Balchem (BCPC) Q2 2022 Earnings Call Transcript

Balchem (BCPC 0.17%)
Q2 2022 Earnings Call
Jul 29, 2022, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Balchem Corporation second quarter earnings conference call. presentation. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr.

Martin Bengtsson, chief financial officer. Thank you, sir. You may begin.

Martin Bengtsson -- Chief Financial Officer

Thank you, Laura. 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, 2022. My name is Martin Bengtsson, chief financial officer; and hosting this call with me is Ted Harris, our chairman, CEO, and president.

Following the advice of our counsel, auditors, and the SEC, at this time, I would like to read our forward-looking statement. This release does contain or likely will contain forward-looking statements, which reflect Balchem's expectation or belief concerning future events that involve risks and uncertainties. We can give no assurance that the expectations reflected in forward-looking statements will prove correct, and various factors could cause results to differ materially from our expectations, including risks and factors identified in Balchem's Form 10-K. Forward-looking statements are qualified in their entirety by this cautionary statement.

I will now turn the call over to Ted Harris, our chairman, CEO, and president.

Ted Harris -- Chairman, President, and Chief Executive Officer

Thanks, Martin. Good morning. Welcome to our conference call. This morning, we reported very strong second quarter results with both strong revenue and earnings growth.

Our revenues of $236.7 million were up 17% and our adjusted earnings from operations were $46.7 million, up 13.6% versus the prior-year quarter. Our second quarter net income of $29.8 million, an increase of 31% resulted in earnings per share of $0.92 on a GAAP basis. On an adjusted basis, our second quarter non-GAAP net earnings were $34.4 million, an increase of 13.3% resulting in earnings per share of $1.07 on a non-GAAP basis. Cash flows from operations were $48.2 million for the second quarter of 2022 with quarterly free cash flow of $37.8 million.

Overall, a great second quarter for Balchem with performance that highlights the strength and resilience of our business model. Before passing the call back to Martin to cover the detailed financial results by segment, I would like to make a few comments about our recent acquisition of Kappa Bioscience AS, or simply Kappa. As previously announced, on June 21, Balchem acquired Kappa, a leading science-based manufacturer of specialty vitamin K2 for the human nutrition industry, headquartered in Oslo, Norway. With the acquisition of Kappa, we accelerate our strategic vision of building a global health and nutrition company, strengthen our human nutrition and health segment, and further support our higher purpose of making the world a healthier place.

Kappa is a leading science-based manufacturer of vitamin K2 for the human nutrition industry. The company was founded by two brilliant chemists who are both still active in the company, Inger Reidun Aukrust and Marcel Sandberg. They had noticed a growing need for vitamin K2, and set out to find a new, more efficient way of producing the vitamin on a large scale with improved purity in an efficient cost position. Together, they invented a new chemical synthesis that laid the foundation for what has become Kappa today. Kappa's unique technology enables them to produce a highly pure vitamin K2 with leading quality and stability that is offered into the marketplace under the brand K2VITAL.

Kappa's K2 is sold either as an oil or a powder, but is also available as a unique double microencapsulated product under the brand K2VITAL DELTA, which provides superior stability in formulations compared to competitive products. Vitamin K2 is a vital vitamin needed by our bodies to support bone and cardiovascular health. It controls the transport and distribution of calcium, making sure the calcium gets to wherever it is really needed. K2 is important at all life stages from pregnancy to early life, to old age.

It is critical for building and maintaining healthy bones and teeth, and at the same time, preventing harmful calcium deposits in soft tissues. Additionally, vitamin K2 plays a significant role in immune function and protection, serving as a synergistic partner with vitamin D3. Together, vitamin D3 and vitamin K2 strengthen the immune system and support the body's capacity to manage inflammation. We are very pleased about this acquisition and the addition to our company of Kappa's deep scientific expertise, patent portfolio and premium branded products.

There are four strategically important elements to this acquisition. One, we fundamentally believe that K2 is an important and critical specialty vitamin for human nutrition and health that will see strong growth for the foreseeable future as the science further evolves and market penetration increases. Two, Kappa's market-leading science-based vitamin K2 position expands our portfolio of products and provides us the opportunity to expand both company's sales to a broader combined customer base. Three, the combination of Kappa's strength in Europe and Balchem's strength in North America will provide an opportunity for accelerated growth for both the legacy Balchem products as well as Kappa's K2.

