Earnings Call Transcript - BCPC Q1 2025

Operator, Operator

Greetings, and welcome to Balchem's First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Martin Bengtsson, CFO. Thank you. You may begin.

Martin Bengtsson, CFO

Thank you, Matt. Good morning, everyone. Thank you for joining our conference call this morning to discuss the results of Balchem Corporation for the quarter ending March 31, 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 statement. 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.

Ted Harris, Chairman, President and CEO

Thanks, Martin. Good morning, and welcome to our conference call. We were very pleased with the financial results for the first quarter of 2025, which continued the positive momentum from the strong 2024 performance and kicked off the new year on a very healthy footing. We delivered record first quarter consolidated sales, adjusted EBITDA, and adjusted net earnings, with year-over-year sales and earnings growth in all three of our reporting segments. We are pleased that each of our segments performed well with encouraging ongoing recovery in our Animal Nutrition & Health segment. Before we get into more detail on the quarter, I would like to reflect for a few minutes on the global trade environment that is evolving around us. As I mentioned on the last call, we believe we are relatively well positioned to effectively manage through the changing global trade environment. We have several advantages of note including an intra-region 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 at the same time, we have strong free cash flows and a solid balance sheet. We are, however, monitoring the situation very closely, given the broad reach and impact U.S. trade policies have on various trade flows and macroeconomic conditions. While this situation is multifaceted, there are three primary areas of impact that we are watching closely. The first is the impact on our raw materials consumed in the U.S. that we procure from outside the U.S. To dimensionalize this area of impact, we import approximately $100 million of raw materials annually into the U.S. with less than $15 million coming from China, and approximately $5 million coming from each of Canada and Mexico, and the rest coming from a myriad of countries around the world with little concentration in any one country. Current tariff rates would suggest approximately $20 million of impact to us. After exemptions, such as the U.S.'s recognition of the United States, Mexico Canada agreement or USMCA. We believe that we will offset approximately half of this impact by shifting to alternate raw material sources and/or production facilities, and the other half will be offset through pricing actions. We will rely on our strong market positions to raise prices where necessary to offset the unmitigated impact of tariffs, just as we effectively did during the post-COVID inflationary period that is still in the not too distant rearview mirror. Additionally, over the last few months, we have built extra inventory of many of these imported products in anticipation of this situation and to provide ample time for us to respond appropriately. The second area of impact focuses on other countries' responses to the U.S. tariffs and the impact those responses could have on our approximately $90 million of exports annually from the U.S. to countries around the world. Today, given current tariffs placed on U.S. goods by those countries, including exemptions like USMCA, the impact is immaterial for Balchem. Our robust multi-country internal manufacturing supply chain benefits us in this situation as we are able to make a number of products both in Europe and the U.S., which we can leverage to the benefit of our customers. The third area of impact is the potential impact on overall demand in our various markets as a result of potential recessionary conditions that may result from prolonged or increased trade disputes. This is obviously a much more difficult picture to clarify given all of the uncertainties that Balchem has historically managed relatively well through these kinds of environments, and our expectation is that we will do so once again. At the moment, demand remains relatively healthy across our end markets as attested by our strong Q1 results, but this situation could change if the current global trade environment worsened significantly. We believe the strength and resilience of our business model will undoubtedly serve us well, as we maneuver through the changing global trade environment and uncertainties that are impacting markets today. In summary, based on where things are today, the direct impact on our raw material imports, while impactful, is manageable with our supply chain and pricing actions. Our exports continue at this point essentially unencumbered by the tariff-related responses from other nations, and we remain nimble and flexible to adjust accordingly as market conditions evolve over the coming weeks and months. Now regarding the first quarter of 2025's financial performance. This morning, we reported record first quarter consolidated revenue of $251 million, which was 4.5% higher than the prior year quarter. GAAP earnings from operations for the first quarter were higher by 22.4% versus the prior year, and we delivered record quarterly adjusted EBITDA of $66 million, an increase of 8.9% with an adjusted EBITDA margin of 26.5%, up 106 basis points from the prior year. Consolidated net income closed the quarter at $37 million, an increase of 27.8%. This quarterly net income translated to diluted net earnings per share of $1.13 on a GAAP basis, up $0.24 or 27% compared to the prior year. On an adjusted basis, our record first quarter adjusted net earnings were $40 million, an increase of 19.2% from the prior year, which translated to $1.22 per diluted share, up $0.19 or 18.4% compared to the prior year. Overall, another very strong quarter for Balchem, which, as I said earlier, kicked off the new year on a very healthy footing. I'm now going to turn the call back over to Martin to go through the first quarter consolidated financial results for the company and the results for each of our business segments in more detail.

