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balchem corp (bcpc) q1 2019 earnings call transcript
by：Top-In
2020-08-09
Image source: Motley FoolBalchem Corp (NASDAQ: BCPC)
CallMay q1209 earnings.
03,209, 11: 00m.
ETContents: prepared notable questions and answered comments from all participants: Greetings from operators and welcome to the quarterly conference call on the first quarter financial results of Balchem Corporation.
At this time, all the participants were listening. only mode. (
Operator instructions)
As a reminder, the meeting is being recorded.
I am now pleased to hand over the meeting to your Mr. moderator.
Martin Benson, chief financial officerThank you. You may begin.
Martin Benson-
Good morning, financial executives.
Thank you for attending our conference call this morning to discuss Balchem Corporation\'s quarterly results as of March 31, 2019.
My name is Martin Benson, and I am our Chairman, CEO and President, the chief financial officer who is with me to host this conference call.
As advised by our lawyers, auditors and SEC, at this time I would like to read our forward Report
Statement.
This version contains or may contain forwarding-
Forward-looking statements that reflect Balchem\'s expectations or beliefs about future events involving risks and uncertainties.
We cannot guarantee the expectations reflected in moving forward --
Forward-looking statements will prove to be correct, and various factors may lead to significant differences in results from our expectations, including the risks and factors identified in Balchem form 10K. Forward-
This cautious statement is in full compliance with the forward-looking statement.
I now transfer the call to Ted Harris, our Chairman, CEO and president. Ted Harris --
Thank you, president and chief executive, Martin.
Good morning, ladies and gentlemen.
Welcome to our conference call
This morning, we posted consolidated net sales of $0. 157 billion for the quarter and net income for the first quarter of $18. $8 million or $0.
According to accepted accounting principles, $58 per share.
Our first quarter
GAAP net income is $23. $7 million or $0.
The $73 per share reported in our press release earlier this morning does not include adjusted taxes
Amortization of cash, transaction and consolidation costs, Undistributed legal fees and excess tax benefits from Equity compensation are $4.
9 million promote comparative assessment of operating performance compared to the previous year. These non-
GAAP net income is $23. $7 million or $0.
$73 per share, down $0. $7 million or $0.
$03 per share, $24 in the same period last year. $4 million or $0. 76 per share.
We also provide $22 in operating quarterly cash flow.
The first quarter was 5 million and the free cash flow for the quarter was $2019, or 14 million.
Our quarterly net sales were $0. 157 billion.
Down 7% from the same period last year.
We have achieved record first quarter sales in terms of human nutrition and health, and continue to grow in our professional product segment, due to the benefits of supply disruption in China the previous year, the expected decline in the animal nutrition and health sector has been offset and will not repeat this year.
With the decline in our industrial product sector, the number associated with oil and gas fracturing remains low compared to the previous year.
The effect of foreign exchange on our sales is minus US $1.
4 million due to the weak euro, it has had a negative 90 basis points impact on our yearover-year growth.
The combined gross profit margin for the first quarter was $49.
$1 million fell by $2. 4 million or 4.
6%, compared to $51 in the same period of the previous year. 5 million.
Our gross profit margin is 31.
Sales for the quarter fell by 60 basis points from 3% to 31.
The first quarter of 2018 was 9%.
The decline was mainly due to increased competition in the single stomach market in Europe, mixing and certain inefficiencies, mainly due to a decrease in the number of single stomach and oil and gas operations.
The combined operating cost of $2019 in the first quarter was $22.
Compared to $24, it was 6 million.
The previous year was 2 million.
The decrease was mainly due to certain reductions in costs related to compensation. Excluding non-
Cash operating expenses related to amortization of intangible assets $5.
1 million, operating costs are $17. 5 million or 111% of sales.
Looking ahead, we will continue to focus on strictly controlling operating costs and leveraging our existing SG & A infrastructure.
Operating income for the first quarter was $26.
5 million, down $0. 8 million or 2.
Compared with the previous year, 8%.
Based on the adjustments detailed in our earnings report released this morning, operating revenue is $33.
$1 million fell by $1.
Compared with $34, 1 million.
The previous year was 2 million.
The adjusted EBITDA is $39.
7 million is $1. 1 million or 2.
6% lower than $40.
In the first quarter of 2018, 7 million articles were released.
Interest expenditure of $2019 in the first quarter was $1.
6 million. our net debt is $0. 101 billion.
The company\'s actual tax rates for the first quarter of 2019 and 2018 were 24, respectively. 2% and 23. 2% respectively.
The increase in the actual tax rate is mainly due to the reduction of excess tax incentives for stock compensation and the increase in national tax revenue.
Consolidated net income for the quarter was $18.
Fell $8 million 0.
Growth of 6 million over the previous year quarter.
When quarterly net income is converted to diluted net income of $0 per share.
58 for that year, a decrease of $0.
Compared with comparable quarterly results last year, $02 per share was $0. 60.
On an adjusted basis, as detailed in our earnings release, our adjusted net profit for the first quarter was $23. $7 million or $0.
After dilution, $73 per share fell by 0. 7 million or 2.
Compared to $24, 8%. $4 million or $0.
76 per share after dilution in the previous quarter.
We created $14 million in quarterly free cash flow and we ended the quarter with $39 million in cash on our balance sheet.
As we noted in our last call, our cash flow in 2018 was particularly strong due to the favorable timing of several capital expenditures and working capital projects.
These projects totalled approximately $8 million, and as mentioned earlier, there may be a reversal in 2019.
This expected 2019 impact in the first quarter did happen, and we now expect to normalize cash flow for the rest of 2019.
$39 million in cash on the balance sheet reflects $16 million in revolving loan payments and $15 in dividend payments.
Capital expenditures of $1 million and $8.
The first quarter of 2019 was 5 million.
Before returning the call to Martin to introduce the detailed results paragraph by paragraph, I would like to introduce you to some of our key strategic activities and growth plans.
Later yesterday, we announced that Balchem had signed a final agreement to acquire Chemogas NV, a private holding specialty gas company based in Grimbergen, Belgium, for a purchase price of 95 euros.
Chemogas is the leader in epoxy ethylene packaging and distribution for sterilization of medical devices mainly in European and Asian markets.
This acquisition is a big addition to our current leadership in the United States. S.
And significantly expanded our geographical position to make Balchem a global leader in the critical supply of ethylene oxide in the Medical Device Sterilization Industry.
The merger of our two companies will greatly improve our ability to provide services and support to our customers on a more global basis.
Chemogas\'s 2019 revenue is expected to be around 30% euros, and EBITDA\'s profit margin is about.
The deal is expected to increase Balchem\'s earnings per share for 2019 on an adjusted basis.
Our team of animal nutrition and health has made some important milestones on our platform for the manufacture of rumination protein and PetShure ingredients.
Last week, at the International recognized Pet Food Forum in Kansas City, our team launched several new products to the industry.
These novel products offer exceptional functionality to food and therapeutic manufacturers, extend the ability to preserve and pH control, and offer some enhanced solutions in a convenient and efficient form
These exciting additions to an already unique portfolio that is starting new courses in the growing pet food sector and creating value for pets and their pet parents.
In the chewing animal business, our dedicated dairy research and business experts are proud to announce that our latest innovations in amino acid nutrition have been launched with the arrival of the amino acid XM.
This next-generation product provides enhanced bio-utilization and excellent feed stability, enabling it to provide industry-leading value to dairy farmers around the world.
This study proves that our North American and European markets will be introducing innovations in the coming weeks.
As we discussed on our previous phone call, Balchem invested in the follow-up study of Cornell University in our human nutrition and health business, the supplemental adrenaline study conducted during pregnancy, to find out whether the cognitive benefits seen during the first year of the initial study will last until the later stages of childhood.
Researchers at Cornell University conducted extensive neurological and cognitive tests for children of the same age 7.
We are pleased to report the results from this
The study will be conducted by Dr.
On June 7, 2019, Rick Canfield from Cornell University, Edinburgh, Scotland, attended the conference of the European Association for liver disease and nutrition in GI.
We are looking forward to learning about the lasting effects of bile-based drugs in children aged 7.
Regarding Curemark and their work in developing unique treatments for autism, we recently met with Joan Fallon, founder and CEO of curemark, who told us several important updates on the progress they are making.
The Curemark team recently met with the United StatesS.
The Food and Drug Administration will
Submit the meeting.
In other topics Joan Fallon told us that they discussed the results of the latest phase III clinical study completed at the end of 2017, and the necessary steps for final submission to apply for approval.
Regarding the results of the recent Phase III clinical study, we are pleased to hear the lead investigator Dr.
Deborah Pearson from the University of Texas Health Sciences Center in Houston will present some findings from their Phase 3 study at the 2019 annual meeting of the International Autism Research Society in Montreal, Canada, later today.
With respect to the necessary steps that need to be taken in the final submission of an approval application, we are advised that Curemark will need to submit an application for a BLA or biological product license, not an NDA or new drug application, because of the nature of the product and the approval process recently provided by the FDA on biological products.
We are working with Curemark and his consultants to gain a broad understanding of the impact of this development on the project as a whole, especially the work that Balchem needs to contribute to the manufacturing process.
One fact we have learned is that 12 years of exclusivity is accompanied by the successful approval of BLA, while 5 years of NDA approval, which is a very positive development for Curemark and Balchem
We appreciate Joan Fallon\'s recent update report and are encouraged by the progress being made.
