Nov 5, 2013
Executives
Frank Fitzpatrick – CFO, Treasurer and Assistant Secretary Dino Rossi – Chairman, President and CEO
Analysts
Tim Ramey – DA Davidson Mike Rosenthal – Piper Jaffray Anthony Pollock – Aegis Capital
Operator
Greetings, and welcome to the Balchem Corporation’s Third Quarter 2013 Earnings Conference Call. At this time, all the participants are in a listen-only mode.
A 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, good morning. Thank you for joining our conference call this morning to discuss the results of Balchem Corporation for the period ending September 30, 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 belief 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 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 quarterly net earnings of 11.7 million on record consolidated net sales of 87.6 million achieving new record for the quarter ended September 30, 2013. These third quarter sales of $87.6 million were approximately 16.6% greater than the $75 million result of the prior year comparable quarter.
In the quarter, ARC Specialty Products segment generated record third quarter sales of 12.4 million, a modest 1% improvement over the prior year quarter. This result was principally due to higher volume sold of propylene oxide used in industrial application and nutmeat fumigation.
Animal Nutrition & Health sales of 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 monograstric 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 & Nutrition sales at 12.3 million were up 13.4% led by strength in sales of human choline products for nutritional enhancements and sales of the encapsulated products sold into the North American food markets. Earnings from operation to 16.9 million, improved 4.5% over the prior year quarter, and equaled 19.4% of sales.
While the result declined as a percentage of the sales in the quarter it does correlate with the higher growth rate and a 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 $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 cost impaired for a key raw material used to manufacture choline derivative due to a feedstock interruption. We did however realized approved efficiency a result of strong sales volume in the quarter.
Raw material increases also had an unfavorable impact on our Food, Pharma & Nutrition and choline product 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 cognate under the impact of price increases to customers in the industry 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 program which our investments in future growth of the company, we continue to leverage 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 America and European markets.
Consolidated earnings from operations remain 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 three months ended September 30, 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 credit and deduction. Our annualized effective income tax rate for all 2013 is going to be estimated to approximately 31.5%.
Net income of 11.7 million equated to $0.38 per diluted common share which is 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 non-cash 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 closed out the quarter with 190 million of cash. We spent 6.6 million of capital for the nine months ended September 30th which included expenses related to the new manufacturing faculty in Virginia.
Capital expenditures for all 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 generate quality organic results from our core businesses.
And in effort to detail our consolidated results better for the shareholders I am now going to hand Frank Fitzpatrick to descript our Specialty Products and the Food, Pharma, Nutrition segment.
Frank Fitzpatrick
Thanks, Dino. The ARC Specialty Products segment posted quarterly sales of approximately 12.4 million or approximate 1% increase over the prior year comparable quarter.
This increase was principally a result of strong sales volume of propylene oxide for synthesis and nutmeat fumigation partially offset by softness in ethylene oxide consuming into markets. In particular we noted a drop in volume sold to the medical device sterilization customers that purchase single used 100% ethylene oxide canisters.
Our recent drop in the U.S. and U.S.
hospital admissions is the likely cause of this decline. Our trend at persisted companies and consumers repo with ships and healthcare policies and economics.
ARC’s quarterly 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 petro chemical commodities and seek to implement price adjustments within contractual guidelines. We also incurred additional expenses pursuing other end market applications where the product handled today by us may have new market opportunities.
For the quarter our Food, Pharma & 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 calling 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 restructured 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 with 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 roller coaster effect of pipeline sales, 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 III clinical trial has conducted a successful free 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 funds for the completion and filing requirements for the new drug application along with the development of other therapies in their pipeline. We continue to work closely with them and support at the NDA filing.
In the near term this sector remains a net expense to the business segment. I will now turn over the call to Dino for him to discuss the Animal and Nutrition and Health segment.
Dino Rossi
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 remained strong in the quarter and expectations of moderating feed prices and continued demand strength in U.S. 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 confirm this industry expert. 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 realized strong volume growth in both the North American and particularly the challenging European markets. A couple of factors contributed to this growth result.
