter. Business segment earnings of $3.3 million were down approximately 3.5% from the prior year quarter, largely due to raw material cost increases within the various sectors of this segment. Particular strength in the international encapsulate sales were realized in ingredients for baking, prepared food, and confection markets.

As in the past, results for this segment continue to reflect the rollercoaster affect 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 remained 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, as we continue to work with the large sports nutrition company on the introduction of sustained released amino acid products. Sales were strong in Q2 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 5% 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 continue to effectively utilize the 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 3 clinical trial and has conducted a successful pre new drug application meeting with the U.S. Food and Drug Administration, and will begin filing its new drug application. We are working with them in support of their NDA filing. In the near term this sector remains a net expense to the business segment.

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

Thanks, Frank.

In the Animal Nutrition & Health segment we realized sales of $57.9 million, an increase of $3.2 million or 5.8% as compared to the prior year comparable quarter. ANH ruminate product sales realized an 8.6% decline 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 8.6% decline suggests, as our comparative results were adversely impacted by the previously announced suspension of sales of AminoShure Health 52% lysine which were realized in Q2 of 2012.

Sales of non AminoShure products were actually up 11.4% in the quarter, led by continued growth of ReaShure and NitroShure as excellent product performance in dairy economics continue to support greater demand for our products.

With respect to the second quarter 2012 suspension of sales of our AminoShure-L 52% lysine product we are diligently working on improvements and will look to introduce 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 demand for our products, despite the increasing challenges of production animal feed/ration prices. Milk prices are currently forecasted to remain strong. Tighter worldwide milk supply, along with expected moderation in feed prices are generally positive indicators that should support greater utilization of our products as herd managers look to continue to maximize results of production animals.

Our global feed grade choline product sales were down 3.5% from the prior year comparable quarter as our sales were adversely impacted by the disruption to production and sales, particularly in June due to the declaration of force majeure by a key supplier. Volumes sold in these markets are strongly influenced by the various dynamics of our customer base, predominantly the poultry production industry, but also swine and aqua culture.

North American choline volumes sold track closely with broiler placements in [ASAT]. 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 ground conditions resulting in steady or declining feed prices for broilers.

We constantly evaluate export choline sales opportunities for the poultry market, but again found Q2 to be a somewhat challenging export market when factoring in raw material cost increases and foreign competitor activities. In the coming quarters we may elect to be more aggressive in seeking to win additional business depending upon the then current costs and market conditions.

Sales of industrial grade products were very strong and sales were up 28.8% over the prior year quarter, and sales into the North American fracking market improved 13.2% on a sequential basis, particularly due to volume. Note that sales of industrial products were also adversely impacted by the previously mentioned disruption to production and sales in June. We continue to see sales opportunities for choline and choline derivative products for 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 and profitability even at current rig 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 $8.1 million as compared to $6.6 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 in each segment continues to be achieved with a constant reevaluation of global raw material cost, product reformulation, currency review, and 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 our operational costs of our business model.

With the bulk of the feed grade choline predominantly going to the poultry and swine markets we remain very sensitive to the uncertain macroeconomic pressures on the large production animal integrators. Feed ration costs stabilized, however, remained high n Q2 due to the well-publicized regionalized U.S. drought situation, and while retail poultry prices have modestly improved, pressure on profitability for this choline market continues.

As noted previously, we continue to see a revenue rollercoaster affect 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 the 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 disciplines.

Overall we continue to build the financial strength of the Company, managing the working capital base aggressively and yielding improved financial results to be a quality supplier to the markets we serve. Near term we remain focused on implementing operational and logistic improvements, new product development, and new product introductions. We also continue to explore alliances, acquisitions or joint ventures to build and leverage 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 a question and answer session. (Operator Instructions)

Our first question comes from the line of Tim Ramey with D.A. Davidson. Please proceed with your question.

Good morning. Thanks. Could you give a little bit more color, if possible, on the force majeure issue? I think you said in the release that it had been resolved in a matter of weeks -- what was the -- what precipitated the force majeure? Was it an equipment failure on the part of the supplier or something out of their control or price, or?

Well, I think in the petrochemical industry you'll find that these guys do scheduled maintenance turnarounds, and this happened to be on the heels of one of those. So we had planned actually for an outage from one of those suppliers and we tend to seek raw material supply from alternatives whenever those situations happen, but the reality is they did not -- well, they started to bring their plant up online and they ran into issues, they had to take it back down, and it took them the better part of probably two-and-a-half, three weeks to get that resolved. And in the meantime another supplier had already scheduled a turnaround and had taken their facility down.

So what we found was that while we had a good plan we thought, when all of a sudden in a series these guys take their plants down, it left us a little bit behind the eight-ball, if you will. So while we scrambled to get additional product in, you know, there's a little bit of a ripple effect that happens here when these guys start to go down, and they kind of do this in sequence, if you will. A lot of the same contractors are used to do a lot of the petrochemical work and they'll go from kind of one job to the next to the next, so these guys are queued up. And so when there's a -- I'll say a significant interruption unplanned, if you will, caused actually a lot of people, not just us, to scramble, as well. So we did.