Earlier this week, Balchem released its first sustainability report, which embodies the company\'s commitment to managing our environmental, social and governance or ESG performance.
This is our first formal sustainability report. over the past 50 years, we have been passionate about developing and delivering innovative solutions to the health and nutritional needs of the world, at the same time operate our facilities and businesses in accordance with the expectations of all our stakeholders.
Our goal is to be a stronger and more dynamic company and make a meaningful contribution to making the world healthier.
This report shares the foundations we have built and conveys our goals and commitments to these goals.
I\'m going to turn the phone back to Martin now to see the detailed results for each of our clips.
Martin Benson-
Thank you, chief financial officer.
Our Human Nutrition and Health Division achieved record first-quarter sales of $85 this quarter. 1 million.
Added $2. 1 million or 2.
An increase of 5% over the previous year.
Sales growth is mainly due to increased sales of ingredient solutions in the food and beverage markets and increased sales of grain systems.
Revenue from operations in the human nutrition and health sector also hit a quarterly record of $13.
7 million, an increase of $0.
Compared to the previous year, it was 8 million or 6%.
Mainly due to the increase in sales and the decrease in amortized expenses, partially offset by a mix.
Not including non
The cash costs associated with amortization of acquired intangible assets are $5 million, and the adjusted earnings for this part of the business are $18.
Compared with $18, 7 million.
Last quarter was 4 million.
Sales in our animal nutrition and health department are $43.
4 million, a decrease of $ 6% or $2.
Compared with the previous year, 8 million.
The effect of foreign exchange is the most significant in our ANH part, minus $0.
The impact in the first quarter was 9 million per cent and 2% per cent for this yearover-year growth.
Product Line Sales for the feed market for mammals increased by $0. 5 million or 4.
7% compared to the previous year, driven by an increase in production, the lower average selling price partially offset the impact due to mixed factors.
Sales in the global single stomach species market fell by $3. 3 million or 9.
Due to increased competition activity, the number of single stomach species in Europe decreased, up 5% from the previous year, as the situation that benefited from the interruption of sodium chloride supply in China in the previous year was no longer repeated this year.
As we have pointed out in advance, we are required to get about $4 million in Q2 Q1 2018 of 2018 and $4 million from this temporary interruption.
Quarterly operating income for animal nutrition and health is $5.
Compared with $7 in the same period last year, the decline was 3 million.
5 million is mainly due to the increase in competition activities and the decrease in the number and profit margin of the single stomach business in Europe.
Professional product sales in the first quarter of $18.
Compared to $17, it was 4 million.
The previous quarter was 7 million.
Increase of 3.
The 9% increase was driven by an increase in ethylene oxide sales in the medical device sterilization market.
The professional product division achieved $6 in operating income in the first quarter.
The first quarter of last year was $7 million, compared with $5 million in the same period last year.
Add $1. 7 million.
Not including non
Cash charges related to amortization of intangible assets are $0.
7 million, adjusted earnings for this segment of the business in the first quarter were $7.
4 million, $5.
The previous year was 8 million.
Growth is driven primarily by higher sales and a better mix above.
Sales in industrial product segments are $10.
A decrease of $1 million. 4 million or 30.
Compared with the previous quarter, it increased by 2%, mainly due to a decrease in sales of choline and choline Derivatives used in shale fracturing applications.
We believe that the main reason for the decline is the slowdown in fracturing activity in the second stack basin.
We do expect this business to resume in the second half of 2019, as logistics solutions for oil and gas transportation will go live around the second stack basin.
But, as we have discussed in the past, we are still cautious about this historically cyclical market, and it is difficult to accurately predict the ups and downs.
Our business income for industrial products is $1.
6 million, $0 Less.
Sales fell, up 8 million from the same period last year.
I\'m going to turn this phone back to Ted now to make some concluding remarks. Ted Harris --
Thank you, president and chief executive, Martin.
We did it in the first quarter of this year. over-
Annual revenue growth is strong in 2 of our 4 sectors, and despite a slight decline in consolidated net profit, there are also some relatively unfavorable factors noted earlier, especially supply disruptions and shale fracturing activities in China
We believe these headwinds will continue in the second quarter. But as the benefits we saw in the single stomach business last year weakened, the hydraulic fracturing activity accelerated with the completion of the Permian Basin pipeline, which should have declined in the second half of the year.
At the same time, we are cautiously encouraged by the recent growth in the United StatesS.
Price of milk ingredients.
The increase in milk and milk protein prices and the reduction in feed costs will contribute to the profitability of dairy farms, which in turn will provide us with a healthier dairy economy environment to operate within one year.
We are very excited about the acquisition of Chemogas NV.
The merger of our two companies has clearly created a global leader in the critical supply of ethylene oxide in the Medical Device Sterilization Industry, which will greatly improve our ability to provide services and support to our customers on a more global basis.
We are pleased with the progress made in the 2019 key strategic growth initiative in the first quarter, and we think we have done a good job --
Make the most of our market growth opportunities.
We will continue to strengthen our company by focusing on our core strategy, strict cost management and seeking acquisition opportunities to create value.
I want to return the phone to Martin now and Martin will ask questions. Martin?
Martin Benson-
Thank you, chief financial officer.
This concludes the formal part of the meeting.
At this point, we will open the conference call on the issue.
Question and Answer: Thank you, operator. (
Operator instructions)
Our first question comes from Brett Hendry at the global seaport.
Please continue with your question. Brett Hundley --
Global Securities Co. , Ltd. -
Thank you. good morning. Ted Harris --
Good morning Brett, chairman and chief executive.
Martin Benson-
Good morning, Brett, chief financial officer. Brett Hundley --
Global Securities Co. , Ltd. -
AnalystI wants to start with Chemogas.
Congrats the agreement. Ted Harris --
Thank you, chairman and chief executive. Brett Hundley --
Global Securities Co. , Ltd. -
In many ways, analysis makes perfect sense, and I fully understand this approach in terms of line-of-business expansion.
It seems to me that this is a very attractive area with a lot of moat.
I was curious about what it said on the international front.
You guys always have some business areas worldwide or outside North America, but when we think of Balchem historically, we think of your business in North America, whether a deal like this shows that more and more Balchem will seek to become a global business.
Can you talk a little? Ted Harris --
Brett, chairman and chief executive
We are very excited about Chemogas and we like the market very much and we continue to find it very attractive.
We see this as a unique opportunity and we have to truly create global leaders in this important product line that we have so strong in the USS.
There is a good synergy.
But your point is good, how does this help Balchem in the international arena?
I don\'t think that necessarily means we\'re going to be a global company more and more, but we still have 75% of our sales in the US. S.
We still feel that given the market we are in, we have a lot of growth opportunities in the US. S.
So we don\'t feel like we have to go to the world in search of growth.
But with that said, we have good growth opportunities in Europe.
Specifically, we can\'t expand our--
The business, in particular, enters the Medical Device Sterilization business in Europe or international, and there is no major acquisition like this.
You know, to expand our animal nutrition and health business in Europe, we recently purchased Bioscreen.
We see huge growth opportunities there, but as you know, more penetration is needed in the US. S.
So, this is a logical next step for the disinfection business.
This really makes us more important in Europe.
If you are willing to further develop in Europe, it provides a bit of infrastructure.
So far, we have basically owned the animal nutrition and health business based in Europe, with two operating factories, and we will now have a third one.
Our two businesses will have important businesses there and we can take advantage of more.
So it could eventually lead to more expansion in Europe.
But the main reason is that this is-
We think this is a good market and a very unique opportunity for us to build a global leader in this product line. Brett Hundley --
Global Securities Co. , Ltd. -
Great analysis.
Thank you for your comments on this.
I\'m glad you mentioned the animals because I have a lot of questions about it.
I will try to limit them to a large range here. But --
So in your animal business, you have been expanding in the world.
You mentioned some new products in the prepared comments.
So, if I just rule out some of the temporary comparison noise Martin mentioned, and when I look at your entire animal business, I really want to get some comments from you, how do we need to consider future growth expectations for this business?
Frankly, you know, I was thinking, if I need to re-adjust my growth expectations, at least in the next year or two, because you have taken some international action, because some of the new products you bring, such as mammals?
Frankly speaking, I would also like to filter out the current situation of pigs in China.
I mean, the government is fighting a little bit, but what we hear and see is that the herd there has just been slaughtered by ASF.
I\'m really thinking, from the point of view of the quantity and pricing of your stomach business, what might the potential domino effect have on your business, because my direct idea is, this can be a real positive factor for you and the business areas you provide in North America.
But I just wanted to let you know. As --
Again, because it involves thinking about the future growth ghost of your animal business? Ted Harris --
There are obviously a lot of chairman and CEO Brett, but I will capture more as much as I can.
If I look at it from a very high point of view, we are optimistic about animal nutrition for a long time.
We believe that protein consumption in the world will continue to increase, and our position in the poultry and pig markets in Europe and the United States will continue to increase. S.
Then our position in the dairy market and the products we have to offer will enable us to grow as the market grows and grow faster than the market because we have the ability to penetrate further.
We are bullish in the long run, but there are obviously a lot of short-term effects or some negative ones, some positive ones.
Clearly, what really affects this quarter and will affect the next quarter is that the huge gains we received from the supply disruption in China in 2018 have disappeared, so this yearover-
A difficult year.
