Q2 2023 Balchem Corporation Earnings Call
Greetings and welcome to your <unk> second quarter 2023 earnings call.
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<unk> and answer session will follow the formal presentation.
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It is now my pleasure to introduce your host Martin Bengtsson Chief Financial Officer. Thank you you may begin.
Good morning, everyone. Thank you for joining our conference call. This morning to discuss the results about Chemed Corporation for the quarter ending June 30th 2023.
My name is 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 C suite at this time I would like to read our forward looking statements.
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 actual results to differ materially from our expectations, including risks and factors identified in biochem small suite.
<unk> Form 10-K, 10-Q, and 8-K reports the company assumes no obligation to update these forward looking statements.
Todays calls and commentary include non-GAAP financial measures. Please refer to the reconciliation in our earnings release for further details.
I will now turn the call over to Ted Harris, our chairman President and CEO .
Thanks, Martin Good morning, and welcome to our conference call. This morning, we reported solid second quarter financial results with improved margins and higher profitability year over year, despite softer sales volumes and revenues of $231 million were down two 3% versus.
The prior year's very strong quarterly results.
Gross margin grew seven 6% and we expanded our gross margin percentage by 300 basis points to 33.4%.
Earnings from operations of $43 million were up seven 3% versus the prior year quarter.
And we delivered a record quarterly adjusted EBITDA of $59 million, an increase of 4.6% and adjusted EBITDA margin was 25, 5% of sales up 169 basis points from the prior year.
Our second quarter net income of $30 million, an increase of 1.1% resulted in earnings per share of 93 cents on a GAAP basis on an adjusted basis, our second quarter non-GAAP net earnings of $34 million were flat with the prior.
Per year, resulting in earnings per share of one dollar and six cents on a non-GAAP basis cash flows from operations were $35 million for the second quarter of 2023 with quarterly free cash flow of $32 million overall, another solid quarter for Balco.
With performance that highlights the strength and resilience of our business model in a market environment that continues to be challenging.
Before passing the call back to Martin to cover more detailed financial results I would like to make a few comments about the overall market environment and what we are saying.
The current market environment continues to be quite challenging with a high degree of uncertainty. We believe that the broad based destocking activities that followed the post pandemic easing of supply chain constraints are now largely behind US. However, we are experiencing.
A prolonged impact in certain markets from our customers and in some cases their customers as efforts to reduce inventories across their supply chains. As a result of end market demand uncertainty given the overall macroeconomic environment, while it is hard for us to predict the timing.
When the broader markets will truly normalize and reset for continued growth. We do believe they will gradually improve as the year progresses. As we are now starting to see in certain markets such as within our human minerals and nutrients business and we are well positioned to benefit when that time.
From the.
The balcom team has been able to maneuver through these volatile times very well, while our second quarter revenues were relatively flat compared to the first quarter of 2023, we were able to grow our gross margins and earnings from operations year every year and sequentially as we started to.
Recapture some of the gross margin percent that was lost over the last few years given the extreme inflationary pressures, we experienced I am very pleased with our overall financial results reported this morning.
While the balcony team effectively manages through this challenging market environment. We also continue to advance our strategic growth initiatives. One area of focus over the last few years has been to add manufacturing capacity and support of our strategic growth businesses.
As we have discussed on previous calls, we recently added manufacturing capacity for our micro encapsulation business as well as our plant nutrition business.
As we highlighted in our press release earlier this morning in Q2.
We were pleased to have mechanically completed a new manufacturing unit provided choline Bell Ken's, leading brand of the essential nutrient choline for human nutrition to support the worldwide growth we are experiencing in infant toddler in adult nutritional formulas as well as dietary supplement.
And food and beverage fortification applications, we continue to be excited about the long term growth potential for Vida choline as awareness increases and market penetration grows for this essential nutrient and our expanded capacity will facilitate significant growth for years to come the new Manny.
Factoring unit is currently being commissioned and should be fully operational by the end of the year.
And lastly on a very personal note I would like to inform everyone, particularly those very longstanding shareholders on the call. The Doctor Herb wise one of the three original founders of Balcom passed away on Wednesday evening. He was 93 years old Dr.
Doctor Weiss was there at the beginning he had the vision to build a company focused on commercializing micron capsulate. It food ingredients using patented micro encapsulation technologies and then he spent the next 30 years of his life, helping to build balcom into what it is today his legacy will.
Live on Forever and Balco.
And with that I will now turn the call back over to Martin to go through the detailed financial results. Thank you Ted as Ted mentioned overall, the second quarter was another solid quarter for about camp, particularly in the context of the very strong first half of 2022 as a comparable.
