Q2 2021 Balchem Corp Earnings Call
Greetings.
2 balcom Corporation's second quarter, 2020, 1 financial results conference call. At this time, all participants are in a listen only mode.
And and answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
And welcome. Please note. This conference is being recorded I will now turn the conference over Tomorrow and banks and.
Chief Financial Officer. Thank you you may begin.
Thank you Sherry.
Everyone. Thank you for joining our conference call. This morning to discuss the results of outcome Corporation for the quarter ending June 30th for 'twenty 'twenty 1.
My name is Martin Bengtsson, Chief Financial Officer, and hosting this call with me is Ted Harris, our chairman and CEO and President.
Following the advice of our counsel auditors and the FCC at this time I would like to read our forward looking statement. This release does contain or likely will contain forward looking statements, which reflect bout camps expectation or belief cause.
Turning future events that involve risks and uncertainties, we can give no assurance that the expectations reflected and forward looking statements will prove correct and various factors could cause results to differ materially from our expectations, including risks and factors identified and biochem form 10-K forward looking statements are qualified in their entirety by this caution.
Cautionary statements I will now turn the call over to Ted Harris, Chairman and CEO and President.
Martin Good morning, and welcome to our conference call. This morning, we reported strong second quarter results with record sales and all 3 of our business segments solid consolidated earnings growth and.
And strong free cash flow.
Net revenues of $202.4 million were up 16.7% and our adjusted earnings from operations were $41.1 million up 14.6% versus the prior year quarter.
Our second quarter net.
Income of $22.7 million and increase of 7.6% resulted in earnings per share of 70 cents on a GAAP basis.
On an adjusted basis, our second quarter non-GAAP net earnings were $34 million and increase of 10.3 per.
Percent, resulting in earnings per share of 93 cents on a non-GAAP basis and.
And we continued to deliver strong cash flows cash.
Cash flows from operations were $35.8 million for the second quarter of 2021 with quarterly free cash flow of $28.4.
<unk> million dollars before passing the call back to Martin to cover the detailed financial results I would like to update you on a few items.
In May and Verona, Missouri plant experienced a flash flood as a result of very localized storms and the southwest part of the state the plant was shut.
Down for several weeks as we repaired affected equipment clean the site and safely restarted activities all 3 of our business segments provide products and services out of the Verona, Missouri site. So each of the segments was affected by the temporary sites shut down to a varying degree.
The negative.
Negative direct financial impact for the quarter was approximately $3.8 million, primarily due to the write off of damaged inventory and the costs associated with external service providers used for the cleanup efforts. We also expect and additional spend of approximately $1.5 million to.
To third quarter customer requirements were largely satisfied through inventory on hand, and by leveraging alternate and redundant manufacturing capabilities across our supply chain.
And the manufacturing site is now fully operational and all activities are functioning normally.
And as part.
Impact of price risk management plan, we have extensive insurance coverage to help mitigate the impact of such and Nevada are deductible. In this particular case is $2 million and we believe at this point all of the remaining costs should be fully recovered and subsequent quarters from air insurance coverage.
While the flash flood was a very unfortunate event has highlighted the value of and our enterprise risk management plan and the benefits of preparedness for such an event as well as the risk mitigation strategies implemented in advance of the event such as our insurance coverage, but also the redundant manufacturing capabilities.
<unk>, we have for many of our products and services across our global supply chain network I would like to once again, thank the <unk> team for their incredible teamwork during and after the event that enabled us to get back up and running safely and a relatively short amount of time with minimal disruption to our customers.
Moving on to a different topic.
I am very excited to share that in June <unk> Board of directors elected Ms. Kathy fish to fill a vacancy on the board as fish recently retired from the position of Chief Research development and innovation officer at the Procter and Gamble company.
Over a long career at PNG, Kathy held various roles within the research and development function of increasing responsibility before leading the global function from 2014 to 2020, Kathy brings to the backend board important new product development and direct to consumer expertise.
Along with her international business acumen, and experience and drive a growth culture, Kathy will serve on the corporate governance and nominating Committee and we are very pleased with her addition to our board of directors.