On the positive side, however, we see milk prices going up there, and I think the price of milk in the US is now close to $16 per poundS.
This is a year of significant growth. over-year.
Milk protein prices rose sharply, close to $2. over-year.
Therefore, I think we will definitely be negatively affected by the economic environment of dairy products in the past few years.
There is a little light at the end of the tunnel, and we use the words of cautious encouragement and cautious optimism to describe the rebound and impact of milk prices, which may have an impact on our dairy business, because our dairy business is growing at a rate far below what we have been able to grow in history and think it should.
Then you throw the African swine fever there, and to be honest, we\'re not quite sure what impact this will have on us in the end.
I think reports outside of China are low-key compared to what really happened.
I think the cull or slaughter of live pigs in China is more important than what most reports reveal.
Exports from the United StatesS.
Prices have skyrocketed, but to a large extent, I think at this point in time this has exceeded inventory and it will take a while to grow the base of pigs in this country.
We do think this will help us in the end, but we may see an increase in the number of sows after 6 months, 9 months, 12 months, and an increase in the number of American pigsS.
There is no doubt that this will benefit us.
I think the shortage of pork will lead to an increase in poultry consumption, which will help us in the short term, and the number of birds added is faster than the number of pigs.
So, you know there\'s an opportunity ahead.
We won\'t say that we really saw our results today or that we saw it in the first quarter, but I think it\'s a positive future.
The negative side and why I said at the beginning that we are not quite sure about the benefit of the ASF is that Chinese manufacturers of the bile base have lower demand for the bile base and therefore try to export more, and tend to export at very low prices now, probably lower than we \'ve seen in history.
So we, you know, eliminate the disruption of supply in Europe, even because the Chinese, yes, are back, but there is not much demand at home in China.
So I think it\'s not good for us today.
So, we are watching it very closely, and we do see the positive side you mentioned in the ASF, and it hasn\'t really hurt us yet, we need to go through this negative period of China\'s return to the market.
But in the long run, we are very optimistic about animal nutrition. Brett Hundley --
Global Securities Co. , Ltd. -
The color is really helpful.
I\'m sorry to let you go through every species in the world, but it\'s really helpful.
The last one for me, I will leave here, is HNH.
I would like to talk about trends in the component solutions business in this area.
Your performance at HNH is a bit better than I expected this quarter.
Your comments on the strength of your solution business caught my attention.
Especially because it fits in with the comments I \'ve heard from other ingredient companies that involve larger food and beverage customers starting to go back to suppliers and talk about innovation again, and focus on reducing costs in just a few years.
Can you please talk a little bit about the segments that you think have an advantage in the component solutions business, and whether you feel that growth is growing more broadly in this area. Thank you. Ted Harris --
Chairman and Chief Executive yes, we are, in general, satisfied with this quarter, both from a top-level perspective and from a bottom-line perspective.
As we have pointed out, the advantage of ingredient solutions is that their food ingredient business is the real highlight.
We feel that we have gone a long way in this industry, and as you know, a lot of business has come from--
Not all of this, but a lot of acquisitions from the sensor effect, we struggle on the growth curve, and we really feel like we \'ve turned things around there.
Of course, our nutritious beverage system, drinks are a big part of what we do.
We feel that when we all convert from part of the hydrogenation oil, we win more than we deserve if you like, and that\'s part of the growth ---
Just part of the growth is the general growth and nutrition drinks, and part of the growth is that we have shifted our efforts from some commodity applications to more professional applications, we felt we had won there.
We talked about some of our taste system business over the past year and it was a bit disappointing last year.
This business really depends on limited time and seasonal products.
I think we did a very good job of winning many of them this year.
Therefore, we are very satisfied with the basic principles of the business and our success in the limited company. time offerings.
This is a very important part of the industry. you brought it up.
We do see more and more food companies coming to companies like us, they said, we need some innovation, we need to introduce new products, we don\'t necessarily have previous R & D personnel, we need help from our suppliers.
This is a very positive trend for us because we are very good at it.
You know, we\'re not a taste company like IFF, and we\'re not a system company where we buy flavors and make flavors.
We do very well and we usually react faster than others. We --
Our factory has more flexibility and smaller batch manufacturing capacity, so we can produce seasonal products.
So, this is a very suitable trend for us.
I think this is one of the reasons why the business is doing better this year.
We feel that we have a good momentum in this industry today. Brett Hundley --
Global Securities Co. , Ltd. -
Thank you. Ted Harris --
The chairman and chief executive thanked Brett.
The next questions are from Ram Selvaraju and H. C. Wainwright.
Please continue with your question.
Savarage--H. C.
Wright Limited-
Analyst, thank you very much for accepting my question.
So I want to start with several aspects of the acquisition of Chemogas.
Can you specifically confirm what the USD purchase price for Chemogas is, where the cash comes from, and when the transaction is expected to end? Ted Harris --
Chairman and chief executive.
Martin Benson-
I\'m Ram. This is Martin.
The acquisition is worth 95 euros.
So when you do a quick calculation there, you translate it to $0. 105 billion, $0. 106 billion.
This is $0. 106 billion on a debt-free, cash-free basis, and they do have some debt.
So we ended up actually paying a little less than that, calling it $10 million lower than the US. S.
Dollars in cash.
This is funded through our existing revolver.
We have a $0. 5 billion revolver.
We are currently using much less than that, and today we are close to $0. 14 billion.
So we will take this out of our revolver and our existing cash.
So, if you look at our current net debt situation, we\'re $100 million.
Ish, $0. 101 billion
This will therefore add about $100 million to the debt position.
So, as debt leverage, we are about 0. 6 today.
So this will bring us closer to 1.
It\'s debt leverage for us.
Savarage--H. C.
Wright Limited-AnalystOkay.
When do you expect the deal to end? Ted Harris --
The chairman and chief executive, this is an estimate at the moment.
We are just waiting for approval from one country.
We expect it to be completed within one month.
Of course, I also hope that there will be a week or two from here.
So it\'s really the only thing we\'re waiting for is regulatory approval from a country, and we\'re pushing this as fast as we can.
Savarage--H. C.
Wright Limited-AnalystOkay.
Can you explain to us if this is a competitive bidding process or if you are opportunistic in this regard, does Chemogas actually sell itself? Ted Harris --
So this is not a competitive situation. We approached --
Chemogas is owned by a management and private equity company called Gilde management in Belgium and the Netherlands.
We contacted them and while they only had a few years, they saw the benefits of considering a deal with Balchem.
So we have a unique process with them.
Savarage--H. C.
Wright Limited-AnalystOkay.
To confirm this, Chemogas only focuses on providing the right service to customers in Europe and Asia.
They only run these markets.
Right? Ted Harris --
The main reason is that they have not served as chairman and chief executive in the United States. S.
But they did ship some products to Central and South America.
But most of their sales are in Europe and Asia, a little bit in the Middle East.
But they did not play in the United States. S.
Savarage--H. C.
Wright Limited-AnalystOkay.
You took care of it. . .
Martin Benson-
I think the sales direction of 2 out of 3 of them is in Europe.
Savarage--H. C.
Wright Limited-AnalystOkay.
Can you disclose a multiple of the income paid based on the purchase price? Given your existing ethylene oxide business, is it in fact possible to have any synergies? Ted Harris --
I mean, when we were sitting here today, their income was about 30 euros.
Therefore, 95 million of the enterprise value is 3,3.
Multiple of income.
We paid 11 times as much as they did on EBITDA 2019.
So from multiple perspectives, this is where we sit.
The second part of your question Ram is. . .
Savarage--H. C.
Wright Limited-
Analyze synergies if you expect any synergies here. Ted Harris --
Chairman and CEO yes, we expect some synergies in the third year, with interest rate synergies around $1 for the whole year.
5 million we baked it when we made the model.
This comes from purchasing, it comes from some indirect savings, and it also comes from some commercial synergies.
But about $1.
Running speed of 5 million.
Savarage--H. C.
Wright Limited-AnalystOkay.
Then I have a few simple questions about the candidates for autism.
You said there would be some Stage 3 data at this sar meeting.
Do you have access to any information provided there and can you provide us with that information? Ted Harris --
The chairman and CEO believes the answer is yes, and we have a group today in the intervention measurement technology department where he will present the results and will certainly report to us.
We have access to the summary that will be presented when we sign up for the meeting.
So we certainly hope that once this is shown publicly, we will be able to share this more formally with you and our shareholders, and we will try to figure out how to do it.
But first of all, we are going to the meeting today and we are very interested to see what is really there.
From our point of view, the abstract short information is certainly very positive.
But we look forward to seeing more in the broader results presentation today.
Savarage--H. C.
Wright Limited-
A summary analysis made public at this juncture? Ted Harris --
The chairman and CEO did not think so.
I think it is only available to those who sign up for the sar meeting.
This is what I believe. I am not 100% sure about it.
But that\'s how we came into contact with it. And --
But I also believe that it will be easier to be consumed by the public once it appears in interference measurement technology.
We will definitely check and find a way to make it widely available.
Savarage--H. C.
Wright Limited-AnalystOkay.
Can you elaborate on what additional manufacturing information or additional work you may be responsible for since it is officially classified as the subject of BLA filing and NDA filing? Ted Harris --
So we haven\'t, you know, we\'re just learning this, just trying to understand.
We did have a meeting with the consulting firm over the next few weeks, which will really help us understand this very specifically.
