Balchem Corporation (NASDAQ:BCPC) Q4 2022 Earnings Call Transcript

Balchem Corporation (NASDAQ:BCPC) Q4 2022 Earnings Call Transcript February 24, 2023

Operator: Greetings and welcome to Balchem’s Fourth Quarter Year-End 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the call over to Martin Bengtsson, Chief Financial Officer. Thank you. you may begin.

Martin Bengtsson: Thank you, and good morning everyone. Thank you for joining our conference call this morning to discuss the results of Balchem Corporation for the quarter ending December 31, 2022. My name’s 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 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 their 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. Before we get into the quarter, I would like to reflect for a few minutes on some of the significant accomplishments the Balchem achieved over the last year. Overall, 2022 was another strong year for Balchem. Financially, we achieved record sales of $942 million, growing almost 18% year-over-year with record sales in all three of our business segments. We also delivered record adjusted net earnings of $131 million, an increase of 12%, and record adjusted EBITDA of $216 million, an increase of 14% from the prior year. In addition, we generated free cash flow of $89 million while at the same time investing $49 million in capital projects to support our continued growth.

Strategically, we had a very good year as well. In 2022, we strengthened our company with the acquisitions of Kappa Bioscience and Bergstrom Nutrition. The addition of vitamin K2 and methylsulfonylmethane or MSM to our product portfolio will undoubtedly enhance our ability to provide innovative solutions for the health and nutritional needs of the world going forward. We continue to innovate, bring new products to market and expand and strengthen the supporting science behind many of our products. We are pleased that our new product development metric that measures the percent of sales coming from products commercialized over the last five years, and which really measures the vitality of our product portfolio once again was close to 28%, showing that we are indeed bringing new innovation to the market.

A number of exciting new studies supporting the supplementation of choline minerals including MSM and vitamin K2 were published or completed in 2022 that augment existing science and bring new science to light, that ultimately will support and strengthen our efforts to drive increased market penetration of these important nutrients. For example, while we have long known that higher levels of maternal choline intake are critical for infant cognition, a study published early in 2022 by Cornell University that suggested higher maternal choline intake has an enduring effect on cognitive performance through early childhood was truly groundbreaking. Additionally, Cornell also published a separate study in 2022 that showed the importance of having adequate levels of choline for DHA absorption or status.

And while not published yet, the study at the University of North Carolina to identify a choline biomarker was completed. So hopefully, we see the results of this study being published here in 2023. This will be an important step in helping to identify choline deficiency and the need for supplementation in individuals. Several important studies were published or initiated in 2022, enhancing the science around vitamin K2 and MSM as well. In December, the Journal of Dietary Supplements published a study conducted at the University of Arkansas for Medical Sciences that provides compelling evidence that Opti MSM, our branded MSM serves as a metal donor which means MSM would then join the club of metal donors, choline, folate and vitamin B12. So Opti MSM is both a sulfur and a methyl donor, which makes it even more nutritionally efficient and was evident before this study.

There were also several studies published or initiated related to vitamin K2 that go beyond the already established therapeutic area of bone health. These studies focused on vitamin K2’s role in cardiovascular health, immune health, and muscle recovery among others. We believe the science around vitamin K2 will continue to grow and help to drive significant market expansion over the coming years, as more and more studies are completed. Similarly, on the Animal Nutrition & Health side of our business, we continue to invest in outside research to advance the science around our portfolio of nutrients for companion, production and dairy animals. One study of note was published in May showing the effects of dietary, human protected, choline supplementation when colostrum yields quality and choline metabolites from dairy cattle.

This was research done with ReaShure power flagship branded women protected choline at Michigan State University. The research demonstrated an 80% increase in colostrum yield in ReaShure supplementing cows without any decrease in colostrum quality. It also demonstrated a large increase in choline metabolites in the colostrum that would then be transferred to the newborn calf as it consumes her colostrum. Another ReaShure study conducted at the University of Florida and published in December in the Journal of Dairy Science show the effects of maternal choline supplementation on performance and immunity of Progyny from birth to weaning. The research demonstrated that calves born to ReaShure supplemented cows had improved health status and survival and increased growth through two years of age.

