May 3, 2013
Executives
Frank Fitzpatrick - CFO Dino Rossi - Chairman, President & CEO
Analysts
Tim Ramey - DA Davidson Andrew O'Conor - BMO Asset Management Greg Garner - Singular Research Lawrence Goldstein - Santa Monica Partners
Operator
Greetings, and welcome to the Balchem Corporation’s First Quarter 2013 Earnings Call. At this time, all 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. Frank Fitzpatrick, CFO for Balchem Corporation.
Thank you, Mr. Fitzpatrick.
You may begin.
Frank Fitzpatrick
Thank you. Thank you for joining our conference call this morning to discuss the results of Balchem Corporation for the period ending March 31, 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 statements.
This release does contain or likely will contain forward-looking statements, which reflects Balchem’s expectation or beliefs concerning future events that involve risks and uncertainties. We can give no assurance that the expectations reflected in forward-looking statements will prove correct, and various factors could cause results to differ materially from our expectations, including risks and factors identified in Balchem’s Form 10-K.
Forward-looking statements are qualified, in their entirety by this cautionary statement. The financial information that is referenced in this meeting was disclosed this morning in our quarterly press release at 9:30 AM Eastern Time.
I will now turn the call over to Dino Rossi, our Chairman, President and CEO.
Dino Rossi
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 the quarter 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, ARC 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 & 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 applications had a very strong quarter, up approximately $4.4 million from the comparable year quarter.
Sales of choline for monograstrics animals (inaudible) were approximately 8.4% and the ANH Specialty Ingredients largely targeted to the ruminant animal markets, realized approximately 8.7% sales growth from the prior year comparable quarter while domestic sales of other encapsulated products more than offset the impact of having discontinued the AminoShure product. Food, Pharma & Nutrition sales at $11 million were up 2.5% led by strength in VitaShure product and encapsulated products in the domestic food market.
Earnings from operation were $15.9 million, improved 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 15.1%. Bookings 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 decrease as a percent of sales from the prior year quarter reflects improved planned efficiencies resulting from strong sales volume and some relief on certain raw materials. Raw material increases did however unfavorably affect our FPN products segment again this quarter.
As mentioned in previous conference calls, we continue to monitor raw material prices which did rise on a sequentially basis for certain key raw materials and speak to as far the timely contractual guidelines as our businesses are likely to remain affected by these types of fluctuations going forward. We continue our work on operational efficiencies and I am happy to report that we have efficiently achieved quality production in our shipping product in our new Covington, Virginia plant effective January of this year.
This expansion has doubled production capacity of our ruminant 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 statistics along with increased expenses related to R&D and marketing programs, which were 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 generally 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 remained 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 rate 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 was $10.9 million equated to $0.36 per diluted common share, which is a 16.1% improvement over the comparative with prior year quarter. These results generated approximately $18.5 million of EBITDA in the quarter which translates in to $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 remained strong. We closed out the quarter with $149 million of cash.
We spend $3.4 million of capital for the three months ended March 31, 2013, which includes payments relating to the new manufacturing facility in Virginia.
Frank Fitzpatrick
Sales of 100% Ethylene oxide for medical device sterilization were also up in the quarter even with a soft start in January. Our quarterly business earnings increased 3.8% to a first quarter record of $4.9 million versus the prior year comparable quarter.
This increase was 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 cost increases within the various sectors of this segment, particularly the strength in the domestic encap sales are up approximately 10.5% were realized ingredients for baking, prepared food and confection market.
As in the past, results for this segment continue to reflect a roller coaster effect of pipeline sales, 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 enhancements. Last quarter, we reported that we were working with a large sports nutrition company on the introduction of sustained release amino acid products and we made our first sale 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 continue to effectively utilize the three structured function claims awarded to Balchem for 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 the successful free new drug application meeting with the US Food and Drug Administration, and will begin filing if new drug application.
We await the unbinding of this trial as 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 will now turn it over the call to Dino for him to discuss the animal nutrition and health segment.