As mentioned on our last earnings call in April we released our third sustainability.
Ability to report we have for the first time published our 2030 goals to reduce both greenhouse gas emissions and water usage by 25%. These are significant and important goals that further our commitment to operate with excellence as strong stewards of our stakeholders, while providing innovative.
These decisions for the health and nutritional needs of the world.
Lastly, despite numerous challenges to manage and the overall macroeconomic environment at the moment and discrete challenges and the quarter related to the flash flood event at our Verona, Missouri manufacturing facility, we achieved solid second quarter results.
<unk>, which highlights the strength and resilience of our business model.
As was always as was also mentioned on our last earnings call, while the significantly higher raw material and freight costs. We are facing are not differentially impacting balcom, we continue to dedicate significant resources to.
As for Luteous mitigating activities to effectively manage through these very significant challenges I am now going to turn the call back over to Martin to go through the detailed consolidated financial results for the company and the results for each of our business segments. Thank you Ted as Ted mentioned overall, we delivered.
<unk> strong financial results and a challenging environment, our second quarter net sales of $202.4 million for 16.7% higher than the prior year comparable quarter, we delivered record sales and all 3 segments, human nutrition, and health animal nutrition, and health and especially.
And to verdict.
The impact of foreign exchange to our sales was a positive $2.3 million, primarily due to the stronger euro contributing a positive 1.3 per cent impact to our year over year sales growth.
Second quarter consolidated gross margin dollars of $59.4.
<unk> per $1 were up $4.1 million or 7.3% compared with $55.4 million for the same period and the prior year on.
Our gross margin percent was 29 point for percent of sales and the quarter down 257 basis points.
Compared to 31, 9% and the second quarter of 2020.
257 basis point decrease was primarily due to a significant increase and certain raw material and distribution costs and the costs associated with the recovery from the flash flood event.
Partially offset by.
Favorable mix and overall manufacturing efficiencies.
Consolidated operating expenses for the second quarter of 2021 were $28.9 million as compared to $28.5 million and the prior year. The slight increase was primarily due to higher compensation related.
And it costs, partially offset by the prior year being negatively impacted by a goodwill impairment charge related to business. Formerly included in the industrial products segment, and a decrease and transaction and integration costs.
GAAP earnings from operations for the second quarter for $30.6 million.
And increase of $3.7 million or 13, 7% compared to the prior year quarter.
On an adjusted basis as detailed in our earnings release. This morning, non-GAAP earnings from operations from $41.1 million were up $5.2 million.
First or 14.6% compared to the prior year quarter.
Adjusted EBITDA of $50.1 million was $6.3 million or 14.3% above the second quarter of 2020.
Interest expense for the second quarter of 'twenty or 'twenty 1.
<unk>.
Zero point $6 million and on net debt was $43.7 million with and overall leverage ratio on a net debt basis of zero point too.
The company's effective tax rates for the second quarters of 'twenty, 'twenty, 1 and 2020 or 'twenty for 3%.
Percent and 18, 7% respectively. The.
The increase and the effective tax rate was primarily due to reduction and certain tax credits and lower tax benefits from stock based compensation.
Consolidated net income closed the quarter at $22.7 million up 7.6.
6% from the prior year quarter.
This quarterly net income translated into diluted net earnings per share of.
70 cents, an increase of 5 cents or 7% from last year's comparable quarter.
On an adjusted basis, our second quarter adjusted net earnings.
We're $30.4 million or 93 cents per diluted share up $2.8 million or 10, 3% compared with prior year quarter.
We generated quarterly free cash flow of $28.4 million and we closed the quarter with $79.9.
<unk> million dollars of cash on the balance sheet.
As we look at it from a segment perspective for the quarter, our human nutrition and health segment generated quarterly sales of $111.5 million and increase of $14 million or 14, 4% from.
<unk> 9 prior year sale.
The sales increase was driven both by strong sales growth within food and beverage markets as well as higher sales within the minerals and nutrients businesses.
We were very pleased to see significant year over year and sequential growth on the food ingredient side of our business.
