Balchem Corporation (NASDAQ:BCPC) Q3 2023 Earnings Call Transcript

Balchem Corporation (NASDAQ:BCPC) Q3 2023 Earnings Call Transcript October 27, 2023

Balchem Corporation misses on earnings expectations. Reported EPS is $ EPS, expectations were $0.91.

Operator: Greetings, and welcome to the Balchem Third Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, Martin Bengtsson, CFO. Thank you, Martin. You may begin.

Martin Bengtsson: Thank you. Good morning, everyone. Thank you for joining our conference call this morning to discuss the results of Balchem Corporation for the quarter ending September 30, 2023. My name is Martin Bengtsson, Chief Financial Officer; and hosting this call with me is Ted Harris, 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. Statements made in today’s call that are not historical facts are considered forward-looking statements. We can give no assurance that the expectations reflected in forward-looking statements will prove correct, and various factors could cause actual results to differ materially from our expectations, including risks and factors identified in Balchem’s most recent Form 10-K, 10-Q and 8-K reports.

The company assumes no obligation to update these forward-looking statements. Today’s call and commentary include non-GAAP financial measures. Please refer to the reconciliation in our earnings release for further details. I will now turn the call over to Ted Harris, our Chairman, President and CEO.

Ted Harris: Thanks, Martin. Good morning, and welcome to our conference call. This morning, we reported solid third quarter financial results with strong margins and higher profitability year-over-year despite softer sales volumes. Our revenues of $230 million were down 5.9% versus the prior year’s very strong quarterly results. It is worth noting that the prior year’s quarter was Balchem’s strongest revenue quarter in its history, and as such, a challenging comparable from a revenue perspective. Gross margin grew 11.9%, and we expanded our gross margin percentage by 530 basis points to 33.3%. Earnings from operations of $44 million were up 29.7% versus the prior year quarter. And we delivered a record quarterly adjusted EBITDA of $60 million, an increase of 11.4% with an adjusted EBITDA margin of 26% of sales up 400 basis points from the prior year.

Our third quarter net income of $29 million, an increase of 15.2% resulted in earnings per share of $0.90 on a GAAP basis. On an adjusted basis, our third quarter non-GAAP net earnings of $34 million, an increase of 4.3% resulted in earnings per share of $1.04 on a non-GAAP basis. Cash flows from operations were $47 million for the third quarter of 2023 with record quarterly free cash flow of $38 million. Overall, another solid quarter for Balchem with performance that highlights the strength and resilience of our business model in a market environment that continues to be challenging. Before passing the call back to Martin to cover the financial results in more detail, I would like to take a few minutes to talk about the broader market conditions within which we are operating today as well as update you on some of our key strategic initiatives.

The global macroeconomic situation and the dynamics within our markets remain quite challenging. And while the destocking we experienced late last year and in the early part of this year is largely behind us, our customers are adjusting to changing consumer buying behavior as a result of inflationary pressures on consumer spending as well as the high level of uncertainty around the overall macroeconomic and geopolitical environment. While it is hard for us to predict the timing of when the broader markets will truly normalize and reset for continued growth, we do believe the underlying fundamentals of the market we serve will continue to allow for growth over time and that we are well positioned with our portfolio of products and solutions to deliver above-market growth over the long term.

We are pleased to report that our strategic initiatives in the Human Nutrition & Health or HNH segment are progressing well. One area of focus is on increasing consumer awareness and driving market penetration through enhanced marketing and communication efforts. To begin, we have laid a strong marketing foundation to help build awareness and to make our ingredients more appealing to end consumers. This includes strengthening our brand positioning and modernizing and unifying our HNH portfolio’s identity for brands such as Albion Minerals, VitaCholine, K2VITAL and OptiMSM. Our goal is to expand brand recognition, enhance our premium positioning and create consumer awareness campaigns that resonate with our target audience. Additionally, we have formed a new partnership with the American Nutrition Association, or ANA, to drive growth through increased consumer awareness.

In 2024, ANA and Balchem will launch campaigns to educate consumers about the health benefits of choline an underappreciated nutrient. This partnership will involve creating evidence-based content to effectively communicate our shared goals. We believe that this collaboration with ANA, a nonprofit organization that promotes personalized nutrition will complement our existing marketing initiatives and help expand the market size of choline. Ensuring quality and transparency in the supplement market is another key priority for us. We have implemented initiatives such as TruQuality for K2VITAL and TRAACS for Albion Minerals to demonstrate our commitment to excellence. These programs involve partnering with selected customers, retailers and analytical labs to ensure that the supplement available in the market, meet the highest quality standards, either by identifying and removing counterfeited products from the market or via improving the quality of the current formulations to further enhance stability and consumer benefits.

