Balchem Corporation

Greetings and welcome to the Balchem Corporation Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Martin Bengtsson, Chief Financial Officer. Thank you. You may begin.

Good morning, everyone. Thank you for joining our conference call this morning to discuss the results of Balkan Corporation for the quarter ending June 30, 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 would like to read our forward-looking statement. This release does contain or likely will contain forward-looking statements. which reflect BALCAM'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 BALCAM'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. This morning, we reported record second quarter consolidated net sales of $173.4 million, which resulted in record second quarter net income of $21.1 million, or 65 cents per share on a GAAP basis. On an adjusted basis, Our record second quarter adjusted non-GAAP net earnings were $27.6 million, or 85 cents per share. Cash flows from operations were $44.6 million for the second quarter of 2020, with quarterly free cash flow of $37 million. Our second quarter net sales of $173.4 million were 7.3% higher and the prior year comparable quarter. We achieved sales growth in all three of our segments as compared to Q2 2019 with all-time record sales in human nutrition and health and specialty products and record second quarter sales in animal nutrition and health. The impact of foreign exchange to our sales was a negative $0.5 million, primarily due to the weaker euro. driving a negative 31 basis point impact to our year over year sales growth. Our Q2 consolidated gross margin dollars of $55.4 million were up $1.5 million or 2.7% compared with $53.9 million for the same period in the prior year. Our consolidated gross margin percent was 31.9% of sales in the quarter. down 143 basis points compared to 33.4% in Q2 of 2019. The 143 basis point decrease was primarily due to mix and certain COVID-19 related expenses partially offset by certain lower raw material costs. Consolidated operating expenses for the second quarter of 2020 were $28.5 million as compared to $27.5 million in the prior year. The increase was principally due to incremental operating expenses related to the ChemoGas and Zumbro acquisitions and a Goodwill impairment charge related to business formerly included in the industrial product segment, partially offset by lower selling expenses primarily due to reduced travel and lower bad debt expense. Excluding non-cash operating expense associated with amortization of intangible assets of $6.2 million, operating expenses were $22.2 million or 12.8% 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 second quarter were $26.9 million An increase of $0.5 million, or 2%, compared to the prior year quarter. On an adjusted basis, as detailed in our earnings release this morning, earnings from operations of $35.9 million were up $2.6 million, or 7.8%, compared to $33.3 million in the prior year. Record adjusted EBITDA of $43.9 million was $3.9 million or 9.8% above the $40 million posted in the second quarter of 2019. Interest expense for the second quarter 2020 was $1 million and our net debt was $142.2 million with an overall leverage ratio on a net debt basis of 0.9. Strong cash flows in the second quarter enabled the company to make $35 million of repayments of its revolving debt. The company's effective tax rates for the second quarter 2020 and 2019 were 18.7% and 20.3% respectively. The decrease in the effective tax rate is primarily attributable to lower enacted tax rates from several states certain higher tax credits, and excess tax benefits from stock-based compensation. Consolidated net income closed the quarter at $21.1 million, up 6.5% from the prior year quarter. This quarterly net income translated into diluted net earnings per share of 65 cents for the current year. An increase of 4 cents from last year's comparable quarterly result of 61 cents. On an adjusted basis, our second quarter adjusted net earnings were 27.6 million dollars or 85 cents per diluted share, up 2.3 million dollars or 9.2% compared with $25.2 million or 77 cents per diluted share in the prior year quarter. These adjusted non-GAAP net earnings exclude tax-adjusted non-cash amortization and other items, as detailed in our earnings release this morning, of $6.4 million to facilitate comparative evaluation of operating performance versus the prior year period. We generated quarterly free cash flow of $37 million and we closed out the quarter with $76.4 million of cash on the balance sheet. Second quarter cash flows from operations benefited by approximately $8.2 million due to deferred tax payments related to the CARES Act and we expect third quarter cash flows from operations to be negatively impacted by the same $8.2 million to be paid in the third quarter. Before passing the call back to Martin to cover the detailed results by segment, I would like to update you on the impacts of COVID-19 on our company, as well as a few of our important strategic activities and growth initiatives. As we shared in the press release this morning, The COVID-19 response effort has been a primary focus for the company since earlier in the first quarter. Our focus has been on employee safety first, keeping our manufacturing sites operational, satisfying customer needs, preserving cash and ensuring strong liquidity, and responding to changes in this dynamic market environment as appropriate. To date, all of our manufacturing sites are operating at near normal conditions, enabling us to supply our customers with the important products and services they need. Our research and development teams are advancing our innovation efforts and all of our other employees are effectively carrying on their responsibilities and functions remotely. Last quarter we indicated an expectation that sales over the next few quarters and for the duration of the pandemic would be challenged by weaker demand from various of our market segments. As we expected, in aggregate, our revenues in the second quarter were indeed negatively impacted by the global response efforts to the pandemic. Of particular note, we have seen lower demand from food services, medical device