What I would say, though, is we certainly were not successful in coming up with all the product that we needed to kind of keep everything I'm going to say steady state, so we did find that in fact we had to take our Verona, Missouri operation down for probably about almost three weeks in June, and we did run our Louisiana operation, but certainly at a slower rate for a solid two weeks in June. So it was really confined to the month of June.

And with that I would say that we worked a lot with our customers, you know, inventory levels that I'm going to say are normal operating levels for them were drawn down pretty dramatically in that window. So that's where there's a little bit of a reading kind of between the lines here they did seriously pull down their inventory levels and we pulled inventory out of our system, as well, to keep customers supplied and I would say the customers really did work well with us, but it certainly took the edge off the sales in that window.

Nice, I've got to assume that is somewhat of a sales push into the Q2 as there would be a desire on the part of your customers to rebuild those inventories to normal levels, is that a fair statement?

You said into Q2?

I mean in -- I'm sorry, into Q3, yes, I misspoke.

Oh, you're right, and certainly that's our objective, as well, is to get those inventory levels restored with those customers and just with our normal I'm going to say inventory pipeline, as well. So we are running strong in July for sure, and near term I'm not sure exactly when we're going to slow down.

And if we just took a step back, I mean you had discussed I think on the fourth quarter call the plant that exploded in China, but just the overall supply demand characteristic, which looked to be much improved in '13 versus '12 for choline chloride -- I mean can you just give us a sense of how that looks today to you?

Well, I think overall the demand for the product does continue to be quite strong, and I think that even the issue with the Chinese producer, while real, I'd say momentarily almost we saw a little bit of a hiccup there on their production and their pricing, but to be honest conversations with other Chinese producers here in between have fully conveyed that it wasn't much of an interruption to them, i.e., a lot of excess capacity in the Chinese production world. So other guys stepped in to fill that void, which was interesting because I would say we probably didn't believe there was that much excess there, but clearly they have stepped up and filled that void.

So the plant that exploded has not been rebuilt, so that state continues, if you will. But our view here going forward is that the choline business should remain strong and pretty robust on a go-forward basis. I would say our view is that the -- on the feed, the animal feed side, in particular poultry, again, North America flat to plus 2%, and we're seeing very, very solid business out of the European market from our [Mirano] operation, and certainly the fracking side of this continues to ring quite strong.

And, just on a different note, I've proved to be fairly bad at reading what I thought was your body language in terms of M&A opportunities. The last couple of quarters you've sounded like you had a sense of urgency in your voice and like something might have been close, and cash continues to build, and is there any -- I know you can't tell us specifics, but again with regard to the landscape there?

Yes, well, clearly I would say that we have -- I would say follow a couple, maybe three targets in sight, and one that we thought was close quite honestly in between here has fallen off of the table. So park that one to the side. It was an opportunity in Europe. We pretty much agreed not to agree, if you will, on price and what-not, so we pulled back on that.

In the meantime we're working on another one here in the States more aggressively, as I'm going to say the due diligence process has continued to work. So certainly our expectation is that we will get a deal done, but I've learned a long time ago they're never done until they're done. So, with that said, our intent is still to do that, and whether it's an actual acquisition or a joint venture opportunity, both we're studying real hard, two different transactions, it's -- they're both on front burners with us.

Thanks much.

Thank you. Our next question comes from the line of Mike Ritzenthaler with Piper Jaffray. Please proceed with your question.

Good morning. Just a quick clarification on the force majeure. I don't mean to go into that in too much detail, but it sounded like from your answer to the previous question that you thought that the benefit, that there might be a net benefit in 3Q even though the situation was resolved in July, is that an accurate characterization?

Yes, it is. Certainly as we sit here we know we've run, continue to run very strong here in July now that the supply chain, if you will, has been restored, and certainly our expectation is that those run rates are going to continue here strongly in Q3.

Okay, that helps. And then I guess what we've been hearing from some channel contacts on the poultry and ruminant animal side, will likely remain subdued somewhat, at least on the producer side until after August, is that sort of consistent with your views and will the year-over-year comparables likely remain challenged on pricing for choline even if sequentially things are starting to improve through 3Q?

I think that -- so our view is that near term we think that the poultry market is going to continue to run at the rate that we've talked about, which is relatively flat here in North America. I think on the dairy side that's one where we feel probably a little bit more bullish, if you will, about the fact that that market continues to be in a good state from an economic standpoint. So we feel pretty good that that will do well.

I think that when you reference the compare, AminoShure-L 52% was not there last year, so when you compare this year for Q3 you're going to start to get more of an apples-to-apples look, so that's going to be a slight probably change in the model look, if you will. But certainly we expect to see percentage improvements there partly because of, I mean what we've used as an exclaimer the last two quarters, which I think is real, is now no longer there going forward.