These efforts build trust in our product brands. Furthermore, we are focused on accelerating the cross-selling of our HNH portfolio. As the recent SupplySide West trade show in Las Vegas, we showcased innovative nutritional concepts that leverage our portfolio of minerals, nutrients and food ingredients. By combining these elements, we aim to create synergies across categories in supplements, food and beverages. For example, the combination of Albion chelated minerals and K2VITAL Delta offers manufacturers a competitive advantage by providing a patented and stable vitamin K2 formulation in the presence of minerals like magnesium, which is in high demand in the market. In addition to our marketing efforts, we continue to prioritize scientific research for our specialty nutrients.

A recent study on OptiMSM, our premium organic sulfur compound known for its unmatched purity, safety and consistency demonstrated significant improvements in hair density and diameter. This study adds further support to the value proposition of Balchem’s OptiMSM brand which is widely used in products promoting healthy aging, joint support and hair, skin and nail care. Within our Animal Nutrition & Health segment, we are proud to announce the publication of three new papers from a study conducted by Dr. Heather White’s laboratory at the University of Wisconsin. These papers add to the existing body of research that highlights the benefits of feeding ReaShure to transition dairy cows. Cows that are transitioning from their dry period through calving to the period where they’re are producing milk by providing data showing that feeding ReaShure helps to not only enhance milk production, but also improve offspring health and growth.

This research further strengthens the value proposition of Balchem’s market-leading rumen protected choline, making it a recommended choice for all transition dairy cows regardless of their health status or production level. Overall, we are making significant progress on our strategic initiatives, and we remain committed to driving consumer awareness, expanding market penetration and delivering high-quality products in both the Human Nutrition & Health and Animal Nutrition & Health segments. In the quarter, we also continued to advance our sustainability efforts and make progress on our higher purpose of making the world a healthier place. As reported on previous calls, over the last several years we have achieved noteworthy year-over-year reductions in both our Scope 1 and Scope 2 greenhouse gas emissions.

In the third quarter of this year, we are very proud to have successfully completed our first ever public disclosure to CDP Climate. This milestone in our sustainability journey underscores our commitment to transparency. We are preparing to report our Scope 3 emissions in 2024, alongside our Scope 1 and 2 emissions that we have been reporting for a number of years. Additionally, in the quarter, Balchem’s Board of Directors was very pleased to elect two new Board members to the Board of Directors to replace two long-tenured Board members who retired from the Balchem Board after reaching our mandatory retirement age. Olivier Rigaud, Chief Executive Officer of Corbion N.V., a global food and biochemicals company based in the Netherlands; and Monica Vicente, Senior Vice President and Chief Financial Officer of Fresh Del Monte Produce Inc.

a global agriculture role and fresh food produce company based in the United States were elected to the Board on September 6. Mr. Rigaud and Ms. Vicente each bring relevant market experience and expertise and strong global business acumen to the Board. We are excited to have them both on the Balchem Board and look forward to their contributions over the years to come. And with that, I will now turn the call back over to Martin to go through the financial results in more detail. Martin?

Martin Bengtsson: Thank you, Ted. As Ted mentioned, overall the third quarter was another solid quarter for Balchem. The strong margin rate performance from gross margin, earnings from operations and adjusted EBITDA were encouraging to see and in line with our expectations that we will be able to restore our margin profile to more normalized levels following the margin contraction we saw during the highly inflationary period we experienced in the prior year. Our third quarter net sales of $230 million were 5.9% below prior year primarily driven by lower volumes as end market demand has continued to be volatile and we’re yet to see a more broad-based recovery across our segments. Our third quarter gross margin dollars of $77 million were up $8 million or 11.9% compared to the prior year.

Our gross margin percent was 33.3% of sales up 530 basis points compared to 28% in the prior year. The significant improvement in margin was primarily driven by favorable mix and lower manufacturing input costs. Consolidated operating expenses for the third quarter were $33 million as compared to $35 million in the prior year. The decrease was primarily due to favorable adjustments to transaction costs, and lower integration-related expenses, offset partially by a restructuring-related impairment charge and higher compensation-related expenses. GAAP earnings from operations for the third quarter were $44 million, an increase of $10 million or 29.7% compared to the prior year quarter. On an adjusted basis, as detailed in our earnings release this morning, non-GAAP earnings from operations of $45 million were up 10.3% compared to the prior year quarter.