We are already seeing some evidence of this in just the first few weeks. And four, we believe that the combination of the scientific expertise and market-leading physicians of both companies will aid in the understanding of the interconnectivity between our existing portfolio of minerals and nutrients with vitamin K2, and subsequently our ability to provide enhanced solutions for our customers. This strategic rationale combined with a strong margin and growth profile of the business make Kappa a very attractive addition to Balchem. We acquired 100% of Kappa for an enterprise value of approximately NOK 3.2 billion prior to net debt and working capital adjustments.

That translates to approximately $320 million, which we funded out of our existing credit facility. In addition to the purchase price, the sellers have an opportunity to receive an additional earn-out payment in 2024, ranging from 0% to 16% of the enterprise value based on growth and other performance targets established for the 2023 calendar year. This transaction represents an enterprise value to EBITDA multiple of approximately 18 times based on the 2022 forecast EBITDA, reflecting the strong growth trajectory we expect over the coming years. Kappa's forecast 2022 revenues are approximately $50 million, with a strong growth and margin profile accretive to Balchem's overall profile.

Kappa has a strong position in a rapidly expanding market where vitamin K2 is expected to be one of the fastest growing vitamins over the next five years. The vitamin K2 market has been growing at rates exceeding 30% over the last few years, and has now reached an approximate market size of $175 million in 2022. While we expect the growth percentages to moderate somewhat as the market gets larger, we still expect the K2 market to grow at rates exceeding 15% compounded annual growth rates over the next five years. The transaction is expected to be accretive to Balchem's earnings per share in 2022 on an adjusted basis, and accretive on a GAAP basis in 2024.

I want to take this opportunity to give a warm welcome to Kappa's 75 plus employees into the Balchem family. The Kappa team is strong, experienced, and committed. They know and understand the vitamin K2 market and have made the K2VITAL brand the most recognized and well regarded brand in the vitamin K2 market through their commitment to quality, science, and transparent communication. We are very excited about what we can achieve together and the opportunities that lie ahead.

And with that, I will now turn the call back over to Martin to go through the detailed financial results for each of our segments.

Martin Bengtsson -- Chief Financial Officer

Thank you, Ted. As Ted mentioned, overall, we delivered strong financial results in the second quarter. Our second quarter net sales of $236.7 million were 17% higher than the prior year. We delivered sales growth in all three segments: human nutrition and health, animal nutrition and health, and specialty products.

We drove strong pricing performance across the portfolio, recovering the continued inflationary increases that we're seeing across our manufacturing and distribution input costs. Our volumes were mixed across the portfolio, with volume growth in our human food ingredients and minerals and nutrients businesses, as well as our monogastric animal nutrition business, while we saw volume declines in our ruminant portfolio, and our specialty products portfolio. Impact from foreign currency exchange, driven primarily by the weaker euro had a negative impact to our sales growth of approximately 1.6%. Our second quarter consolidated gross margin dollars of $71.9 million were up $12.4 million, or 20.9% compared to the prior year.

Our gross margin percent was 30.4% of sales in the quarter, up 99 basis points, compared to 29.4% in the second quarter of 2021. Input costs inflation continues to be significant, and it's hard to predict at this time, how this will evolve over the next few quarters. We've been fairly successful so far in racing average selling prices to help offset the inflationary pressures, but it continues to have a dilutive impact on margins. We're also starting to see some demand destruction in certain areas resulting from the increased prices.

Consolidated operating expenses for the second quarter were $32 million as compared to $28.9 million in the prior year. The increase was primarily due to higher compensation-related costs and higher advertising and marketing expenses. GAAP earnings from operations for the second quarter were $39.9 million, an increase of $9.3 million, or 30.5% compared to the prior-year quarter. On an adjusted basis, as detailed in earnings release this morning, non-GAAP earnings from operations of $46.7 million were up $5.6 million, or 13.6% compared to the prior-year quarter.

