Balchem Corporation (BCPC) Earnings Call Transcript & Summary

I'd like to welcome everyone to the 2021 JPMorgan Virtual Industrials Conference. Our conference is virtual this year in the interest of health and safety. And we very much appreciate your attendance. It's my pleasure this morning to introduce Ted Harris, the CEO of Balchem and Martin Bengtsson, who's Chief Financial Officer. Ted has been CEO of Balchem since 2015. Previously, he was in FMC's Ingredients business and also in Ashland's Performance businesses. Martin has been CFO of Balchem since 2019 and came over from Honeywell's Flooring Products Operation and later from Performance Materials. Martin and Ted will present, and then they'll take some questions. Ted?

Great. Thanks so much, Jeff, and thank you for having us part of this conference. We're really looking forward to telling everybody today about our little company. So I am going to go through the presentation. I understand that it's not being displayed at the same time, so I'll try to announce the page numbers as I step through. On Page 2, I would just like to start by reminding you that we may make forward-looking statements during today's presentation and that actual results may vary. Slide 3 really starts the presentation, and it's just a very broad overview of our company. Balchem was founded in 1967. So we celebrated our 50th anniversary a few years ago. But really, I would say, have transformed the company over the last 6 years, almost doubling in size. And during that time, outperforming the Russell 2000 by approximately 20%. We consider ourselves a specialty ingredient manufacturer for health and nutrition markets, particularly Human and Animal Health & Nutrition, but also we have a nice plant nutrition business. We are approximately a $4 billion market cap company traded on the NASDAQ. And we finished 2020 with $704 million in sales and about a 25% adjusted EBITDA margin. We have 21 plants with 5 R&D sites in the U.S., Europe and now in Asia. So moving on to the next slide, Slide 4. I think Jeff did a good job of introducing ourselves. So maybe I'll just skip through that. Martin will join us for Q&A at the end. Slide 5 is just Balchem at a glance. We manage our company through 4 market-facing business segments, Human Nutrition & Health, Animal Nutrition & Health, Specialty Products and other. And other used to be a lot larger than it is today. And so we actually are no longer even reporting out on other. 84% of our revenue comes from Human and Animal Nutrition & Health, and 15% from Specialty Products. And as I said, the other segment is very small at this point. Slide 6 gets into a little bit more detail, and you can see the markets served in each of the segments. And 3 core technologies or solutions that are common to varying degrees across our 3 segments, reporting segments. Microencapsulation, where we're the world leader in lipid microencapsulation and maybe just to give you a visual for what that is. Think about any single particle grain of sugar or a particle of vitamin C, for example. We put a very thin coding around that individual particle, and we call that microencapsulation. And we do that for various reasons, to provide protection may be to it, to provide some sort of release profile and so forth. You also see choline. Choline is an essential nutrient, both for humans and really most animals, and we are the world leader in manufacturing and marketing choline. Choline used to be classified as vitamin B4. It's still related to the vitamin B family and benefits liver function, neural tube development, brain function, infant child, cognition and various other bodily function. It truly is an essential nutrient. And again, we're the world leader there. And then chelated minerals, you see there, where we are the world leader in human. Chelated minerals for human nutrition, and we have a growing position in animal nutrition & plant nutrition. And what chelated minerals are, Jeff and I were talking about this earlier. It's just where we take the inorganic mineral and we put it in an organic molecule that the body can better absorb. And so we typically put it into an amino acid that the body can absorb. And so we're largely selling our product versus other minerals based on bioavailability with our products having higher bioavailability than just the base mineral. So you see those 3 solutions occurring in various degrees across all 3 of the now reporting segments. Of course, we do have some other technologies that we sell, but those really are our 3 base technologies. On Page 7, we just articulate our higher purpose or our vision, which is to make the world a healthier place. And our mission, which is really about being focused on building a global nutrition and health company by delivering trusted, innovative and very importantly, science-based solutions to our customers. On Slide 8, we talk about our strategic focus, which is really around building larger, stronger, better positioned Human and Animal Nutrition & Health businesses, simple as that, driving growth, both organically and inorganically within these businesses. For example, within Human Nutrition & Health, we really feel like we're in the infancy of the choline or really mineral nutrition revolution, maybe that's too strong of a word. But as awareness grows, we believe these businesses can grow dramatically. And similarly, with -- within Animal Nutrition & Health, we think that we're in the early stages of growth, where we have a significant market penetration opportunity ahead of us, and we'll talk a little bit more about that in the coming slides. Slide 9 gets a little bit into our very specific growth platforms, and I'll step through not each of the bullets, but each of the reporting segments in a little bit of detail. Starting with Human Nutrition & Health. In 2020, that segment generated sales of approximately $400 million with an EBITDA margin of approximately 24%. Our growth platforms, as you can see on that slide, if you have it open, are around leveraging synergies across the segment. We've made several acquisitions in this area over the last few years. And so driving those synergies is an important growth platform for us. The FDA, in 2016, came out with a recommended daily intake for choline. And that is a clear growth platform for us really driving expanded choline awareness and science on the back of the FDA's recommended daily intake, and EFSA in Europe did something similar. Mineral Nutrition, where we have the leading brand of chelated minerals, as I talked about earlier, to meet the growing consumer needs. Systems for nutritional beverages, where we're both selling our nutrients as well as our powder and flavor systems. The CureMark delivery system, where we have a unique microencapsulated delivery system for a drug in development to treat autism. And then geographic expansion and M&A. We still are a company with 75% of our revenues focused on the U.S. So there is significant geographic expansion opportunity for us. So moving on to Animal Nutrition & Health. That segment generated sales of $192 million in 