Adjusted EBITDA of $60 million was $6 million or 11.4% above the third quarter of 2022, with an adjusted EBITDA margin rate of 26%. Interest expense for the third quarter was $7 million, an increase of $3 million compared to the prior year. This increase in interest expense is driven by the significantly higher interest rate environment. We continue to use our solid cash flows to pay down debt and reduced our debt by $25 million in the third quarter and ended the quarter with net debt of $304 million with an overall leverage ratio on a net debt basis of 1.3x. Our company’s effective tax rates for the third quarter of 2023 and 2022 were 20.3% and 18.8%, respectively. And consolidated net income closed the quarter at $29 million up 15.2% from the prior year.

This quarterly net income translated into diluted net earnings per share of $0.90, an increase of $0.12 compared to the prior year. Our third quarter adjusted net earnings were $34 million, an increase of 4.3% from the prior year, which translated to $1.04 per diluted share. Cash flows from operations were $47 million, an increase of $5 million or 11.8% and we were particularly pleased with delivering record free cash flow of $38 million in the quarter as we continue to translate our earnings into cash. As we look at the quarter from a segment perspective, for the third quarter, our Human Nutrition & Health segment generated sales of $144 million, an increase of 1.3% from the prior year. The increase was driven by higher sales within the Minerals and Nutrients business, the incremental contribution of two months of the Bergstrom acquisition since we acquired it in late August of 2022, and a favorable impact related to changes in foreign currency exchange rates, partially offset by lower sales within food and beverage markets.

Our Human Nutrition & Health segment delivered quarterly earnings from operations of $31 million, an increase of 51.9% compared to the prior year. This was driven by the aforementioned higher sales, favorable mix, lower manufacturing input costs and favorable adjustments to transaction costs, partially offset by restructuring-related impairment charge. Third quarter adjusted earnings from operations for this segment were $36 million, an increase of $7 million or 26.1%. We were very pleased with the overall performance of our Human Nutrition & Health segment in the third quarter. The destocking behind us within HNH, the overall demand picture seems to be normalizing. The acquisitions we made last year are contributing nicely. The Minerals & Nutrients business has returned to growth, and the food and beverage business appears to be stabilizing despite inflationary-driven shifts in consumer buying behaviors.

While volatility and uncertainty remain, we’re encouraged by the year-over-year top and bottom line growth in our Human Nutrition & Health segment, as well as the sequential improvement. Sequentially compared to the second quarter of 2023, sales for Balchem’s Human Nutrition & Health segment were up 6.5%. Our Animal Nutrition & Health segment generated quarterly sales of $54 million, a decrease of 17.8% compared to the prior year, driven by lower sales in both the ruminant and monogastric species markets partially offset by a favorable impact related to changes in foreign currency exchange rates. Animal Nutrition & Health delivered earnings from operations of $5 million, a decrease of 36.9% from the prior year, primarily due to the aforementioned lower sales, partially offset by a decrease in manufacturing input costs.

Third quarter adjusted earnings from operations for this segment were $5 million, a decrease of 38.2%. Similar to what we discussed in our Q2 earnings call, our Animal Nutrition & Health segment is experiencing challenging market conditions particularly in Europe, but also increasingly in the North American dairy market. The European animal feed market continues to show market demand softness and also increased competition from low-cost Chinese products. Additionally, recent decreases in U.S. milk and milk protein prices have further challenged the U.S. dairy industry, impacting demand for our rumen-protected encapsulated nutrients in North America. We continue to believe that the animal protein markets provide significant growth opportunity for Balchem over the longer term, but they remain very challenging markets at moment.

Looking forward, as input costs come down and the domestic Chinese market strengthens, we do expect to see our European monogastric business normalize, but this may take some time. Regarding our ruminant business, we anticipate that over the course of the remaining months of 2023 and the early part of 2024, dairy farm margins in the U.S. will improve as a result of the lower feed costs and higher milk prices and the overall U.S. dairy market conditions will improve, enabling a return to growth of our ruminant business in the near term. Our Specialty Products segment delivered quarterly sales of $30 million, an increase of 1.2% compared to the prior year due to higher sales in the plant nutrition business and a favorable impact related to changes in foreign currency exchange rates, partially offset by lower sales in the Performance Gases business.