Excuse me.
And as well as continued strong sales within our minerals and choline nutrients business.
Our human nutrition, and health segment delivered quarterly earnings from operations of $19 million and increase of $3.5 million or 22, 7% compared to the prior year quarter primarily.
From the pre aforementioned higher sales and overall and manufacturing efficiencies.
Partially offset by higher raw material and distribution costs and the costs associated with the recovery from the flash flood event that we experienced at our Verona, Missouri manufacturing sites.
Excluding the effect of non.
Non cash expense associated with amortization of intangible assets of $4.3 million.
And excluding the direct expenses related to the Verona Flash flood event second quarter adjusted earnings from operations for this segment were $25.3 million and increase of $5 million or.
Due to the 4.6%.
Our animal nutrition, and health segment generated quarterly sales of $54.5 million and increase of $8.1 million or 17, 6% compared to the prior year.
The increase in sales was primarily the result of higher sales.
<unk>, 20th mono gastric and room, and anatomy ruminant animal markets and a favorable impact related to changes and foreign currency exchange rates, which contributed $1.3 million or 2.8% of growth to the segment.
Our ruminant business grew volumes 31, 8%.
And boat and we continued to successfully drive penetration of our room and protected encapsulated products and the market.
In terms of day, Ray economics, milk and milk protein prices have come down a bit during the second quarter, but are still at relatively healthy levels, where our products have a strong value proposition.
On the mono gastric side.
Percentage overall volumes were down slightly due to lower European demand for choline. However, the financial impact of this volume decrease was fully offset by higher volumes of U S feed grade choline.
And increase in average selling prices and higher sales of chelate and minerals and companion animal products.
Right.
Animal nutrition and health quarterly earnings from operations of $3.6 million were down $2.9 million or 44.6% from the prior year quarter, primarily due to increases in raw material and distribution costs and the costs associated with the recovery from the flash.
On event at our Verona, Verona, Missouri manufacturing facility.
Excluding the effect of noncash expense associated with amortization of intangible assets and <unk> $2 million and excluding the direct expenses related to the Verona Flash flood event of $1.4 million.
Second quarter adjusted.
Adjusted earnings from operations for this segment were $5.2 million, a decrease of $1.4 million or 21, 8%.
And as raw material Escalations slows and given the pricing mechanism. We have currently in place and the vast majority of our animal nutrition and health customer.
Customer contracts, we're expecting that margins will improve and this business segment as we progress through the second half of the year and into 2020.2.
Our specialty products segment delivered quarterly sales of $34 million and increase of $5.8 million or 27% compared.
<unk> the prior year quarter per.
Primarily due to higher sales for products sold both to the medical device sterilization and the plant nutrition markets.
The specialty products segment had second quarter earnings from operations of $9.7 million and increase of $1.7 million for 'twenty, 1.5%.
Per the prior year quarter.
The increase was primarily due to the aforementioned higher sales, partially offset by increases in raw material and distribution costs.
Excluding the effect of noncash expense associated with amortization of intangible assets of $1.3 million and excluding the direct expenses related to.
Versus and a flash flood event second quarter adjusted earnings from operations for this segment were $11.2 million and increase of $1.6 million or 16, 8%.
I'm now going to turn the call back over to Ted for some closing remarks. Thanks, Martin we are very pleased.
<unk> financial results reported earlier this morning, delivering all time record revenues and all 3 of our business segments. We achieved record second quarter consolidated GAAP net earnings record quarterly non-GAAP adjusted net earnings record adjusted EBITDA and strong cash flows.
From operations all of this while facing continued higher raw material costs global logistics and distribution challenges and manufacturing disruption and inventory loss related to the flash flood event had ever on our plan.
These strong results reported today continue to show that we are well.
And as with version and attractive markets, where we have the leadership and capabilities to be successful not only today, but also into the future.
I will now turn the call back over to Martin to open it up for questions. Martin. Thank you Ted and this now concludes the formal portion of the conference at this point we.
<unk> is on the conference call for questions.