I think from a very high level perspective, we do expect us to do more work, because just here, maybe I simplified it too much, or my understanding is not that specific.
But if you consider a NDA and specific drug approvals, a lot of the work is around specific molecules made with larger molecules such as biological products.
It seems that BLA pays more attention to the consistency of the manufacturing process, ensuring that the manufacturing parameters are clearly understood, and clearly understanding what happens when you operate outside of these parameters.
So we do expect more work to be done.
Let me give you a hypothetical example of a false number.
If we say we need to operate at 100 degrees, I think we have to make it clear ---
When we say 100 positive and negative five degrees, we must accurately show what happens when positive and negative five degrees.
Therefore, there is evidence that we have a stable and sustainable manufacturing process that produces the same product every day.
So we do see that there will be more work like this in this regard ---
In BLA, it may also be the producer of enzymes.
But all this will be reviewed in the coming weeks and months.
I believe we will have a lot of, better and clear information about you ---
Next phone call.
Savarage--H. C.
Wright Limited-
Analyst can you confirm if you will become the only manufacturer of the product to transfer the technology to other contract manufacturers that may be involved if the product is commercialized, or if any kind of product is required, and will you participate in the generation of batch-to-batch comparability data that supports BLA? Ted Harris --
In the view of the chairman and chief executive, we will definitely participate in the formation of batch comparable data.
We will be the only producer of this product.
Obviously, if it succeeds, we may be looking for some redundancy in the manufacturing process and we will do it soon.
But we will be the only producer of this product, and we are particularly pleased with the 12-year exclusive sales prospects that BLA may have in comparison to traditional 5 years.
Obviously this is better than a very strong patent portfolio protection because it has the exclusivity that comes with BLA and I think it\'s positive for us as an exclusive manufacturer and for Curemark.
Savarage--H. C.
Wright Limited-AnalystOkay.
Then there is a quick question about choline.
You talked about this human pediatric data, proving the benefits of the bile-based drugs from a cognitive perspective.
Can you tell us if this information will eventually be made public and spread by you people.
If since this information has begun to come out from entities that may be interested in working with you to develop a range of products specifically for baby nutrition, do you have any potential interest that you expect this aspect of the business to move forward because of this new information? Thank you. Ted Harris --
Thank you, chairman and chief executive
You know us again. -
We mentioned in our previous phone call that we have invested in this study, which has now been completed.
So, the next step is really the release of data.
We are confident that this study will produce at least 3 basic reports.
One of them is a speech to be held in Scotland on June 7.
Like my comments on the speech on interference synthetic aperture radar, we do believe that once this is made, we will be able to get those results, we will be able to spread these results more widely and talk about as little detail as possible in the next quarter of the conference call, but also try to find ways to communicate the results more broadly.
We are very interested in the results here.
I just saw the idea, that is, being able to show that the cognitive benefits that are seen in infants that last until the age of 7 will be a rather powerful message choline and cognitive benefit for our efforts to build awareness.
Yes, our interest in the cognitive field is increasing, especially prenatal vitamins, and we really think that in the near future choline will be a fixed part of the prenatal program, usually included in the prenatal vitamin program, not in the past.
I think the first study at Cornell University
Learning plays an important role in this regard.
Although there is some evidence, this is not the need for cognitive benefits for adults.
We also believe that the power of this information in infants and older children today is increasing adult dialogue.
As a company, we are trying to figure out how to take advantage of this, how to invest this further, how to do some research around this, in order to really be able to participate in discussions about adult cognition, adult memory, and more on the horizon.
But I think this study has not only increased the discussion of babies and children, but also the beginning of the discussion of adults.
Savarage--H. C.
Wright Limited-AnalystOkay.
Sorry, I just didn\'t hear the name of the Cornell researcher.
Can you tell me who I am again? Ted Harris --
His name is Rick Canfield.
He really led this.
In his studies, he himself will give a speech based on my understanding in Scotland.
Savarage--H. C.
Wright Limited-
Very good.
Thank you very much.
Something very exciting. Ted Harris --
Chairman and Chief Executive thanked Ram.
The next question comes from Mitra Ramgopal from Sidoti and Company.
Please continue with your question. Mitra ramgopa-
Sidoti & Company, LLC--
Hello, good morning.
Two simple questions.
First of all, Ted I would like to know if you can give us an update on the integration of ERP systems and any incremental costs that may arise this quarter? Ted Harris --
Chair and CEO yes Mitra, thank you, we have other things to talk about so we are not talking about it in my strategic initiative update and it is really a very important project
Update related to implementation, I think it is very positive because we are on track, on budget.
We\'re live now.
I think, as we have said in the past, we are now doing all the financial integration work in the new system, which is the first milestone.
The second plan is to start production at various production bases.
On November, we conducted a live test in Lincoln City, USA.
We learned a lot from it.
Our work in Lincoln is very stable.
On April 1, we broadcast live on the second website. inaudible)
The time difference between Lincoln and Defiance, Ohio is the second.
That website is doing very well.
What I want to say is that if it is not already stable, it is close to stability.
We will now start to accelerate and do more sites faster.
Lincoln was really the first test site and we wanted to learn everything we needed from there before going live again.
As a matter of fact, the resistance has gone so smoothly that we will begin to accelerate our pace.
We feel that by the second quarter of next year, we will definitely implement it completely.
Compared to the additional incremental cost, this is very, very small so far. Mitra ramgopa-
Sidoti & Company, LLC--AnalystOkay.
Great now.
Then in terms of the introduction of the new product, you will soon highlight the next generation of chewing animal products.
I just want to know if you feel as far as your channel is concerned that there are other products that make a lot of sense in this term. Ted Harris --
Chairman and Chief Executive yes Mitra, we are very pleased with the release of our historical product AminoShure
M stands for mectolon. we are--
We have launched a new bioshure XM product.
Again, this is a product that we are very excited to be able to market.
However, we are working on the next generation of upgraded versions of existing products.
I would like to say to our product line that I am excited to bring about better efficacy and better bio-utilization is a key theme there.
However, we are also exploring some new market products that will bring nutrients that may not be available or even sold in the dairy market, such as today, we believe that this is of great benefit to the health of the cows and the final production.
Therefore, I am satisfied with the channel of opportunity.
I feel very good when we talk and we start to bring some of them to market. Mitra ramgopa-
Sidoti & Company, LLC--AnalystOkay.
Great now.
Thank you again for answering the question. Ted Harris --
The chairman and chief executive thanked Mitra.
The next question comes from Matt McGeary of Eagle Asset Management.
Please continue with your question. Matthew J. McGeary --
Eagle Asset Management--
Good morning, analyst.
Most of my questions have been answered, but I hope you can give us more details about the frac business.
Just to help me understand the exact location and what you played there--
I mean, obviously this is an unstable space, but what is driving the current results? Ted Harris --
Chairman and chief executive.
Thanks Matt.
So, fundamentally, our choline product is a clay stabilizer, which is contained in the fracturing fluid, where the clay stabilizer is really needed.
Therefore, not all geographical locations require clay stability, but Clay stabilizer is very commonly used in the second stack basin.
So what I want to say is that the second stack basin is our main market and of course, in the recent past, this is where you really want to go.
So we are not involved in drilling, so the number of rigs is not necessarily telling this story for us, because many wells are drilled, but in the end it is not fracking.
We believe that the main driving force of our business today is only the lower fracturing activity in the second stack basin, because the market is really waiting for the completion of these pipelines to reduce the cost of oil transportation and gas in the region.
But there are other drivers of what\'s going on in our business.
I think oil prices may even be a bigger driver in the end of our business.
When we saw a rebound in oil prices a few weeks ago, today\'s oil price is already at a low of $60.
If the price rises more clearly, it may have a positive impact on us.
On the negative side, this is a very good market in reducing costs and reducing costs to cope with falling oil prices.
So we do see some cutting of our products, dilute our products, and they may try to dilute it here and there in order to save money, rather than using 100% of ACH.
So all of these factors work, but in general, over time, we \'ve seen a fairly good correlation with fracking activity and our volume. Matthew J. McGeary --
Eagle Asset Management--AnalystOkay. Thanks. Ted Harris --
Thank you, Matt.
Ladies and gentlemen, we have finished this issue. and-answer session.
At this point, I want to turn the phone back to Ted Harris and ask for his concluding remarks. Ted Harris --
The chairman and chief executive thanked everyone for attending our meeting today.
We look forward to the next call in early August to review our second-quarter results and update you on the progress of our strategic growth plan.
In the next conference call, we should be able to report with certainty the progress of integration related to Chemogas, as we have just talked about the results of the research published by the Cornell research and the Curemark Research.
In the meantime, Martin and I will attend the annual farm-to-market meeting of BMO Capital Markets in New York on May 16.
On June 5 or 6, we will attend the Deutsche Bank Global Conference on industry and materials in Chicago.
And then we have two
Planning a trade Roadshow at this point, one of which is Sidoti in Baltimore
June, then in the Midwest with the harbor in July.
So hope to see some of you at these events.
In addition to that, we will sign and thank you again for joining. Thanks.
Martin Benson-
Thank you. chief financial officer.
This concludes today\'s meeting.
At this point, you may disconnect the line.
Thank you for your participation.
Participant: Martin Benson--
Harris, chief financial officer--
Brett Hundley, chairman and chief executive--
Global Securities Co. , Ltd. -
Selvaraju analyst-H. C.