Martin Bengtsson, CFO

Thank you, Ted. As Ted mentioned, overall, the first quarter was a great quarter for Balchem with record sales, earnings from operations, and adjusted EBITDA. Our first quarter net sales of $251 million were 4.5% higher than the prior year, driven by strong performance in all three segments: Human Nutrition & Health, Animal Nutrition & Health, and Specialty Products. Our first quarter gross margin dollars were $88 million, up 8.2% compared to the prior year, and our gross margin percent was 35.2% of sales, up 120 basis points compared to the prior year. The increase in gross margin percent was primarily due to a favorable portfolio mix. Consolidated operating expenses for the first quarter were $37 million as compared to $40 million in the prior year. The decrease was primarily due to lower amortization expense and a decrease in compensation-related costs, partially offset by higher professional services. GAAP earnings from operations for the first quarter were a record of $51 million, an increase of 22.4% 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 13.8% compared to the prior year. Adjusted EBITDA was a record of $66 million, an increase of 8.9% compared to the prior year, with an adjusted EBITDA margin rate of 26.5%. Net interest expense for the first quarter was $3 million, a decrease of $2 million compared to the prior year, driven primarily by lower outstanding borrowings. Sequentially, our net debt remained at $140 million with an overall leverage ratio on a net debt basis of 0.5. The effective tax rates for the first quarters of 2025 and 2024 were 22.7% and 21.3%, respectively. The increase in the effective tax rate from the prior year was primarily due to lower tax benefits from stock-based compensation. Consolidated net income closed the quarter at $37 million, up 27.8% from the prior year. This quarterly net income translated into diluted net earnings per share of $1.13, an increase of $0.24 compared to the prior year. On an adjusted basis, our first quarter adjusted net earnings were a record of $40 million, an increase of 19.2% from the prior year, which translated to $1.22 per diluted share. Cash flows from operations were $36 million, with free cash flow of $31 million, and we closed out the quarter with $50 million of cash on the balance sheet. As we look at the first quarter from a segment perspective, our Human Nutrition & Health segment generated record sales of $158 million, an increase of 3.7% from the very strong results in the prior year, primarily 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 14.2% compared to the prior year. This was primarily driven by the aforementioned higher sales and a favorable mix. First quarter adjusted earnings from operations for this segment were $41 million, an increase of 6.2%. We're very pleased with the overall performance of our Human Nutrition & Health segment, where we continue to experience solid end consumer demand. As anticipated, we are seeing healthy growth once again across our Food Ingredients and Solutions businesses as well as continued growth of our Nutrients business. While there is still demand volatility and uncertainty in the market, we remain confident that our strong market positions will enable us to continue to deliver growth in Human Nutrition & Health. Our Animal Nutrition & Health segment generated quarterly sales of $57 million, an increase of 6.2% compared to the prior year. The increase was driven by higher sales in the ruminant species markets, partially offset by modestly lower sales in the monogastric species markets. Animal Nutrition & Health delivered earnings from operations of $5 million, an increase of 154.2% from the prior year. The increase was primarily due to the aforementioned higher sales and favorable mix. First quarter adjusted earnings from operations for this segment were $5 million, an increase of 126.5%. We were once again pleased to see our Animal Nutrition & Health segment deliver both top and bottom line growth in the first quarter and the continuation of the steady recovery in the business that has occurred since Q3 of last year. This improvement is primarily due to healthier dairy market conditions and continuing strength of our flagship Rumen-protected Choline brand, ReaShure, further supported by the commercial launch of our AminoShure-XL product, which has been well received by our customers. We believe the Animal Nutrition & Health business has good momentum and is well positioned to deliver solid growth in 2025. Our Specialty Products segment delivered quarterly sales of $33 million, an increase of 5.3% compared to the prior year, driven by higher sales in both the Performance Gases and Plant Nutrition businesses. Specialty Products delivered quarterly earnings from operations of $10 million, an increase of 16.9% versus the prior year, primarily driven by lower operating expenses and the aforementioned higher sales. First quarter adjusted earnings from operations for this segment were $11 million, an increase of 12.7%. We're very pleased with the performance of Specialty Products in the first quarter both from a sales growth and margin perspective, and we expect healthy demand, particularly in our Performance Gases business to drive another year of growth for the Specialty Products segment. So overall, the first quarter was another solid quarter for Balchem. I'm now going to turn the call back over to Ted for some closing remarks.

