BCPC
#Thanks, Bill.
Good morning, ladies and gentlemen, and welcome to our conference call.
Before I begin discussing the third quarter results, I would like to officially welcome our new CFO, Terry Coelho, to the team.
Terry has been with us for a little over two weeks, and we are extremely pleased to have her on the Balchem team.
I am looking forward to having you meet her over the coming weeks and months.
This morning, we reported third quarter consolidated net sales of $150.7 million, which resulted in record third quarter net income of $16.0 million, or $0.50 per share on a GAAP basis.
This result includes significant non-cash amortization expenses of $6.7 million for acquisition-related intangible assets which were recorded in the third quarter GAAP financial statements.
The amortization expense is a direct result of acquisition, valuation, and business combination accounting rules.
This quarter also includes an $813,000 favorable tax benefit compared to the prior year due to the adoption of updated share-based payment accounting.
In addition, the current quarter includes $228,000 of transaction and integration costs.
Consequently, our third quarter non-GAAP net earnings of $20.4 million, or $0.63 per share, reported in our press release earlier this morning, exclude these items to facilitate comparative evaluation of this current period operating performance versus the prior year period.
These non-GAAP net earnings were 4.6%, or $896,000, above the comparable prior year quarter of $19.5 million, or $0.61 per share.
We delivered third quarter free cash flow of $26.9 million, and also paid down $40.3 million of debt, including $31.5 million against the revolver.
We have now fully paid down the outstanding balance on our revolving line of credit from the $85 million we borrowed to fund the acquisition of IFP and partially fund the acquisition of Albion.
Our third quarter sales of $150.7 million were 9% higher than the $138.5 million result of the prior year comparable quarter.
Sales growth in 3 of our 4 reporting segments, Human Nutrition & Health, Specialty Products, and Industrial Products, contributed to the increase, with H&H achieving an all-time record quarter and Specialty Products achieving a record third quarter.
The primary sales drivers were: increased sales into the shale fracking market within Industrial Products; the added sales from the IFP acquisition; strong growth in human choline nutrient sales volume; increases in powder systems and human chelated mineral sales within Human Nutrition & Health; as well as both strong plants nutrition and higher repackaged gas sales within Specialty Products.
These increases were partially offset by a decline in sales within the Animal Nutrition & Health segment and in flavor systems sales within Human Nutrition & Health.
Our Q3 consolidated gross margin dollars of $46.2 million were up $1.5 million, or 3.4%, compared with the same period in the prior year.
On an adjusted basis, adjusted this year primarily for the previously mentioned amortization expense as a direct result of acquisition valuation and business combination accounting rules, of $722,000, gross margin dollars were $46.9 million, up $1.3 million, or 2.8%, compared with the prior year quarter.
The increase was primarily driven by the higher sales, partially offset by unfavorable segment, product, and customer mix, higher raw material costs within the current quarter across all of our segments, and certain plant inefficiencies.
Our consolidated gross margin was 30.6% of sales in the quarter, down 160 basis points from 32.2% in Q3 of 2016.
Adjusted gross margin was 31.1% of sales, down 180 basis points from 32.9% in the prior year comparative period.
The decline was primarily due to the aforementioned mix, higher raw material costs, and certain plant inefficiencies.
Gross margin percentage for the Human Nutrition & Health segment decreased by 100 basis points, primarily due to mix, lower powder and flavor systems volumes which drove certain plant inefficiencies, and higher raw material costs.
This was partially offset by stronger gross margins across our human nutrients product lines, including choline nutrients, chelated minerals and other nutritional products, primarily driven by higher volumes.
Gross margin percentage decreased for the Animal Nutrition & Health segment by 280 basis points, primarily due to unfavorable product mix, certain decreased volumes, and cost increases of certain key raw materials.
On a sequential basis, Animal Nutrition & Health gross margins improved 290 basis points on higher ruminant volumes and increased monogastric average selling prices.
Gross margin percentage for the Specialty Products segment was flat, primarily due to the exclusion of prior-year acquisition accounting related to the fair value of acquired inventory for plant nutrition, partially offset by an unfavorable product and customer mix and certain higher raw material costs.
Industrial Products gross margin increased by 360 basis points due to higher volumes, partially offset by higher raw material costs.
Consolidated operating expenses for the 3 months ended September 30, 2017 were $23.1 million as compared to $21.7 million for the 3 months ended September 30, 2016.
The increase was primarily due to the inclusion of IFP operating expenses, additional R&D spend, and increased transaction and integration costs, partially offset by a reduction in the amount of non-cash operating expense associated with amortization of intangible assets.
Excluding transaction and integration costs of $228,000, and non-cash operating expense associated with amortization of intangible assets of $5.9 million, operating expenses were $17.2 million, or 11.4% of sales.
