Balchem Corp Q2 FY2025 Earnings Call

Ladies and gentlemen, thank you for being here. My name is Desiree, and I will be your conference operator today. I would like to welcome everyone to Balchem's Second Quarter 2025 Earnings Call. I would now like to turn the conference over to Martin Bengtsson, Chief Financial Officer. You may begin.

Good morning, everyone. Thank you for joining our conference call this morning to discuss the results of Balchem Corporation for the quarter ending June 30, 2025. My name is Martin Bengtsson, Chief Financial Officer; and hosting this call with me is Ted Harris, our Chairman, President and CEO. Following the advice of our counsel, auditors and the SEC, at this time, I would like to read our forward-looking statements. Statements made in today's call that are not historical facts are considered forward-looking statements. We can give no assurance that the expectations reflected in forward-looking statements will prove correct, and various factors could cause actual results to differ materially from our expectations, including risks and factors identified in Balchem's most recent Form 10-K, 10-Q and 8-K reports. The company assumes no obligation to update these forward-looking statements. Today's call and commentary also include non-GAAP financial measures. Please refer to the reconciliations in our earnings release for further details. I will now turn the call over to Ted Harris, our Chairman, President and CEO.

Thanks, Martin. Good morning, and welcome to our conference call. We were extremely pleased with the financial results for the second quarter of 2025 as well as the ongoing strong performance of our company. We delivered record second quarter consolidated sales, adjusted EBITDA, adjusted net earnings and adjusted EPS, with year-over-year sales and earnings growth in all three of our reporting segments. Before we get into more detail on the quarter, I would like to make a few comments about the overall market environment, including the evolving global trade situation as well as some of the new science that has recently been published supporting our various minerals, vitamins and nutrients and an important capacity expansion project that we are working on. We continue to see healthy demand across the vast majority of our end markets. Our Human Nutrition & Health segment continues to perform extremely well, driven by strong demand for both our unique portfolio of nutrients and our food ingredients and solutions, which are benefiting from trends toward nutrient dense, high protein, high fiber and low sugar or good-for-you foods, where our nutrition and formulations expertise brings considerable value to our customers. In the Animal Nutrition & Health segment, we delivered another quarter of year-over-year growth on healthy demand in both our monogastric and ruminant businesses as market conditions continue to improve. We were very pleased with the European Commission's recently announced provisional antidumping duties on Chinese choline of 95% to 120%, which is an important step in reestablishing a level playing field within Europe. Final measures are expected by the end of the year and after many years of injurious pricing by Chinese suppliers, these measures should undoubtedly help contribute positively to the overall growth of our Animal Nutrition & Health segment in the coming quarters. And within our Specialty Products segment, both our Performance Gases business and our Plant Nutrition business are performing well, driven primarily by higher demand. Our outlook for the second half of the year also remains positive. As discussed at length on the last earnings call, we believe we are relatively well positioned to effectively manage through the current global trade environment. As a reminder, we have several advantages of note, including an intra-regional manufacturing and sales model where approximately 85% of the company's sales are manufactured in the same region where they are sold. A global supply chain with little reliance on China, a robust U.S. manufacturing footprint and strong market positions that historically have provided us with the ability to raise prices to offset rising costs. Given today's global trade environment, we remain nimble and flexible to adjust accordingly as market conditions evolve. Additionally, I am excited to share some progress we have made in our scientific and clinical research pipeline, which continues