Adjusted EBITDA of $56.5 million was $6.3 million, or 12.6% above the second quarter of 2021. Interest expense for the second quarter of 2022 was $1 million, and our net debt was $357.4 million, with an overall leverage ratio on a net debt basis of 1.8. The company's effective tax rates for the second quarters of 2022 and 2021 were 24.1% and 24.3%, respectively, with no significant change year over year as various items largely offset each other. Consolidated net income closed the quarter at $29.8 million, up 31% from the prior-year quarter.

This quarterly net income translated into diluted net earnings per share of $0.92, an increase of $0.22, or 32.4% from last year's comparable quarter. On an adjusted basis, our second quarter adjusted net earnings were $34.4 million, or $1.07 per diluted share, up 13.3% compared with prior-year quarter. Cash flows from operations were $48.2 million and we closed out the quarter with $76.2 million of cash on the balance sheet. As we look at it from a segment perspective, for the quarter, our human nutrition and health segment generated record quarterly sales of $131.6 million, an increase of 18.1% from the prior year.

The increase was driven both by sales growth within food and beverage markets, as well as higher sales within the minerals and nutrients business. Our human nutrition and health segment also delivered record quarterly earnings from operations of $23.7 million, an increase of 24.6% compared to the prior year, primarily due to the aforementioned higher sales, higher average selling prices, and the timing of costs associated with the recovery from a fact -- flash flood event in the prior year, partially offset by higher manufacturing input costs and distribution costs. Excluding the effect of non-cash expense associated with amortization of intangible assets of $4 million, and excluding the prior-year expenses related to the flash flood event, second quarter adjusted earnings from operations for this segment were $27.7 million, an increase of 9.2%. Our animal nutrition and health segment generated quarterly sales of $62.6 million, an increase of 14.9% compared to the prior year.

Increase in sales was a result of higher sales in monogastric and companion animal markets, partially offset by lower sales in ruminant animal markets, and an unfavorable impact related to changes in foreign currency exchange rates. We're currently seeing a mixed demand picture in our animal nutrition and health business. In the U.S., we continue to see solid demand for our monogastric business, as well as our companion animal business, while we see weaker demand on the ruminant side with dairy farmers struggle with profitability in this inflationary environment. In Europe, we've seen a slowdown in both monogastric and ruminant markets as the inflationary environment and geopolitical tension in the region has generated a very volatile demand situation, and some customer destocking actions in the quarter.

Animal nutrition and health delivered earnings from operations of $7.6 million, an increase of 113% from the prior-year quarter, primarily due to the aforementioned higher sales, higher average selling prices, and the timing of costs associated with the recovery from a flash flood event in the prior year, partially offset by increases in manufacturing input costs and distribution costs. Excluding the effect of non-cash expense associated with amortization of intangible assets of $0.1 million and excluding the prior-year expenses related to the flash flood event, second quarter adjusted earnings from operations for this segment were $7.7 million, an increase of 49.7%. Our specialty products segment delivered record quarterly sales of $36.6 million, an increase of 7.7% compared to the prior-year quarter, due to higher sales of products in the medical device sterilization market, partially offset by lower plant nutrition sales, and an unfavorable impact related to the changes in foreign currency exchange rates. Volumes into the medical device sterilization market increased sequentially for the third consecutive quarter, but was slightly below prior-year volumes.

But it's encouraging to see the gradual recovery in this business that was negatively impacted by the pandemic. Specialty products delivered earnings from operations of $9.9 million, an increase of 2% versus the prior quarter. The increase was primarily due to the aforementioned higher sales, partially offset by increases in manufacturing input costs and distribution costs. Excluding the effect of non-cash expense associated with amortization of intangible assets of $1.1 million and excluding the prior-year expenses related to the flash flood event, second quarter adjusted earnings from operations for this segment were $11 million, a decrease of 1.8%.

Lastly, before turning the call back to Ted for closing remarks, I would like to share that on July 27, 2022, we entered into a new credit agreement with lenders in the form of a senior secured revolving credit facility due July 2027. This new revolving credit agreement allows for up to $550 million of borrowing and replaces the existing $500 million revolving credit facility June 2023. Having this facility in place for the upcoming five years provides us with great flexibility to support the growth that lies ahead. I'm now going to turn the call back over to Ted for some closing remarks.