Wright Limited-
Ramgopa analysis--
Sidoti & Company, LLC--
Matthew J. McGeary --
Eagle Asset Management--
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CallMay q1209 earnings.
03,209, 11: 00m.
ETContents: prepared notable questions and answered comments from all participants: Greetings from operators and welcome to the quarterly conference call on the first quarter financial results of Balchem Corporation.
At this time, all the participants were listening. only mode. (
Operator instructions)
As a reminder, the meeting is being recorded.
I am now pleased to hand over the meeting to your Mr. moderator.
Martin Benson, chief financial officerThank you. You may begin.
Martin Benson-
Good morning, financial executives.
Thank you for attending our conference call this morning to discuss Balchem Corporation\'s quarterly results as of March 31, 2019.
My name is Martin Benson, and I am our Chairman, CEO and President, the chief financial officer who is with me to host this conference call.
As advised by our lawyers, auditors and SEC, at this time I would like to read our forward Report
Statement.
This version contains or may contain forwarding-
Forward-looking statements that reflect Balchem\'s expectations or beliefs about future events involving risks and uncertainties.
We cannot guarantee the expectations reflected in moving forward --
Forward-looking statements will prove to be correct, and various factors may lead to significant differences in results from our expectations, including the risks and factors identified in Balchem form 10K. Forward-
This cautious statement is in full compliance with the forward-looking statement.
I now transfer the call to Ted Harris, our Chairman, CEO and president. Ted Harris --
Thank you, president and chief executive, Martin.
Good morning, ladies and gentlemen.
Welcome to our conference call
This morning, we posted consolidated net sales of $0. 157 billion for the quarter and net income for the first quarter of $18. $8 million or $0.
According to accepted accounting principles, $58 per share.
Our first quarter
GAAP net income is $23. $7 million or $0.
The $73 per share reported in our press release earlier this morning does not include adjusted taxes
Amortization of cash, transaction and consolidation costs, Undistributed legal fees and excess tax benefits from Equity compensation are $4.
9 million promote comparative assessment of operating performance compared to the previous year. These non-
GAAP net income is $23. $7 million or $0.
$73 per share, down $0. $7 million or $0.
$03 per share, $24 in the same period last year. $4 million or $0. 76 per share.
We also provide $22 in operating quarterly cash flow.
The first quarter was 5 million and the free cash flow for the quarter was $2019, or 14 million.
Our quarterly net sales were $0. 157 billion.
Down 7% from the same period last year.
We have achieved record first quarter sales in terms of human nutrition and health, and continue to grow in our professional product segment, due to the benefits of supply disruption in China the previous year, the expected decline in the animal nutrition and health sector has been offset and will not repeat this year.
With the decline in our industrial product sector, the number associated with oil and gas fracturing remains low compared to the previous year.
The effect of foreign exchange on our sales is minus US $1.
4 million due to the weak euro, it has had a negative 90 basis points impact on our yearover-year growth.
The combined gross profit margin for the first quarter was $49.
$1 million fell by $2. 4 million or 4.
6%, compared to $51 in the same period of the previous year. 5 million.
Our gross profit margin is 31.
Sales for the quarter fell by 60 basis points from 3% to 31.
The first quarter of 2018 was 9%.
The decline was mainly due to increased competition in the single stomach market in Europe, mixing and certain inefficiencies, mainly due to a decrease in the number of single stomach and oil and gas operations.
The combined operating cost of $2019 in the first quarter was $22.
Compared to $24, it was 6 million.
The previous year was 2 million.
The decrease was mainly due to certain reductions in costs related to compensation. Excluding non-
Cash operating expenses related to amortization of intangible assets $5.
1 million, operating costs are $17. 5 million or 111% of sales.
Looking ahead, we will continue to focus on strictly controlling operating costs and leveraging our existing SG & A infrastructure.
Operating income for the first quarter was $26.
5 million, down $0. 8 million or 2.
Compared with the previous year, 8%.
Based on the adjustments detailed in our earnings report released this morning, operating revenue is $33.
$1 million fell by $1.
Compared with $34, 1 million.
The previous year was 2 million.
The adjusted EBITDA is $39.
7 million is $1. 1 million or 2.
6% lower than $40.
In the first quarter of 2018, 7 million articles were released.
Interest expenditure of $2019 in the first quarter was $1.
6 million. our net debt is $0. 101 billion.
The company\'s actual tax rates for the first quarter of 2019 and 2018 were 24, respectively. 2% and 23. 2% respectively.
The increase in the actual tax rate is mainly due to the reduction of excess tax incentives for stock compensation and the increase in national tax revenue.
Consolidated net income for the quarter was $18.
Fell $8 million 0.
Growth of 6 million over the previous year quarter.
When quarterly net income is converted to diluted net income of $0 per share.
58 for that year, a decrease of $0.
Compared with comparable quarterly results last year, $02 per share was $0. 60.
On an adjusted basis, as detailed in our earnings release, our adjusted net profit for the first quarter was $23. $7 million or $0.
After dilution, $73 per share fell by 0. 7 million or 2.
Compared to $24, 8%. $4 million or $0.
76 per share after dilution in the previous quarter.
We created $14 million in quarterly free cash flow and we ended the quarter with $39 million in cash on our balance sheet.
As we noted in our last call, our cash flow in 2018 was particularly strong due to the favorable timing of several capital expenditures and working capital projects.
These projects totalled approximately $8 million, and as mentioned earlier, there may be a reversal in 2019.
This expected 2019 impact in the first quarter did happen, and we now expect to normalize cash flow for the rest of 2019.
$39 million in cash on the balance sheet reflects $16 million in revolving loan payments and $15 in dividend payments.
Capital expenditures of $1 million and $8.
The first quarter of 2019 was 5 million.
Before returning the call to Martin to introduce the detailed results paragraph by paragraph, I would like to introduce you to some of our key strategic activities and growth plans.
Later yesterday, we announced that Balchem had signed a final agreement to acquire Chemogas NV, a private holding specialty gas company based in Grimbergen, Belgium, for a purchase price of 95 euros.
Chemogas is the leader in epoxy ethylene packaging and distribution for sterilization of medical devices mainly in European and Asian markets.
This acquisition is a big addition to our current leadership in the United States. S.
And significantly expanded our geographical position to make Balchem a global leader in the critical supply of ethylene oxide in the Medical Device Sterilization Industry.
The merger of our two companies will greatly improve our ability to provide services and support to our customers on a more global basis.
Chemogas\'s 2019 revenue is expected to be around 30% euros, and EBITDA\'s profit margin is about.
The deal is expected to increase Balchem\'s earnings per share for 2019 on an adjusted basis.
Our team of animal nutrition and health has made some important milestones on our platform for the manufacture of rumination protein and PetShure ingredients.
Last week, at the International recognized Pet Food Forum in Kansas City, our team launched several new products to the industry.
These novel products offer exceptional functionality to food and therapeutic manufacturers, extend the ability to preserve and pH control, and offer some enhanced solutions in a convenient and efficient form
These exciting additions to an already unique portfolio that is starting new courses in the growing pet food sector and creating value for pets and their pet parents.
In the chewing animal business, our dedicated dairy research and business experts are proud to announce that our latest innovations in amino acid nutrition have been launched with the arrival of the amino acid XM.
This next-generation product provides enhanced bio-utilization and excellent feed stability, enabling it to provide industry-leading value to dairy farmers around the world.
This study proves that our North American and European markets will be introducing innovations in the coming weeks.
As we discussed on our previous phone call, Balchem invested in the follow-up study of Cornell University in our human nutrition and health business, the supplemental adrenaline study conducted during pregnancy, to find out whether the cognitive benefits seen during the first year of the initial study will last until the later stages of childhood.
Researchers at Cornell University conducted extensive neurological and cognitive tests for children of the same age 7.
We are pleased to report the results from this
The study will be conducted by Dr.
On June 7, 2019, Rick Canfield from Cornell University, Edinburgh, Scotland, attended the conference of the European Association for liver disease and nutrition in GI.
We are looking forward to learning about the lasting effects of bile-based drugs in children aged 7.
Regarding Curemark and their work in developing unique treatments for autism, we recently met with Joan Fallon, founder and CEO of curemark, who told us several important updates on the progress they are making.
The Curemark team recently met with the United StatesS.
The Food and Drug Administration will
Submit the meeting.
In other topics Joan Fallon told us that they discussed the results of the latest phase III clinical study completed at the end of 2017, and the necessary steps for final submission to apply for approval.
Regarding the results of the recent Phase III clinical study, we are pleased to hear the lead investigator Dr.
Deborah Pearson from the University of Texas Health Sciences Center in Houston will present some findings from their Phase 3 study at the 2019 annual meeting of the International Autism Research Society in Montreal, Canada, later today.
With respect to the necessary steps that need to be taken in the final submission of an approval application, we are advised that Curemark will need to submit an application for a BLA or biological product license, not an NDA or new drug application, because of the nature of the product and the approval process recently provided by the FDA on biological products.
We are working with Curemark and his consultants to gain a broad understanding of the impact of this development on the project as a whole, especially the work that Balchem needs to contribute to the manufacturing process.
One fact we have learned is that 12 years of exclusivity is accompanied by the successful approval of BLA, while 5 years of NDA approval, which is a very positive development for Curemark and Balchem
We appreciate Joan Fallon\'s recent update report and are encouraged by the progress being made.
Earlier this week, Balchem released its first sustainability report, which embodies the company\'s commitment to managing our environmental, social and governance or ESG performance.