Thank you and he would like to ask a question. Please press star 1 on your telephone keypad and confirmation tone will indicate your line is and the question you.
You May press star 2 if he would like.
<unk> for your question from the queue and.
And for participants using speaker equipment.
And may be necessary to pick up your handset before pressing the star keys.
Our first question is from Mark Connelly with Stephens. Please proceed.
Thank you Ted last quarter and my question about normalization of hospital activity would probably premature.
We will open and seeing any retrenchment and hospitals in terms of suspending elective surgeries and sort of reversing that early.
Early normalization.
Thanks for the question Mark and the short answer is no we are not yet, but as we all can reflect maybe on the news of the last.
Are you as it's obviously a.
And continues to be a rapidly changing environment relative to the pandemic and the delta variance. So while we're not seeing that today, we're watching it closely.
I would say.
Pleased with the sterilization.
<unk> business has been slowly returning.
Volumes are up both year over year and sequentially, but I would also say it has been a little bit lumpy and that that return.
And it continues to be a.
Lumpy I think.
As as we see real demand return with increased elective surgeries, but also the replenishment of supply chains that were depleted during the pandemic.
But again, that's the short answer is no we're not seeing that yet.
But obviously that debt.
And could be a possibility going forward, so we need to watch that closely.
Okay.
Switching gears and we're hearing from a number of companies that the big wellness push with the surge and vitamins and supplements last year and us.
Slowed and in some cases river how does.
Does that affect your expectations for the nutrient part of human health for the rest of the year.
Yeah.
Certainly the.
On the pandemic and the focus on immunity boosting minerals and vitamins has benefited our nutrients.
<unk> business over the last year or so.
We have not yet seen a slowdown in demand.
We are seeing the.
And the growth year every year is slower than.
And then it was.
<unk>.
Last quarter for example.
So we're seeing a slowing.
Slowing in and the growth year over year, partly because we're now comparing to quarters that that saw some benefit.
Last year, but demand remains very.
Along and at this point and time, we continue to believe that the changing in <unk>.
Consumer behavior relative to <unk>.
Increased attention to these.
These types of products and supplementation will continue.
But.
And certainly the year over year growth will will wane as we saw in Q2, but.
But we're still very pleased with the strong demand for our products.
And I Hope you continue to book.
And just 1 last question.
Your your market share in.
Strong and the animal market you saw a nice a nice boost this quarter.
What are the biggest challenge is to drive and penetration rates and how do you decide how aggressively to go after that on a sort of a year over year basis.
And so so again.
And as you're well aware there are 2 <unk>.
Different aspects to our choline business for the animal market.
1 certainly is the.
The amount of gastric market that includes companion animal <unk>.
Wine and poultry primarily.
We have very strong market share and the U S strong market share in Europe, we really don't have much presence in in Asia and in South America. So.
Our business.
As primarily a north American and European.
And Elliot business and.
Our business there tends to to grow with the market I would say that there is some share to be gained but really I think the opportunity is more around driving increased.
Usage of choline there are alternatives, we've talked about butane in the past so replacement of butane, which grows the overall choline market that will grow our business.
Using science to show that that choline should be fed at higher doses.
European Mills than it currently is that also would drive.
Higher demand.
And for us and and increased usage for calling so those really are more of the growth drivers and the mono gastric and the feed grade choline and.
The companion animal business.
So slightly is growing.
Quickly with the overall market that.
Is certainly showing up and our results. So that's really how we're how we're driving growth there from a penetration perspective choline is very highly penetrated and that is.
Market's most companion animal products include choline, most poultry and swine diets include choline and so it's not so much penetrating the market.
Very different 2 are sort of highly engineered encapsulated choline that we sell into the dairy industry, where we feel.
Though.
So in North America.
Choline is only penetrated let's say, 40% at this point and time and in Europe, it's still less than 5%. So that's really.
And where we have an opportunity to be very aggressive about.
Driving penetration.
And that's again a lot by developing new science, bringing our old science to customers and convincing nutritionists that that there's a significant payback and benefit of feed and choline and and we're learning through new studies that that Colm.
Choline.