Ted Harris -- Chairman, President, and Chief Executive Officer

Thanks, Martin. We are extremely pleased with Balchem's financial results reported earlier this morning and the strong second quarter of 2022. We delivered all-time record revenues with revenue growth in all three of our business segments and record adjusted earnings in what continues to be a very difficult market environment. We are also extremely pleased with the acquisition of Kappa and are excited to have the Kappa team join the Balchem team.

Together, I know we will find new ways to make the world a healthier place. Despite continued disruptions within global supply chains, the extreme inflationary environment we are facing, and the broad market uncertainties, we remain cautiously optimistic about the remainder of the year, given the strength of our market positions and the resilience of our business model. The Balchem team continues to do a fantastic job of finding creative solutions to challenges never seen before. I would like to once again take this opportunity to thank all of our employees for the incredible work they do for our company, our customers, and our key stakeholders.

I would now like to hand the call back over to Martin, who will open up the call for questions. Martin?

Martin Bengtsson -- Chief Financial Officer

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

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Bob Labick with CJS Securities. You may proceed with your question.

Bob Labick -- CJS Securities -- Analyst

Good morning, and congratulations on another strong quarter and on the Kappa acquisition.

Ted Harris -- Chairman, President, and Chief Executive Officer

Thanks a lot, Bob.

Bob Labick -- CJS Securities -- Analyst

Absolutely. Yes. No, it's very exciting. So maybe starting there, could you tell us more about the drivers of growth for vitamin K2 and maybe how it's similar or different from the choline growth opportunity and maybe where they sell into versus choline and potential sales synergies going forward?

Ted Harris -- Chairman, President, and Chief Executive Officer

Yes. So again, thanks for your comments. And we really are excited about the addition of Kappa to Balchem. And yes, the drivers of growth really are around the science behind vitamin K2.

I mean, it's clearly an essential vitamin needed by our bodies for support of bone health and cardiovascular health with an aging population. These important factors become increasingly important. So I mean that's an important driver unto itself. It's just the overall aging population.

But another important driver is just increased science and knowledge around the effectiveness of K2 and the importance of K2. I also talked about in the prepared remarks, the synergy between K2 and vitamin D3. And as the world becomes more aware and focused on immunity and building your immune systems, vitamin K2 plays a really important role relative to building immunity, particularly given its synergistic effects with vitamin D3. So I would say those are two really important overall drivers of growth.

One is the aging population; and number two is the kind of awareness around immunity and the desire for people to continue to focus on building their immune systems. And then, I guess, thirdly, just overall science behind K2, I think, is evolving, which I think is a key driver. And so those things are similar relative to choline. I mean choline science continues to evolve relative to choline.

We think the ultimate addressable market of choline is far larger than the existing market as science evolves, awareness builds, penetration ultimately happens exactly the same thing with vitamin K2. Yes, the other similarity is that choline really plays a role in all aspects of life, whether it's in pregnancy, early life, old age cognition and K2 as well. We're really excited around one of our strengths in -- at Balchem and our company is around the prenatal choline and early life choline, while we think there is a role for choline through all stages of life, K2 plays a really important role in early life as well. And that's a really strong part of who we are and our value proposition.

So I think we're really excited to take our prenatal early life expertise that we bring to our customers, add K2 to that and bring that to our customers. And so all of that touches a little bit on some of the obvious synergies and we're really excited to take K2 and include that in our portfolio to bring to our existing customers. And similarly, Kappa has access to customers that we haven't necessarily penetrated over the years, and we're really excited about the Kappa leads and relationships and so forth to bring our mineral and choline technology. I also talked a little bit about just the regional element from a synergy perspective.

Kappa's strength really is Europe. They're present in the U.S. and Asia, but their strength is Europe. Like us, we have presence in Europe.

We have presence in Asia, but our strength really is in the U.S. And so we really believe that we can accelerate K2 penetration in the U.S. with our strength. And we also think that the Kappa team can accelerate choline and mineral growth for us in Europe through their strength in Europe.