Ted Harris, Chairman, President and CEO

Thanks, Martin. Once again, we are very pleased with the first 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 the company. The evolving global trade environment provides yet another chance for us to show the resilience and strength of our business model. As mentioned earlier, we believe we are well positioned, but we will remain nimble and flexible so that we can adjust accordingly as these uncertain market conditions evolve. I will now hand the call back over to Martin, who will open up the call for questions.

Martin Bengtsson, CFO

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

Operator, Operator

Thank you. We will now be conducting a question-and-answer session. First question here is from Robert Labick from CJS Securities. Please go ahead.

Unidentified Participant, Analyst

Hi. This is Will on for Bob. Congrats on the strong quarter.

Martin Bengtsson, CFO

All right.

Ted Harris, Chairman, President and CEO

Thanks.

Unidentified Participant, Analyst

I know it's hard to clarify the second derivative impacts of tariffs and a trade war, but could you add some color to what impacts you are anticipating? And where are you the most exposed?

Ted Harris, Chairman, President and CEO

Yeah. I'd say, obviously, a very relevant question and why we spend a fair amount of time in the prepared remarks talking about tariffs. I mean, overall, as we said, we really feel like we're very well positioned. And as is typical, we feel very good about the things that we can control. And obviously, we do import raw materials from outside the country in order to manufacture products within the U.S. and those raw materials are subject to tariffs, but we feel very confident that we have a supply chain flexibility and levers to pull where we can, as we said, offset at least half of those cost impacts really based on everything that we see today plus could imagine could happen going forward. And then, we obviously have strong market positions and an ability to raise prices if necessary. And we believe that we certainly can do that as well. And we specifically mentioned the post-COVID inflationary period where we're very, very pleased with how we were able to price dollar-for-dollar as costs went up. And so, we view our ability to do that as very high. So again, I put this all in the area of being able to control the outcome of impacts on our raw materials and feel very confident around that. I think where we feel less confident is around the potential of the evolving trade environment impacting global growth, global demand and specific impacts on various markets and we're certainly not seeing that today. Our order book looks very healthy, and demand appears to be continuing as it did in Q1 and before that. So we're seeing no signs of that, but that is somewhat out of our control. And so that's probably the area where we have the most concerns. But we also look at these kinds of environments as something we've been through before. This is the 23 consecutive quarter where we've announced earnings with year-over-year growth in adjusted EBITDA. And if we think about what the world has been through in the last 23 quarters with COVID, post-COVID inflation and so forth. And we tend to operate quite well in those kinds of environments. And even if you step back and look back at 2008 and those sorts of recessionary times, we've always performed quite well, given our product portfolio and the markets that we serve. So again, the things that we can control, we feel quite confident around and those that we don't, we have to watch carefully. But of course, we've performed quite well in those environments as well on a relative basis. Hopefully, that gives you a little bit more color.

Unidentified Participant, Analyst

That does. Thank you. And then just one more. Do you have an update on the potential European Chinese dumping ruling and how does global economic chaos impact that?

Ted Harris, Chairman, President and CEO

So we do not have an update. We have filed an anti-dumping, anti-subsidy case. It has been accepted by the EU, and they are reviewing it. And we are expecting some sort of response from the EU in the next, let's say, three to six months. We feel as though our case is quite solid, but we really don't have any feedback from the EU at this time. And what we're hearing from the market, and this might be more speculation than fact, is that the current global trade environment really shouldn't have an impact on the EU's assessment of these kinds of very specific product-by-product allegations. So while I think that's a very good question and a relevant question that we have had ourselves, we've been somewhat assured by others going through similar cases that this should stand on its own and not necessarily be impacted by the current trade environment. But let's see how it goes. Hopefully, on the next call, we might have an update if it's not on the next call. It should be certainly by the third quarter call.