Is important.
<unk> for more than maybe just we originally.
Positioned it as a a fad.
Fatty liver.
A product that addresses fatty liver, we've recently done a study that shows that.
<unk> may be very beneficial to heat stress and in cows and that really could bring a very.
You know a different value proposition.
2 choline and therefore help penetration and broadened the use of choline and so I think the the.
And the opportunity to really drive increased penetration and be very aggressive.
Both in Europe, and the U S for for that.
<unk> is really where our focus is and and we're doing that through science, we're doing it through.
For nutritionists on our staff more salespeople on the ground boots on the ground matters here.
And.
And that's where we're focused.
Super helpful. Thank you Tim.
Thanks Mark.
Our next question is from Bob <unk> with TD Securities. Please proceed.
Good morning, and congratulations on nice quarter and execution.
Thanks, Bob.
I wanted to start on human nutrition side, how would you characterize the food.
And beverage for flavors from powder sales are they back to pre COVID-19 levels, yet and.
What are the growth drivers that you're focused on from here.
So our sales our sales in aggregate certainly are are back and ahead of of pre COVID-19.
Levels, we've been growing nicely there if you just look at the food business. So you exclude nutrients.
And we were up about 17% and in the quarter.
And that's really as a result, I think of just.
Just good solid fundamental growth and the markets that we serve.
I think certainly some of our growth initiatives are coming to fruition there.
But theres also a bit of a replenishment of the supply chain that is happening.
There is a return of demand associated with those parts.
Is the market that were depressed because of the.
And of the pandemic, specifically foodservice, which.
I think in aggregate, we would say is probably not quite back to pre pandemic levels, but getting close was certainly seen it come back nicely.
And you know also.
Partly and no real decline and and the aspects of the business that benefited somewhat from.
From the pandemic so it's.
And really fairly kind of broad based.
Our growth that we're experiencing and and.
And certainly our sales levels are higher than our pre pandemic.
Levels, but.
Uh huh.
We don't believe all of the foodservice business is fully back and we also don't believe that debt some of the benefits that we have seen that we expect.
2 a slow down a little.
<unk>.
We believe that there is still there and they haven't haven't waned fully yet so we feel good about the growth and the overall.
Business, and human nutrition, and health and the quarter and and.
And expect that we can continue to drive nice growth.
And for the rest of the year.
Yeah.
Okay, Great and yes, I'm sticking with the human nutrition and health and margins remained very strong on an adjusted basis as well you know well above prior levels.
Is that a benefit from mix or how are you thinking about the kind of margin profile and.
NH NH going.
And forward.
Let me start and then Mark Martin can add to our correct me, but.
Certainly mix is playing playing a role.
And in.
The margin performance.
The business.
But we're also seeing if you recall.
Here in 2.
2019, 2018, we talked a fair bit about manufacturing inefficiencies that we were struggling and certain areas from an efficiency perspective and some of their.
Human nutrition health plans and really are.
Our.
Our business teams and our supply chain and operations teams have really done a good job of addressing many of those inefficiencies and.
And so you know as you saw on the prepared remarks were seeing some.
Favorable manufacturing efficiencies, partly driven by.
By higher volumes, but also partly driven just by eliminating some of those inefficiencies that we were experiencing so.
Mix for sure as part of it.
Addressing some of those inefficiencies is also a big part of it offset somewhat by the higher raw material cost.
Costs that net while clearly.
Very significantly impacting our animal nutrition business are also impacting human nutrition and.
On a material way so Martin.
Pass it back to you with any other color on maybe the only thing I would add there is debt or human business.
Are the ones that have been.
Best enabled to date to also pass through the raw material increases to their customers. So.
And so they've seen less of an impact there. So the efficiencies that Ted mentioned have therefore been able to to shine through and show up and the P&L.
So that's maybe.
What I would add there.
Got it great and then the last 1 for me and I can jump back in queue.
On the last call, we talked about your pivot and marketing spending and how you were.
Reallocating dollars.
Can you give us any examples of what you're doing now I know, it's still relatively new if theres.