Within our companion animal business, there were several studies published from Auburn University related to our innovative use of microencapsulation for our structure forming line of products. The research demonstrated a cost-effective method for manufacturing nutritious pet products for greater sustainability by upcycling protein co-products with the use of our microencapsulated calcium lactate with sodium alginate. These published studies combined with the Pitcher Assigilance Research from Kansas State University that was published in 2021, which demonstrated the value-added benefits of microencapsulated acids to control pathogenic salmonella and fresh meat pet foods form the foundation of our very successful customer attended Pitcher Imaginarium that took place in November at Auburn University with the Starkey Research Laboratory.

Overall, we are very excited about the opportunities that exist with our portfolio of products, and we believe that, as the library of science keeps growing, the market opportunities for our unique portfolio of products and technologies will grow as well. Additionally, we made important and significant new investments in plant and equipment in 2022, resulting in capacity additions for our Human Nutrition, Animal Nutrition and plant nutrition businesses. A particular note for the addition of European manufacturing capabilities for our human encapsulation product line as well as our plant nutrition products, which should enable accelerated growth in the region. All of these new investments will help support our continued organic growth as we further penetrate the markets with our product offerings.

We also made significant progress in 2022 relating to the company’s efforts to advance our environmental, social and governance or ESG initiatives. Balchem released its fourth Sustainability Report in 2022, in which we provided an update on our progress toward our 2030 goals to reduce both greenhouse gas emissions and water usage by 25%. And I am happy to report that, we are well on our way to delivering on our goals. The report details many of the ways we are advancing our environmental, social and governance initiatives across the organization, in alignment with widely accepted ESG reporting frameworks. Balchem’s sustainability efforts are fully integrated into our business strategy, which remains unchanged, as we continue to focus on our two main objectives, providing innovative solutions for the health and nutritional needs of the world and operating with excellence, as strong stewards of our stakeholders.

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As a result of our efforts, Balchem was once again recently named one of America’s most responsible companies by Newsweek Magazine for the third consecutive year. And lastly, in December, we announced another increase to our annual dividend, taking the dividend from $0.64 to $0.71 per share, an 11% increase year-over-year. This most recent increase marked the 14th consecutive year of double-digit growth of our dividend, which once again reinforced our commitment to our longstanding dividend strategy. All-in-all, another strong year both financially and strategically for Balchem. 2022 was once again a year of unprecedented external market challenges, where the pandemic impact we experienced in 2020 and 2021 was followed by the war in Ukraine, significant supply chain disruptions and rapidly accelerating inflation.

The Balchem team was able to step-up and deliver strong results both financially and strategically, under these challenging conditions, once again proving the strength of our team and the resilience of our business models. I would like to take this opportunity to thank all of our employees and broad group of stakeholders, who supported us and contributed to our success throughout the year. Thank you all. Now regarding the fourth quarter of 2022. This morning we reported solid fourth quarter results. Our revenue of $233 million was up 9% and our adjusted earnings from operations were $43 million up 13% versus the prior year quarter. Our net income of $21 million a decrease of 14% resulted in earnings per share of $0.66 on a GAAP basis. On an adjusted basis, our fourth quarter non-GAAP net earnings were $30 million, an increase of 9%, resulting in earnings per share of $0.94 on a non-GAAP basis.

And we continued to deliver solid cash flows. Cash flows from operations were $42 million for the fourth quarter and quarterly free cash flow of $28 million. I’m now going to turn the call back over to Martin to go through the fourth quarter consolidated financial results for the company and the results for each of our business segments.

Martin Bengtsson: Thank you, Ted. As Ted mentioned, overall, the fourth quarter was another solid quarter for Balchem. Our fourth quarter net sales of $233 million were 9.1% higher than the prior year, and we delivered sales growth in our Human Nutrition health and specialty product segments, while sales in the Animal Nutrition and health segment were essentially flat. Foreign currency exchange driven primarily by the weaker Euro, had a negative impact to our sales growth of 1.7%. Our fourth quarter gross margin dollars of $69 million were up $5 million or 7.1% compared to the prior year. A gross margin percent was 29.5% of sales in the quarter, down 54 basis point compared to 30.1% in the fourth quarter of 2021. We continue to experience input cost inflation in the fourth quarter compared to prior year.