2020 with an EBITDA margin of approximately 20%, and our growth platforms in that area are: number one, further market penetration of our flagship ReaShure brand, which is our microencapsulated choline product for the dairy industry, where we believe, today, we have approximately 35% market penetration of the dairy cows in the U.S., and we're working very hard to drive that to 50%. And we have even more opportunity in Europe, where our market penetration is quite low at around 5%, and we're really striving to grow that dramatically. Secondly, additional rumen-protected nutrients for the dairy industry like our next-generation AminoShure XM product, which is a microencapsulated methionine that we launched in late 2019 that really has seen some nice growth for us over the last year and market penetration. Expansion within the companion animal and aquaculture markets are important opportunities for us, a substantial amount of our business today is within the companion animal market. We've recently launched a new line of products, specifically for companion animals. So we're excited about that. And the aquaculture market is a growing market that we feel we have a good opportunity to grow with that market. And then similarly, with human nutrition, we have significant geographic expansion opportunity. And then moving on to Specialty Products. We delivered sales in Specialty Products of $104 million in 2020 with an EBITDA margin of approximately 37%. Our growth platforms there are -- we really have 2 businesses within Specialty Products. One is our Performance Gases business and the other is plant nutrition. And within Performance Gases, it's really around delivering on the synergies associated with the recent KioChemogas acquisition in Europe, where we took our very significant position in the U.S. and really built a global business by buying the largest player in Europe who also had a nice position in Asia and building that global franchise. And then secondly, within the plant nutrition business, this is a relatively small but a very profitable business for us and growing that through new applications such as row crops, but also adding new products to our portfolio. We recently added an organic chelated potassium, which has been growing very significantly. And also in that market, geographic expansion. We're excited about all of those growth opportunities. And the next slide really just kind of pulls all that together and shows that we really believe that we're in growth markets today. So we start fundamentally with markets that are growing. And we add to that market growth our unique growth platforms that we just really talked about. And then thirdly, our ability to identify and execute on strategic acquisitions, I think, is key to our growth platform. And when you combine the 3 of those, we really feel confident that we'll be able to continue to drive growth and outperform the market as a whole. Slide 11 really speaks specifically to the COVID-19 pandemic, and this has been a significant focus area for us over the last 12 months. It's hard to believe that it's been that long. But almost to the day, it's been about 12 months, and we've been focused through that time on employee safety, keeping our factories operating and really all of our processes functioning so that we could keep our customers fully serviced. And by and large, we have done just that. I couldn't be more pleased with the response efforts of the Balchem team and ultimately, our ability to deliver what was a strong 2020 despite pandemic challenges. As we indicated very early in the pandemic, we expected that there would be parts of our business where the demand would be challenged by the pandemic. We do sell into the food services market. We thought that, that would be negatively impacted. We sell our sterilants into the medical device sterilization market. We also thought that, that would be negatively impacted with fewer elective surgeries. And the business that we do have into the oil and gas fracking market, we thought would also be negatively impacted. And again, they all were negatively impacted to some extent. But at the same time, we felt like we would see some favorable demand in the food business that focuses on grocery store food products. We thought that we would see some benefit from our functional technologies that aid food preservation. The immunity-boosting nature of some of our minerals and nutrients would see some benefit. And again, by and large, we did see those benefits. And as we step back and we look at those negatives and positives, we feel by and large, they offset one another. And we were able to deliver what was a strong 2020 in a very challenging environment. The next slide, which is Slide 12, really shows some of our thoughts relative to the markets, pre the pandemic, during the pandemic and post the pandemic. And we thought it would be helpful to show this slide. We don't always use this, but I think it's helpful to step back and see what we were thinking before the pandemic emerged, how things sort of played out during the pandemic and what our view is post. And just kind of stepping down through the various markets that we serve, food and beverage. While we have seen lower demand for food service during the pandemic, we've seen somewhat offsetting demand pickup in other areas like retail and preservation, as I just mentioned. And we expect the food service part of the business to slowly recover. We are starting to see that. But it likely will take some time for that to fully recover. But we don't see any long-term disruption to our business model relative to food and beverage. Supplements. We have experienced strong demand during the pandemic as people focus on immune-boosting minerals and vitamins, and we expect this heightened awareness to provide some benefit also post COVID. And we have not seen any slowing of that today, and we do expect some of that will be sustained post the pandemic. Dairy and protein has been probably one of the more volatile segments that we sell in during the pandemic, with supply chains being disrupted, a lot of milk price volatility, for example. But at the end of the day, the impact was relatively short-lived, where there was an impact and we view the underlying demand fundamentals supporting really a healthy market going forward. The ag or plant nutrition market, the impact has been fairly muted, and we don't see any long-term impacts to the overall market dynamics. Medical devices, I mentioned this earlier, with fewer elective surgeries being performed during the pandemic, the demand for medical device sterilization has certainly decreased. And while there clearly is some pent-up demand, we're fairly cautious in terms of how long it will take for people to want to return to hospitals and do elective surgeries. So we think that there will be some extended delay in this recovery. And we're seeing that. We are seeing some recovery in our business almost week by week, but certainly month by month, but it's been quite slow. And then the energy market, this part of our portfolio has really become almost