Balchem Corp (BCPC) 2013 Q3 法說會逐字稿

Greetings, and welcome to the Balchem Corporation's third-quarter 2013 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Frank Fitzpatrick, CFO for Balchem Corporation. Thank you. Mr. Fitzpatrick, you may begin.

Thank you. Good morning. Thank you for joining our conference call this morning to discuss the results of Balchem Corporation for the period ending September 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 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 10K. 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're pleased to report record quarterly net earnings of $11.7 million on record consolidated net sales of $87.6 million, achieving new records for the quarter ended September 30th, 2013. These third quarter sales of $87.6 million were 16.6% greater than the $75 million result of the prior year comparable quarter.

In the quarter, our Specialty Products segment generated third-quarter sales of $12.4 million, a modest 1% improvement over the prior year quarter. This result was principally due to higher volumes sold of propylene oxide for use in industrial application and nutmeat fumigation.

Animal Nutrition and Health sales at $62.8 million was up 21% 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 prior period. Sales of choline for monogastric animals, poultry and swine, were up approximately 19.8%. The ANH Specialty Ingredients largely targeted to the ruminant animal markets, realized an approximately 13.4% sales increase from the prior year comparable quarter, led principally by strong volume growth of ReaShure and chelated minerals.

Food, Pharma, and Nutrition sales at $12.3 million were up 13.4%, led by strength in sales of human choline products for nutritional enhancement and sales of encapsulated products sold into the North American food markets.

Earnings from operations of $16.9 million improved 4.5% over the prior year quarter and equals 19.4% of sales. While the result declined as a percentage of sales in the quarter, it does correlate with the higher growth rates, hence, percent of business that is largely choline related.

As previously noted, consolidated net income closed the quarter at $11.7 million, up from $10.9 million in the prior year quarter. This quarterly net income translated into diluted net earnings per share of $0.38, as compared to the $0.36 we posted in the comparable quarter of 2012, an increase of 5.6%.

Looking between the top and bottom line, you will see that our consolidated gross profits were $24.5 million, or 28% of sales in the quarter. As noted in our press release, this result does reflect additional costs incurred for a key raw material used to manufacture choline derivatives due to a feed stock interruption. We did, however, realize improved plant efficiencies, a result of strong sales volume in the quarter.

Raw material increases also had an unfavorable impact on our Food, Pharma, and Nutrition and choline products again this quarter. As mentioned in previous conference calls, we continue to monitor and challenge raw material cost increases and seek to adjust prices within contractual guidelines. Our businesses are likely to be affected by these types of fluctuations going forward, and we remain cognizant of the impact of price increases to customers in the industries served.

At the consolidated operating expense level, you will note a $388,000 increase totaling $7.5 million for the quarter, which equaled 8.6% of sales versus the prior year metric of 9.5% of sales. 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 are generally pleased with our earnings from the operations for the quarter, especially considering the continuing challenging economic environment in North American and European markets. Consolidated earnings from operations remained strong and finished at 19.4% of sales, or approximately $17 million for the quarter, up approximately $700,000, or 4.5% over the prior year quarter.

The company's effective tax rate for the 3 months ended September 30th, 2013, and 2012, was 31.7% and 33% 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 31.5%.

Net income of $11.7 million equated to $0.38 per diluted common share, which is a 5.6% improvement over the comparative prior year quarter. These results generated approximately $19.6 million of EBITDA in the quarter, which translates into $0.64 per diluted share, and, when including our noncash stock-based compensation charge, we generated $20.5 million of EBITDA, 23% of sales in the quarter, equaling approximately $0.67 per share.

Our balance sheet continues to strengthen and our cash flow remains strong as we close out the quarter with $190 million of cash. We have spent $6.6 million of capital for the 9 months ended September 30th, which includes expenses related 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 the shareholders, I am now going to have Frank Fitzpatrick discuss our Specialty Products and Food, Pharma, Nutrition segment.

Thanks, Dino. The ARC Specialty Products segment posted quarterly sales of approximately $12.4 million, or an approximate 1% increase over the prior year comparable quarter. This increase was principally the result of strong sales volume of propylene oxide for synthesis and nutmeat fumigation, partially offset by softness in ethylene oxide consuming end markets.