Dino Rossi
Thanks Franc. In the animal nutrition and 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, and its [luminous] product sales realized 8.7% growth from the prior year comparable quarter.
As mentioned in this morning’s press release, our quarterly result in this sector of ANH were actually much stronger than the 8.7% suggest as our compared results were adversely impacted by the previously announced suspension of sales for AMINOSHURE-L, a 52% Lysine. Sales of non AMINOSHURE were up 19.7% on a sequential basis led by strong volume growth of REASHURE and NITROSHURE as excellent product performance in dairy economics continue to support greater demand for our products 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 improvement and we look to reintroduce this product into the dairy industry once improvements are completed in conscience with the industry expert. At this time, our work continues; however we're unable to get 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. No prices are currently forecasted to remain strong and a worldwide no supply along with expected moderation in the peak prices are all positive indicators that should support greater utilization of our product as herd managers will 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 permission with more than doubling output capacity for aluminum stable products in January. As well we’ll see great (inaudible) product sales were up 8.4% from the prior year comparable quarter as we saw modest volume growth in both North America and Europe.
Bond sold in these market are strongly influenced by the various dynamics of our customer base, predominantly with poultry production industry, but also supply in our pork culture market. North American coal volume sold track closely with (inaudible) ship placements at $0.08.
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 condition resulting in steady or declining peak prices for (inaudible).
We constantly evaluate export (inaudible) sales opportunities for the poultry markets but again found Q1 to be somewhat challenging export market, when factoring in to (inaudible) cost increases and growing competitor activities. In the coming quarters, we would like to be more aggressive and seeking to win additional businesses depending on the then current costs and market conditions.
Sales of industrial grade products was very strong, as sales were up 29.1% over the prior year quarter and sales into the North American fracing market improved 9.6% on a sequential basis particularly due to volume. We continue to see sales opportunities for choline and choline derivatives products for other industrial applications.
The near-term especially for the gas fracing opportunities. We remain confident that these products will continue to show strength in 2013 driving steadily 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 8.5 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 be achieved with a constant revaluation 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 in multi-plant, operational benchmarking, marketing strategies and the ability to leverage other operational cost 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 these uncertain macroeconomic pressures on the large production animal integrators. Feed-rationing cost stabilized, however remain high in Q4 due to the well publicized (inaudible) draught 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 rollercoaster effect quarter-to-quarter within the various products or market sectors. This quarter was no different, and we remained committed to organic growth as we will to continually expand our offerings and move in to new geographies.
We will continue to strengthen our global growth pipelines and are confident that more business can be generated based on the unique portfolio or 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 of returns 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 improved financial results to good qualities acquired in markets we serve.
Near term we remain focus on implementing operational logistic improvements, new product development and new product introduction. We also continue to look for 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 [call]. At this point, I will open the conference call for questions.
Operator
(Operator Instructions) Our first question comes from the line of Tim Ramey with DA Davidson.
Tim Ramey - DA Davidson
Dino, you mentioned and correct me if I get this wrong, but I think you said industrial products up 29.1% and 9.1% sequentially. The 9.1% I think related to fracking, wasn't sure if the 29.1% was sequential or year-over-year sorry for the confusion?
Dino Rossi
Yeah, the 29.1% is year-over-year and 9% was sequential and a lot of that is fracking, but also some other industrial products that we sell in the European markets as well.
Tim Ramey - DA Davidson
So the 29.1% would also include fracking products, so that's.
Dino Rossi
Yeah.
Tim Ramey - DA Davidson
I'm sorry I was trying to parse that and I shouldn't have so and would fracking products have been the main driver I assume of that improvement?
Dino Rossi
Certainly the main, I think that's a fair conclusion, but we did see a little bit 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 us, the poultry space as well and also on the specialty animal side you know. So that’s actually there was a very good growth there.
I think on the specialty side it was a little bit less than straight percentages because of the AminoShure issue, but sort of that I think all of them contributed pretty nicely to that.