Looking forward, we will continue to focus on tightly controlling our operating expenses and leveraging our existing SG&A infrastructure.
U.S. GAAP earnings from operations were $23.1 million, which increased $109,000, or 0.5%, compared with the prior year comparable quarter.
This increase was primarily due to earnings growth in our Specialty Products and Industrial Products segments.
On an adjusted basis, as detailed in our earnings release this morning, earnings from operations of $29.9 million decreased $970,000, or 3.1%, from the prior year comparable quarter, specifically due to lower earnings in our Animal Nutrition & Health segment for the reasons previously noted.
And this was only partially offset by gains in our Specialty Products and Industrial Products reporting segments.
Interest expense for the 3 months ended September 30, 2017 was $2.0 million, and our net debt on September 30 was $201 million.
The company's effective tax rates for the 3 months ended September 30, 2017 and 2016 were 22.5% and 32.5%, respectively.
The decrease in the effective tax rate is primarily attributable to the adoption of ASU 2016-09, which required excess tax benefits from stock-based compensation to be recognized as a decrease to the provision for income taxes; a purchase price reduction related to the SensoryEffects acquisition; as well as reduced liabilities and tax rates in certain jurisdictions.
The tax benefits associated with the adoption of ASU 2016-09 have been adjusted out of adjusted net earnings to aid in comparability of results to prior period.
As previously noted, consolidated net income closed the quarter at $16 million, up $2 million from the prior year quarter.
This quarterly net income translated into diluted net earnings per share of $0.50 for the current year, an increase of $0.06 per share over last year's comparable quarterly result of $0.44.
On an adjusted basis, and as detailed in our earnings release, our adjusted net earnings were $20.4 million, or $0.63 per diluted share, up 4.6% compared with $19.5 million or $0.61 per diluted share in the prior year quarter.
Our third quarter results generated $35.7 million of adjusted EBITDA, or 23.7% of sales in the quarter, compared with $36.6 million, or 26.4% of sales, in the prior year, a decrease of $886,000.
As previously noted, our cash flow remains strong as we generated third quarter free cash flow of $26.9 million and closed out the quarter with $34.7 million of cash.
This reflects principal payments on long-term debt of $40.3 million, including accelerated payments of $31.5 million, along with $6.9 million of capital expenditure funding in the quarter.
Before I hand the call back over to Bill to go through the segment's detailed results, I would like to update you on a few of our key strategic initiatives.
As previously noted, on June 1, we purchased IFP, a privately held manufacturer of agglomerated and microencapsulated food and nutritional ingredients located in Minnesota.
We are in the process of integrating this small, but highly synergistic acquisition, and have been pleased with the integration efforts to date.
We are already realizing synergies, and fully expect to achieve the results projected for this acquisition.
Relative to the Albion Clearfield fire recovery efforts, we are pleased to say the expansion project at our Ogden, Utah facility to replace the Clearfield facility is largely complete.
The buildout and mechanical capabilities are substantially in place.
We are in an equipment and product qualifying stage, and we should start commercial production late in the year.
In the meantime, we continue to utilize interim manufacturing capabilities, including leveraging the acquired IFP assets and know-how, to make some of our products at one of our newly acquired IFP manufacturing sites in Minnesota.
We continue to work hard to progress awareness around choline, the Reference Dietary Intake issued by the Food and Drug Administration, and the European Food Safety Authority's first ever intake recommendations for this essential nutrient.
A recent survey conducted by the Council for Responsible Nutrition of adults in the U.S. age 18 and older on choline consumer awareness showed a 26% increase in awareness and an 8% increase in choline usage.
This is certainly encouraging, and shows that our consumer awareness strategy, along with the benefits of the egg industry promoting choline, and the American Medical Association announcing their support and advocacy for the inclusion of choline in all prenatal vitamins to help maintain normal neural development of the fetus, are having an impact.
We will continue our VitaCholine market development activities through both consumer awareness and strategic expansion of our sales channels.
Within our Animal Nutrition & Health segment, we were also encouraged by new data from a recent field research study conducted at the University of Florida demonstrating full lactation benefits of ReaShure, Balchem's rumen-protected choline in dairy cows.
This adds to what already is an extensive library of field trials showing the benefits of ReaShure, but introduces new evidence of the broader benefits of this important nutrient beyond the transition cycle of a dairy cow.
This will certainly help in our efforts to expand the penetration of ReaShure into dairy herds across the globe, and to also explore the implications of dosing choline throughout the full lactation cycle.
This study has been accepted for publication in the Journal of Dairy Science, which should be published later this year or early next year.