Sales were positively impacted early in the third quarter as we were successfully able to produce and shift sufficient volumes to restore our customers depleted inventory to normal level effectively offsetting the disruption to choline production particularly in June due to the declaration of force majeure by a key supplier. In addition volume sold in these markets are strongly influenced by the various dynamics of our customer base predominantly the poultry production industry but also but also swine and aquaculture markets.
North American choline volume sold tracked closely with broiler chick placements and egg sets. The current USDA forecast for broiler meat production continues to forecast modest growth for the balance of 2013.
Especially due to the lower projected corn and soybean milk prices. With these lower forecasted grain prices and expectations for continued gain in the domestic economy broiler production is forecasted to continue expand into 2014.
In Europe despite the poor economic climate sales of feed grade choline remains strong in the quarter additionally improvements in production capability at our Italian plant let to greater volumes of product available we 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 so much challenging export market when factoring in raw material cost increases and foreign competitor activity.
In the coming quarters we may like to be more aggressive in seeking to win additional business depending upon the then current costs, export market additions and capacity available. Sales of the industrial grade products were very strong and sales were up 26.8% over the prior year quarter largely due to activities in the North American fracking market.
Now to sales of industrial products were also adversely impacted by the previously mentioned disruption to production and sales in June and we also experienced the 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 solutions 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 volumes sold.
While these earnings improved nicely we were still unfavorably impacted by increases in certain raw material 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 re-evaluation of 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 revenue of roller coaster effect quarter-to-quarter within the various products and market segments.
This quarter was no different, we remained committed to organic growth as we look to continually expand our product offerings and move into new geographies. We will continue to strengthen our global growth platform and are confident that more business can be generated based on the unique portfolio of products we offer to markets we serve.
Our business continues to create good balance, yielding profitable growth opportunities across the served value chain. We also remain focused on helping customers generate reinvestment level of 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 improvements, new product development and new product introductions.
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.
Operator
Thank you. Ladies and gentlemen at this time, we will now be conducting question-and-answer session.
(Operator Instructions) Our first question comes from the line of Tim Ramey from Davidson. Please proceed with your question.
Tim Ramey – DA Davidson
Good morning, thanks. Looks like 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 defused factors?
Dino Rossi
Yeah actually Tim it’s a good question. The surcharge itself was order magnitude about $700,000 in the quarter so not insignificant.
But that’s definitely plays through and that’s clearly has been remedy since that’s good to have behind us. But the other part too is and I think just close to most models the most significant growth we have gone on within our ANH segment and even within that the choline or choline derivative molecules have been very solidly grow.
They typically quick carry a lower gross margin percentage than the other segments. So as that continues I am going to say it grows at a higher rate whether it’s in dollars or well-known percentages.
I think that you’re going to see that margin number while total dollars will grow that as a percentage probably be adjusted a bit more which I think is pretty easy to understand given how the segments play out. But those are the certainly the two key factors that drove maybe to that slightly lower margin percentage.
Tim Ramey – DA Davidson
So little bit of negative mix expected. I know you talked about maybe segmenting out the industrial choline separately which might kind of isolate that mix shift, to be had more thoughts about that?
Dino Rossi
Yeah I mean we continue to steady and I would say we’re probably getting closer and closer to that decision not quite yet there but maybe as early as next year.
Tim Ramey – DA Davidson
Okay. And then just with regard to the new plant, I know you’ve been ramping up capacity utilization there and it would be helpful to get the AminoShure-L product running through there again but where are you at with that?
Dino Rossi
Yeah so I mean the plant’s running good with other products through there right now other than the one that we pulled off the market. So it’s running at a pretty good state clearly not a full blown 24x7 but probably five days a week for sure and we’ve made some shifts in product line and what not into that facility other animal health products.
But so it’s actually running rather well considering that the basis for that expansion into that was the new health product. So we’re pretty pleased and it just kind of shows that the other parts of that segment are actually growing pretty nicely maybe even better than we originally thought.
Tim Ramey – DA Davidson
Thank you.
Dino Rossi
Thank you.
Operator
Our next question comes from the line of Mike Rosenthal from Piper Jaffray. Please proceed with your question.
Mike Rosenthal – Piper Jaffray
Yeah, good morning 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 are thinking about pricing going forward given competition and those types 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 and 3Q?