Tim Ramey - DA Davidson
Okay. And then I think on the last call you mentioned that Covington was running at 24-5 or something like that, and you mentioned the commercial shipments began in January.
Can you give us an update on that because I mean it sounds like that could be your real meeting for contributor to sales this year, particularly as you get the AminoShure-L product back relaunched?
Dino Rossi
Yeah, I absolutely agree. And so we continue to run probably 24-5 to 24-6, but you know we are running different products through that and they run at different range.
So you know that changes what the total output is, but net-net you know some of the transition of those products has been a very, very nice contributor early on. We did in fact transition some production that we had from our New York operation over there.
So I will look at that activity early on certainly with transitions but honestly that freed up capacity in the New York operations for the food business. So you are right, I think our view if we get the AminoShure product back out there, certainly it would be significant step change going forward.
Operator
Our next question comes from the line of Andrew O'Conor with BMO Asset Management.
Andrew O'Conor - BMO Asset Management
I wanted to know if you could better characterize the pricing environment for choline products and for feed grade choline, in particular you know how was pricing changed from the beginning of the quarter to today and then how would you characterize the outlook for the pricing environment over the next quarter or two? Thanks.
Dino Rossi
Well, I think the pricing situation on the poultry side still remains very competitive you know there. We tend to run this on a model that I talked about before to give us some protection on the raw materials.
With that said, we did have a modest increase in price passing on raw material cost increase in Q1. The key raw materials and I alluded too I know kind of different points in the conversation here, couple of the raw materials had gone up or couple of raw materials had gone down, but net, it’s still yet up, I think they are a little bit just disappointment of as it relates to that end product.
So we would look to past that on in to the market. So I don’t see that there is going to be 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 is there as it relates to the poultry market itself. So our view and it’s 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 models is to see, we think stabilize, would like to think stabilize down, but again there is a couple moving up, couple moving down.
Again not huge, but in any quarter, it's likely to see a little bit of fluctuation there. So and I think going out through the balance of the year, again if you follow the forecast that are out there in the chemical industry, it would certainly suggest the modest decline through the balance of the year.
So we will wait and see, these guys aren’t always still very predictable in terms of their forecast.
Andrew O'Conor - BMO Asset Management
Thanks for the color. And then secondly, what's your outlook for CapEx spend in 2013?
Dino Rossi
Yeah, first quarter we spent a little bit over 3, the forecast right now is about 10.3 million
Andrew O'Conor - BMO Asset Management
10.5 million.
Dino Rossi
Yeah and so which is up a little bit over a normal trend, but again with more plants just some projects there and actually part of that too is some nice return on investment projects that we sketched out and hope to have well on our way this year.
Andrew O'Conor - BMO Asset Management
So the 10.3, how much is growth CapEx and how much is maintenance?
Dino Rossi
Yeah, I would say it's almost 50-50.
Andrew O'Conor - BMO Asset Management
Got you. Okay, thanks again.
Operator
(Operator Instructions) Our next question comes from the line of Greg Garner with Singular Research.
Greg Garner – Singular Research
Hi, nice quarter too. So first I want to ask you about the 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 normal -- larger than normal increase in the choline sales for?
Dino Rossi
Great question, the answer is really no. I think a little bit of surprise.
I think when we talk about this in the last quarterly call mentioned that this had happened and we will wait and see what the outcome was. I think at that time I speculated may be that there was additional capacity within China that may absorb that shortfall.
And I think our read to that is that’s been the case, although a little choline is fair too is that they had serious flu operation in China that probably has decreased internal demand of choline. So it's a little bit of difficult read here in Q1.
I would say early on we were getting some calls from some concerned customers and/or some people that provide some Chinese materials, but it is not -- we can't point to that as being reason that we saw good results here in North America.
Greg Garner – Singular Research
So was that the (inaudible) fleet situation, I mean that generally in the past has resulted in what for lack of -- perhaps the best terms of killing of the fleet and so then consequently the demand for choline comes back just to fill that chicken fleet backup, is that the normal?