Also the strong margin rate performance from gross margin earnings from operations and adjusted EBITDA was encouraging to see and shows that we are well positioned to benefit as inflationary pressures east.
Our second quarter, net sales of $231 million or 2.3% lower than the prior year quarter, and essentially flat sequentially to the first quarter.
As end market demand has continued to be volatile and we're yet to see a more broad based recovery across our segments.
Sales from our recent acquisitions contributed $14 million to our second quarter and the impact from foreign currency exchange driven primarily by the stronger Euro had a favorable impact on our sales of approximately point $6 million.
Our second quarter gross margin dollars of $77 million were up 5 million or seven 6%.
Impaired to the prior year.
Our gross margin percent was 33, 4% of sales in the quarter up 300 basis points compared to 30.4% in the prior year.
The improvement in margins was primarily driven by higher prices and lower input costs and favorable mix.
The 33.4% gross margin rate is a significant improvement sequentially to the 31.5% we saw in Q1 2023.
Consolidated operating expenses for the second quarter were $35 million as compared to $32 million in the prior year.
The increase was primarily due to incremental expenses and amortization related to the capa and bergstrom acquisitions as well as restructuring related impairment charges offset partially by favorable adjustments to transaction costs.
GAAP earnings from operations for the second quarter were $43 million, an increase of $3 million or seven 3% compared to the prior year quarter.
On an adjusted basis as detailed in our earnings release. This morning, non-GAAP earnings from operations of $49 million were up four 8% compared to the prior year quarter.
Adjusted EBITDA of $59 million was $3 million or 4.6% above the second quarter of 2020 two.
Interest expense for the second quarter was $5 million, an increase of $4 million compared to the prior year. This increase in interest expense is driven both by the increased debt level. Following our 2022 acquisitions and the significantly higher interest rate environment. We.
<unk> to use our solid cash flows to pay down debt and we reduced our debt by $26 million in the second quarter and ended the quarter with net debt of $333 million with an overall leverage ratio on a net debt basis of 1.5 times.
The company's effective tax rates for the second quarters of 'twenty, 'twenty, three and 2022 or.
<unk>, 21.6% and 24.1% respectively. The decrease in the effective tax rate was primarily due to certain lower state taxes and higher tax benefits from stock based compensation.
Consolidated net income close to quarter at $30 million up 1.1% from the prior year.
This quarterly net income translated into diluted net earnings per share of ninety-three cents, an increase of one cent compared to prior year.
Our second quarter, adjusted net earnings were flat at $34 million or $1.06 per diluted share.
Cash flows from operations were $35 million and we closed out the quarter with $67 million of cash on the balance sheet on a year to date basis cash flows from operations were $70 million, an increase of $15 million or 26.4% and free cash.
Cash flow was $57 million, an increase of $22 million or 62, 3% as we continue to translate our earnings into cash.
As we look at the quarter from a segment perspective.
For the second quarter, our human nutrition, and health segment generated sales of $136 million, an increase of three 1% from the prior year.
The increase was driven by the contribution from recent acquisitions, partially offset by lower sales within food and beverage markets and the minerals and nutrients business.
Our human nutrition, and health segment delivered quarterly earnings from operations of $27 million, an increase of 16% compared to the prior year.
This was driven by the aforementioned higher sales.
And lower manufacturing input costs, partially offset by higher operating expenses.
Second quarter adjusted earnings from operations for this segment were $32 million, an increase of $4 million or 14.7%.
We're continuing to experience volatility in overall market demand softness in our human nutrition and health segment as Ted mentioned earlier as the quarter progressed, we were pleased to see the minerals and nutrients business show signs of stabilization and a return to more normal order patterns after a several quarter.
<unk> of significant volatility, while the food ingredients business remained quite volatile throughout the quarter.
We continue to believe that as the year progresses, we will start to see a broader based stabilization, which will ultimately lead to a return to growth.
Sequentially compared to the first quarter of 'twenty to 'twenty three.
For about camps, human nutrition, and health segment were up 2.3%.
Our animal nutrition, and health segment generated quarterly sales of $61 million, a decrease of 2% compared to the prior year.
Driven by lower sales in the mono gastric markets, partially offset by higher failure fails in the ruminant species markets.
Animal nutrition and health delivered earnings from operations of $8 million, an increase of 1% from the prior year.
Primarily due to higher average selling prices and a decrease in manufacturing input costs, partially offset by lower sales volumes.
Second quarter adjusted earnings from operations for this segment were $8 million a decrease of 2.2% Sim.