to bolster our Human Nutrition & Health segment. Our current pipeline features over 20 active clinical studies focused on evaluating the benefits of certain nutrients, including VitaCholine, K2Vital, OptiMSM and Albion Minerals. These studies are integral to our strategy for entering new markets, expanding our ingredient categories and building consumer awareness. In Q2 of this year, our sponsored research and collaborations resulted in six significant publications. And year-to-date, we have had a total of nine research studies published. I'd like to highlight two specific studies that we are particularly excited about. The first is focused on dietary choline and Alzheimer's disease. This NIH-funded study examined the relationship between dietary choline intake and the risk of Alzheimer's dementia. Data was gathered from 991 retirees participating in the Rush Memory and Aging Project in Chicago, who were monitored for an average of 7.5 years with 27% of participants developing Alzheimer's disease. The study found that a daily intake of choline above 350 milligrams was linked to a 51% reduction in the incidence of clinical Alzheimer's diagnosis when compared to those consuming less than 200 milligrams per day. These findings align with previous research such as the Framingham Heart Study, reinforcing the notion that higher choline intake is associated with a decreased risk of cognitive decline. The second publication that I would like to highlight is related to OptiMSM, our premier branded methylsulfonylmethane and its favorable impact on exercise-induced oxidative stress. This study explored whether OptiMSM could offer protection against significant oxidative stress from intense exercise in experienced runners. Participants received 500 milligrams of OptiMSM or a placebo for 27 days, followed by 1,000 milligrams or a placebo for another three days just before participating in a half marathon. Blood samples taken before and after the exercise analyzed 785 mRNAs connected to 47 immune response pathways. The results showed favorable modulation of 29 mRNAs across four distinct immune response pathways within two to four hours post-exercise. This suggests that OptiMSM could support faster muscle recovery and protect against oxidative stress triggered by strenuous physical activity. We believe the research findings associated with these two studies, along with all of the findings from the other studies that have been published recently will further strengthen the science behind our premium branded nutrients and continue to help advance our ability to expand market penetration. Additionally, I'd like to share that Balchem has announced its intent to build a new $36 million state-of-the-art food ingredient and nutraceutical microencapsulation manufacturing facility in Orange County, New York, just down the road from our legacy microencapsulation site. If approved by the county, the facility will ultimately more than double Balchem's capacity for its fast-growing microencapsulation technologies and further support our continued growth. So some exciting progress being made on our strategic growth initiatives. Now regarding the second quarter of 2025's financial performance. This morning, we reported record quarterly consolidated revenue of $255 million, which was 9.1% higher than the prior year quarter. We delivered record quarterly GAAP earnings from operations of $51 million, an increase of 12.3% versus the prior year. Consolidated net income closed the quarter at $38 million, an increase of 19.4%. This quarterly net income translated to diluted net earnings per share of $1.17 on a GAAP basis, up $0.19 or 19.4% compared to the prior year. On an adjusted basis, we delivered record quarterly adjusted EBITDA of $69 million, an increase of 11.2% with an adjusted EBITDA margin of 27.1%, up 50 basis points from the prior year. Our record quarterly adjusted net earnings were $42 million, an increase of 16.8% from the prior year, which translated to $1.27 per diluted share, up $0.18 or 16.5% compared to the prior year. Overall, another excellent quarter for Balchem as we continue to deliver strong financial returns while making good progress on our strategic growth initiatives. And with that, I'm now going to turn the call back over to Martin to go through the second quarter consolidated financial results for the company and the results for each of our business segments in more detail.