In particular, we noted a drop in volume sold to the medical device sterilization customers that purchase single-use 100% ethylene oxide canisters. A recent drop in US hospital admissions is the likely cause of this decline, a trend that may persist as companies and consumers grapple with shifts in healthcare policies and economics.

ARC's quarterly business earnings declined 7.6% to $4.9 million versus the prior year comparable quarter. This decrease is principally due to higher raw material cost and increased operating expenses. During the quarter, we did realize increases in the cost of certain petrochemical commodities and seek to implement price adjustments within contractual guidelines.

We also incurred additional expenses pursuing other end-market applications, wherein the product handled today by us may have new market opportunities.

For the quarter, the Food, Pharma, and Nutrition segment realized sales of $12.3 million, up approximately 13.4% over the prior year comparable quarter. These business segment earnings of $2.8 million were down approximately 4.8% from the prior year quarter, largely due to increases in cost of certain key raw materials for our human choline products. This result was primarily due to a 20% increase in sales, or approximately $850,000 of our human choline products for nutritional enhancement, which is also a 5% growth on a sequential basis.

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

Also contributing to the higher sales was an 8% increase in sales in the food sector, principally from encapsulated ingredients for baking and food preservation end markets. As in the past, results for this segment continue to reflect the rollercoaster effect of pipeline-filled, inventory-level management, and customer marketing initiatives.

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, has conducted a successful pre-new drug application meeting with the U.S. Food and Drug Administration, and has begun filing its new drug application. In addition, they recently announced the closing of an $18.5 million financing, indicating that they will use the funds for the completion and filing requirements for the new drug application, along with a development of other therapies in their pipeline.

We continue to work closely with them in support of the NDA filing. In the near term, this sector remains a net expense to the business segment.

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

Thanks, Frank. In the ANH segment, we realized sales of $62.8 million, an increase of $10.9 million, or 21%, as compared to the prior year comparable quarter. ANH ruminant product sales realized a 13.4% increase from the prior year comparable quarter. As mentioned in this morning's press release, this increase was led principally by strong double-digit volume growth of ReaShure and chelated minerals.

Milk prices remain strong in the quarter, and expectations of moderating feed prices and continued demand, strengthened US and export markets, are all positive indicators that should support growing utilization of these products.

With respect to the 2012 suspension of sales of our AminoShure-L 52% lysine product, we continue working on improvements and look to reintroduce this product into the dairy industry once improvements are completed and confirmed with industry experts. However, we are unable to give a precise estimate as to when a re-launch will occur.

Our global feed-grade choline product sales were up 19.8% as we realize strong volume growth in both the North American and particularly the challenging European markets. A couple factors contributed to this growth result. Sales were positively impacted early in the third quarter, as we were successfully able to produce and ship sufficient volumes to restore our customers' depleted inventories to normal levels, effectively offsetting the disruption to choline production, particularly in June, due to the declaration of force majeure by a key supplier.

In addition, 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 agriculture markets. North American choline volumes sold tracked closely with broker chick placements and egg sets. The current USDA forecast for broiler meat production continues to forecast modest growth to the balance of 2013, especially due to the lower projected corn and soybean meal prices. With these lower forecasts, the grain prices and expectations for continued gain in the domestic economy, broiler production is forecast to continue to expand into 2014.

In Europe, despite the poor economic climate, sales of feed-grade choline remain strong in the quarter. Additionally, improvements in production capabilities in our Italian plant led to greater volumes of product available to be sold during the traditional August European shutdown period, resulting in solid contribution to our growth in this period as well.

We constantly evaluate export choline sales opportunities for the poultry market, but again found Q3 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 cost, export market conditions, and capacity available.

Sale of industrial-grade products were very strong, as sales were up 26.8% over the prior year quarter, largely due to activities in the North American fracking market. Note that sales of industrial products were also adversely impacted by the previously mentioned disruption to production and sales in June, and we also experienced a strong recovery early in the quarter here as well. We remain confident that these products will continue to show strength in 2013, driving steady to increasing levels of sales.