So that really touches on it. We don't feel like there are a lot of cost synergies necessarily, even from a procurement perspective, the raw materials are very, very different to ours. I'm sure we will find some cost synergies as we go, but it's really more about market synergies and those synergies I described.

Bob Labick -- CJS Securities -- Analyst

OK, great. That's really helpful. And can you talk about the choline market size right now relative -- I think you gave the Kappa size is $175 million globally. Where is human choline right now? And I think it's behind that size for the K2.

What does it take to get to that higher level and then beyond for choline?

Ted Harris -- Chairman, President, and Chief Executive Officer

Yeah. So when you look at choline, the one big difference about choline is that choline also has a role in animal nutrition that is very, very significant today. So we think of the choline market probably as being about $500 million from an overall market size for choline. The human choline market is far less than that.

It's probably more like $50 million. K2 today is primarily a human nutrition vitamin. We do think that there may be some elements in animal nutrition that may make a lot of sense, but that's really not part of the opportunity today. So that hopefully gives you kind of a size comparison.

Bob Labick -- CJS Securities -- Analyst

OK, great. And I'll ask one more and I'll jump back in queue. Just changing subjects a little bit. Obviously, over the last several quarters, you've been, I guess, put in a position based on raw material prices or material costs rising to raise your prices as well.

You mentioned some -- for the first time some modest demand destruction. But maybe talk a little bit about what you've learned about the price elasticity or the elasticity curve. And given your niche leadership position in so many areas, how do you see kind of prices playing out if raw material prices or when raw material prices ultimately pull back? I mean, have you discovered that maybe you were underpriced in certain markets? Might there be an opportunity to hold some of that? Or looking ahead, where do you think the pricing environment goes, if and when raw material inputs normalize?

Ted Harris -- Chairman, President, and Chief Executive Officer

It's a complicated but really good question, Bob. We're really pleased with the market positions that we have that have allowed us, by and large, to raise prices and recover the majority of our input costs. We're still behind, and we still see margin degradation. So we have a ways to go.

We're continuing to raise prices selectively. We're raising prices August 1 in certain areas. So we're behind, but we believe that we have the market positions and the ability to offset the cost increases. I wouldn't say that anywhere we've recognized that we were underpricing and we were doing a poor job of pricing in the past.

But I think what we have substantiated is that we are bringing differentiated products to market. We do have strong market positions and that we have been, by and large, able to raise prices. Why we're behind is typically because of a contractual agreement that forces us to be behind because we have a quarter lag based into our contracts. It will obviously be very interesting to see how the market evolves and as raw materials do flatten out, there's no question.

In certain markets, we're going to give some of those price increases back to our customers as raw materials come down, and likely, we've been in this environment of lagging and in a period of margin compression because of that lag. And as things flatten out, there's a high likelihood that we'll see some margin expansion as we get ahead of that on the way down.

Bob Labick -- CJS Securities -- Analyst

Got it. Super. OK. Thank you.

I'll hop back in queue. Thanks.

Ted Harris -- Chairman, President, and Chief Executive Officer

Thanks.

Operator

Our next question comes from the line of Ram Selvaraju with H.C. Wainwright. You may proceed with your question.

Ram Selvaraju -- H.C. Wainwright and Company -- Analyst

Hi. Thanks very much for taking my question. So I wanted to ask you a little bit about the broader long-term strategy in human health and nutrition based on not only the Kappa acquisition, but also what you're seeing as emerging trends in the space that you expect Balchem to be particularly advantageously positioned to capitalize upon. And specifically, I was hoping that you could talk a little bit about what you plan to do with the Kappa portfolio, especially from an intellectual property perspective, if you're going to look at potentially developing new co-formulated products.

And also, if we should be thinking about the Kappa acquisition as more indicative of what you intend to do in the HNH space relative to potentially some other strategic choices that you may have, like, for example, exploring an entry into prescription medical foods.

Ted Harris -- Chairman, President, and Chief Executive Officer

So again, thanks for your questions, Ram. A lot in there. On the -- is this more indicative of our future growth, I really think that the acquisition of Kappa as, we kind of think of the -- our pipeline as a bit of a radar screen. And I would say that the Kappa acquisition is right there in the middle of the bull's eye relative to the margin profile, relative to the specialty nature of it, relative to the brand, strength of the brand, relative to the science behind it, relative to the fact that it is an essential nutrient and adds to our health and nutrition focus.