Dino Rossi
4Q is in 4Q right now. 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 as to pass on those raw material costs increases quarterly, sometimes we lag that the quarters would indicate but we’re kind of stick into although in certain (inaudible) 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 rushed in terms of the volume coming in but clearly people are sitting up and paying attention to this market and 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 just pays attention sooner or later as well.
So our sense is that the 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 responses to the general market.
I’m going to see need to both economically as well as from a volume standpoint so paying very close attention to it.
Mike Rosenthal – Piper Jaffray
Okay. And then on the raw material prices in 4Q have they persisted more or less the same?
Dino Rossi
I think kind of flat if you will, look right now based on kind of the early read forecast wide here in the quarter we think it’s going to be pretty close to flat with Q3.
Mike Rosenthal – Piper Jaffray
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 lot better than fields, there are potential changes to IFRS for 2014 so forth.
So there is a number of things that are bringing corn prices down, is it fair to assume that your customers in ANH are more sensitive to corn price volatility than to soya price volatility until the change there rate of adoption in your view?
Dino Rossi
Of by product?
Mike Rosenthal – Piper Jaffray
Yeah.
Dino Rossi
Yeah, well, certainly, I mean they are very-very sensitive with what’s going on with corn, soy maybe almost the two different regions of our product lines. Soy can be a substitute for one of our products in particular so prices fall.
I’m going to say far enough there may be an elections to move which these guys are proven that they can rather in their rationale make up the modeling and with corn prices down certainly what I would tell is that almost we’ve created more space in that ration cost so perhaps used more products like corn it tends to be viewed as more expensive in the market especially on the ruminant side. And but we’re, we could argue there is a value proposition there and they can even get better results.
And sometimes when they are squeezed they are squeezed and there is no room in that ration at lower corn prices certainly helped to keep that door open for these guys to make a transition to our product.
Mike Rosenthal – Piper Jaffray
Okay that’s helpful. Thank you.
Dino Rossi
Thank you.
Operator
(Operator Instructions) Gentlemen there are no further questions in the queue. Would you like to make some closing remarks?
Dino Rossi
We did just get a couple of more people.
Operator
Our next question comes from the line of Tony Pollock from Aegis. Please proceed with your question.
Dino Rossi
Hi, Tony.
Anthony Pollock – Aegis Capital
Good morning. In terms of the cure mark the announcement that was made over the last couple of days, could you give us a little more explanation what that means?
Dino Rossi
While the recent announcement that they are proceeding with our filing is that’s what you’re talking about?
Anthony Pollock – Aegis Capital
Yes.
Dino Rossi
NDA, yeah I mean this is what has been talked about probably at least for a couple of months maybe a little bit longer was the idea of initiating the filing as we have to know today 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 have 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 clearly has been initiated which had been talked about I think people will wonder when we are going to start this clearly now has..
Anthony Pollock – Aegis Capital
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?
Dino Rossi
No I wouldn’t 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 cost. And I think in the quarter itself it probably crossed to 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 neighborhood maybe wouldn’t be so outrageous. But it’s a number that’s been there pretty regularly in the quarter somewhere more than that.
Anthony Pollock – Aegis Capital
Okay. Thank you.
Operator
Our next question is a follow up question from the line of Mike Rosenthal. Please proceed with your question.
Mike Rosenthal – Piper Jaffray
Yeah thanks. I just wanted to ask a quick question on AminoShure it doesn’t sound like the tone that has changed versus the previous call but I was wondering if you would 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?
Dino Rossi
Yeah 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 as a field to start animal testing yet.
Mike Rosenthal – Piper Jaffray
Okay thank you.
Dino Rossi
Thank you.
Operator
There are no further questions in the queue. I’d like to turn the call back over to management for any closing comments.
Dino Rossi
Okay thanks ladies and gentlemen, appreciate everybody participating on the call today. Again I think although we’ve stated that pretty happy with the way the quarter turned out, certainly challenges with raw material pricing and what not but net-net I think pretty good results on the quarter.
So we’ll continue to move forward here. Thanks, bye.
Operator
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.