Balchem Corporation

Greetings. Welcome to the Balcom Corporation Financial Results Call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note that this conference is being recorded. At this time, I'll turn the conference over to Martin Bengtsson, Chief Financial Officer. Mr. Bengtsson, please go ahead.

Good morning, everyone. Thank you for joining our conference call this morning to discuss the results of Balcombe Corporation for the quarter ending March 31st, 2020. My name is Martin Bengtsson, Chief Financial Officer, and hosting this call with me is Ted Harris, our Chairman, CEO, and President. Following the advice of our counsel, auditors, and the SEC, at this time I'd like to read our forward-looking statement. The release does contain or likely will contain forward-looking statements. which reflect Balkem's expectation or belief concerning future events that involve risks and uncertainties. We can give no assurance that the expectations reflected in forward-looking statements will prove correct and various factors could cause results to differ materially from our expectations, including risks and factors identified in Balkem's Form 10-K. Forward-looking statements are qualified in their entirety by this cautionary statement. I will now turn the call over to Ted Harris, our Chairman, CEO, and President.

Thanks, Martin. Good morning and welcome to our conference call. Before I get into the quarter, I'd like to discuss our response to the COVID-19 crisis. As we shared in the press release this morning, the COVID-19 response effort has been the primary focus for the company since early in the first quarter. Having two of our three manufacturing facilities in Europe located in Italy, one of the first countries to be impacted by the pandemic, We got off to an early start to this situation, something that prepared us well for actions that needed to be taken in the rest of the world as the pandemic became more widespread. We were early to take actions around the safety of our employees, such as international domestic travel restrictions, site visitation restrictions to both internal and external personnel, strict protocols to deal with necessary visitors to sites, for example, delivery drivers. Elimination of large groups gatherings, mandatory work from home for all non-manufacturing and non-research and development employees, separation of employees into smaller work groups to reduce density within work teams, and new protocols relative to personal protection equipment, including face masks and sanitation procedures. We also move to ensure the continuity of our business and our ability to serve our customers with the important products and services they need by examining our supply chains, and Lowering Risk by increasing inventory levels where appropriate, as well as pre-positioning certain goods in various locations in case one specific facility would be disrupted. Very early on, we activated our Crisis Management Team or CMT to manage the day-to-day activities relating to the pandemic response efforts and to make timely decisions. Some examples of the early decisions made by the CMT are Holding a special board of directors meeting to ensure board engagement and involvement in the response plan. Creation of an individual response plan for the eventuality of positive cases within our employee base based on the Centers of Disease Control and Prevention or CDC guidelines. Execution of a communication strategy to keep employees and customers informed of requirements, decisions, and outcomes. and approval of special bonuses to non-executive employees to recognize the hourly and salaried workforce attendance and hard work during the pandemic. The combination of the various actions taken and the commitment and resilience of our employees have enabled us to keep all of our manufacturing sites open and running at near normal conditions, allowing us to keep our customers supplied. Our research and development teams advancing our innovation efforts and all of our other employees carrying on their responsibilities and functions remotely. We have had two employees that we are aware of out of our approximately 1400 employees test positive for COVID-19. Both cases were early in the stages of the pandemic and both employees are recovering well. We managed the cases effectively using our individual response plan, which is based on the CDC guidelines. and believe our early adoption of exposure mitigation actions played an important role in mitigating the impact of these cases on our employees and our company. From a financial perspective, the impact of the pandemic on Balchem in the first quarter was limited. However, the pandemic is far from over and the longer it carries on, the more likely it will be that impact on demand from our customers will be more significant. and therefore we are studying the markets that we serve very closely and at the same time staying attuned to our customers' needs to aid in our ability to respond to demand shifts. We have stress tested our balance sheet and liquidity position under various significant downturn scenarios and given our relatively low net debt position of 1.1 times trailing 12 months adjusted EBITDA, cash on hand, access to our undrawn revolving credit facility and expected free cash flows, we are pleased with the strength of our balance sheet going into this uncertain market environment. Despite this relative strength, we are taking actions to reduce capital expenditures and non-critical cash expenses wherever possible to preserve cash. As we look ahead, sales over the next few quarters will be challenged by weaker demand in food services, the animal protein markets including dairy protein, Medical device sterilization due to fewer elective surgeries and lower fracking activities. We anticipate that there will be somewhat