Thank you, Ted. As Ted mentioned, overall, the second quarter was a great quarter for Balchem with record sales, earnings from operations, adjusted EBITDA, adjusted net earnings and adjusted earnings per share. Our second quarter net sales of $255 million were 9.1% higher than prior year, driven by strong performance in all three segments: Human Nutrition & Health, Animal Nutrition & Health and Specialty Products. Our second quarter gross margin dollars were $93 million, up 12.2% compared to the prior year, and our gross margin percent was 36.4% of sales, up 90 basis points compared to the prior year. The increase in gross margin percent was primarily due to a favorable portfolio mix, which was partially offset by certain higher manufacturing input costs. Consolidated operating expenses for the second quarter were $42 million as compared to $37 million in the prior year. The increase was primarily due to higher compensation-related costs and professional services, partially offset by lower amortization expense. GAAP earnings from operations for the second quarter were a record $51 million, an increase of 12.3% compared to the prior year. On an adjusted basis, as detailed in our earnings release this morning, non-GAAP earnings from operations of $56 million were up 10% compared to the prior year. Adjusted EBITDA was a record $69 million, an increase of 11.2% compared to the prior year, with an adjusted EBITDA margin rate of 27.1%. Net interest expense for the second quarter was $3 million, a decrease of $1 million compared to the prior year, driven primarily by lower outstanding borrowings. Our net debt decreased to $125 million with an overall leverage ratio on a net debt basis of 0.5. The effective tax rates for the second quarters of 2025 and 2024 were 21.9% and 22.2%, respectively. The decrease in the effective tax rate from the prior year was primarily due to higher tax benefits from stock-based compensation. Consolidated net income closed the quarter at $38 million, up 19.4% from the prior year. This quarterly net income translated into diluted net earnings per share of $1.17, an increase of $0.19 compared to the prior year. On an adjusted basis, our second quarter adjusted net earnings were a record $42 million, an increase of 16.8% from the prior year, which translated to $1.27 per diluted share. Cash flows from operations were $47 million with free cash flow of $41 million, and we closed out the quarter with $65 million of cash on the balance sheet. As we look at the second quarter from a segment perspective, our Human Nutrition & Health segment generated record sales of $161 million, an increase of 8.7% from the very strong results in the prior year, driven by higher sales within both the Food Ingredients and Solutions businesses and the nutrients business. Our Human Nutrition & Health segment delivered record quarterly earnings from operations of $38 million, an increase of 14.9% compared to the prior year. This was primarily driven by the aforementioned higher sales and a favorable mix, partially offset by an increase in certain manufacturing input costs and higher operating expenses. Second quarter adjusted earnings from operations for this segment were $41 million, an increase of 10.8%. We're very pleased with the overall performance of our Human Nutrition & Health segment, where we continue to experience solid end consumer demand for our unique portfolio of ingredients and solutions. As mentioned on our last call, we're seeing healthy growth once again across our Food Ingredients and Solutions businesses, at least partly due to the good-for-you trends where our formulations expertise brings considerable value to our customers as well as continued growth of our Nutrients business. We believe our product offering is well positioned to meet growing market demands and that our strong market positions will enable us to continue to deliver healthy growth in Human Nutrition & Health. Our Animal Nutrition & Health segment generated quarterly sales of $56 million, an increase of 13.1% compared to the prior year. The increase was driven by higher sales in both the ruminant and monogastric species markets. Animal Nutrition & Health delivered earnings from operations of $4 million, an increase of 30.5% from the prior year. The increase was primarily due to the aforementioned higher sales and a favorable mix, partially offset by an increase in certain manufacturing input costs and higher operating expenses. Second quarter adjusted earnings from operations for this segment were $4 million, an increase of 27.8%. We were once again pleased to see our Animal Nutrition & Health segment deliver both top and bottom line growth in the second quarter and the continuation of the stabilization and recovery of the business. The end markets for Animal Nutrition & Health remain relatively stable at the moment, and we believe the Animal Nutrition & Health business has good momentum and is well positioned to deliver solid growth in 2025. As Ted mentioned earlier, the European Commission's recently announced provisional antidumping duties on Chinese choline will certainly provide further support for the Animal Nutrition & Health segment's growth outlook. Our Specialty Products segment delivered record quarterly sales of $37 million, an increase of 6% compared to the prior year, driven by higher sales in both the Performance Gases and Plant Nutrition businesses. Specialty Products also delivered record quarterly earnings from operations of $11 million, an increase of 0.4% versus the prior year, primarily driven by the aforementioned higher sales, partially offset by higher operating expenses. Second quarter adjusted earnings from operations for this segment were $12 million, an increase of 1.3%. We are very pleased with the performance of Specialty Products in the second quarter, both from a sales growth and margin perspective, and we expect healthy demand to drive another year of growth for the Specialty Products segment. So overall, the second quarter was another excellent quarter for Balchem, and we believe we are well positioned for continued growth as we head into the second half of the year. I'm now going to turn the call back over to Ted for some closing remarks.

Thank you, Martin. Once again, we're extremely pleased with the second quarter financial results reported earlier this morning. As a company, we continue to show an ability to deliver results in a variety of market conditions, given our strong market positions and our value-added portfolio of products, and we remain confident in the long-term growth outlook for Balchem as a company. I will now hand the call back over to Martin, who will open up the call for questions.