insignificant. And at this point, with the reduced tracking activities, we're really not counting on any significant recovery in the near future. But again, as I started, if you take a step back, we believe that in aggregate, the post-pandemic market dynamics will largely be in line with our pre-pandemic outlook. But obviously, you have to be a little bit cautious here given the higher degree of uncertainty that prevails at the moment. So moving on to Slide 13 and just specifically talking about our most recent quarter's performance, and that was the fourth quarter of 2020. Overall, we had a very strong fourth quarter. Our consolidated sales were up 8.5% year-over-year, really led by strong growth in our Human Nutrition & Health and in Animal Nutrition & Health segments. So really pleased with that growth. We also delivered record adjusted EBITDA that was up 8.9% from the previous year's quarter. So very pleased with that. We did see a slight decline in adjusted net earnings, really based off of a significantly higher tax rate in 2020 versus 2019, and it wasn't really because the tax rate in 2020 was high, it was that the tax rate in 2019 was unusually low at 10% based on some foreign R&D tax credits that we're able to secure in 2019 that caused us to have an unusually low tax rate in 2019. But all in all, a nice quarter. And then on Slide 14. As you look at the full year, we had a very strong 2020. Consolidated sales were up 9.3% year-over-year with growth in all 3 of our reporting segments. We also delivered record adjusted EBITDA up 8.9% from the prior year. And adjusted net earnings were up 4% year-over-year, driven by the higher earnings, partially offset by the higher tax rate that was particularly pronounced in the fourth quarter. But again, overall, a really good year and one that, I think, showed the resilience of our business model and our ability as a team to overcome challenges like those associated with the pandemic. So Slide 15 really just puts the 2020 results into the context of the last few years. And you can see over the last 6 years or so, we've really delivered consistent performance and growth, as you can see from these charts showing sales, adjusted EBITDA, adjusted net earnings and adjusted EPS. And 2020 was actually our 11th consecutive year of sales and adjusted EPS growth. So we're very proud of that. Slide 16, I won't go through in much detail, but really just breaks down the sales and adjusted EBITDA by reporting segment. You can see firstly that the other category that used to be our industrial products has diminished to almost being insignificant, as I already said. But the other 3 segments have all contributed to the growth over that time period. So we're really pleased with that. Slide 17 just speaks a little bit to our capital allocation strategy and M&A. And our capital allocation strategy really remains unchanged. We continue to prioritize organic and inorganic growth while maintaining a healthy balance sheet and a sensible debt leverage ratio, as you can see from the chart on the right that we have done over the last 5 or 6 years. Slide 18 really just shows the acquisitions that we have done over the last few years. We've made 6 bolt-on, I would describe them, acquisitions over the last 4 years, really to add either adjacent product offerings to our portfolio, geographic expansion or to create scale and drive industry consolidation. I think each of these is a good example of one of those attributes of acquisition that we're looking for. And all of the acquisitions, I think you would agree, have been very close to our core. And at the end of the day, I think, helped us build a larger, stronger, better positioned businesses within Belcan. Slide 19 shows our free cash flow conversion, which is a very important metric that we focus a lot on, and we're very pleased with these results. We define free cash flow conversion as free cash flow as a percent of non-GAAP net income. And we think that's the right way for us to define it. And as you can see there, we've been at around 100% over this time period, really showing, as we say, our ability to turn profits into cash. And we've maintained a strong performance over this time period and certainly plan to do so. 2015 was a little bit of an anomaly where we had significant capital expenditures we wanted to invest in. But again, very pleased with this, and we'll continue to focus very much cash flow conversion. Slide 20 just shows our dividend record. And while our yield is relatively low, we are committed to maintaining our dividend as well as our consistent approach to a double-digit dividend growth. And we just announced in December, another year of double-digit dividend growth, taking the dividend from $0.52 to $0.58, which was an 11.5% increase year-over-year. Slide 21 and 22, just spend a little bit of time talking about our ESG activities. And in 2019, we took the opportunity to consolidate all of the great work that we've been doing for years relative to ESG and putting it into one consolidated report. Our 2 primary objectives of our sustainability strategy are to provide solutions for the health and nutrition needs of the world and to act as strong stewards of all of our stakeholders. And in April of last year, we published our second annual sustainability report, updating our commitments, and we plan to issue our third next month. Slide 22 just shows our scorecard, if you will. We report out around 3 pillars: people, planet and profit, and really are very proud of our accomplishments to date and look forward to sharing an update with all of you in April around our continued progress. And I think really, our progress toward our ultimate goal of making the world a healthier place. So just a couple more slides. Slide 23 just speaks to what we think makes Balchem unique. And at the end of the day, we think we have a strong track record, dating back more than 50-plus years. We continue to innovate and bring new products to the markets that we serve. We've carved out protected positions in our market, allowing us to stay ahead of the competition over many years. And we have significant future upside potential to grow organically, both through market penetration, as we talked a little bit about as well as geographic expansion with our existing products as well as new products that we bring to market. So the last slide, Slide 24 is really just a summary. I think if there are 5 things I could have you take away from this presentation, if you're new to Balchem. Number one, we have leading positions in attractive markets. We are creating new demand through innovation and driving growth across our segments. We deliver really a very healthy margin profile. And we're generating strong cash flow from operations available for reinvestment. And as I started the last slide, we really have a proven track record that we're very proud of. So with that, I would just like to thank you for spending a little time today, learning about our company. I appreciate your interest and your time, and I'll hand it back over to Jeff to see if there might be any questions.