The third Phase 3 clinical trial for the Curemark drug to be utilized in the treatment of autism continues to progress, and we are pleased to confirm that in September, full enrollment for the trial was achieved.
This is obviously an important milestone, and means that the 14-week double-blind, randomized, placebo-controlled Phase 3 study will be complete by year's end, making way for NDA submission in the first half of 2018.
In the meantime, Balchem remains focused on our manufacturing and supply chain preparedness for the ultimate launch of the product, while continuing to manufacture additional trial quantities of the encapsulated enzyme for patients in the ongoing Phase 3 clinical trial, as well as rollover participants from previous trials.
We are encouraged by the progress made over the past few months toward critical milestones within this key growth initiative.
I'm now going to have Bill <UNK> discuss the segments in more detail.
Thanks, Bill.
We delivered year-over-year revenue growth in 3 of our 4 segments, and operating earnings growth in 2 segments, with overall third quarter revenues of $150.7 million, adjusted net earnings of $20.4 million, and free cash flow of $26.9 million, despite significant challenges, particularly within the Animal Nutrition & Health segment.
On our last call, we noted that we had experienced some working capital degradation and needed to refocus on improving our balance sheet.
In Q3, we were able to drive some improvement, and our strong cash generation enabled accelerated debt payments of $31.5 million above and beyond the regularly scheduled payment of $8.8 million.
This reduced our net debt to $201 million as of September 30, or less than 1.4x 12-months trailing adjusted EBITDA, further strengthening our balance sheet.
With the third quarter accelerated debt payments, we have now fully paid down our outstanding revolver balance from the $85 million that were used to finance the acquisition of IFP in June and partially fund the Albion acquisition in 2016.
In addition to the challenges we are facing within the Animal Nutrition & Health segment, the global macroeconomic environment continues to present headwinds to our company.
As previously indicated, recovery of higher raw material costs through pricing actions continues to be an important focus of our business teams.
And we recently announced a price increase for both animal feed and industrial grades of choline chloride.
Additionally, we are pleased with the progress made on our key strategic growth initiatives and the integration of IFP.
And we will continue to strengthen our company by focusing on these initiatives, exercising disciplined cost management and seeking value-creating acquisition opportunities.
I would now like to hand the call back over to Bill who will open up the call for questions.
Bill.
Sure, <UNK>.
We were pleased with the overall revenue growth in H&H.
I think up about 9%.
And within that, we had several product lines that were up very nicely.
Choline sales were up close to 30%.
Minerals were up ---+ actually powder systems sales were up, but unfortunately, powder systems volumes were down.
And this is somewhat reflective of our strategy to evolve the business away from mature products to more specialty products, and that comes typically with higher prices, higher margins, but on lower volumes.
And so we are experiencing at 2 of our 18 plants across our network some lower utilization issues, as well as obviously resulting absorption issues.
And that was reflected in this quarter's margins, particularly in H&H.
I think the positive news is that we have 18 sites across the company.
We just purchased 2 relative to IFP.
We purchased 3 with the Albion acquisition.
And we clearly do have some overlap and some similar capabilities across multiple plants, so we believe we have a significant opportunity to look at our plant as a complete network and drive some optimization and efficiencies across the entire network, and as I said, feel like we have some good opportunities to offset these inefficiencies we experienced this quarter in coming quarters.
No.
I would say they're really manufacturing inefficiencies.
I'm using that word plant really to mean manufacturing site inefficiencies, yes.
Yes, they were.
They were, and we're very excited about that.
Looking at the full year, sales are up about 13% or so.
So it's going to be ---+ some of our products are a little bit lumpy as they grow.
Q3 happened to be a particularly good quarter for choline for human consumption.
But overall year to date, we're up about 13%.
And we think that ---+ Q4 last year was not the best quarter for choline, so we should realize even higher than the year-to-date 13% growth in choline.
So we're quite encouraged by the choline growth.
I think we've said in previous quarters last year that we should start to see some benefits from the RDI and our increasing awareness efforts in 2017, and expect to see even more in 2018.
Bill, do you want to give a\xe2\x80\u015a
So call it 20%, <UNK>.
<UNK>, I think the simple answer to that is, yes, if we were to find the right acquisition that strengthened our market position, strengthened the company significantly.
I think as we have indicated in the past, we have made several acquisitions, but our first focus really is driving organic growth.
We have a strong pipeline of acquisitions that really is made up of very small deals, but also transformative ones.
And if the right one comes alone, and we feel like we can acquire it for a reasonable price and get an appropriate return on it, we certainly believe we've got the management capabilities, as well as the financial strength to do a transformative deal.
But it obviously needs to be the right one.
We are not a company that's sitting here and saying we think we're too small and we have to do something like that.