As we’ve discussed on previous calls, we’re pleased with our efforts to recover these cost increases through pricing actions, but the grossing up of revenues and costs have a dilutive impact on the gross margin percentage, despite the fact that we continue to grow our gross margin dollars. Consolidated operating expenses for the fourth quarter were $35 million as compared to $30 million in the prior year. The increase was primarily due to incremental expenses and amortization from the Kappa and Bergstrom acquisitions. GAAP Earnings from operations for the fourth quarter were $33 million, a decrease of 1.5% compared to the prior year quarter. On an adjusted basis, as detailed in our earnings released this morning, non-GAAP earnings from operations of $43 million were up $5 million or 13.2% compared to the prior year quarter.

Adjusted EBITDA of $52 million was $7 million or 14.6% above the fourth quarter of 2021. Interest expense was $5 million, and our net debt was $374 million with an overall leverage ratio on a net debt basis of 1.7. The effective tax rates for the fourth quarters of 2022 and 2021 were 17% and 24.7% respectively. The decrease in the effective tax rate from the prior year was primarily due to favorable provisions to return adjustments, favorable FIN 48 reserve adjustments, and higher tax benefits from stock-based compensation. Consolidated net income close to quarter at $21 million, down 14.2% from the prior year, driven primarily by the higher interest expense and negative impact from amortization related to the recent acquisitions. This quarterly net income translated into diluted net earnings per share of $0.66, a decrease of $0.10 or 13.3% from last year’s comparable quarter.

On an adjusted basis, our fourth quarter adjusted net earnings were $30 million, translating to $0.94 per diluted share, an increase of 10.1% compared with the prior year quarter. Cash flows from operations for the fourth quarter were $42 million, and we closed out the quarter with $67 million of cash on the balance sheet. As we look at it from a segment perspective, for the fourth quarter, our Human nutrition and health segment generated sales of $130 million, an increase of 12.9% from the prior year. The increase was driven both by the contribution from recent acquisitions, as well as sales growth within food-and-beverage markets and higher sales within the minerals and nutrients business. Our human attrition and health segment delivered quarterly earnings from operations of $18 million, an increase of 0.1% compared to prior year.

Higher sales and higher average selling prices were offset by the timing of an insurance reimbursement related to a flash flood event in the prior year. Higher manufacturing input costs and higher amortization and operating expenses related to the recent acquisitions. Fourth quarter adjusted earnings from operations for this segment were $24 million, an increase of 11%. As mentioned in our last earnings call, we are experiencing increased demand volatility across our Human nutrition and health segment. In particular, we’re experiencing market demand softness in the dietary supplements market, which we see as a relatively short-term impact on a market that has historically grown at mid-single digits. This market softness is being driven both by a normalization of demand, following the very strong demand experience during the pandemic given the immunity-boosting nature of many supplements, and a clear destocking of inventory across the value chain, as supply chain disruptions have dissipated post the pandemic, and customers adjust their inventories down to more normal levels.

Recent U.S. retail sales data provided by Nielsen for dietary supplements show negative double-digit growth year-over-year. Although, sales levels remain above the pre-pandemic period. We will likely face this transitionary short-term demand softness through Q1 and into Q2, as the situation normalizes over the course of the year, and the supplements market returns to growth in line with its historical growth trajectory. Our Animal Nutrition and health segment generated quarterly sales of $65 million, a decrease of 0.3% compared to the prior year. The decrease in sales was the result of lower sales into the monogastric market, and an unfavorable impact related to changes in foreign currency exchange rates, partially offset by higher sales into the ruminant market.

Pricing actions and the contribution from the acquisition of Bergstrom, which included a small Animal Nutrition business. On a constant currency basis, the Animal Nutrition and health segment grew 3.1%. Animal Nutrition and health delivered earnings from operations of $9 million, a decrease of 10% from the prior year quarter, primarily due to the timing of an insurance reimbursement related to a flash flood event in the prior year. Increases in manufacturing input costs and higher operating expenses related to the recent acquisitions, partially offset by the aforementioned higher sales into the ruminant market, pricing actions and the contribution from the acquisition of Bergstrom. Fourth quarter adjusted earnings from operations for this segment were $10 million, an increase of 16.5%.

Similar to what we’re experiencing in Human Nutrition and health, our Animal Nutrition and health segment is also experiencing increased demand volatility, particularly in Europe. The European food animal feed market has been hit hard by a combination of factors including the spread of animal diseases, higher utility costs, increasing cost linked to environmental and animal welfare policy measures, and the economic impact of the war in Ukraine. This has resulted in lower feed demand in our key markets, poultry, swine, and dairy across much of Europe. Lower utility costs and ultimately the containment of animal diseases within Europe should allow for improved market conditions and a normalizing of demand as 2023 progresses. Our specialty product segment delivered quarterly sales of $32 million, an increase of 16.2% compared to the prior year quarter.