Thanks very much for your presentation, Ted. It seems that your competitive advantages stem from -- in part, from your ability to chelate to make minerals bioavailable to humans and to animals and also from your ability to microencapsulate your nutrients so that they can become involved in all kinds of food production and nutrient production. Why are these sustainable competitive advantages? What keeps other companies from being able to have strength in microencapsulation or chelation?

Right. So I think you're right. Those are areas where we do have competitive advantage, and there is a significant amount of differentiation. Firstly, I would say, what we do in those areas of chelation and microencapsulation is not easy to do. While it's been around for a while, there are significant subtleties that are just difficult to grasp. Chelation, we do have a very extensive patent portfolio, so we do have some protection from patents in our chelation portfolio. But we also have a lot of manufacturing know-how that's just different. We believe we manufacture our products differently than those other companies that do some chelation, but how we do it's different. And so we very -- we're very protective of that manufacturing know-how as well. And I would say that's really the case in microencapsulation. Of all the companies that we know of, that microencapsulate, they do it very differently to us. They do it on a much larger scale. We tend to have very small reactors that we think are critical for the robustness of the microencapsulation, and it's very unique how we do it versus others. We've bought a few companies that do microencapsulation and they do it very differently. And so we're very particular about who gets to know how we microencapsulate and that know-how is something we protect greatly. That technology, while we do have some patents around it, tends to be protected through trade secrets and know-how. But at the end of the day, we just do it differently, and it's not so easy.