Unidentified Participant, Analyst

Thank you.

Ted Harris, Chairman, President and CEO

Thanks a lot.

Operator, Operator

Our next question is from Ram Selvaraju from H.C. Wainwright. Please go ahead.

Ram Selvaraju, Analyst

Thanks so much for taking my questions and congratulations on the excellent operational performance. I was wondering if you could comment on the following two aspects relating to the state of the business and what you anticipate to be the most significant tailwinds for 2025. Firstly, with respect to subsegments of HNH in particular flow and K2 delta fermented. Are you seeing emergent trends with regard to uptake, inclusion, for example, for VitaCholine Pro-Flo in multivitamin preparations that lead you to believe that those two products might drive outperformance over the course of the remainder of 2025? And if so also, it's more a question for Martin. Given the recent currency fluctuations, the extent to which you anticipate foreign currency appreciation against the U.S. dollar is likely to be a tailwind from an earnings reporting perspective for you?

Ted Harris, Chairman, President and CEO

Thank you, Ram. You experienced some interruptions, but I believe I understood your two questions about tailwinds and product launches, as well as currency, which I will leave to Martin. The choline category and vitamin K2 category are both seeing growth. According to Nielsen data, demand for our VitaCholine and choline products is indeed increasing. We attribute part of this success to our marketing and awareness strategies. Our overall product line, including VitaCholine Pro-Flo, is growing at double digits, having achieved that in Q1, and we are optimistic about continued growth. VitaCholine is new to the market, so we haven't made many sales yet, but the awareness campaigns we are running are reflected in both Nielsen data and our results. Similarly, K2 is performing well, with Nielsen indicating strong double-digit growth for specialty vitamin K2. Sales for vitamin K2 in 2024 increased by over 30%, and it remains a fast-growing segment in our portfolio. The new K2 DELTA fermented product has been a positive addition. Overall, our Nutrients portfolio had an exceptional first quarter of 2024, and we are pleased to continue growing from that strong performance, anticipating robust growth ahead. Additionally, our food business is thriving in specific areas, leveraging our formulation expertise to meet the needs of various products like beverages, nutritional drinks, and the meat sector. We have a less-discussed product line for encapsulated vigilant products aimed at the meat sticks market, which is rapidly expanding, and we are capitalizing on that growth. We see favorable trends in our food business and are confident in the overall performance of HNH. The upcoming product launches will further enhance our progress. Now, I'll pass it to Martin for more insights.

Martin Bengtsson, CFO

From an FX perspective and considering the weakening dollar, it's useful to view it in two ways: translational and transactional impacts. The translational impact primarily comes from the euro and the profits we generate, which affects us significantly. We started the quarter around a 105 rate and rose to 115, and currently, we're at about 114. Simplifying the math, the translational impact of operating in a 115 environment compared to a 105 environment translates to an annual revenue impact of approximately $10 million to $15 million. If the rate remains at this level, it should provide some beneficial effects for us. On the other hand, the transactional impact from daily flows in and out is likely to be minimal and may not significantly influence our results. Overall, while we face some headwinds and tailwinds from a transactional standpoint, it’s not expected to significantly affect the outcome.

Ram Selvaraju, Analyst

Thanks. And just very, very quickly. Two other things. Firstly, you obviously paid down a significant amount of debt over the course of 2024 and I was just wondering if you can give us any kind of directionality or context around how you anticipate approaching debt paydown, debt repayment over the course of 2025. And then also, Martin, I think it would be helpful if you just give me a sense of what you expect for the remainder of the year in terms of the effective tax rate? And to what extent, if any, we should be looking at the first quarter effective tax rate as predictive? Thank you.