So I do think that it's very clearly in the bull's eye of what we want to do. And just to -- so you don't think it's only human nutrition. I think there are certainly plenty of those kinds of nutrients on the animal side that are in the middle of the bull's eye as well. But we continue to have a pipeline that has various acquisitions in it and investments in technology that may include medical foods.

They may include broader food ingredients and so forth. So we are looking at a broad array of acquisitions to strengthen our company as a whole, but this is firmly in the bull's eye of what we're going to do. From a patent portfolio, I think it is worth -- relative to Kappa, I think it is worth noting that we're quite pleased with the existing patent portfolio of Kappa. And I think their -- it's probably accurate to say that their science and the protection of the business is not really just all wrapped up in the filed patents.

There is quite a bit of proprietary technology know-how that exists and very deliberate decisions made around when to file a patent and when to keep it as trade secret and so forth. So when we look at that holistically, we feel like it's quite strong, and we like that. But there are three or four, I would describe, key patents around the synthetic approach to manufacturing K2 that have some good lengths to them and some real strengths to them. And then a handful of others that have -- I'll maybe describe them as variant products or a broader application of K2 in human health.

And your specific question, can I see a broadening of this, the inclusion of various other products potentially synergistic with our existing products around immune health and so forth? Absolutely. I mean we've talked about microencapsulation. We look at ourselves as one of the world leader in microencapsulation. One of our products is microencapsulated.

I think there's a role for microencapsulation here in K2. So might we bring something there, and we also feel like there are some synergistic opportunities with choline, various minerals, whether it's zinc or magnesium and so forth that we will -- we're really excited to get our technology group together with Kappa's to see what we can find there. So hopefully, that answers your question. And the first part of your question was around the long-term strategy of HNH.

And it really -- I think it mimics our overall strategy as a company to build a human health and nutrition company that is global, that is broad, that is based on science-based, technology-based specialty ingredients and nutrients that are differentiated that can broaden our ability to solve our customers' problems, both from a food and nutrition perspective. And we really have -- I think we talk a lot about our growth platforms, and we do have a broad array of growth platforms that I think that will allow us to do just that going forward. And I think again, Kappa fits perfectly in that.

Ram Selvaraju -- H.C. Wainwright and Company -- Analyst

Just to clarify, when do you expect the principal patents from Kappa to expire?

Ted Harris -- Chairman, President, and Chief Executive Officer

Again, like all -- when you have a multitude of patents, we have some that expire in 2036, some in 2029 and kind of through that time frame. So we feel good about the length of patent protection. And again, as I said, it's really not -- we're not reliant on any one patent. There's a lot of trade secret proprietary information.

In fact, there's work that's been done recently to optimize the synthetic path that has been very deliberately decided to not patent that we feel will give protection for many years to come.

Ram Selvaraju -- H.C. Wainwright and Company -- Analyst

OK. And then just a very quick question for Martin on the debt side. I understand that you did acquire some debts in the conjunction of the Kappa acquisition transaction. And just wanted to see if you could give us a quick snapshot of the current debt picture overall and specifically whether you're looking to restructure or refinance any of the Kappa debt or if you feel that it's OK to go forward servicing it as usual.

And to what extent that really represents a meaningful component of the overall debt position of the company at this point. Thank you.

Martin Bengtsson -- Chief Financial Officer

Yes. The -- in terms of the debt that Kappa carried at the time we acquired them, it was in round numbers, about $30 million, which we paid down at closing. So Kappa no longer has any debt in the Kappa entities. Obviously, we increased our debt as we found -- funded the transaction.

So if you look at Balchem's overall balance sheet right now, it will show about $430 million or so of outstanding debt, which is just part of our normal revolving credit facility, which was previously $500 million. And as mentioned in the prepared remarks, we just refinanced that two days ago for a new five-year period with a $550 million revolver. So we currently have $430 million of debt out of the $550 million credit facility. So we feel that we're in good position there.