Similar to what we discussed in our Q1 earnings call, our animal nutrition and health segment is experiencing increased volatility and demand softness, particularly in Europe .
The European food animal feed market continues to show demand softness which is in direct contrast to the relatively strong demand experienced this time last year.
Hopefully with lower energy costs, and some disinflation, we believe we will see some stabilizing and normalization in the European food animal feed markets as we progress through 2023.
But it remains a very challenging market at the moment.
While Europe has been more challenged lately, our larger U S market has been more stable and has not experienced anywhere near the same type of demand volatility.
Our specialty products segment delivered quarterly sales of $33 million.
A decrease of 10.7% compared to the prior year due.
Due to lower sales both in the plant nutrition and performance gases businesses.
Specialty products delivered earnings from operations of $9 million, a decrease of 6.3% versus the prior year.
Primarily driven by lower sales volumes, partially offset by higher average selling prices and lower manufacturing input costs set.
Second quarter adjusted earnings from operations for this segment were $10 million a decrease of 5.7%.
Within specialty products, we continue to see higher margins in our performance gases business due to pricing actions, we have taken and sequential reductions in raw material costs that have benefited the business but.
But volumes have not yet fully recovered to pre pandemic levels, yet as many of our customers have taken longer than unusual outages to upgrade their emissions control systems in anticipation of updated regulations with regards to plant nutrition, we saw lower sales into the western United States.
Driven by the unusually wet spring, which negatively impacted the planting season.
While the volumes and specialty products were below expectations in the second quarter margins were very strong and we are in a great positions as volume start to normalize.
I'm now going to turn the call back over to Ted for some closing remarks. Thanks. Martin we are pleased with the solid financial results reported earlier. This morning with improved margin performance, leading to record adjusted EBITDA for the quarter, particularly in light of the strength of the prior year's comparable <unk>.
And the continued economic uncertainties, we are facing in the marketplace. We continue to show resilience. During this time of elevated economic market uncertainty and ability to manage through challenging and dynamic market environments.
The current market environment continues to be volatile we remain confident in the long term growth outlook for our markets and for Falcon as a company I would now like to hand, the call back over to Martin who will open up the call for questions. Martin. Thank you. Ted. This now concludes the formal portion of the conference at this point.
We will open up the conference call for questions.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.
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Our first question comes from the line of Bob Lebesgue with C. J S. Securities. Please proceed with your question.
Good morning, congratulations on very strong margins in the quarter.
Thanks, Bob.
Yeah I wanted to start you highlighted this earlier I wanted to dig a little deeper you mentioned the vital choline manufacturing unit I guess expansion you talk a little bit you know more about the capacity. It adds you know maybe it would be how long it takes to fill capacity and well there'd be a like a P&L impact initially once like depreciation runs through as a tender.
[noise] utilized or how should we think about that impacting.
You know the P&L of the business looking ahead.
Yeah. So first first of all I'll start with just the fact that that we're really excited that this is a new manufacturing unit has now been mechanically complete we are in the midst of of getting our customer approvals for the product in and so forth.
It should be up and running fully by the end of the year. It essentially doubles our capacity for Vida choline, we have been over the last few years with increased demand been bumping up against our capacity limits, we've got a really good.
Job of.
Getting more out of the the existing assets and.
You have been kind of pleased with the efficiencies that we've been getting out of the plant, but it has been restricting our growth overall and so by doubling the capacity it really frees us up to to fully satisfy demand, but given that it is in fact, you know doubling our capacity.
You know it will take some time to.
Really fill out the plant fully but.
We've got great plans to do that over time, but that certainly for the.
The next four or five years, we're not really going to have to be worried about our capacity. The overall investment was was about $20 million and so you can kind of think through the impact there, but we really feel like the growth well well be.
Be able to absorb that additional depreciation.
Yeah pretty easily and the financial burden on the on the P&L should not be a <unk>.
Material from my perspective, but I'll, let Martin can chime in as well.
But I agree with that and also there.
From a depreciation standpoint, while this obviously adds depreciation as you would expect we also have other parts that are kind of coming off and as I model out depreciation is not going to have a material impact or changed as you look out into the future based on on the timing of what's coming in and whats.
What's coming out.
Okay, Great and then maybe just.
Discuss the Capex plans going forward and how you decide when you are adding capacity or targeted Roy you mentioned, the encapsulation and plant nutrition.
What's kind of like next.
In the.
And how do you decide on you or what are your targeted returns on the Capex.