Quantify the outcomes, where if you're happy with the results, so far or any update on that and.
<unk>.
Yeah, we really are happy and I have.
You have to do say I have to say you know, it's still all relatively new.
And so.
Or not.
Not necessarily seeing a lot of fruits from our labor at this point in time, but.
And we're really.
Pleased with the team that we've built.
We are seeing.
We had a campaign for example.
This quarter for.
Any way to within beverages for the use of our branded choline, which we call Vita choline as well as our Albion minerals.
We've also kind of introduced.
A bit of and indulgent products, but in air encapsulates and and inclusions business a glimmer.
For our guests that are getting some attention that basically are.
Glimmering pieces of.
And that you can put into ice cream and and treats and things like that that debt are pretty cool and like I said getting some attention and frozen desserts.
<unk> and so forth. So yes, we are.
Excited about the tie.
Types of things that we can do based on market research that we're doing and house right now as well as the market expertise that we're bringing to our customers and and the market. So I think there's.
Dessert and more to come there because this is all all new but.
Early signs are very positive and we continue to be excited just about the new launches that are customers are launching out there of products that have <unk>.
And our products.
A lot ma'am.
Premier Nutrition for example, just launched.
A new SKU that includes choline and a protein beverage and you know.
And that really is a leading consumer brand and the and the protein beverage segment and and there are various other launches that were.
We're excited about so.
I think overall, we're really headed in the right direction from a marketing perspective, and and something that was really missing in the past for us.
Got it it sounds super Thank you very much.
Thanks.
Our next question is from.
And Mitra.
And Paul with Sidoti and company. Please proceed.
Yes, hi, good morning, and thanks for taking the questions.
Firstly I just wanted to get a sense as you look at gross margin clearly seeing some pressure from the as you mentioned higher raw material and distribution costs and I'm just curious.
As we look on look out for the second half of the year, if we should.
Anticipate maybe some improvement off of <unk> or it's still too early.
Again, a census, and how that plays out.
Yes, good morning Mitra This is Martin.
I think the when you think about where the pressures coming.
Coming from obviously, the raw materials as to the big 1 and it's significant.
We saw almost above $9 million of inflation and the second quarter for and on like for like items year over year, which is a huge number when you think about it and nothing that we've ever seen in the past.
Asked.
And we pass through a lot of that and not all of it will pass through in terms of pricing call. It about 7 million on this.
But you still end up with a couple of million dollars.
And of gross margin pressure when we think about that Ross I said go on and go away.
I don't know when it will it will go away if it will go away and to what extent and prices will start coming down. It's just hard to tell right now for us It is primarily around chemical.
Chemicals, it's around oils.
And some some proteins that we buy et cetera, where we're seeing.
And.
This commodity price increases that are.
And that are are are pretty pretty.
And so I think it's going to be a matter of how that curb develops so will it happen and the third quarter fourth quarter and whether it be and 2022, it's almost impossible to say and in the Meanwhile, we're really focused on.
Getting the right pricing and the market and recovering our costs around this as Ted pointed out before we're not really differentially impacted versus our competition and we're on the same boat here.
Which makes it a little bit easier for US also to go out and and recover some of these costs for.
On the production.
And get and standpoint, and on efficiency and our supply chain network.
Our plants have been running well we had the flood event, but that's more of a discrete unique event that you cant nest.
Necessarily control, but apart from that our plants have been running very well.
And the last few quarters and and we.
Suppose that too to continue.
You mentioned the distribution costs.
Which are you know.
And just like the Ross seen significant increases just with all the disruptions and containers being in the wrong places and price is going up et cetera and.
And for Us that was.
When you look at it on a year over year basis call. It a 50 to 60 basis points impact.
2 our profitability from that and you would have to think that.
Supply and demand will balance and prices for.
Come down to more normalized level at some point.
It's not like suddenly older containers are gone.
But they're there and the wrong places at the moment and then the system is not working well so I just cant say, whether that's going to happen.
Third quarter fourth quarter.
Our 2022.
You would have to think that it will it will start normalizing.
At some point.
And that's a little bit what were <unk>.