Martin Bengtsson, CFO

Yeah, absolutely. So I think from a capital allocation, we're paying down our debt has been part of that, right? We're obviously prioritizing investing in our business and our organic growth first, and then, we try to augment that with M&A, which has been, as you know, slower for the last two years from a market conditions perspective, and then we serve our debt and then we're sort of after that, we think about share repurchases for antidilutive purposes from the equity awards. And we've continued to pay down our debt and now the leverage is becoming relatively low. So we see it as we continue to really focus on evaluating a variety of M&A opportunities. And I would say we're making fairly good progress there over the last sort of three to six months as things were warming up a bit. I would say that now with the new trade environment that things have certainly cooled off a little bit, again, just things have gone on a little bit of a pause due to the uncertainty, so we'll see how long that remains. So I think as a result of that, we will look a little bit closer at the next steps in our capital deployment and whether it is time to start offsetting some of the dilutive and doing some share buybacks for antidilutive purposes here going forward over the next quarter or two. Yeah, I'm sorry, yeah. And on the taxes, what you saw there, I mean, from a full year basis, we're thinking we'll be in that 22% to 23% range will probably be more in the 22% to 22.5% based on what we learned in the first quarter. So that's where I would put it from a modeling perspective.

Ram Selvaraju, Analyst

Thank you very much.

Ted Harris, Chairman, President and CEO

Thanks, Ram.

Operator, Operator

Our next question is from Daniel Harriman from Sidoti & Company. Please go ahead.

Daniel Harriman, Analyst

Hey, Ted and Martin. Good morning. Congrats on the results and thank you for taking my question. I want to follow up a little bit on an earlier question and just talk about the H&H segment. 4% year-over-year growth is pretty astounding, considering where you were in the first quarter of 2024. So I'm hoping that maybe you could just give us a little bit of a contribution breakdown between Nutrition and Food Ingredients. And then, Ted, I know you talked about this a little bit, but just how we should think about that breakdown moving forward throughout the rest of the year.

Ted Harris, Chairman, President and CEO

Sure. Daniel, thanks for your comments, and I appreciate your question. As we said earlier now a couple of times, we really were very pleased with H&H's overall performance and the year-over-year growth, given how strong the prior year was. The food business or the food ingredient business, as you know, which is the kind of slightly larger part of the portfolio actually grew a little bit faster. It grew closer to 5%, 5.5% in the quarter. And so, we are very pleased with that. We think generally speaking, it's a market that's growing quite a bit less than that. And so it's a clear indication that the parts of the market that we're focused on are growing faster. I mentioned meat sticks as a small example. But overall, if we look across our broad food ingredients and solutions businesses, all of them are performing well and at a healthy level. And so at this point in time, we're seeing that continue and we're really pleased. The Nutrients business did continue to grow, as we said, albeit at a lower rate because Q1 of last year, that nutrients business was a blowout quarter. I think I might have used that earlier. I think the whole H&H grew at 15% revenue and 37% adjusted EBITDA. So to drive growth on top of that was really great. And most of that growth came from the nutrients business. So we remain bullish on our nutrients business, particularly those product lines that I highlighted earlier but feel very good now that both parts of H&H are contributing to the growth, and we see that continuing.

Daniel Harriman, Analyst

Great. I really appreciate it. And it's exciting to see you all continue to execute regardless of the environment. So best of luck for the balance of the year.

Ted Harris, Chairman, President and CEO

Thanks, Daniel. Appreciate it.

Operator, Operator

This concludes the question-and-answer session. I'd like to turn the floor back to Ted Harris, CEO for any closing comments.

Ted Harris, Chairman, President and CEO

All right. Thanks, Matt. Once again, thank you all very much for joining the call today. We really appreciate your support and your time today and we look forward to reporting out our Q2 2025 results in the latter part of July. In the meantime, we will be attending a few conferences that I wanted to tell you about. The first is the Deutsche Bank Access Global Consumer Conference in Paris on June 4, and then next will be the Wells Fargo Industrials and Materials Conference in Chicago on June 11, and we'll also be attending the CJS Securities 24th Annual New Idea Summer Conference in White Plains, New York on July 10, which will happen shortly before the earnings call. So we hope to see some of you at least one of these conferences. And thank you again for your time today and joining the call.

Operator, Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.