Yeah, I mean as part of both the strategic plan that we refresh every year as well as the budget process. We work through the the capex requirements with whether the both of the businesses and our supply chain organization and and in an ideal case right as you start getting up to capacity.
Life's Asian of assets getting up there you know and you know it starting to exceed 80% you really don't want to get up into to the high number of that are and you would need a plan for the next tranche of capacity.
That being said, we saw with the significant acceleration during the pandemic where demand in some of our assets went really high really fast that squeezed that capacity as we've talked about in the past and you were sort of sold out on some of these assets.
<unk>, which has now eased off a little bit but under normal circumstances, that's a little bit how we approached our planning and you lay that out to what the right timelines or where in the network. It fits in and and you know should we expand capacity do we work with our partner etcetera, depending on what kind of product and the strategic importance.
Some fit of it as you look at the return on that we look at that primarily really from a cash flow perspective, right. There's a cashier investment upfront and obviously, we're in need of recoup that and generate a return.
And a little bit that the size of that there is not a specific number what I can say, okay. If it exceeds X then if yes, and if it's below that it's no it depends a little bit on on the the risk of the investment how well do we know that technology, how well our weak sort of feeling confidant.
And being able to fill the asset et cetera.
And so there's a risk balanced there between what kind of return you expect obviously when making that decision.
But in general the returns are are pretty high on the organic investments you do and then the capital investments.
The investments we make.
So it's you know.
Usually a pretty straightforward decisions I think certainly Bob every time, you know and.
And this is maybe the no brainer comment of the day, but over time, we certainly find that that are the lowest risk highest return investments that we've made typically are and you know.
Our own asset expansion because we are in the market. We have good line of sight into the gross margins are healthy.
And so we really liked to be able to invest in our.
Existing.
Products and in infrastructure and go after the growth that the growth platforms in the market affords us in these products.
Okay great.
Helpful color. There appreciate that and then just switching over to just.
General.
Margins in the quarter I'm wondering if you could talk about you always cap, which was I believe.
Business, but then impacted by inventory corrections as that kind of got back to normalization or how is that.
Impacting the margins.
How is that progressing in terms of its.
And sales cycle.
Yeah. So yeah. So you're right we were really pleased with.
Overall, H and H results.
Obviously from an organic growth perspective, it's not where we would like it to be.
Given the overall market environment, but margins were very strong and really had to do with you know.
<unk> mix of the business is that that performed the best tended to be the higher margin businesses.
Think our price discipline was very very good in the quarter as it normally is raw material deflation is is benefiting but also the spend controls in our manufacturing plants on somewhat lower volume. So you know, it's multifaceted and we were very.
Pleased to see the overall.
Profitability margin improvement in the quarter and yes.
The the K two sales from from Capa.
Our accretive at the margin profile of cap is higher than.
Our average profile as a company and the average profile of H and H. So.
The margin profile of that business is.
Is accretive and can.
<unk> contributed <unk> <unk>.
And while I wouldn't say use the word you know has it normalize I would not say it has normalized Norwood ice I stay that the overall minerals and nutrients business has normalized we did comment that we're really pleased to do.
Do you think to see that it has stabilized.
Over the course of the quarter and I would say that was true about the the the K two in the Capa business.
Q2 of 'twenty.
23 was the best quarter for Cat.
Capa NK to since the acquisition of course, we acquired it just as the market was was turning down.
And so we've seen it stabilize.
To pick up not quite back to the normalization that we would like to say, but the margins are contributing nicely.
And the overall cap the business contributed nicely to the results this quarter as well.
Okay Super Thank you very much I'll get back in queue.
Thanks, Bob.
Our next question comes from the line of Graham So silver water with H C. Wainwright. Please proceed with your question.
Hi, Thanks for taking my questions and congrats on the strong bottom line performance.
With respect to the H N H business I, just wanted to get a little bit more clarity on.
Ultimately what you see as the long term upside potential in the Vida choline business. If you can offer us kind of any color on a long term kinetics of growth there given.
Given the status of article in its very much a flagship high product for you as well as you know how you are thinking about the growth curve, particularly with regard to the capa product lineup.
And you know you mentioned earlier, you know inventory normalization and you know the fact that you don't exclude you're you're not looking at that business as having been totally normalize yet, but whether we should look at this as being a situation where you expect it to hit its stride in terms of growth before the end of this year or if we should really expect.
What are the afterburners to be turned on and the Capa product line in 2024.
Yeah.
Yeah, So I'll take a stab at that Martin you can chime in.
Add some color, but really two questions there one around Vita choline and the market potential and then one around cabinet growth.
Well I'll invite a choline you know we continue to be.