Due to higher sales of products in the performance gases business and higher Plant Nutrition sales partially offset by an unfavorable impact related to changes in foreign currency exchange rates. Specialty products delivered earnings from operations of $8 million, an increase of 20.4% versus the prior year quarter. The increase was primarily due to the aforementioned higher sales. Fourth quarter adjusted earnings from operations for this segment were $9 million, an increase of 19.6%. Within specialty products, we continue to see recovery in our performance gases business in both the U.S. and in Europe, following the negative impact we experienced during the COVID-19 pandemic. We’re still slightly below pre-pandemic volumes, but the business has further stabilized and we are well positioned to drive growth in 2023.

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 Balchem’s financial results reported earlier this morning for the fourth quarter of 2022, capping off another great year for Balchem, a year in which we delivered strong growth in both sales and earnings while managing through a challenging environment. We also continue to progress our strategic growth initiatives and remain encouraged about the long-term growth opportunities ahead of us, despite shorter-term challenges. Our results show that we continue to evolve and strengthen our company and position ourselves in attractive markets where we have capabilities to be successful not only today, but also into the future. I would like to once again take this opportunity to thank all of the Balchem employees across the world who helped to make it happen every day. Thank you so much. I will now hand the call back over to Martin, who will open up the call for questions. Martin?

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Q&A Session

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.

Operator: Thank you. . Our first questions come from the line of Bob Labick with CJS Securities. Please proceed with your question.

Lee Jagoda: Hi. Good morning. It’s actually Lee Jagoda for Bob. Just a couple of questions. First to start, I know you made some comments about a little bit of demand softness related to the sell through in the first half of 2023. Can you talk to what the channel inventory situation looks like versus that core demand and when we expect things to become normalized?

Ted Harris: Sure, Lee. Thanks for stepping in for Bob. Good to talk to you. So, Martin in the prepared comments talked to really about the slowing of demand that we have seen in two particular areas, one being the dietary supplements market, particularly obviously in the Human Nutrition & Health business. And then secondly, the European feed market demand slowing that’s impacting Animal Nutrition & Health. So, let’s talk about both of those separately. We saw as Q4 evolve that, after a relatively strong start to the quarter that, weakening demand progressed throughout the quarter, which ultimately, we were pleased to see. We delivered organic growth in the quarter, but it was fairly modest at low single digits, but that really came from a stronger growth in the early part of the quarter, offset by a negative growth in the latter part of the quarter.

And we see that continuing for the dietary supplements portion of our Human Nutrition & Health business in Q1 of 2023 and correcting itself in the early part of Q2. So, we see, the second half of 2023 as being certainly stronger than the first half. And in many ways, it’s a little bit of a reverse of what we saw in 2022, where we saw an incredibly strong first half offset by slower demand in the second half. So that’s our perspective there. We do have more visibility into retail sales demand in that channel as well as customer inventory. So, feel as though, our view into that market evolution is relatively good at this point. The Animal Nutrition market in Europe is a little bit more difficult for us to really forecast. We have seen slow demand, I would say, really through the second half of 2022, which we see continuing in the first quarter of 2023.

We do see some positive signs. Obviously, energy costs have come down from their peaks. They are still very high, relative to historical levels, but they have come down from their peaks and that’s starting to ease some of at least the cost pressure on the market. And so, we see some positivity coming out of that. So, we believe that Q1 will continue to be soft, but as that positivity of the lower utility costs and energy costs starts to result in replacement of animals, we will see that business start to pick up in Q2, and as 2023 evolves. So hopefully that gives you a little bit of a feel for those two specific markets, which is really the area that Martin highlighted in his prepared remarks.

Lee Jagoda: Yes. That’s very helpful. Just one more, and I’ll hop back in the queue. It sounds like you’ve done a pretty good job working with your customers to sort of raise prices on a dollar-for-dollar basis to cover your costs, but ultimately at the expense of your gross margin percentage. Where are we related to the price cost balance, and how should we think about when certain raws start going back down? Are your customers going to be willing to work with you to kind of get back some of the gross margin percentage as we come out of the inflationary environment that we’ve been in?