This is our first formal sustainability report. over the past 50 years, we have been passionate about developing and delivering innovative solutions to the health and nutritional needs of the world, at the same time operate our facilities and businesses in accordance with the expectations of all our stakeholders.
Our goal is to be a stronger and more dynamic company and make a meaningful contribution to making the world healthier.
This report shares the foundations we have built and conveys our goals and commitments to these goals.
I\'m going to turn the phone back to Martin now to see the detailed results for each of our clips.
Martin Benson-
Thank you, chief financial officer.
Our Human Nutrition and Health Division achieved record first-quarter sales of $85 this quarter. 1 million.
Added $2. 1 million or 2.
An increase of 5% over the previous year.
Sales growth is mainly due to increased sales of ingredient solutions in the food and beverage markets and increased sales of grain systems.
Revenue from operations in the human nutrition and health sector also hit a quarterly record of $13.
7 million, an increase of $0.
Compared to the previous year, it was 8 million or 6%.
Mainly due to the increase in sales and the decrease in amortized expenses, partially offset by a mix.
Not including non
The cash costs associated with amortization of acquired intangible assets are $5 million, and the adjusted earnings for this part of the business are $18.
Compared with $18, 7 million.
Last quarter was 4 million.
Sales in our animal nutrition and health department are $43.
4 million, a decrease of $ 6% or $2.
Compared with the previous year, 8 million.
The effect of foreign exchange is the most significant in our ANH part, minus $0.
The impact in the first quarter was 9 million per cent and 2% per cent for this yearover-year growth.
Product Line Sales for the feed market for mammals increased by $0. 5 million or 4.
7% compared to the previous year, driven by an increase in production, the lower average selling price partially offset the impact due to mixed factors.
Sales in the global single stomach species market fell by $3. 3 million or 9.
Due to increased competition activity, the number of single stomach species in Europe decreased, up 5% from the previous year, as the situation that benefited from the interruption of sodium chloride supply in China in the previous year was no longer repeated this year.
As we have pointed out in advance, we are required to get about $4 million in Q2 Q1 2018 of 2018 and $4 million from this temporary interruption.
Quarterly operating income for animal nutrition and health is $5.
Compared with $7 in the same period last year, the decline was 3 million.
5 million is mainly due to the increase in competition activities and the decrease in the number and profit margin of the single stomach business in Europe.
Professional product sales in the first quarter of $18.
Compared to $17, it was 4 million.
The previous quarter was 7 million.
Increase of 3.
The 9% increase was driven by an increase in ethylene oxide sales in the medical device sterilization market.
The professional product division achieved $6 in operating income in the first quarter.
The first quarter of last year was $7 million, compared with $5 million in the same period last year.
Add $1. 7 million.
Not including non
Cash charges related to amortization of intangible assets are $0.
7 million, adjusted earnings for this segment of the business in the first quarter were $7.
4 million, $5.
The previous year was 8 million.
Growth is driven primarily by higher sales and a better mix above.
Sales in industrial product segments are $10.
A decrease of $1 million. 4 million or 30.
Compared with the previous quarter, it increased by 2%, mainly due to a decrease in sales of choline and choline Derivatives used in shale fracturing applications.
We believe that the main reason for the decline is the slowdown in fracturing activity in the second stack basin.
We do expect this business to resume in the second half of 2019, as logistics solutions for oil and gas transportation will go live around the second stack basin.
But, as we have discussed in the past, we are still cautious about this historically cyclical market, and it is difficult to accurately predict the ups and downs.
Our business income for industrial products is $1.
6 million, $0 Less.
Sales fell, up 8 million from the same period last year.
I\'m going to turn this phone back to Ted now to make some concluding remarks. Ted Harris --
Thank you, president and chief executive, Martin.
We did it in the first quarter of this year. over-
Annual revenue growth is strong in 2 of our 4 sectors, and despite a slight decline in consolidated net profit, there are also some relatively unfavorable factors noted earlier, especially supply disruptions and shale fracturing activities in China
We believe these headwinds will continue in the second quarter. But as the benefits we saw in the single stomach business last year weakened, the hydraulic fracturing activity accelerated with the completion of the Permian Basin pipeline, which should have declined in the second half of the year.
At the same time, we are cautiously encouraged by the recent growth in the United StatesS.
Price of milk ingredients.
The increase in milk and milk protein prices and the reduction in feed costs will contribute to the profitability of dairy farms, which in turn will provide us with a healthier dairy economy environment to operate within one year.
We are very excited about the acquisition of Chemogas NV.
The merger of our two companies has clearly created a global leader in the critical supply of ethylene oxide in the Medical Device Sterilization Industry, which will greatly improve our ability to provide services and support to our customers on a more global basis.
We are pleased with the progress made in the 2019 key strategic growth initiative in the first quarter, and we think we have done a good job --
Make the most of our market growth opportunities.
We will continue to strengthen our company by focusing on our core strategy, strict cost management and seeking acquisition opportunities to create value.
I want to return the phone to Martin now and Martin will ask questions. Martin?
Martin Benson-
Thank you, chief financial officer.
This concludes the formal part of the meeting.
At this point, we will open the conference call on the issue.
Question and Answer: Thank you, operator. (
Operator instructions)
Our first question comes from Brett Hendry at the global seaport.
Please continue with your question. Brett Hundley --
Global Securities Co. , Ltd. -
Thank you. good morning. Ted Harris --
Good morning Brett, chairman and chief executive.
Martin Benson-
Good morning, Brett, chief financial officer. Brett Hundley --
Global Securities Co. , Ltd. -
AnalystI wants to start with Chemogas.
Congrats the agreement. Ted Harris --
Thank you, chairman and chief executive. Brett Hundley --
Global Securities Co. , Ltd. -
In many ways, analysis makes perfect sense, and I fully understand this approach in terms of line-of-business expansion.
It seems to me that this is a very attractive area with a lot of moat.
I was curious about what it said on the international front.
You guys always have some business areas worldwide or outside North America, but when we think of Balchem historically, we think of your business in North America, whether a deal like this shows that more and more Balchem will seek to become a global business.
Can you talk a little? Ted Harris --
Brett, chairman and chief executive
We are very excited about Chemogas and we like the market very much and we continue to find it very attractive.
We see this as a unique opportunity and we have to truly create global leaders in this important product line that we have so strong in the USS.
There is a good synergy.
But your point is good, how does this help Balchem in the international arena?
I don\'t think that necessarily means we\'re going to be a global company more and more, but we still have 75% of our sales in the US. S.
We still feel that given the market we are in, we have a lot of growth opportunities in the US. S.
So we don\'t feel like we have to go to the world in search of growth.
But with that said, we have good growth opportunities in Europe.
Specifically, we can\'t expand our--
The business, in particular, enters the Medical Device Sterilization business in Europe or international, and there is no major acquisition like this.
You know, to expand our animal nutrition and health business in Europe, we recently purchased Bioscreen.
We see huge growth opportunities there, but as you know, more penetration is needed in the US. S.
So, this is a logical next step for the disinfection business.
This really makes us more important in Europe.
If you are willing to further develop in Europe, it provides a bit of infrastructure.
So far, we have basically owned the animal nutrition and health business based in Europe, with two operating factories, and we will now have a third one.
Our two businesses will have important businesses there and we can take advantage of more.
So it could eventually lead to more expansion in Europe.
But the main reason is that this is-
We think this is a good market and a very unique opportunity for us to build a global leader in this product line. Brett Hundley --
Global Securities Co. , Ltd. -
Great analysis.
Thank you for your comments on this.
I\'m glad you mentioned the animals because I have a lot of questions about it.
I will try to limit them to a large range here. But --
So in your animal business, you have been expanding in the world.
You mentioned some new products in the prepared comments.
So, if I just rule out some of the temporary comparison noise Martin mentioned, and when I look at your entire animal business, I really want to get some comments from you, how do we need to consider future growth expectations for this business?
Frankly, you know, I was thinking, if I need to re-adjust my growth expectations, at least in the next year or two, because you have taken some international action, because some of the new products you bring, such as mammals?
Frankly speaking, I would also like to filter out the current situation of pigs in China.
I mean, the government is fighting a little bit, but what we hear and see is that the herd there has just been slaughtered by ASF.
I\'m really thinking, from the point of view of the quantity and pricing of your stomach business, what might the potential domino effect have on your business, because my direct idea is, this can be a real positive factor for you and the business areas you provide in North America.
But I just wanted to let you know. As --
Again, because it involves thinking about the future growth ghost of your animal business? Ted Harris --
There are obviously a lot of chairman and CEO Brett, but I will capture more as much as I can.
If I look at it from a very high point of view, we are optimistic about animal nutrition for a long time.
We believe that protein consumption in the world will continue to increase, and our position in the poultry and pig markets in Europe and the United States will continue to increase. S.
Then our position in the dairy market and the products we have to offer will enable us to grow as the market grows and grow faster than the market because we have the ability to penetrate further.
We are bullish in the long run, but there are obviously a lot of short-term effects or some negative ones, some positive ones.
Clearly, what really affects this quarter and will affect the next quarter is that the huge gains we received from the supply disruption in China in 2018 have disappeared, so this yearover-
A difficult year.
On the positive side, however, we see milk prices going up there, and I think the price of milk in the US is now close to $16 per poundS.
This is a year of significant growth. over-year.