I noticed that there's very little financial leverage on your balance sheet. And in general, you're not a company that's really characterized by share repurchase. Can you talk about your approach to acquisitions? That is, the kinds of businesses that you want. And it seems like those businesses maybe haven't been as available as they were in the past and in 2020. Can you discuss why that is?

Yes. So I think that the reason we show that slide of those 6 acquisitions is I think it really does represent the kinds of things we're looking for. Doesn't mean to say we wouldn't do something more transformative, we would if it were available. But we're really looking for adjacent product offerings that would work well with our portfolio. We're looking for geographic expansion. And if there are consolidation or scalability opportunities, we'll do that as well. We're very happy with the legs to our proverbial stool. We're not looking for a new leg to the stool. We think that there's a lot of inherent growth available in our current -- I'm using this analogy too much, with our current stool. So our focus with acquisitions is, as I just suggested. We have to admit that as the pandemic unfolded, we struggled a little bit with how do you buy a company in this environment where we can't go feel and touch the assets and meet the people. I think we've figured that out now. But I do think that we were on a, let's call it, a 6-month pause period as we kind of sorted through the pandemic but obviously, we've learned with all of the acquisition activity as possible. And so I think we're back on track. And while assets are indeed extensive, and we do find that the health and nutrition space that we've been in for a very long time seems to be a little bit more popular today than maybe it was 5 years ago, creating more competition. We still feel like our pipeline is quite healthy and that there are opportunities out there, whether it's a combination of companies going through official processes or family-owned companies that are trying to make decisions about their company. We do feel it's relatively healthy. And so we do have some optimism that we're kind of through the slow period of the pandemic. We're back on track and that we'll be able to continue to, again, strengthen our strategic positions by finding the right acquisitions. Our balance sheet, our debt leverage ratio is at about 0.5 as you remarked. And I think that shows a couple of things. One is, we are going to be disciplined. We're not just going to buy an acquisition -- spend money to spend money, we're going to wait for the right opportunity that we, as I just said, I think, are out there. And in the meantime, we'll pay down debt and take the small benefit associated with that. Relative to stock repurchases, we have been doing stock repurchases over the last few years, but really, solely focused on antidilution stock repurchases of our equity incentive program. And in 2020, we, by and large, did buy back the amount of stock that did create that antidilution element. We'll continue to do that. And I think contemplate a change to that potentially if we find that our acquisition pipeline is not as rich as it should be, and we find opportunities don't exist out there, I think we could reflect back on that and potentially reverse. But that's not our strategy. As I said, it really is on using our balance sheet to invest in organic growth as well as inorganic growth. And at this point in time, we're still really solely focused on that.

I know that your Human Health business is larger than your Animal Health business. When you -- but when you think of the growth rates or the opportunities in Human Health or Animal Health, are they very different? Which one is faster, which one is slower? Or are they more akin to each other?

I think the bottom line is, I think they're more akin to each other. And the growth that we've experienced in Human Nutrition that came from inorganic investments, acquisitions was really because the opportunities were there, was not because we preferred the Human Nutrition business or we're trying to differentially grow that. We're very excited about Animal Nutrition. We feel like we've got an incredibly strong brand in the Balchem name in the Animal Nutrition space. We have very good positions within -- we didn't talk about this, but the monogastric species, which is pet, poultry, swine, and we really have been leading the way in dairy nutrition from new product development, new science. And I think we have an incredible reputation from a science-based nutrition perspective that we can significantly expand and grow and leverage. So both Human Nutrition & Animal Nutrition have more mature of the business that will grow at 2%, 3% and other parts that will clearly grow at double digits. And when you kind of pull that all together, we think that those businesses should be growing at mid-single digits and organically. And so it's -- they're more akin to one another.

Thanks very much for your presentation. You guys have a lovely company, and you seem to be very good stewards of capital. And so I wish you well in finding the next piece of bulk cap. Thanks very much.

Thanks so much, Jeff, and thanks JPMorgan for having us.

Sure. I hope to see you next year.

Okay. Bye.