Balchem Corporation (BCPC) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us, and welcome to the Balchem Second Quarter 2026 earnings call. [Operator Instructions]. I would now like to hand the conference over to Martin Bengston, Balcom CEO. Please go ahead.

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, 2026. My name is Martin Benson, 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.

Thanks, Martin. Good morning, and welcome to our conference call. We were extremely pleased with our second quarter performance reported this morning. which was once again driven by healthy, broad-based growth across all 3 of our reporting segments and continued solid execution on our strategic growth initiatives. Our healthy growth continues to be fueled by the ongoing market penetration of our unique portfolio of specialty nutrients and delivery systems and the favorable better-for-you trends within the food and nutrition markets, that are well aligned with our product offerings and capabilities. As a result, we delivered record quarterly consolidated sales, adjusted EBITDA and and adjusted net earnings as well as solid cash flows. Before discussing our second quarter financial results in more detail, I'd like to take a moment to comment on the broader operating environment within each of our business segments and highlight a few areas of progress in the quarter, particularly within our capital allocation strategy. Demand trends across our businesses remain healthy. Our unique portfolio, strong market positions and focus on innovation continue to drive above-market growth. Within Human Nutrition & Health, we delivered another very strong quarter, supported by solid demand across both our nutrients portfolio and our food ingredients and solutions businesses. heightened interest in supplementation and healthier nutrient dense, high protein, high-fiber and lower sugar products continues to create opportunities for our customers and subsequently, our science-based ingredients formulation expertise and application capabilities. In Animal Nutrition & Health, we continue to generate healthy growth as a result of both expanding adoption of our precision release room and protected nutrient technologies within the dairy industry as well as realizing higher year-over-year volumes and margins in our European monogastric business. We remain encouraged by the momentum across our Animal Nutrition & Health portfolio and the value our products provide to producers seeking greater efficiency, productivity and sustainability. And Specialty Products also continues to drive healthy top and bottom line growth on solid volume and pricing growth, particularly within our Performance gases business. So demand trends across our businesses remain healthy, and each of our reporting segments is performing well. On a consolidated basis, we delivered strong growth and healthy margins despite higher input costs related to the conflict in the Middle East as a result of both mitigating actions and growth-driven operating leverage. And we remain confident in our ability to drive continued growth and margin performance going forward. On the capital allocation front, consistent with our balanced approach to capital allocation, we took several actions during the quarter to enhance financial flexibility and return capital to shareholders. First, we recently completed the refinancing of our revolving credit facility. The new amended agreement increases our borrowing capacity from $550 million to $650 million, and extends the maturity of the facility into 2031. This transaction further strengthens our financial position and provides additional flexibility to support our growth strategy. including continued investment in innovation, capacity expansion and strategic acquisition opportunities. Second, we repurchased approximately $29 million of Balchem common stock during the second quarter and $114 million over the trailing 12 months, reflecting our continued commitment to disciplined capital allocation and shareholder value creation. Now regarding the second quarter financial performance. This morning, we reported record quarterly consolidated revenue of $284 million, an increase of 11.2% versus the prior year. We delivered record quarterly GAAP earnings from operations of $59 million, an increase of 15.1% versus the prior year. Consolidated net income closed the quarter at a record $45 million, an increase of 16.6%. This quarterly net income translated to diluted net earnings per share of $1.39 on a GAAP basis, up 18.8%. On an adjusted basis, we delivered record quarterly adjusted EBITDA of $78 million, an increase of 12.6%. Our quarterly adjusted net earnings were a record $48 million, an increase of 15.7%, which translated to $1.49 per diluted share up 17.3%. Overall, we delivered an outstanding second quarter, highlighted by record financial results, broad-based growth across our businesses, the strengthening of our balance sheet via our newly amended credit facility and continued execution on our long-term strategic objectives. And with that, I'm now going to turn the call back over to Martin to go through the second quarter financial results in more detail and the results for each of our business segments.

