Balchem Corporation

Greetings and welcome to Balchem Corporation's third quarter 2021 financial results. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone can require operator assistance during a 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.

Morning, everyone. Thank you for joining our conference call this morning to discuss the results of Balcombe Corporation for the quarter ending September 30th, 2021. 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 FCC, at this time, I would like to read our forward-looking statement. This release does contain or likely will contain forward-looking statements which reflect 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. This morning, we reported strong third quarter results with record third quarter sales in all three of our reporting segments, as well as record third quarter net earnings and adjusted EBITDA and strong free cash flow. Our revenues of $197.9 million were up 13% and our adjusted earnings from operations were $39.6 million, up 9.2% versus the prior year quarter. Our net income of $25 million, an increase of 16%, resulted in earnings per share of 77 cents on a gap basis. On an adjusted basis, our third quarter non-gap net earnings were $30 million, an increase of 11.3%, resulting in earnings per share of 92 cents on a non-GAAP basis. And we continued to deliver strong cash flows. Cash flows from operations were $39.6 million for the third quarter, an increase of $4.3 million from the prior year with quarterly free cash flow of $31.1 million. Before passing the call back to Martin to cover the detailed financial results, I would like to update you on a few items. Last quarter, we informed you that we experienced a flash flood event at our Verona, Missouri manufacturing facility in May. The plant was shut down for several weeks in the second quarter while we repaired affected equipment, cleaned the site, and safely restarted activities. Since that time, the plant has been fully functional. And while this event was categorized as a once in 500 year event, Our focus has turned to implementing actions that will help to mitigate the impact of another such event. We recognize an additional $500,000 of expense in the third quarter, primarily due to additional expenses associated with the write-off of damaged inventory and the costs associated with external service providers used for the cleanup efforts. We do not expect any further expense associated with this event to impact subsequent quarters and should start to receive insurance reimbursements in the coming quarters. While we remain focused on maneuvering the company through the pandemic and our priorities remain the same, 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, we are increasingly having to focus on managing the extraordinary supply chain disruptions that are challenging the markets we operate within. We are experiencing severe input cost inflation, raw material shortages, logistics disruptions and labor availability issues. These challenges have been with us to some extent since the beginning of the year. but have accelerated as the year has progressed and certainly through the third quarter. We expect this trend to continue to accelerate in the fourth quarter of 2021 and be with us at least through the first half of 2022. We will continue to focus on dampening the impacts of these challenges by leveraging our global supply chain capabilities and redundancies to ensure continuity of production While raising prices where we can to offset the extraordinary input cost inflation. Within our human nutrition and health segment, research conducted by Professor Marie Caudel at Cornell University into the role of choline in DHA and omega-3 fatty acid metabolism during pregnancy has been completed and a manuscript has been submitted for peer review. Also in the final stages of review is a long-awaited paper from Cornell University reporting on the seven-year follow-on study of offspring from mothers supplemented with adequate levels of choline during their third trimester of pregnancy. The seven to seven and a half year old children were subjected to a variety of validated cognitive tests and the first results are expected to be published soon. We expect the results of both of these studies to further support the need for choline supplementation. Additionally, we continue to accelerate our marketing efforts in the quarter, launching a functional beverage campaign promoting our choline and chelated minerals for functional beverage applications and a campaign introducing novel plant and dairy-based extruded protein crisps to the market. We also announced an agreement with the best-selling author of the children's book series Ninja Life Hacks to secure strategic partners for branded food products to enable food innovations that deliver on consumer demand for children's nutrition. In the third quarter, our animal nutrition and health segment continued to progress several key strategic advances around the technical support for our products and portfolios. Our team was present to preview the early results from the updated and long-awaited nutrient requirements of dairy cattle, or NRC, from the National Academies of Sciences. The NRC committee reviewed all of the available research over the past 20 years and validated the belief that an effective source of rumen-protected choline fed to dairy cows before and after calving will increase milk production and efficiency in the subsequent lactation cycle, while also reducing the incidence of several metabolic health disorders. This exciting new NRC release emphasizes the importance of an efficacious encapsulated product such as Reassure, and it will certainly bring more focus onto rumen-protected choline as a fundamental supplemented nutrient during the dairy transition period. Additionally, in our companion animal business, there were numerous accepted publications and technical presentations made during the return of several important industry meetings. These included the National Animal Science Association, the International Food Technology Scientific Symposium, and the highly anticipated return of the pet food industry's premier event, the Pet Food Forum, held in Kansas City, Missouri. It was at this event that new research was presented demonstrating the important value proposition of our unique PetShare portfolio. Research was presented in collaboration with Auburn University that demonstrated the value of restructuring proteins derived from animal coproducts for the manufacture of highly nutritious treats. This novel application uses our proprietary encapsulated ingredients and allows for a sustainable and nutritious ingredient option for treat and pet food manufacturers. The Pet Food Forum was also the venue for two other research presentations surrounding Valchem's technology. The first was new research demonstrating the value of PetSure encapsulated acids towards controlling salmonella in raw meat-based diets conducted at Kansas State University. The second invited talk focused on the benefits of supplemental pet-sure choline in controlling obesity in cats, with that research being led by the Ontario Veterinarian College at the University of Guelph. Within the specialty product segment, we started up a new manufacturing line for our metallisate foliar applied plant nutrition products at Balchem's existing complex in Murano, Italy. This new production capability in Europe will augment our existing North American production and will enhance our ability to serve the growing needs of our international customer base and strengthen the robustness of our supply chain capabilities. We have also substantially completed our project to consolidate seven ERP systems into one, Microsoft Dynamics 365, with the recent go live of our last major manufacturing site on the system. We now have near 100% of our revenues on the new system. We are extremely pleased with the completion of this project that was delivered on budget and on time relative to the pandemic adjusted timeline. This initiative is critical for the continued growth and operational efficiency of the company and we are very pleased to move from focusing on implementation to realization of the many benefits Thank you very much. We have made significant progress and we are particularly proud of publishing in April of this year of our 2030 goals to reduce both greenhouse gas emissions and water usage by 25% and all of the work that is going on across our company to realize these important goals. As we look back on the last year, joining the UN Global Compact was an important step Thank you, Ted. As Ted mentioned, overall, we delivered strong financial results in a challenging environment.