sterilization due to fewer elective surgeries, and lower fracking activities. These negative impacts to demand were only partially offset by higher food ingredient sales to retail and other outlets and higher sales of our immunity strengthening minerals and colding nutrient solutions. We are extremely pleased with the fact that despite the aggregate negative impact on our sales from the pandemic, we were able to drive significant year over year sales growth as a result of the resilience of our business model and the sales contribution from various organic and inorganic strategic growth initiatives. While uncertainty continues to exist, as the second quarter progressed, we were able to see some evolution of these various market drivers. For example, within the quarter, while we did see some recovery in certain sub-segments of our food service related business, we have seen little recovery in other negatively impacted markets, indicating, at least for now, a relatively protracted and slow recovery. While the significantly higher demand for minerals and choline nutrients tapered off somewhat as the quarter progressed, there appears to be some sustained higher demand for these immunity-boosting products going forward. Also, the boost in food ingredient sales to retail and other outlets gradually returned to more normal levels throughout the quarter. We will continue to watch each of these markets very closely and remain nimble, flexible, and ready to respond accordingly. Moving on to an update on important strategic activities and growth initiatives within human nutrition and health, we made a minority stake investment in SNP Therapeutics, a research-based genomics company founded by Dr. Steven Zeisel, the director of the University of North Carolina's Nutrition Research Institute and a world-renowned scientist and choline expert, with a focus on identifying genetic misspellings or mutations called SNPs or single nucleotide polymorphisms which impair nutrition metabolism and contribute to diseases and other health-related issues. SMP Therapeutics evaluates each patient's genome and translates it into meaningful, actionable information by utilizing the company's proprietary custom genetic test and algorithms. Once SMP Therapeutics has evaluated a patient's genome data, the company can provide information to patients and physicians so treatment options can be explored. Physicians can then prescribe a scientifically based medical food or recommend supplement solutions for many of these medical and nutritional conditions, including personalized vitamin, mineral and other nutrient solutions. Valchem's investment and S&P Therapeutics will enable us to participate in this exciting venture that provides relevant learning, the prospect for building choline awareness and future commercial opportunity for our human nutrition and health segment. Relative to animal nutrition and health, the launch of our previously discussed Aminosure XM, our next generation rumen protected methionine continues to progress very well. This next-generation product offers enhanced bioavailability and superior feed stability that allows it to deliver industry-leading value for dairy farmers. Nutritionists and dairy farmers around the world agree as market penetration grows for this new product, which is being further boosted by healthier dairy protein prices. Additionally, we have been extremely pleased with our animal nutrition and health e-learning platform and webinar series that have attracted over 4,000 attendees to our 11 live real science webinars and over 5,000 people viewing them online via Valchem's YouTube channel. With the global pandemic, we have had to pivot to increase virtual marketing. and the Animal Nutrition and Health team has leveraged existing tools and technical content to reach current and prospective customers with important technical information. Within specialty products in May, we celebrated the one-year anniversary of the ChemoGas NV acquisition, which significantly expanded Valchem's geographic presence in the packaged ethylene oxide market. enabling us to offer worldwide service and support to our medical device sterilization customers. We are extremely pleased with the acquisition and how it has enabled the creation of Valchem Performance Gases, our now global business unit focused on providing ethylene oxide and other chemicals to, most notably, the medical device sterilization market worldwide. ChemoGas has been fully integrated into the specialty product segment and is meeting our expectations from a strategic and economic perspective. We also released our second annual sustainability report in April in support of our environmental, social and corporate governance ideals. In 2019, we issued our first sustainability report consolidating all of the great work that Valchem has been doing for many years into a consolidated report. We are committed to providing solutions for the health and nutrition needs of the world and acting as strong stewards of all of our stakeholders. We are proud of our ESG accomplishments to date and look forward to sharing updates with you as we progress our initiatives as well as our higher purpose of making the world a healthier place. And lastly, as we have discussed in previous quarters, We have embarked on an important project to consolidate our five ERP systems into one, Microsoft Dynamics 365. In the second quarter, we elected to pause activities related to our global ERP implementation project due to our global pandemic response efforts. In particular, Traveler Sticksons made it impossible to provide on-the-ground support for additional site go-lives. So we chose to refocus our ERP project team's efforts on optimization of the new ERP system for sites that have already gone live while preparing for future go-lives when restrictions are lifted. While we still believe that we will be able to implement the full project within our $12 million budget, the project will now take approximately 9 to 12 months longer than originally planned. with our current expectation for full implementation by the middle of next year. I'm now going to turn the call back over to Martin to go through the detailed results for each of our segments.