Okay, that's helpful. And forgive my ignorance on the pharmaceutical side of things, that's not really my bailiwick, but it sounds like with the successful Phase 3 trial and the filing going forward it sounds like that's all kind of progressing as you've pointed out in the past. Is that or is anything moving maybe quicker or more slowly or is it about where you expected?

I think it's -- I would say based on conversations with the third party, who is the marketing entity here, I would say it's moving as they said it would. From our own personal standpoint does it seem like it's going a little slow? The answer is probably yes. I, too, am not going to profess to be a pharmaceutical expert, but it does seem rather typical of kind of the timeline to get into these products.

All right, thanks, guys, and congrats.

Thank you.

Thank you. (Operator Instructions)

Our next question comes from the line of Daniel Rizzo with Sidoti & Company. Please proceed with your questions.

Hi, guys. I'm sorry I missed it, could you just -- I missed the part you said about the thing with the pharmaceutical filing in your original comments, could you just repeat that, please?

Well, I think in our original comments, basically, it said that things are on track. I mean she has had a meeting with the FDA that was a successful meeting, giving additional to some degree guidance, if you will, but that was all I think positive. So I would say generally on track with what the FDA is looking for and just the things that will go into the filing, if you will. She's going to initiate and do a rolling filing, if you will, where she can continue to add data, and that's the plan, and to that end we continue to support that.

And do you know has she started that rolling process yet, has she started filing NDA or is that coming shortly?

I think the filing is coming shortly, so to answer straight up I don't think that that particular filing has been done, but I think it's pretty close, at least to starting.

Okay, and then with AminoShure-L I know you guys were working on maybe getting that back to the market, is there any update on when that will occur? Is it something that could happen by the end of the year?

Well, I'd like to say yes, Dan, clearly it's taking us longer than I think any of us thought it was going to come back with a new product there. We've made improvements. I would say that we're not yet there and but when we get there we'll probably go into cow trials that will last anywhere from three to six months. So having a product by the end of the year I think I'd say low probability, but maybe Q1.

Okay, all right, thank you, guys.

Thank you. Our next question comes from the line of Tony Pollock with Aegis. Please proceed with your question.

Good morning. You talked about other industrial applications for choline, could you go into that a little?

Honestly, Tony, I'm probably not going to get into a lot of details there. There's some things that we're working on that were under CDA right now, and some of them were not our ideas, to be honest with you, and they've been brought by other parties. So we're working with them. Will they truly translate into any significant volume of business? I don't know for sure, I like the markets that they're targeted to. I think there is up side opportunity there and so in the meantime we're just going to continue to work with them, but clearly using choline as a key molecule in the product that they're looking to bring to market.

Great. Is the Virginia plant up at capacity now? I mean is it all fully felt, was it fully in the second quarter?

No, it's -- I mean it's running well, but we're not sold out. So, yes, but at any rate it is running well.

Okay, thanks. Great quarter.

Thank you.

Thank you. Our next question comes from the line Andrew O'Conor with BMO Management. Please proceed with your question.

Thanks. Dino, Frank, congratulations on your progress.

Thank you.

I may have missed this earlier in the call, I dialed in a little bit late, but what are the Company's near-term priorities for its cash and cash flow? And I was wondering if you could take a stab at quantifying that through say yearend '13? Thanks so much.

Yes, well, I think clearly the real priority for us right now, as I alluded to a little bit earlier, our desire to do some acquisitions and some joint venture partnering. And so to some degree I'd say we're kind of keeping the powder dry, if you will, to be able to execute on that. Certainly even with that said the order of magnitude may be a transaction larger than certainly our cash position, so those -- that's kind of what's up front here.

We talked about our CapEx, it's, you know, we're looking at $10.5 million for the year so not a big deal from that standpoint, but clearly we're looking to add on to the revenue and profitability of the business through acquisition and that's what's right up front right now.

All right, sir. And then excluding the potential for an acquisition can you make an estimate about what yearend '13 balance sheet would look like relative to where we are today?

You mean cash?

Sure, cash, cash and debt?

Yes, I think -- I mean well it'll be no -- right now unless there's an acquisition, no debt, and I think it's fair to say we'll probably be around maybe $190 million in cash.

Got you.

Or better.

Or better, yes.

Or better, uh-huh.

So.

All right, sir. Thanks very much.

Thank you.

Thank you. Mr. Rossi, there are no further questions at this time. I'd like to turn the floor back over to you for closing comments.

Thank you. And I just want to thank everybody for joining the call today. Again, I think it was almost kind one of our typical quarters, maybe a little bit more unfavorable because of the outage on the raw materials, but I'd like to think that we did a lot of good things to continue to see the business grow, relationships with the customers, through all of that, and certainly do believe we're well positioned here for the future. Organic growth should remain kind of on track, if you will, and certainly with an expectation of getting some transactions done. So, with that, I'll close up the call and say thanks, again, for attending, and look forward to talking to you in the next quarter. Thanks.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.