Milk protein prices rose sharply, close to $2. over-year.
Therefore, I think we will definitely be negatively affected by the economic environment of dairy products in the past few years.
There is a little light at the end of the tunnel, and we use the words of cautious encouragement and cautious optimism to describe the rebound and impact of milk prices, which may have an impact on our dairy business, because our dairy business is growing at a rate far below what we have been able to grow in history and think it should.
Then you throw the African swine fever there, and to be honest, we\'re not quite sure what impact this will have on us in the end.
I think reports outside of China are low-key compared to what really happened.
I think the cull or slaughter of live pigs in China is more important than what most reports reveal.
Exports from the United StatesS.
Prices have skyrocketed, but to a large extent, I think at this point in time this has exceeded inventory and it will take a while to grow the base of pigs in this country.
We do think this will help us in the end, but we may see an increase in the number of sows after 6 months, 9 months, 12 months, and an increase in the number of American pigsS.
There is no doubt that this will benefit us.
I think the shortage of pork will lead to an increase in poultry consumption, which will help us in the short term, and the number of birds added is faster than the number of pigs.
So, you know there\'s an opportunity ahead.
We won\'t say that we really saw our results today or that we saw it in the first quarter, but I think it\'s a positive future.
The negative side and why I said at the beginning that we are not quite sure about the benefit of the ASF is that Chinese manufacturers of the bile base have lower demand for the bile base and therefore try to export more, and tend to export at very low prices now, probably lower than we \'ve seen in history.
So we, you know, eliminate the disruption of supply in Europe, even because the Chinese, yes, are back, but there is not much demand at home in China.
So I think it\'s not good for us today.
So, we are watching it very closely, and we do see the positive side you mentioned in the ASF, and it hasn\'t really hurt us yet, we need to go through this negative period of China\'s return to the market.
But in the long run, we are very optimistic about animal nutrition. Brett Hundley --
Global Securities Co. , Ltd. -
The color is really helpful.
I\'m sorry to let you go through every species in the world, but it\'s really helpful.
The last one for me, I will leave here, is HNH.
I would like to talk about trends in the component solutions business in this area.
Your performance at HNH is a bit better than I expected this quarter.
Your comments on the strength of your solution business caught my attention.
Especially because it fits in with the comments I \'ve heard from other ingredient companies that involve larger food and beverage customers starting to go back to suppliers and talk about innovation again, and focus on reducing costs in just a few years.
Can you please talk a little bit about the segments that you think have an advantage in the component solutions business, and whether you feel that growth is growing more broadly in this area. Thank you. Ted Harris --
Chairman and Chief Executive yes, we are, in general, satisfied with this quarter, both from a top-level perspective and from a bottom-line perspective.
As we have pointed out, the advantage of ingredient solutions is that their food ingredient business is the real highlight.
We feel that we have gone a long way in this industry, and as you know, a lot of business has come from--
Not all of this, but a lot of acquisitions from the sensor effect, we struggle on the growth curve, and we really feel like we \'ve turned things around there.
Of course, our nutritious beverage system, drinks are a big part of what we do.
We feel that when we all convert from part of the hydrogenation oil, we win more than we deserve if you like, and that\'s part of the growth ---
Just part of the growth is the general growth and nutrition drinks, and part of the growth is that we have shifted our efforts from some commodity applications to more professional applications, we felt we had won there.
We talked about some of our taste system business over the past year and it was a bit disappointing last year.
This business really depends on limited time and seasonal products.
I think we did a very good job of winning many of them this year.
Therefore, we are very satisfied with the basic principles of the business and our success in the limited company. time offerings.
This is a very important part of the industry. you brought it up.
We do see more and more food companies coming to companies like us, they said, we need some innovation, we need to introduce new products, we don\'t necessarily have previous R & D personnel, we need help from our suppliers.
This is a very positive trend for us because we are very good at it.
You know, we\'re not a taste company like IFF, and we\'re not a system company where we buy flavors and make flavors.
We do very well and we usually react faster than others. We --
Our factory has more flexibility and smaller batch manufacturing capacity, so we can produce seasonal products.
So, this is a very suitable trend for us.
I think this is one of the reasons why the business is doing better this year.
We feel that we have a good momentum in this industry today. Brett Hundley --
Global Securities Co. , Ltd. -
Thank you. Ted Harris --
The chairman and chief executive thanked Brett.
The next questions are from Ram Selvaraju and H. C. Wainwright.
Please continue with your question.
Savarage--H. C.
Wright Limited-
Analyst, thank you very much for accepting my question.
So I want to start with several aspects of the acquisition of Chemogas.
Can you specifically confirm what the USD purchase price for Chemogas is, where the cash comes from, and when the transaction is expected to end? Ted Harris --
Chairman and chief executive.
Martin Benson-
I\'m Ram. This is Martin.
The acquisition is worth 95 euros.
So when you do a quick calculation there, you translate it to $0. 105 billion, $0. 106 billion.
This is $0. 106 billion on a debt-free, cash-free basis, and they do have some debt.
So we ended up actually paying a little less than that, calling it $10 million lower than the US. S.
Dollars in cash.
This is funded through our existing revolver.
We have a $0. 5 billion revolver.
We are currently using much less than that, and today we are close to $0. 14 billion.
So we will take this out of our revolver and our existing cash.
So, if you look at our current net debt situation, we\'re $100 million.
Ish, $0. 101 billion
This will therefore add about $100 million to the debt position.
So, as debt leverage, we are about 0. 6 today.
So this will bring us closer to 1.
It\'s debt leverage for us.
Savarage--H. C.
Wright Limited-AnalystOkay.
When do you expect the deal to end? Ted Harris --
The chairman and chief executive, this is an estimate at the moment.
We are just waiting for approval from one country.
We expect it to be completed within one month.
Of course, I also hope that there will be a week or two from here.
So it\'s really the only thing we\'re waiting for is regulatory approval from a country, and we\'re pushing this as fast as we can.
Savarage--H. C.
Wright Limited-AnalystOkay.
Can you explain to us if this is a competitive bidding process or if you are opportunistic in this regard, does Chemogas actually sell itself? Ted Harris --
So this is not a competitive situation. We approached --
Chemogas is owned by a management and private equity company called Gilde management in Belgium and the Netherlands.
We contacted them and while they only had a few years, they saw the benefits of considering a deal with Balchem.
So we have a unique process with them.
Savarage--H. C.
Wright Limited-AnalystOkay.
To confirm this, Chemogas only focuses on providing the right service to customers in Europe and Asia.
They only run these markets.
Right? Ted Harris --
The main reason is that they have not served as chairman and chief executive in the United States. S.
But they did ship some products to Central and South America.
But most of their sales are in Europe and Asia, a little bit in the Middle East.
But they did not play in the United States. S.
Savarage--H. C.
Wright Limited-AnalystOkay.
You took care of it. . .
Martin Benson-
I think the sales direction of 2 out of 3 of them is in Europe.
Savarage--H. C.
Wright Limited-AnalystOkay.
Can you disclose a multiple of the income paid based on the purchase price? Given your existing ethylene oxide business, is it in fact possible to have any synergies? Ted Harris --
I mean, when we were sitting here today, their income was about 30 euros.
Therefore, 95 million of the enterprise value is 3,3.
Multiple of income.
We paid 11 times as much as they did on EBITDA 2019.
So from multiple perspectives, this is where we sit.
The second part of your question Ram is. . .
Savarage--H. C.
Wright Limited-
Analyze synergies if you expect any synergies here. Ted Harris --
Chairman and CEO yes, we expect some synergies in the third year, with interest rate synergies around $1 for the whole year.
5 million we baked it when we made the model.
This comes from purchasing, it comes from some indirect savings, and it also comes from some commercial synergies.
But about $1.
Running speed of 5 million.
Savarage--H. C.
Wright Limited-AnalystOkay.
Then I have a few simple questions about the candidates for autism.
You said there would be some Stage 3 data at this sar meeting.
Do you have access to any information provided there and can you provide us with that information? Ted Harris --
The chairman and CEO believes the answer is yes, and we have a group today in the intervention measurement technology department where he will present the results and will certainly report to us.
We have access to the summary that will be presented when we sign up for the meeting.
So we certainly hope that once this is shown publicly, we will be able to share this more formally with you and our shareholders, and we will try to figure out how to do it.
But first of all, we are going to the meeting today and we are very interested to see what is really there.
From our point of view, the abstract short information is certainly very positive.
But we look forward to seeing more in the broader results presentation today.
Savarage--H. C.
Wright Limited-
A summary analysis made public at this juncture? Ted Harris --
The chairman and CEO did not think so.
I think it is only available to those who sign up for the sar meeting.
This is what I believe. I am not 100% sure about it.
But that\'s how we came into contact with it. And --
But I also believe that it will be easier to be consumed by the public once it appears in interference measurement technology.
We will definitely check and find a way to make it widely available.
Savarage--H. C.
Wright Limited-AnalystOkay.
Can you elaborate on what additional manufacturing information or additional work you may be responsible for since it is officially classified as the subject of BLA filing and NDA filing? Ted Harris --
So we haven\'t, you know, we\'re just learning this, just trying to understand.
We did have a meeting with the consulting firm over the next few weeks, which will really help us understand this very specifically.
I think from a very high level perspective, we do expect us to do more work, because just here, maybe I simplified it too much, or my understanding is not that specific.