Thank you, Ted. The second quarter was another strong quarter. Our record second quarter net sales of $284 million were up 11.2% compared to prior year. driven by strong performances across all 3 segments: Human Nutrition & Health, Animal Nutrition & Health and Specialty Products. Our gross margin dollars were $104 million, up 11.4%, and our gross margin percent expanded to 36.5% of sales, up 10 basis points. The gross margin performance was driven primarily by sales growth and manufacturing efficiencies, partially offset by certain higher manufacturing input costs. Consolidated operating expenses for the second quarter were $44 million as compared to $42 million in the prior year. The increase was primarily due to higher compensation-related costs. GAAP earnings from operations for the second quarter were a record $59 million, an increase of 15.1%. On an adjusted basis, as detailed in our earnings release this morning, record non-GAAP earnings from operations of $64 million were up 13.9%. Adjusted EBITDA was a record $78 million, an increase of 12.6% with an adjusted EBITDA margin rate of 27.4%. Net interest expense for the second quarter was $2 million, a decrease of $1 million primarily driven by lower outstanding borrowings and lower interest rates. Our net debt was $89 million with an overall leverage ratio on a net debt basis of $0.3 million. The effective tax rates for the second quarter of 2026 and 2025 were 22.8% and 21.9%, 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 a record $45 million, up 16.6%. This quarterly net income translated into diluted net earnings per share of $1.39, an 18.8% increase. On an adjusted basis, our second quarter adjusted net earnings were a record $48 million, an increase of 15.7%, which translated to $1.49 per diluted share. Cash flows from operations were $47 million with free cash flow of $36 million, and we closed out the quarter with $63 million of cash on the balance sheet. As we look at the second quarter from a segment perspective, our Human Nutrition & Health segment saw record sales of $177 million, up 10%, driven by growth in both our Nutrient business and our Food Ingredients and Solutions businesses. Record earnings from operations of $42 million were up 10.5%, driven by the higher sales and favorable mix, partially offset by certain higher manufacturing input costs and higher operating expenses. Second quarter adjusted earnings from operations for this segment were a record $46 million, up 10.9%. We are excited about the growth outlook for Human Nutrition & Health, where consumer demand for healthier nutritional solutions continues to support growth. Our differentiated ingredients, formulation expertise and branded portfolio position us well to continue serving our customers and expanding our market opportunities. Our Animal Nutrition & Health segment delivered sales of $64 million, up 15%. The increase was driven by higher sales in both the monogastric and ruminant businesses. Animal Nutrition & Health delivered earnings from operations of $5 million, up 48.7%, driven by the higher sales partially offset by certain higher manufacturing input costs and higher operating expenses. Second quarter adjusted earnings from operations for this segment were $6 million, up 47.7%. We delivered another quarter of improved year-over-year performance in our Animal Nutrition & Health segment. Growth was driven by continued adoption of our encapsulated room and protected nutrient technologies in the dairy market, stable demand in our U.S. monogastric business and ongoing improvement in our European monogastric business following the implementation of EU antidumping duties. And we were also pleased with the year-over-year margin improvement delivered in the quarter within ANH, despite higher input costs related to the conflict in the Middle East as a result of both mitigating actions taken and growth-driven operating leverage. We're encouraged by the momentum across the Animal Nutrition & Health segment and remain confident in our ability to continue expanding adoption of our technologies and delivering long-term growth. Our Specialty Products segment delivered record quarterly sales of $41 million, up 8.9%, driven by healthy growth in both Performance Gases and Plant Nutrition businesses. Specialty Products delivered a record quarterly earnings from operations of $13 million, up 14.4%, driven primarily by higher sales partially offset by certain higher manufacturing input costs and higher operating expenses. Second quarter adjusted earnings from operations for this segment were a record $14 million, up 12.1%. We were encouraged by the continued strong performance in Specialty Products, which once again delivered healthy, profitable growth. supported by favorable market positions and disciplined execution, we believe this segment remains well positioned for continued success. Overall, our second quarter reflects all-time record financial performance, continued momentum across our businesses and strong execution across the organization. With that, I'll turn the call back over to Ted for some closing remarks.

Thanks, Martin. We are very pleased with the results we reported earlier today. Our teams executed exceptionally well during the quarter, delivering record financial performance, while continuing to advance our strategic priorities. The second quarter of 2026 was our 28th consecutive quarter of year-over-year growth in adjusted EBITDA. We believe this achievement reflects the strength of our unique portfolio, the resilience of our business model and the consistent execution of our teams across a wide range of market conditions. And as a team, we are extremely proud of these results and excited about the future of our 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.

[Operator Instructions]. Your first question comes from the line of Bob Labick with CJS Securities.

Congratulations on continued strength and record results. You've been really successful in growing minerals and nutrients, in particular, choline, K2 magnesium and more -- my question is, how do you evaluate new products? Is it based on where you can improve bioavailability or markets or what -- and so how do you evaluate new products for that area? And then how do you decide if it's a kind of build versus buy opportunity to enter markets for new products?