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

Earnings from operations for this entire segment grew to $9.4 million, as compared to $8.1 million in the prior year comparable quarter, principally a result of increased volume sold. While these earnings improved nicely, we were still unfavorably impacted by increases in certain raw materials during the quarter, including the previously noted feedstock interruption to one of our key suppliers, resulting in our paying a significant surcharge. This issue has been remedied. However, raw material cost fluctuations continue. We continue to challenge raw material price volatility and seek to implement price adjustments within our contractual guidelines.

The profitability of the ANH segment continues to be achieved with a constant reevaluation of global raw material cost, 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 costs of our business model.

As noted previously, we continue to see a revenue rollercoaster effect quarter to quarter within the various products end-market segments. This quarter was no different. We remain committed to organic growth as we look to continuously 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 we offer to markets we serve.

Our business continues to create good balance, using profitable growth opportunities across the served value chain. We also remain focused on helping our customers generate reinvestment level return, while maintaining our own operating discipline. Overall, we continue to build the financial strength of the company, managing the working capital base aggressively and yielding solid financial results to be a quality supplier.

Near term, we remain focused on implementing operational and logistic improvement, new product development, and new product introduction. We continue to explore alliances, acquisitions, and/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. (Operator Instructions) Tim Ramey, Davidson.

Looked like a really nice quarter at the top line. And I just was trying to understand this surcharge on COGS. Was that largely responsible for the margin pressure that occurred or was it more diffuse factors?

Actually, Tim, that's a good question. The surcharge itself was, order of magnitude, about $700,000 in the quarter, so not insignificant. So that definitely played through. And that clearly has been remedied since, so that's good to have that behind us.

But the other part, too, is, and I think this flows through most models. The most significant growth we have going on is in our ANH segment. And even within that, the choline or choline derivative molecules have been very solidly growing. They typically could carry a lower gross margin percentage than the other segment. So as that continues, I'm going to say to grow at a higher rate, whether it's in dollars or [let alone] percentages, I think that you're going to see that margin number, while total dollars will grow, but as a percentage, probably be adjusted a bit more, which I think is pretty easy to understand given how those segments play out.

But those are certainly the 2 key factors that kind of drove, maybe to that slightly lower margin percentage.

So a little bit of negative mix expected. I know you talked about maybe segmenting out the industrial choline separately, which might kind of isolate that makeshift.

Yes.

Have you had more thoughts about that?

Yes. I mean, we continue to study it. And I'd say we're probably getting closer and closer to that decision. Not quite yet there, but maybe as early as next year.

And then just with regard to the new plant, I know you've been ramping up capacity utilization there, and it'd be helpful to get the AminoShure-L product running through there again. But where are you at with that?

Yes. So, I mean, the plant's running good with other products through there right now, other than the one that we pulled off the -- the L that we pulled off the market. So it's running at a pretty good [state], clearly not a full-blown 24/7, but solidly 5 days a week for sure. And we've made some shifts in product line and whatnot into that facility of other animal health products. So it's actually running rather well considering that the basis for that expansion into that site was the new L product. So we're pretty pleased. And it just kind of shows that other parts of that segment are actually growing pretty nicely, maybe even better than we originally thought.

Mike Ritzenthaler, Piper Jaffray.

Just a follow-up to the raw material escalation. How are you thinking about price initiatives? I know you touched on it in your prepared comments a little bit. But I was wondering if you could elaborate a little bit on how you're thinking about pricing going forward, given the competition and those kinds of pressures. And as a follow-up, I was interested if the same pressures have persisted at more or less the same rate in 4Q as 3Q.

4Q, as in 4Q right now?

Yes.

Yes. Well, I think, certainly, competitive pressures continue to build, I think. I mean, the price increases themselves are kind of up and down a bit. And certainly, our desire with our customers that are under contract, kind of under a formula basis is to pass on those raw material cost increases quarterly. Sometimes we lagged, as the quarters would indicate, but we're kind of sticking to it. Although, in no uncertain terms, there's definitely some competition out there from offshore in a couple of the spots that I think we're very sensitive to. I don't know that it's really, really broad-brushed in terms of the volume coming in. But clearly, people are sitting up and paying attention to this market maybe more than they ever have, and part of it is our disclosure about what's going on in this market.