But if you consider a NDA and specific drug approvals, a lot of the work is around specific molecules made with larger molecules such as biological products.
It seems that BLA pays more attention to the consistency of the manufacturing process, ensuring that the manufacturing parameters are clearly understood, and clearly understanding what happens when you operate outside of these parameters.
So we do expect more work to be done.
Let me give you a hypothetical example of a false number.
If we say we need to operate at 100 degrees, I think we have to make it clear ---
When we say 100 positive and negative five degrees, we must accurately show what happens when positive and negative five degrees.
Therefore, there is evidence that we have a stable and sustainable manufacturing process that produces the same product every day.
So we do see that there will be more work like this in this regard ---
In BLA, it may also be the producer of enzymes.
But all this will be reviewed in the coming weeks and months.
I believe we will have a lot of, better and clear information about you ---
Next phone call.
Savarage--H. C.
Wright Limited-
Analyst can you confirm if you will become the only manufacturer of the product to transfer the technology to other contract manufacturers that may be involved if the product is commercialized, or if any kind of product is required, and will you participate in the generation of batch-to-batch comparability data that supports BLA? Ted Harris --
In the view of the chairman and chief executive, we will definitely participate in the formation of batch comparable data.
We will be the only producer of this product.
Obviously, if it succeeds, we may be looking for some redundancy in the manufacturing process and we will do it soon.
But we will be the only producer of this product, and we are particularly pleased with the 12-year exclusive sales prospects that BLA may have in comparison to traditional 5 years.
Obviously this is better than a very strong patent portfolio protection because it has the exclusivity that comes with BLA and I think it\'s positive for us as an exclusive manufacturer and for Curemark.
Savarage--H. C.
Wright Limited-AnalystOkay.
Then there is a quick question about choline.
You talked about this human pediatric data, proving the benefits of the bile-based drugs from a cognitive perspective.
Can you tell us if this information will eventually be made public and spread by you people.
If since this information has begun to come out from entities that may be interested in working with you to develop a range of products specifically for baby nutrition, do you have any potential interest that you expect this aspect of the business to move forward because of this new information? Thank you. Ted Harris --
Thank you, chairman and chief executive
You know us again. -
We mentioned in our previous phone call that we have invested in this study, which has now been completed.
So, the next step is really the release of data.
We are confident that this study will produce at least 3 basic reports.
One of them is a speech to be held in Scotland on June 7.
Like my comments on the speech on interference synthetic aperture radar, we do believe that once this is made, we will be able to get those results, we will be able to spread these results more widely and talk about as little detail as possible in the next quarter of the conference call, but also try to find ways to communicate the results more broadly.
We are very interested in the results here.
I just saw the idea, that is, being able to show that the cognitive benefits that are seen in infants that last until the age of 7 will be a rather powerful message choline and cognitive benefit for our efforts to build awareness.
Yes, our interest in the cognitive field is increasing, especially prenatal vitamins, and we really think that in the near future choline will be a fixed part of the prenatal program, usually included in the prenatal vitamin program, not in the past.
I think the first study at Cornell University
Learning plays an important role in this regard.
Although there is some evidence, this is not the need for cognitive benefits for adults.
We also believe that the power of this information in infants and older children today is increasing adult dialogue.
As a company, we are trying to figure out how to take advantage of this, how to invest this further, how to do some research around this, in order to really be able to participate in discussions about adult cognition, adult memory, and more on the horizon.
But I think this study has not only increased the discussion of babies and children, but also the beginning of the discussion of adults.
Savarage--H. C.
Wright Limited-AnalystOkay.
Sorry, I just didn\'t hear the name of the Cornell researcher.
Can you tell me who I am again? Ted Harris --
His name is Rick Canfield.
He really led this.
In his studies, he himself will give a speech based on my understanding in Scotland.
Savarage--H. C.
Wright Limited-
Very good.
Thank you very much.
Something very exciting. Ted Harris --
Chairman and Chief Executive thanked Ram.
The next question comes from Mitra Ramgopal from Sidoti and Company.
Please continue with your question. Mitra ramgopa-
Sidoti & Company, LLC--
Hello, good morning.
Two simple questions.
First of all, Ted I would like to know if you can give us an update on the integration of ERP systems and any incremental costs that may arise this quarter? Ted Harris --
Chair and CEO yes Mitra, thank you, we have other things to talk about so we are not talking about it in my strategic initiative update and it is really a very important project
Update related to implementation, I think it is very positive because we are on track, on budget.
We\'re live now.
I think, as we have said in the past, we are now doing all the financial integration work in the new system, which is the first milestone.
The second plan is to start production at various production bases.
On November, we conducted a live test in Lincoln City, USA.
We learned a lot from it.
Our work in Lincoln is very stable.
On April 1, we broadcast live on the second website. inaudible)
The time difference between Lincoln and Defiance, Ohio is the second.
That website is doing very well.
What I want to say is that if it is not already stable, it is close to stability.
We will now start to accelerate and do more sites faster.
Lincoln was really the first test site and we wanted to learn everything we needed from there before going live again.
As a matter of fact, the resistance has gone so smoothly that we will begin to accelerate our pace.
We feel that by the second quarter of next year, we will definitely implement it completely.
Compared to the additional incremental cost, this is very, very small so far. Mitra ramgopa-
Sidoti & Company, LLC--AnalystOkay.
Great now.
Then in terms of the introduction of the new product, you will soon highlight the next generation of chewing animal products.
I just want to know if you feel as far as your channel is concerned that there are other products that make a lot of sense in this term. Ted Harris --
Chairman and Chief Executive yes Mitra, we are very pleased with the release of our historical product AminoShure
M stands for mectolon. we are--
We have launched a new bioshure XM product.
Again, this is a product that we are very excited to be able to market.
However, we are working on the next generation of upgraded versions of existing products.
I would like to say to our product line that I am excited to bring about better efficacy and better bio-utilization is a key theme there.
However, we are also exploring some new market products that will bring nutrients that may not be available or even sold in the dairy market, such as today, we believe that this is of great benefit to the health of the cows and the final production.
Therefore, I am satisfied with the channel of opportunity.
I feel very good when we talk and we start to bring some of them to market. Mitra ramgopa-
Sidoti & Company, LLC--AnalystOkay.
Great now.
Thank you again for answering the question. Ted Harris --
The chairman and chief executive thanked Mitra.
The next question comes from Matt McGeary of Eagle Asset Management.
Please continue with your question. Matthew J. McGeary --
Eagle Asset Management--
Good morning, analyst.
Most of my questions have been answered, but I hope you can give us more details about the frac business.
Just to help me understand the exact location and what you played there--
I mean, obviously this is an unstable space, but what is driving the current results? Ted Harris --
Chairman and chief executive.
Thanks Matt.
So, fundamentally, our choline product is a clay stabilizer, which is contained in the fracturing fluid, where the clay stabilizer is really needed.
Therefore, not all geographical locations require clay stability, but Clay stabilizer is very commonly used in the second stack basin.
So what I want to say is that the second stack basin is our main market and of course, in the recent past, this is where you really want to go.
So we are not involved in drilling, so the number of rigs is not necessarily telling this story for us, because many wells are drilled, but in the end it is not fracking.
We believe that the main driving force of our business today is only the lower fracturing activity in the second stack basin, because the market is really waiting for the completion of these pipelines to reduce the cost of oil transportation and gas in the region.
But there are other drivers of what\'s going on in our business.
I think oil prices may even be a bigger driver in the end of our business.
When we saw a rebound in oil prices a few weeks ago, today\'s oil price is already at a low of $60.
If the price rises more clearly, it may have a positive impact on us.
On the negative side, this is a very good market in reducing costs and reducing costs to cope with falling oil prices.
So we do see some cutting of our products, dilute our products, and they may try to dilute it here and there in order to save money, rather than using 100% of ACH.
So all of these factors work, but in general, over time, we \'ve seen a fairly good correlation with fracking activity and our volume. Matthew J. McGeary --
Eagle Asset Management--AnalystOkay. Thanks. Ted Harris --
Thank you, Matt.
Ladies and gentlemen, we have finished this issue. and-answer session.
At this point, I want to turn the phone back to Ted Harris and ask for his concluding remarks. Ted Harris --
The chairman and chief executive thanked everyone for attending our meeting today.
We look forward to the next call in early August to review our second-quarter results and update you on the progress of our strategic growth plan.
In the next conference call, we should be able to report with certainty the progress of integration related to Chemogas, as we have just talked about the results of the research published by the Cornell research and the Curemark Research.
In the meantime, Martin and I will attend the annual farm-to-market meeting of BMO Capital Markets in New York on May 16.
On June 5 or 6, we will attend the Deutsche Bank Global Conference on industry and materials in Chicago.
And then we have two
Planning a trade Roadshow at this point, one of which is Sidoti in Baltimore
June, then in the Midwest with the harbor in July.
So hope to see some of you at these events.
In addition to that, we will sign and thank you again for joining. Thanks.
Martin Benson-
Thank you. chief financial officer.
This concludes today\'s meeting.
At this point, you may disconnect the line.
Thank you for your participation.
Participant: Martin Benson--
Harris, chief financial officer--
Brett Hundley, chairman and chief executive--
Global Securities Co. , Ltd. -
Selvaraju analyst-H. C.
Wright Limited-
Ramgopa analysis--
Sidoti & Company, LLC--
Matthew J. McGeary --
Eagle Asset Management--
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