Thank you, Ted. This now concludes the formal portion of the conference. At this point, we will open up the conference call for questions.

Our first question comes from Bob Labick with CJS Securities.

Congratulations on the recent antidumping news. Hopefully, that will put things back on track and level the playing field, as you mentioned. Can you provide an overview of the macro environment? What is the current demand for European monogastrics? How should that impact your business? Additionally, aside from the anticipated recovery in monogastric demand, what other growth drivers do you foresee for A&H over the next 6 to 18 months?

Thank you, Bob. In response to your question about monogastric demand in Europe, I would say the demand has been relatively stable for a while. Looking at the overall market, we have observed fluctuations in the market share held by Chinese suppliers over the years. With the current antidumping provisional ruling, it will be interesting to see how their market share evolves in the coming quarters as we create a more level playing field. Currently, Chinese suppliers hold a significant market share in Europe, and if the provisional duties remain at this level, their pricing will be comparable to that of European producers. Historically, when prices are similar, we tend to see a preference for local supply. This could lead to an increase in our market share in Europe compared to where we are now, which would be beneficial for the business. However, the overall market for feed-grade choline is anticipated to grow slowly, driven mainly by protein production in the region. When considering growth in A&H as a whole, we anticipate substantial growth on the ruminant side, particularly in our dairy business, where there remains significant room for market penetration both in the U.S. and other regions with ongoing innovation. For instance, we introduced the new AminoShure-XL product last year, which is a rumen encapsulated lysine, and our innovation efforts continue as we develop additional products. Growth is expected to be strong in the ruminant sector, along with opportunities in the companion animal business driven by our technologies. In contrast, the monogastric segment is likely to grow more slowly due to being a more mature and fully penetrated market. I hope this gives you some useful insights.

Yes, it's been great. Now, shifting to the U.S., particularly New York, could you provide more details about the investment in the manufacturing facility? You mentioned that it would double the capacity. What additional revenue is expected from this? How long will the process take? Also, what are the other advantages of establishing this new facility, such as improvements in margin, faster throughput, market share, or any specific objectives for this new operation?

We're really enthusiastic about this new investment, Bob. It's something we've been anticipating for a while. The foundation of Balchem is rooted in microencapsulation technology and manufacturing. Our founders, who were scientists and technologists, developed a unique method for microencapsulating food ingredients and established a small dairy in Slate Hill, New York, which marked the beginning of our company. We have been producing microencapsulated products there since the 1960s. Over the years, we have expanded to manufacture similar products at our site in Missouri and overseas in Italy, but Slate Hill continues to be our main site. However, due to its age and the original construction, it is relatively inefficient, making operations less than ideal. This new purpose-built microencapsulation site will bring significant efficiencies and importantly, allow us to expand our production. We have been tight on capacity for about a year, as our business has been growing at a rate of 20% to 25% annually, so a capacity doubling is necessary. The key takeaway is that this investment will enable us to sustain double-digit growth rates for the foreseeable future; without it, our expansion would be limited. We have already optimized and maximized our current capacity as much as possible, and this new facility will not only provide increased capacity but will also be more efficient due to its modern design, unlike our retrofitted dairy.

Congratulations on another very solid quarter. Just to clarify on the previous point about the facility. I was wondering if you could just let us know specifically when you anticipate the facility fully coming online and how you are funding the facility construction costs? Just wanted to clarify that, that's all coming from existing cash resources.

Thank you for the question, Ram, and for your comments. In terms of capital expenditure, we have been spending between $35 million and $40 million annually, and we believe we can carry out this new project within that budget over the next three years. Thus, we do not anticipate a significant rise in our capital expenditure. The funding will come from our existing cash and our debt facility, so we are not worried about financing this site. I mentioned earlier that it will take a little over two years to establish this manufacturing site. We expect to begin production around late 2027 to 2028. We believe our current facility has sufficient capacity, aided by the improvements I discussed, to support our growth until the new facility becomes operational within that timeframe.