So like anything good, everybody else sits up and pays attention sooner or later as well. So our sense is that competition is there. Is it any greater here in Q4 than Q3? I don't think so based on our analysis. But it's there. And so we're just kind of paying very, very close attention to it and trying to be responsive to the general market, I'm going to say needs, both economically as well as from a volume standpoint. So paying very close attention to it.

And then on the raw material prices in 4Q, have they persisted more or less the same?

I think they're kind of flat, if you will. Our look right now based on kind of the [early reads] forecast watch here in the quarter, we think it's going to be pretty close to flat with Q3.

Okay. Just one quick follow-up, if I could. On corn prices, so, obviously, corn prices have been favorable for animal producers, as you noted. Yields are looking a lot better in the fields. There's potential changes to RFS for 2014, and so forth. So there's a number of things that are bringing corn prices down. Is it safe to assume that your customers in ANH are more sensitive to corn price volatility than to soy price volatility? And does it change their rate of adoption, in your view?

Of our products?

Yes.

Yes. Well, certainly, I mean, they're very, very sensitive to what's going on with corn and soy, maybe almost for 2 different reasons with our product line. Soy can be a substitute for one of our products in particular, so if prices fall, I'm going to say far enough, there may be an election to move, which these guys have proven that they can rather easily in their ration makeup or modeling. And with corn prices down, certainly what I would tell you is that almost leaves -- creates more space in that ration cost to perhaps use more products like ours that tend to be viewed as more expensive in the market, especially on the ruminant side. And, but we could argue there's a value proposition there and they can even get better results. But sometimes when they're squeezed, they're squeezed, and there's no room in that ration. But lower corn prices certain help to keep that door open for these guys to make a transition to our products.

(Operator Instructions) Gentlemen, there are no further questions in the queue. Would you like to make some closing remarks?

Sure.

We did just get a couple more people. Tony Polak, Aegis.

In terms of the Curemark, the announcement that was made over the last couple days, could you give us a little more explanation what that means?

Well, the recent announcement that they're proceeding with their filing, is that what you're talking about?

Yes.

The NDA. Yes, I mean, this is what has been talked about probably at least for a couple months, maybe a little bit longer was the idea of initiating the filing. As we also noted, they had this pre-meeting with the FDA to, I think, clearly understand this [rolling filing], if you will. And our understanding is that that's what they've now initiated. So they'll begin to populate that filing with the required information that -- I can't tell you exactly how long that'll take for completion. But certainly, it clearly has been initiated, which had been talked about, and I think people were wondering when it was going to start. So clearly, now it has.

The relocation and recruiting, could you give us a number on that? And is that going to continue or you're pretty much done? Is that a one-time thing for the quarter?

No, I would say it's a one-time thing, as we've continued to add people. Sometimes, not always, but sometimes we've had to incur relocation costs and -- I think in the quarter itself, it probably cost us somewhere between $100,000 and $200,000. I don't think that's a normal number to be expected. But I think in any given quarter, we, on a go-forward basis here, I think it could be in that $100,000 neighborhood, maybe it wouldn't be so outrageous. But it's a number that's been there pretty regularly in the quarter, some were more than not.

Mike Ritzenthaler.

I just wanted to ask a quick question on AminoShure. It doesn't sound like the tone there has changed versus the previous call. But I was wondering if you wouldn't mind, if possible, elaborating on how the trials have been going or any other sort of incremental color that you can give on the AminoShure product.

Yes. So that's, again, a good question. I think that there are no trials running right now on AminoShure-L 52. It's still in-house being developed and kind of going through our in-house testing. So we haven't pushed it out to the field to start animal testing yet.

There are no further questions in the queue. I'd like to turn the call back over to management for closing comments.

Thanks, ladies and gentlemen. Appreciate everybody participating on the call today. Again, I think earlier we stated that pretty happy with the way the quarter turned out, certainly challenges with raw material pricing and whatnot. But net-net, I think pretty good result on the quarter. So we'll continue to move forward here. Thanks.

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