offsetting potential strengthening demand in grocery store food products, functional technologies aiding food preservation needs, immunity strengthening minerals and nutrients, and certain benefits from lower raw material costs. While we understand the market dynamics impacting these downsides and upsides, It is very difficult at this time to tell the specific dimensional impact of these forces, but our overall expectation is that we will experience sequentially lower overall revenues in the second quarter and for the duration of the pandemic, given the significant disruption on economic activity across global markets. We will watch each of these markets very closely and remain nimble, flexible, and ready to respond accordingly. Balchem has dedicated significant resources to the COVID-19 response over the first quarter, and we are pleased with the results to date, given the circumstances. I would like to take this opportunity to thank all of the approximately 1,400 employees of Balchem across the world for their tremendous and compassionate response to the pandemic that we are all living through. I could not be more proud to be part of the Balchem team. Now, with regard to the first quarter of 2020, This morning we reported record quarterly consolidated net sales of $174.4 million, which resulted in record first quarter net income of $19.8 million, or 61 cents per share on a gap basis. A record first quarter non-gap net earnings of $26.4 million, or 81 cents per share, exclude tax-adjusted non-cash amortization and other items. as detailed in our earnings released this morning of $6.7 million to facilitate comparative evaluation of operating performance versus the prior year period. These first quarter record non-GAAP net earnings of $26.4 million or 81 cents per share represent an increase of $2.7 million or 8 cents per share compared with the prior year quarter of $23.7 million or 73 cents per share. We also delivered solid quarterly cash flows from operations of $22.6 million for the first quarter of 2020 with quarterly free cash flow of $17.4 million. Our quarterly net sales of $174.4 million were 11.1% higher than the prior year comparable quarter. As noted in our earnings release this morning, In order to align with our strategic focus on health and nutrition, our allocation of resources, and our evaluation of operating performance, and given the previously reported 2019 reduction in portfolio scale of industrial products, we have revised our reporting segment structure to three reportable segments, human nutrition and health, animal nutrition and health, and specialty products. This realignment has been retrospectively applied. Industrial product sales and production and other minor business activities are included in other and unallocated. We achieved all-time record sales in all three of our reporting segments, with these record sales partially offset by a decrease in sales related to business formally included in the industrial product segment, driven primarily by a decline in shale fracking activity. The impact of foreign exchange to our sales was a negative $0.5 million due to the weaker euro, driving a negative 33 basis point impact to our year-over-year sales growth. Our Q1 consolidated gross margin dollars of $55.3 million were up $6.2 million, or 12.7%, compared with $49.1 million for the same period in the prior year. Our consolidated gross margin percent was 31.7% of sales in the quarter, up 46 basis points from 31.3% in Q1 of 2019. The 46 basis point increase was primarily due to mix and certain lower raw material costs. Consolidated operating expenses for the first quarter of 2020 were $29.1 million as compared to $22.6 million in the prior year. The increase was principally due to incremental operating expenses related to the chemogas and Zumbro acquisitions and the prior year benefiting from the timing of an insurance recovery. Excluding non-cash operating expense associated with amortization of intangible assets of $6.3 million, operating expenses were $22.8 million or 13.1% of sales. Looking forward, we will continue to focus on tightly controlling our operating expenses and leveraging our existing SG&A infrastructure. GAAP earnings from operations for the first quarter were $26.3 million, a decrease of $0.2 million or 0.8% compared to prior year. On an adjusted basis, as detailed in our earnings release this morning, earnings from operations of $34.7 million were up 1.6 million dollars or 4.9 percent compared to 33.1 million dollars in the prior year. Record adjusted EBITDA of 42.4 million dollars was 2.7 million dollars or 6.8 percent above the 39.7 million dollars posted in the first quarter of 2019. Interest expense for the first quarter 2020 was 1.7 million dollars and our net debt was $179.6 million with an overall leverage ratio on a net debt basis of 1.1. The company's effective tax rates for the first quarter 2020 and 2019 were 19.3% and 24.2% respectively. The decrease in the effective tax rate is primarily attributable to lower enacted tax rates from several states. Consolidated net income closed the quarter at $19.8 million, up 5.2% from the prior year quarter. This quarterly net income translated into diluted net earnings per share of $0.61 for the current year, an increase of $0.03 from last year's comparable quarterly result of $0.58. On an adjusted basis, and as detailed in our earnings release, Our first quarter adjusted net earnings were $26.4 million or $0.81 per diluted share up $2.7 million or 11.4% compared with $23.7 million or $0.73 per diluted share in the prior year quarter. We generated quarterly free cash flow of $17.4 million and we closed out the quarter with $74 million of cash on the balance sheet. I'm now going to turn the call back over to Martin to go through the detailed results for each of our segments.