Yes. Thanks for the question, Bob. We're really, really pleased with the performance of the Nutrient business as well as the food ingredients and solutions part of H&H, both contributing to very, very strong results in our Human Nutrition & Health business. And specifically in nutrients, as you know, over the years, we have develop their own products, sometimes with outside partners in the case of Option Plus that we launched a year or so ago, that's a good example of kind of an internal development with external support. And then we've acquired technologies like we did with vitamin K2 and buying Capa solutions. And I think it has to do with how you select which path to go down -- it has to do with how close is that technology to our core. And for example, in OptifolinPlus, part of the backbone of that technology is choline. And so we were able to use our expertise to expand into that technology with an outside partner. And so that was more sort of ripe for internal development, if you will, whereas the vitamin K2 is very different technology. And so it made sense to do that through acquisition. But -- when we step back and look at the marketplace, how do we decide which nutrients we want to invest in, and we think would be valuable as part of our portfolio. Certainly, 1 thing we start with is the science. We want to make sure there is already good existing sound science behind the the products that we're bringing in. And I think that, that clearly has been true with all of the additions to our portfolio over the years. So the science is really important. And then kind of as you touched on, I think it's the -- what is our point of differentiation that's going to make our product different and more special and and so forth. I think that's also a very, very important aspect of the product. For example, when we bought Capa Solutions and vitamin K2 was very important to us that one of the primary forms of K2 that Capa Solutions had was an encapsulated K2 that was protected with patent was very different, very unique and very special in the marketplace. So lots of points of differentiation there and moats, if you will, on that product. So differentiation, I think, is another key point. The other thing we like to look at is how well penetrated is that nutrient. Our nutrients still even after many years of efforts still are relatively well known. They're increasing in awareness and increasing in market penetration, but it's a very different dynamic if you're -- if you have a nutrient that from your perspective, is fully penetrated in the marketplace is -- has very high awareness like, for example, I'll say, vitamin D3. Our nutrients tend to be lesser known, more niche. And we have a real opportunity with that science and that differentiation to drive awareness, drive market penetration and really drive above-market growth rates. And I think you can see evidence of that on all of our products that are part of our nutrient portfolio. So I think those are sort of the key elements that we look at. And we're excited by the fact that we do see opportunities in the marketplace to add additional products to our Nutrient portfolio, and we're working hard on that.

Okay. Great. And you mentioned the science as part of the differentiation and everything. Maybe this isn't kind of every quarter question because I know it's not this fast, but I know you have a number of trials out there. I was wondering if you could give us any updates on some of the trials that may come to fruition in this year? And then I guess just more broadly, how you use that information once you get it to help grow the business.

Yes, certainly investing in clinical studies. And as I've referred to at the science behind our products is really an important part of what we do. It's how we help our customers have claims for their own products, which is an important part of marketing. So it's -- it's a fairly significant investment. At any one time, we have 20, 25 ongoing studies out there. And you're right, some of these take many years. Some are a little bit shorter. There were 4 studies of note in the last quarter, 1 on Optifolin+ on K2 Vital and 1 on VitaCholine that are all really good studies and further enhance our already kind of broad library of studies for the products. It just kind of gives you a feel this is ongoing, and these are all a little bit different, but kind of add to that portfolio and add to that science behind our products. The one that I am excited about and unfortunately, I don't have a an update today, but I'm very excited about this 1 that I've talked about in the past, and that's the MD Anderson University of Texas MIT, a pilot clinical study that has people in the study that have the APOE4 gene, which is really the gene that leads to Alzheimer's. And so it is an adult cognition study that I'm excited to ultimately get the results about and hopefully be able to talk significantly about because if we can from this study, see clear evidence that high doses of choline have an impact on the development of dementia and Alzheimer's. That would be really an important finding and important part of the science behind the cognitive benefits of choline. I do think that, that study once it's published, will lead to another bigger study that will further reinforce those findings. But -- we have -- we do know that, that study is completed, and we do expect that, that study should be published in the next couple of months. So I'm really hopeful that with the next quarterly update, I will be able to talk about the results of that study. So that's an exciting study that's going on that I'm particularly interested in -- along with the 4 that I talked about that were published in the last quarter and the others that are ongoing.

Your next question comes from the line of Ram Selvaraju with H.C. Wainwright.