If you take that against the backdrop of how much free cash flow we generate every year, we expect that we will pay that down pretty quick. And in terms of the interest rate environment and what's going on there, the simple math, you can do obviously on $430 million is that every percent is a little over $4 million. We refinanced at sort of very attractive margin spreads that actually slightly improved depending on debt leverage to what we had before. But we follow the -- what used to be the LIBOR.

It's now the SOFR plus a margin spread on the debt we carry. But our expectation is that we'll delever the 1.8 times net debt leverage that we have at the moment pretty quick here with the cash that we're generating.

Ram Selvaraju -- H.C. Wainwright and Company -- Analyst

And just lastly, on the currency markets picture. Can you just comment a little bit on what you expect continued strength in the U.S. dollar to mean for your ongoing businesses? And especially if you expect, for example, meaningfully greater growth for the Kappa businesses in the U.S. versus Europe going forward relative to what Kappa was originally able to achieve.

I don't know whether that's indeed the case, but it would be helpful for you to clarify that. If that's going to have an impact on your being able to offset any potential negative implications of the stronger dollar?

Martin Bengtsson -- Chief Financial Officer

Yes. I think from the currency perspective with the strong dollar now, where the euro is almost a 1:1, right? Obviously, it has a translationary impact on our European business of -- if at last year average sort of in the 114, 115 range. That's a 15% translationary impact on our European business when we translate it back. In terms of impacting the underlying fundamental business itself, I would say, not to a great extent.

We do a lot of our sourcing and our sales locally for our regional businesses. So a lot of our European business is sourced locally and sold locally. So therefore, it has a lesser impact and the same thing for our U.S. business where we're obviously 70%-plus U.S.-based, and a lot of that is sourced locally and sold locally.

So the FX changes are more of a translationary impact to us than an actual sort of driver of underlying business performance. We can always find a small exception somewhere, but overall, it shouldn't change things too much.

Ted Harris -- Chairman, President, and Chief Executive Officer

And just relative to Kappa, all of the competitive product is either made in Europe or in Asia. And therefore, we're not in a -- necessarily in a position of strength relative to the market or competition with European production and the U.S. market. So we don't really see this arbitrage opportunity as something that will differentially impact Kappa.

Ram Selvaraju -- H.C. Wainwright and Company -- Analyst

Thank you.

Martin Bengtsson -- Chief Financial Officer

Thanks, Ram.

Operator

Our next question comes from the line of Mitra Ramgopal with Sidoti. you may proceed with your question.

Mitra Ramgopal -- Sidoti and Company -- Analyst

Yes. Good morning. Thanks for taking the questions. First, I know we're only a month into the third quarter, but maybe you can give us a sense as to what you're seeing on the manufacturing input and distribution costs relative to 2Q and maybe your expectations for the rest of the year on that front?

Martin Bengtsson -- Chief Financial Officer

Yes. Thanks, Mitra. From an inflationary and input cost perspective, I would first kind of highlight that it has continued on an upward trend. As we look back here for the first half of the year, it has continued to tick up a little bit every month as we've gone through the year.

So it would be hard for me to sit here and say that it has plateaued and started to materially or significantly decrease. I cannot say that based on what I see. Obviously, depending on which raw materials you look at, you see a different picture. Some have turned around and you see deflation in some materials, but others are still in inflationary environment.

And overall, for our overall spend, it has continued with slight inflation sort of month-over-month, quarter over quarter. And we're seeing a similar trend for July. So I would say no change so far in terms of what we've seen indicating any dramatic change compared to the last few quarters. It's not as an aggressive of a curve in terms of the trend line, how steep it is.

It's not as steep, but it's unfortunately still pointing upwards.

Mitra Ramgopal -- Sidoti and Company -- Analyst

OK. No, that's very helpful. And Ted, I know you had highlighted there are a couple of areas that were a little soft in terms of the lower ruminant sales and also on plant nutrition. Just curious in terms of your expectations for the remainder of the year and longer-term outlook there.