But there are opportunities out there, and if one comes about, we will seize on it.
I'm not sure I would say that, <UNK>.
We think that we like the legs to our stool, if we can use that analogy.
We're not looking for a fifth leg to the stool.
And we think there are plenty of nice, small and/or transformative acquisitions within our core.
So that really is our focus area.
Sure.
And you're correct; that really is the only significant year-over-year acquisition impact.
We did make that very small acquisition earlier in the year, Chol-Mix, but it's almost immaterial.
So IFP really is the only year-over-year.
And as we said, the IFP annual revenues were about $20 million, so about $5 million a quarter, and we were slightly ahead of that in Q3.
<UNK>, on the choline nutrients within H&H, I would say that we are increasingly excited about what we're seeing in the marketplace.
Sales and volume was up 13% or so year to date, and so that's really positive to see.
And maybe it's increasing here as the year has progressed, as Q3 growth shows.
But to me what I think is more exciting, and I think why the team is increasingly optimistic, is just the level of awareness that seems to be improving out there.
The fact that we've now talked about a couple times the American Medical Association coming out with such strong advocacy for choline, that is really very positive.
The recent Council for Responsible Nutrition study that showed increased awareness, as well as increased usage.
And awareness there is still relatively low.
It was sub-25% of the surveyed folks were aware of choline, but it was up significantly from the prior year.
And then the data that we have around the number of new products that are coming out with choline I think is really encouraging.
And this is all without a, I would say, significant homerun from our perspective of inclusion of choline in a major brand multivitamin or prenatal vitamin or what have you.
And so this is a lot of singles and doubles and new product launches and various supplements and nutritional beverages and so forth that are coming out with choline included.
But we do see some of those homeruns happening over the course of the next few years.
And I think that we really from the beginning said that 2017, we should see some very nice growth.
In 2016, our volume and revenue for choline was about flat.
And I think that we'll see very nice double digit growth in 2017, and we should see higher growth in 2018, again, as awareness increases as we get a win or two that I might call a homerun.
So we're pleased with what we're seeing in the market, and I think our sales organization and marketing team are more excited today than they were a year ago.
So hopefully that gives you a little bit of color from what we're thinking about in that business.
The other thing we're doing, and part of the increased R&D spend there, is we are spending money on a few clinical studies around choline.
And one that I think is particularly important is around trying to identify a biomarker for choline.
One of the issues with choline, if you will, is that when you go have your annual physical, a doctor can't run a test to see whether or not you're deficient in choline.
And we have started a clinical study just around that specifically, and believe that we can identify a biomarker.
And that would be a really, really important tool to help advance the growth in choline.
So again, lots of evidence in the marketplace of increased awareness.
We're spending money on various trials to help support the effort.
We're starting to see some growth in our revenues.
So we're pretty encouraged about the future of choline.
Relative to Animal Nutrition & Health, Animal Nutrition & Health has been obviously disappointing for the last few quarters.
We had an excellent 2016 in our Animal Nutrition & Health business.
And at the end of the day, we were really pleased with the improvement in Q3 relative to Q2.
Sales were up almost 3%, and earnings were up I think 30-plus percent sequentially, but obviously still down year over year.
Milk prices are starting to improve.
Milk protein prices improved in the last month pretty significantly as Bill talked about, and that all should help provide some tailwind to our growth.
And really we've had kind of two primary issues in the business.
One has been our ruminant volumes have been down, which primarily has been related to the poor dairy economics, but also that one customer that was destocking.
That's behind us.
That customer destocking is behind us.
But the dairy economics are still playing a role, but we're seeing some signs of improvement, and the improvement in ruminant volumes sequentially is a nice piece of evidence relative to that.
And then the ongoing improvement in milk protein prices I think is positive.
And then the second part has been on the monogastric side where we've seen increased competition.
And while that business has continued to grow pretty nicely, we've seen significant margin erosion.
That improved somewhat in Q3 as well, with margins in monogastric picking up nicely over Q2.
Still down over prior year, but up over Q2.
And we announced a price increase in September, which really is the first price increase in that business for quite some time, and we're in the midst of raising prices in that business.
We're also encouraged about our efforts there to offset some of those higher costs.
We believe we're well-positioned in the animal nutrition health business.
It's a core part of our company.
We're optimistic about the long term.
We've had a difficult couple of quarters, but we're starting to see some signs of recovery both on the ruminant side, as well as the mono side.
Thank you.
I just really want to end by thanking everybody for joining our call today and your continued interest in our company.
We look forward to our next call, which will be in February, to update you on the progress of our strategic initiatives, as well as to report out on our Q4 and full-year results.
Thank you again for joining.