Very excited about the potential of this essential nutrient.
It is really a special nutrient that that Oh, yeah. We believe just has underperformed over the years because of lack of awareness not really because of lack of studies, but really lack of awareness and so we are as I've talked in the past.
Really focusing on on building a.
Marketing, if you will communication platform for effectively and comprehensively communicating about.
<unk> Vita choline N and our other portfolio of minerals, and and and vitamins and we do believe that we're starting to make strides there and starting to impact overall awareness and it's a bit of a journey and it will take some time, but we believe that the Si.
As of the the Vida choline market really is yeah, I Wanna say three to five times, what it is today and that should allow for not only double digit grows which we've already been achieving by penetrating the.
Get through awareness, but you know more significant growth you know I I'm I'm not gonna be satisfied until we're growing yeah. This market by 20, 25% a year.
And I think we need to be growing at that that sorts of those sorts of rates in order to achieve that three to five times.
Market growth and we need to do it by building awareness in the cognitive space, we need to do it by building awareness in the liver health space.
And and so forth and that's what we're focused on so hopefully that gives you a little bit of a feel for what we think is possible there and hence why we're investing in more capacity.
Relative to Capa.
You know I do think that that the rest of the year will continue to be.
You know uncertain, although we see some stabilization and a return to.
More normal conditions, you know I guess I would like to say that 2000 twenty's going into 2024, you know we're going to start to see growth really accelerate in our portfolio and are in products like.
Our RK to yeah, we certainly have a lot of new launch opportunities that we're working on and the team is excited about there's no question that the coming together of the balcom team in the cap of team is creating synergistic opportunities and I.
We're gonna start to realize that.
More and more as the year progresses, but as we go into 'twenty 'twenty four we should be back up into the call. It 15 20.
Type percent growth year every year of of K, two little bit similar to choline and we think that the market should be substantially larger than it is today and we need to drive awareness. There maybe we need to do a few more studies.
But we continue to be excited about our K two is a specialty vitamins.
Great. Thanks for that color just a couple of quick housekeeping financial questions. Maybe these are more for Martin.
First of all if I perennially ask how should we be thinking about the effective corporate tax rate going forward.
Generally speaking you know I think in the past you've always tended to guide us towards a number that's meaningfully higher than the number that was reported for this most recent quarter I was just wondering whether you know anything's changed there or if we should for the remainder of 2023 expect you know an effective tax rate more in that 23 plus.
Per cent range and then also with respect to debt repayment pace and you give us a sense of whether what you reported for the second quarter is kind of around where you expect to be doing debt repayments in the months and quarters ahead or.
Or if you expect the pace of debt repayments to change meaningfully up or down.
Yeah. Thank you Rob yeah on the tax rate I.
I guess I would say I'm pleased that we beat the guidance a little bit.
Normally guide at effective tax rate around 23% as you mentioned and you know recently, we've been able to beat that through call. It discrete items and projects that the tax team has developed together with the businesses and so on 'twenty three is sort of where you land. If you. If you do the math and you do the paper exercise so.
Where we're based on what kind of income were generating etcetera, you fallout right around there.
But then we have been effective at finding call it discrete items to come in lower than that I think from a guidance perspective, I will still continue to guide to the 23, because I don't know.
You know what those discrete items will be going forward and I can't guarantee that we'll continue to come up with them.
We'll certainly do our best to continue to do that and I sort of cautiously optimistic that we'll be able to beat it but 23 is sort of the.
Wherever you end up if you just do the math before you come up with new ideas.
On the debt repayment you know we paid back 26 here in the 26 million in the second quarter.
I would say that that kind of level, plus or minus a little bit for a normal quarter as it's very reasonable to assume.
With the exception of Q1s, if I put it that way we paid the dividend in Q1, so we have less call it excess cash to pay down debt. So we have a little less capacity in the first quarter every year, but for other quarters. What we did in in our Q2 I would say it's not unique.
We should be able to continue something along along those lines here going forward.
Thank you so much congrats once again.
Thank you thanks, Rob appreciate it.
There are no further questions in the queue I'd like to hand, the call back to Ted Harris for closing remarks.
Great. Thanks, Doug once again, just thank you all very much for joining the call today.
We really appreciate your support as well as your time and we certainly look forward to reporting out our progress in Q3 2023 results in October .
In the meantime, we will be presenting at a few conferences the Jefferies Conference in New York City on September six as well as the H C. Wainwright Conference in New York on September 11th So hopefully, we'll see some of you at one of those conferences. Thank you again for your time today I appreciate it.
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.