Dino Rossi
Yeah, you are absolutely right, I mean we’re going to populate those 10 houses and grow, and it’s a kind of the birds out there right now that’s likely not going to happen for the [sales margin] in China probably until May is what they were saying. So we will see if that really happens, but again -- so our decision today and tell you that we haven't seen unexpected increase here as we go into Q2.
We have seen steady volume but not like people are planning for there would be a shortage in there because they are redirecting choline of Chinese production or sourcing back to and within China not seen that right now.
Greg Garner – Singular Research
So safe to assume then that, what is really driving the [ANH] choline sales is the increased broiler activity or increase?
Dino Rossi
Yeah, I think egg sales but also they have grown up more aggressively as well. So we have an extended period there of growth gone off within those birds that again it’s a period more choline would be test as well.
Greg Garner – Singular Research
And how that works in the industry, this is sort of a step up, wouldn't it be for the volume demand?
Dino Rossi
Yeah, there's a modest increase that’s going on here. Again that can change month-to-month or quarter-to-quarter for sure.
Yeah.
Greg Garner – Singular Research
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 am wondering if that was still the strategy and that that would be helping to drive market share. Is that the dynamics that's working here or (inaudible) the milk industry having some favorable parameters.
Dino Rossi
I would say not, I think if you went to the industry they will tell the outcomes of not dropping prices, I'm not saying that probably I think you know if anything it will probably raise 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; I mean we had very, very nice volume growth in these markets. So that did lead to some efficiency for sure manufacturing costs, but it wasn’t because we were out there raising prices.
Greg Garner – Singular Research
And for the FPN the raw material price is there, 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?
Dino Rossi
Yeah, I think that's a fair appraisal, in particular there's one key raw material we alluded to last quarter as well that's natural [sulfuric] acid that’s consumed when we manufacture choline by (inaudible) that is one that has seen the raw material costs increase as due to tightness in supply and we don’t see any real release there. There's some discussion about transitioning away from natural (inaudible) to 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 cost increase to those customers as well.
Greg Garner – Singular Research
So you are saying, I guess I'm not totally getting it, the synthetic would be a lower cost.
Dino Rossi
That's correct.
Greg Garner – Singular Research
Okay, okay. That’s alright, okay.
I just wanted to verify that. And one last question and I'll go into the queue I think 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.
Dino Rossi
Yeah, I think as far as what we are going to do is it continues to be strategically in support of acquisitions as joint ventures and partnerships. You know we are in the background probably working on four or five different things, some small couple of midsized I would say.
So our expectation is that we look at a transaction or two done here this year that I hope I'm not being too optimistic but certainly that's the view and the expectation internally.
Operator
Our next question comes from the line of Lawrence Goldstein with Santa Monica Partners.
Lawrence Goldstein - Santa Monica Partners
I think you just answered my question, but I might make an observation and if you don't want to comment, I won't be concerned. But it appears your tangible net worth is $165 million or something like that and the cash is 60% odd of that or more, may be its’ more than 60, and earning nothing and couple of conference calls back I think you mentioned your whole planned goal, your objectives was to learn 15% to 19% on whatever you put in to some day.
My god; that would add 20 odd, almost 30 million bucks.
Dino Rossi
Your memory is correctly Larry. That’s what we said and certainly that’s the expectation as we look to do transactions, and so I can only assure you that we continue to work on those and like I said we do have some very real targets, processing always take longer than you want to expect, but we're still in the hunt.
Lawrence Goldstein - Santa Monica Partners
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. On the last call, I recall you said a few words like, well maybe, we're trying maybe we want to adjust our, what would pace some things, don’t adjust?
Operator
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.
Dino Rossi
I appreciate all the questions that everybody (inaudible) out here today. We're pretty pleased with this first quarter.
I think it's been a great start for the year and certainly our expectations is continuations throughout the year. So appreciate all the support and look forward to the next quarter call.
Operator
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.