Specialty Products delivered earnings from operations of $9 million, an increase of 23% versus the prior year, primarily driven by higher average selling prices and lower manufacturing input costs. Third quarter adjusted earnings from operations for this segment were $10 million, an increase of 21.1%. We were pleased with the performance of Specialty Products in the quarter as improved margins on modest sales growth delivered strong earnings growth. While volumes continued to be challenged in the quarter as a result of ongoing destocking in the medical device markets, as well as customers taking downtime to upgrade the emissions control systems in anticipation of updated environmental regulations, the overall market conditions further stabilized as the quarter progressed.

We were very pleased with our ability to drive earnings growth within Specialty Products in this environment and we believe we are well positioned to benefit as volumes fully normalized. So overall, the third quarter was another solid quarter for Balchem with sales and earnings growth in two out of our three reporting segments in a challenging market environment. I’m now going to turn the call back over to Ted for some closing remarks.

Ted Harris: Thanks, Martin. We are pleased with the solid financial results reported earlier this morning with significant improvement in margin performance leading to record adjusted EBITDA for the quarter, particularly in light of the strength of the prior year’s comparable quarter and the continued economic and geopolitical uncertainties we are facing in the marketplace. We continue to show an ability to deliver results in a variety of market conditions and we remain confident in the long-term growth outlook for our markets and for Balchem as a company. Now I’d like to hand the call back over to Martin to open up the call for questions. Martin?

Martin Bengtsson: Thank you, Ted. This now concludes the formal portion of the conference. At this point, we will open up the conference call for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Bob Labick with CJS Securities. Please proceed with your question.

Bob Labick: Good morning. Congratulation on some solid performance. And thanks for taking our questions.

Martin Bengtsson: Thank you, Bob.

Ted Harris: Thanks Bob.

Bob Labick: Yes, I wanted to start with ANH and kind of following up on Martin, the comments you just made there. Maybe if he could, break it down a little bit further. It sounds like, the European feed situation has kind of two headwinds between demand, there from the farmers. And then also competition from Chinese imports, and maybe give us a sense of how that’s flowing. And then, overall talk about the level has dropped to 54 million you haven’t seen since early 2021. How do you see kind of sales recovering? Going forward, but maybe just break down Europe, first, please?

Ted Harris: Yes, Bob, thanks for the question. I’ll give it a shot. And Martin, you can chime in to add some color. But I do think it is worth noting just out of the gates that 2022 was quite a strong year for ANH. We grew revenues about 16% and profits up almost 30%. So we’re coming off of a very strong year. But having said that, we’re clearly experiencing some real challenges in ANH business. It’s really starting with the European situation. And I guess to put it into context, our European monogastric business is about 20% of our ANH business. So it’s on the smaller side of the geographies. But we are experiencing both lower demand driven I think, certainly in part by the economic situation in Europe, with high energy costs, high commodity costs.

There’s just the feed market generally speaking is down in Europe, and that’s driving lower demand for us. And we do see that stabilizing and starting to come back a little bit. I think Q3 was a little bit better than then than Q2 from a volume perspective. And we expect Q4 to be a little bit better than then Q3. So, we do see as energy costs have come down, some commodity costs have come down, that volumes are starting to pick back up a little bit, which is – encouraging. But as you noted, the other part of the equation is the increased competition from imports from China. And that’s being driven by certainly the low demand that is occurring in the Chinese marketplace and not enough demand to soak up their capacity. So it is moving offshore.

And that’s impacting us. And we, as we said, believe that, as demand picks up in Europe a little bit as the economy and China picks up as well, that we should see some easing of that situation in Europe. But again, it is a challenging environment. And it may take some time for that to fully recover, but we do feel like it’s stabilizing where it is which at least is, the, first step that you need to see. The ruminant situation is quite different. I think there’s a little bit of timing associated with this quarter versus the quarter last year that was particularly strong, as well as Q2 that was quite healthy. So, there’s a timing element to Q3 of this year. But also milk prices have really come down significantly – protein prices as well in the U.S. market.

And that’s just having an impact overall on the market. But we see this as a much shorter period of kind of depressed demand. And that over the course of the next three to four months, we should see demand to pick back up somewhat as commodity costs decline in this country, farm margins improve, and the appetite to add supplements to feed increases. So, we do see the ruminant business in the U.S. turning around in the near term. We also are excited about several new innovations, one of which we should bring to market in the coming three to four months, that will give some tailwind to sales as well with a new product on the marketplace. So ruminant certainly as a shorter term issue that we’re facing the European situation is a little bit longer term.