I was hoping you could update us on the status of VitaCholine and Pro-Flo, especially regarding how these products are integrating into multivitamin lines and brands. How do you foresee this evolution over the rest of the year? Additionally, I'd like to know about Balchem's strategic outlook in human health compared to nutrition. It appears you have adopted a different approach regarding the clinical studies you're pursuing. Does this suggest that Balchem is moving more deliberately into the human health sector, possibly in areas like medical food or pharmaceuticals? Any insights you can provide would be greatly appreciated.

Sure, I'll address those questions. This reflects both an industry trend and the ongoing development of our company. The growing demand for health-oriented foods, eco-friendly labels, better eating habits, and personalized nutrition has been a trend we've benefited from over many years. Recently, there have been factors that have accelerated this trend, including the rapid rise of GLP-1 drugs, which have created new nutritional needs, particularly for those using these medications who may face challenges with protein intake, liver health, and other nutrition deficiencies due to reduced food consumption. Our food ingredient formulation business aligns well with this trend, and our nutrient portfolio supports it as well. Market trends are shifting in this direction, and we are evolving to meet these needs. We've been discussing our recent investments in marketing, which represent a new capability for us, but our commitment to science and research has always been present. It's important to clarify that we are emphasizing marketing as an addition to our science-based foundation. These studies are vital for our company's growth, market penetration, awareness building, and more. We are actively investing in marketing while maintaining our focus on science. The markets and Balchem are evolving more towards the health sector. While we aren't aiming to become a pharmaceutical company, the boundaries between food, nutrition, and pharmaceuticals are becoming less distinct due to ongoing trends. This may explain some of the updates we've provided. Despite highlighting our marketing efforts, we want to reassure everyone that we continue to invest in science. Regarding our new products, we've launched VitaCholine and Pro-Flo, which helps incorporate choline into multivitamins. We're starting to introduce this to customers with positive feedback. Although we can’t report significant successes yet, it's enhancing our product range, especially in the multivitamin market where we previously had limited presence. We're excited about this development. Additionally, I'm particularly enthusiastic about the rising use of choline in nutritional beverages and other food products. Supporting the inclusion of choline in these areas, including energy drinks, represents a substantial market opportunity for us, and we've achieved notable successes here recently.

Great. And then just two very quick things for Martin as per usual. Just wanted to see if you could comment on the broader strategy with respect to debt reduction and what we might expect to see over the course of the remainder of this year, if it's steady as she goes or you expect to accelerate debt repayment? And also, if you could give us a sense of your perspective on where the effective tax rate might shake out for the second half of 2025.

Absolutely, Ram. I think as you talk about debt reduction, I think you have to think about it in the broader context of our capital allocation strategy, right, where our primary focus is always invest in our organic growth opportunities that we have internally and that you see us doing. And then obviously, we try to complement that with strategic M&A that we feel accelerates some of those growth initiatives. And then we focus on paying down debt with cash that we have on hand that we're generating since we continue to generate strong free cash flows. We pay down that debt, and we'll continue to pay down that debt, while at the same time, as you've seen over the last decade, maintaining and growing that dividend. You may have noticed, if you look closely that we also occasionally do smaller share repurchases for anti-dilutive purposes, right? So we try to keep our share count relatively flat, so we have done that as well to keep that. But as you look forward, we will continue to generate good cash flows. We will continue to pay down debt. And I think sort of when we do our next M&A transaction, obviously, that debt level will rise again, and you'll probably see a repeat of history of us adding on some debt and then we continue to pay it down. So I don't think you'll see any change in strategy here. We'll continue to pay down that debt for a little bit further until the next M&A transaction happens. And then on the effective tax rate...

And the effective tax rate, yes.

Yes, we are currently around a 22% effective tax rate this year. I have mentioned before that we expect it to stay between 22% and 23% for the year. Looking into the second half, we will likely lean towards the lower end of that range, so I would expect it to be closer to 22% than 23%.