Living through at the moment, it's Matt.
Managing the Ross.
Getting the pricing and and the market passing that through.
And just trying to be efficient on the distribution side, while obviously, ensuring that our own backyard in terms of how we run.
Life Science is running very efficiently and that's kind of where the attention is at the moment.
No that's great I definitely appreciate the color there.
And then on the ERP platform I believe that's almost on us.
In terms of the implementation and I was wondering if you were on starting to see some efficiencies there or is it.
A little too early yet.
Now, we're definitely seeing efficiencies.
<unk>.
Call. It 90, 899% done we have 2 international.
Smaller locations to to go and the implementation and now that wood plants and we plan to be done this year.
And 2021.
And <unk>.
And on budget as well I should point out because we're pretty proud of that and stop somebody and tighten up the case and ERP implementation, but if we take a step back and and ask US why do we do this and the first place right for us.
On on 5 systems and with acquisitions that grown at 7.
And it's getting that down to on just from a business continuity was very important some of these other assistance we're closer to the end of life and we really need to have a modern system and place. It was a lot around the controls and the security.
<unk>, which we feel very good about at the moment just in terms of that enhanced visibility.
And controls and also.
And just from a cyber security and all the attention around that and trying to stay on top of it.
And managing that situation and so a lot easier for us having 1 system to manage then.
And then many.
And then the growth and scalability.
<unk>.
And system growing as a business growing on this 1 platform enable us to actually do that.
And not be prohibited and lastly from a cost perspective, which was not the primary incentive why why we did the 365 and we're seeing some efficiencies there we're doing a lot more with the resources, we have in terms of not needing.
And to add resources as we've grown here over the last 2 years and we.
We've also made some smaller organizational changes and some areas in terms of efficiencies, but I.
I would not call that out as the key big driver of trying to take cost out it's more to Bill day, a proper platform that's.
Ports are growth our controls.
And just a continuity of the business.
And no that's great and then finally I guess.
And I assume it does.
ERP it probably makes the total EPS.
Digest, a new app.
Acquisitions and I'm, just curious if he had and.
Any update in terms of activity levels, you might be seeing.
On the acquisition front.
Yes, I think that debt.
Activity levels are reasonably high again as I've.
And I've said, probably and the last few calls.
As we enter.
<unk> 'twenty 'twenty things really did slow down.
And the market, but also at.
At Bell Cam, we were struggling with how do we.
Completed transaction, and a and a remote environment and and our I would say we are.
Very much through that and.
And the market is busy and active and we are as well.
So we continue to feel good about the pipeline of opportunities that are.
We see out there and and the specific opportunities that are active so.
We're spending a fair amount of resources.
Focused on.
<unk> in organic growth obviously, our primary focus is driving the organic growth of the company, but we are spur.
<unk> spending I would say back to pre pandemic levels amount of risk.
Sources and time on inorganic.
<unk> opportunities.
Okay. That's great. Thanks for taking the questions.
Thanks for taking share.
Our next question is from Ram <unk> with H C. Wainwright. Please proceed.
Thanks, very much for taking my questions.
A couple of minor housekeeping ones I think these are probably for margin.
Can you just comment on how the accounting treatment is going to look like for whatever insurance recovery, you're able to accomplish in the wake up the flash flood event and Verona, Missouri.
How is that potentially.
And just show up from a P&L perspective, and also from a cash flow perspective, and can you comment at this time on when you talk about partial recovery, what does that mean half 10% approx.
<unk>.
Yeah. So.
In terms of recovery I'll answer that first.
We do expect I can't guarantee it since we haven't gone through it for the insurance company, yet, but it would be reasonable to expect that we would recover our costs with it.
Exception of the insurance deductible right. So there's a $2 million deductible, so our costs less the 2 million.
Yeah, and this is what we expect to recover.
Had about call it $3.8 million of impact and the and the second quarter, we expect another $1.5 million.
Costs show up and the third quarter.
So take those 2 and and deduct 2 million and that's what we expect to get back.
Back from an accounting perspective.