Martin Bengtsson -- Chief Financial Officer

Yes. I mean, clearly, the ruminant has been a little bit softer, and we've seen that and we've talked about that on some of the previous calls that where the input costs for the dairy farmers go up, we tend to see a little bit more sensitivity and their willingness to put our products in there despite the value proposition that they have because they just don't have cash to spend. And we see that decline, which is what we're seeing in this high inflationary environment. How that will play out going forward, I'm not going to speculate in as it depends a little bit on the input costs for the dairy farmers and your soybean meal and your corn, etc., etc.

Plant nutrition, where we saw a little bit of softness in Q2, on a year-to-date basis, they're actually still up, but they were down in Q2. They had an exceptionally strong Q1 where the season started a little bit earlier. This is our most seasonal business in our portfolio for the planting season. And I think our customers sort of took the opportunity to maybe order a little bit earlier than normal, given longer lead times and securing they had what they needed going into the season, given all the supply chain disruptions over the last few years.

So we saw sort of the bump earlier and that made Q2 look a little bit lower year over year. In terms of other businesses, many of them are still doing very well with strong demand and strong order books here as we go forward. But we're obviously very, very cautious as we keep seeing higher costs and as we keep pricing up. Inevitably, you would think that at some point, the increased prices will have to start having an impact on demand, and that's why we're sort of cautious as we look in the outlooks.

But the order books are looking pretty healthy at the moment.

Mitra Ramgopal -- Sidoti and Company -- Analyst

OK. No, that's great. And then just coming back to the Kappa acquisition, I was just curious if you need to hire additional personnel in terms of sales, etc., to support the growth there? Or is just that something you can immediately lever given your existing workforce?

Ted Harris -- Chairman, President, and Chief Executive Officer

Maybe I'll take that one, Mitra. Yes, I think the simple answer to that is no, not really. We are hopeful that really the entire Kappa team remains as part of Balchem and engaged. And so far, we believe that to be the case.

Kappa was growing really rapidly. And so they have been on a hiring trajectory. And certainly, our plan is to continue that. So we will be hiring -- you mentioned salespeople, we have a plan to hire some salespeople in several regions as part of the existing Kappa plan, and we will be executing on that and adding people as they had planned.

But at this point in time, and obviously, it's a little early, we don't necessarily see the need to augment that. There clearly will be some synergies. Now we've got access to the broader Balchem sales organization in North America, etc. But we also, at the same time, do believe that we'll continue to add the people that Kappa felt they needed in order to execute the plan because we think they have a really good plan.

Mitra Ramgopal -- Sidoti and Company -- Analyst

OK. Thanks. And then just finally on Kappa again. I think, Ted, you had mentioned $175 million market potential numbers.

Is that the U.S. -- now for the U.S. or is that global?

Ted Harris -- Chairman, President, and Chief Executive Officer

That's our estimate for the global market of K2. And we believe that Kappa had approximately a 30% market share of the global market.

Mitra Ramgopal -- Sidoti and Company -- Analyst

OK. Thanks for clearing that up. And again, congrats on a really nice quarter given the environment.

Ted Harris -- Chairman, President, and Chief Executive Officer

Great. Thanks, Mitra.

Operator

Our last question comes from the line of Tony Polak with Aegis. You may proceed with your question. Ladies and gentlemen, we have reached the end of today's question-and-answer session. I'd like to turn this call back over to Mr.

Ted Harris for closing comments.

Ted Harris -- Chairman, President, and Chief Executive Officer

OK. Not sure what happened to Tony there. But Tony, if you'd like to talk, give us a call, we're happy to answer any questions you might have. So once again, thank you very much for joining our call today.

We really appreciate your support, as well as your time. And we look forward to reporting out our Q3 2022 results in late October or early November. In the meantime, we will be presenting in a few conferences, the Sidoti fall conference on September 21 and 22; and the Baird global industrial conference on November 8, 9, and 10 in Chicago. So we hope to see some of you there.

And in the meantime, thanks again for joining today, and have a great day. Thanks.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Martin Bengtsson -- Chief Financial Officer

Ted Harris -- Chairman, President, and Chief Executive Officer

Bob Labick -- CJS Securities -- Analyst

Ram Selvaraju -- H.C. Wainwright and Company -- Analyst

Mitra Ramgopal -- Sidoti and Company -- Analyst

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