I just want to know basically two questions on tariffs to the U.S. Does that affect you at all? And an update on CureMark, if I may?

Certainly. The tariffs do have an impact on us, but we believe we are relatively well positioned. Last quarter, we mentioned a $20 million impact from tariffs due to purchasing raw materials internationally for the U.S. This number is somewhat fluid, but since our last call, new agreements have emerged particularly in Europe, as well as in key countries like Indonesia, Malaysia, and the Philippines. The impact has increased to about $25 million today. We anticipate offsetting about half of this through adjustments in our supply chain, alternative suppliers, and manufacturing strategies, which is proceeding as we had planned. The remaining half will need to be managed through pricing adjustments, and we are currently working on this with confidence in our ability to achieve these goals. Overall, we feel well equipped to handle the situation, though it does require effort and attention. At this time, we do not have significant updates regarding CureMark. They are preparing to file the Biologics License Application, which is the next step, and we have completed all necessary preparations on our end. The process is now in their hands to submit to the FDA for approval. From our regular communications, we know they are diligently working on this with various consultants, and we look forward to when they reach that filing milestone, but I don’t have further details about their progress.

Just a couple of quick ones for me here. First, within A&H, the 8.7% year-over-year growth, I was hoping you might be able to break that down between nutrients and ingredients. And then, Martin, I know you just discussed this, but I wanted to confirm, obviously, quite a large step-up in stock repurchases versus the second quarter of 2024. And just wanted to confirm from you that, that is just an opportunistic repurchase due to valuation and not a shift towards more of an active return strategy.

Yes, Daniel, let's start with the stock repurchase. This aligns with our historical approach. We repurchased shares for anti-dilutive purposes in 2022, 2021, and early in 2023. After our last two acquisitions, we paused to focus on reducing debt. Now, we see a good opportunity to buy back some stock for anti-dilutive reasons. Our strategy remains consistent; it's still just for anti-dilutive purposes. Regarding A&H, the overall sales growth was 13% for the quarter. Growth occurred on both fronts. The monogastric business, being more mature, increased by about 7%, while the ruminant side grew around 30%. Relative to each other, ruminant is growing much faster than monogastric, which aligns with our expectations since ruminant is a higher growth segment.

Well, you got some good insights into A&H as well. And we are pleased that monogastric being a stable business continues to grow. And then, of course, ruminant, we view as a growth business and 30% growth is really good to see as well. So on H&H, we grew about 9%. And once again, a little bit like A&H, both the food business as well as the nutrients business grew and actually similar percentages. So the Nutrients business grew at 8.8% organically, and the Food Ingredient and Solutions business grew at 8.6% organically. So again, very pleased with the growth that we're seeing in both of those. And it's, I would say, pretty much played out as we expected last year. We saw double-digit growth in our nutrients business last year and quite low single-digit growth in food, and we thought that the growth in nutrients would moderate a little bit given the accelerated growth that we've seen, but would continue to grow. And so that's exactly what's happening. But the Food Solutions business would pick up. And so really pleased with that. In the Nutrients business, sort of stand out, I would say, our K2 product line is growing at high double-digit type growth. So very pleased with that, in the 30% to 40% type range. Our MSM business growing at solid double digits. And our Minerals business continues to grow very nicely with kind of a standout continuing to be magnesium with growing awareness of that important mineral. And then in the Food business, it's really across the portfolio. Our encapsulated acidulants, I talked a little bit earlier about the need to expand manufacturing, has been growing at 20% plus. But generally, our good-for-you formulations, whether they be in kind of our powders or cereal systems businesses are growing quite well. So hopefully, that gives you a little bit of an insight into the H&H growth.

That concludes the question-and-answer session. I would like to turn the call back over to our Chief Executive Officer, Ted Harris, for closing remarks.

So thank you all very much again for joining the call today. We really appreciate the time today as well as your ongoing support, and we look forward to reporting out our Q3 2025 results in October. We will be participating in the H.C. Wainwright Investment Conference in New York City on September 9. So we certainly hope to see some of you there. Thank you again for joining.

Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.