Where you would see it at the moment and the second quarter right as you see it and our Cogs are almost exclusively.
Exclusive of day in terms of where the negative impact has hit and cost cost goods sold the $3.8 million.
We adjusted it.
Adjusted earnings.
Cash and adjustment.
As we go forward.
And have insurance recoveries. Our intention is also to adjust out those recoveries so that theres, an apples for apples right. We adjusted out the negative impact now we will adjust out.
Out for and the insurance recoveries as we go forward.
From a cash flow perspective, obviously, it will be positive cash flow. When we received the insurance recoveries as we've had negative cash outlays here and this period.
But most of this is flowing through.
And <unk>.
Cogs at the moment since that's where we're having are expensive.
I don't know if that answers your question ROM or not happy to add any additional debt.
No. That's very helpful. So whatever the impact is going to be both the negative impact and the positive impact the vast majority of it is going to be.
On the Cogs line.
Correct correct, Okay and you.
You would anticipate that a there is not going to be any further negative impact. After this quarter is over and be that you will get the insurance proceeds before the end of this year is that reasonable.
I.
I would just clarify that and saying, we do expect the third quarter to half a million and a half of negative impact.
We have 3.8 and the second quarter, we expect another million and a half into third quarter of negative impact when we will get the insurance recovery side I don't want to comment.
And went on that because sometimes it and move relatively quickly sometimes it is a longer process I don't know, whether we will see any and the third quarter weather will come and the fourth quarter and what will come early in 2022.
Just don't have.
And that knowledge as to when exactly the the process will conclude so.
It will depend on on the process there.
No that's fair and secondly, I wanted to ask and a general sense about the.
Medical sterile sterilization business and if you believe that we are now seeing and.
Level of activity and that domain.
And the level of demand that arena, which is commensurate with steady state demand or if you expect there to be further tailwind going forward given.
Given the current status of the pandemic.
Some normalization around that just.
Just wanted to get a sense of where you think things stand on that front.
Yes, so so while we've seen really improvement quarter on quarter for 3 or 4 quarters now.
I would say that we're still not back to steady state and a pre pandemic level and and certainly.
And.
And.
Elective surgeries are the driver here and I do think that people while.
Hospitals are.
Allowing elective surgeries and and.
And there's there's room for elective surgeries I do think some people still.
Phil are choosing to not have and elective surgery.
And just for concern about going to the hospital so.
The business has improved quarter on quarter, we feel good about that but I would not say that it's back to pre pandemic levels and we do think that there is more.
Improvement that we will see and subsequent quarters barring any.
Significant kind of change and the progress that we've been making relative to the pandemic and any man.
Mandates around.
Elective surgeries that could.
Stall the.
The.
Slow recovery or <unk>.
Cause it to regress, but as I said earlier.
We are not seeing that today and in our orders or hearing that from from our customers, we're still seeing that sort of a slow steady.
And.
And recovery.
Great. Thanks, and then just to revert back to margin once more not sure. If I missed this what is your guidance regarding effective tax rate percentage for the second half of 2020.1.
23.
So we're at about 23.1 year to date, and and I think around there 23, plus or minus a little bit as the right estimate for 2020.1.
Great. Thank you very much and congrats on an excellent quarter. Despite these challenges with the flash flood.
Thank you Ron Thanks, Rob.
We have reached the end of our question and answer session I would like to turn the conference back over to Mr. Harris for closing remarks.
Thanks, Sherry once again, thank you very much for joining the call today, we really are very pleased with our second quarter 2021 results that we released today and the ongoing progress we're.
We're making on our key strategic growth initiatives. So we really appreciate your time and look forward to reporting out Q3 results in October and the meantime, we will be presenting at the Jefferies 2021, Industrials Conference next week and later in the year was signed up for the Baird Industrials Conference.
In November and the Stephens annual investment conference in December I am sure, we will attend and some other conferences, but hopefully we will see some of you the virtual.
The conference next week, the Jefferies, 1 and and if not there and 1 of the other ones. So thanks again for joining today have a great weekend.
Weekend.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Okay.
And.
Okay.
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