Welcome to Balchem Corporation's 2nd Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to Martin Bengtsson, Chief Financial Officer.
Thank you. You may begin.
Thank you, Sherry. Good morning, everyone. Thank you for joining our conference call this morning to discuss the results of Baltham Corporation for the quarter ending June 30, 2021. 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 statements.
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 ks. Forward looking statements are qualified in their entirety by these cautionary statements. I will now turn the call over to Ted Harris, Chairman, CEO and President.
Thanks, Martin. Good morning and welcome to our conference call. This morning, we reported Strong second quarter results with record sales in all three of our business segments, solid consolidated earnings growth and strong free cash flow. Our revenues of $202,400,000 were up 16.7 percent Our adjusted earnings from operations were $41,100,000 up 14.6% versus the prior year quarter. Our 2nd quarter net income of $22,700,000 an increase of 7.6 percent resulted in earnings per share of $0.70 on a GAAP basis.
On an adjusted basis, Our 2nd quarter non GAAP net earnings were $30,400,000 an increase of 10.3%, resulting in earnings per share of $0.93 on a non GAAP basis. And we continue to deliver strong cash flows. Cash flows from operations were $35,800,000 for the Q2 of 2021 with quarterly free cash flow of $28,400,000 Before passing the call back to Martin to cover the detailed financial results, I would like to update you on a few items. In May, our Verona, Missouri plant experienced a flash flood As a result of very localized storms in the Southwest part of the state, the plant was shut down for several weeks as we repaired affected equipment, Clean the site and safely restarted activities. All three of our business segments provide products and services out of the Verona, Missouri site.
So each of the segments was affected by the temporary site shutdown to a varying degree. The negative direct financial impact to the quarter was approximately $3,800,000 primarily due to the write off of damaged inventory and the costs associated with external service providers used for the cleanup efforts. We also expect an additional spend of Approximately $1,500,000 to impact the Q3. Customer requirements were largely satisfied through inventory on hand by leveraging alternate and redundant manufacturing capabilities across our supply chain. The manufacturing site is now Fully operational and all activities are functioning normally.
As part of our enterprise risk management plan, We have extensive insurance coverage to help mitigate the impact of such an event. Our deductible in this particular case is $2,000,000 and we believe at this point, all of the remaining costs should be fully recovered in subsequent quarters from our insurance coverage. While the flash flood was a very unfortunate event, it highlighted the value of our enterprise risk management plan and the benefits preparedness for such an event as well as the risk mitigation strategies implemented in advance of the event such as our insurance coverage, but also the redundant manufacturing capabilities we have for many of our products and services across our global supply chain network. I would like to once again thank the Balchem team for their incredible teamwork during and after the event that enabled us to get back up and running safely in a relatively short amount of time with minimal disruption to our customers. Moving on to a different topic, I am very excited to share that in June, Balchem's Board of Directors elected Ms.
Kathy Fish to fill a vacancy on the Board. Ms. Fish Recently retired from the position of Chief Research Development and Innovation Officer at the Procter and Gamble Company. Over a long career at P&G, Kathy held various roles within the research and development function of increasing responsibility The 4 leading the global function from 2014 to 2020. Kathy brings to the Balchem Board important New product development and direct to consumer expertise, along with her international business acumen and experience in driving Kathy will serve on the corporate governance and nominating committee and we are very pleased with her addition to our Board of Directors.
As mentioned on our last earnings call, in April, we released our 3rd sustainability report. We have, for the first time, published Our 2,030 goal is to reduce both greenhouse gas emissions and water usage by 25%. These are significant and important goals to further our commitment to operate with excellence as strong stewards of our stakeholders while providing innovative solutions for the health and nutritional needs of the world. Lastly, despite numerous challenges to manage in the overall macroeconomic environment At the moment and discrete challenges in the quarter related to the flash flood event at our Verona, Missouri manufacturing facility, We achieved solid second quarter results, which highlights the strength and resilience of our business model. As was also mentioned on our last earnings call, while the significantly higher raw material and freight costs we are facing are not Differentially impacting Balchem, we continue to dedicate significant resources to various mitigating activities to effectively manage through these very significant challenges.
I am now going to turn the call back over to Martin to go through the detailed consolidated financial results for the company and the results for each of our business segments.
Thank you, Ted. As Ted mentioned, overall, we delivered strong financial results 16.7 percent higher than the prior year comparable quarter. We delivered record sales in all three segments, Human Nutrition and Health, Animal Nutrition and Health and Specialty Products. The impact of foreign exchange to our sales was a positive $2,300,000 primarily due to the stronger euro, contributing a positive 1.3% impact to our year over year sales growth. 2nd quarter consolidated gross margin dollars of $59,400,000 were up $4,100,000 or 7.3 percent compared with $55,400,000 for the same period in the prior year.
Our gross margin percent was 29.4 percent of sales in the quarter, down 257 basis points compared to 31.9% in the Q2 of 2020. The 257 basis point decrease was primarily due to a significant increase in certain raw material and distribution costs and the costs associated with the recovery from the flash flood event, partially offset by favorable mix and overall manufacturing efficiencies. Consolidated operating expenses for the Q2 of 2021 were $28,900,000 as compared to $28,500,000 in the prior year. The slight increase was primarily due to higher compensation related costs, partially offset by the prior year being negatively impacted by a goodwill impairment charge related to business formerly included in the Industrial Products segment and a decrease in transaction and integration costs. GAAP earnings from operations for the Q2 were $30,600,000 an increase of $3,700,000 or 13.7% compared to the prior year quarter.
On an adjusted basis, as detailed in our earnings release this morning, non GAAP earnings from operations of $41,100,000 were up $5,200,000 or 14.6 percent compared to the prior year quarter. Adjusted EBITDA of $50,100,000 was $6,300,000 or 14.3 percent above the Q2 of 2020. Interest expense for the Q2 of 2021 was $600,000 And our net debt was $43,700,000 with an overall leverage ratio on a net debt basis of 0.2. The company's effective tax rates for the 2nd quarters of 2021 2020 were 24.3% and 18.7%, respectively. The increase in the effective tax rate was primarily due to reduction in certain tax credits and lower tax benefits from stock based compensation.
Consolidated net income closed the quarter at $22,700,000 up 7.6% from the prior year quarter. This quarterly net income translated into diluted net earnings per share of $0.70 an increase of $0.05 or 7% from last year's comparable quarter. On an adjusted basis, Our 2nd quarter adjusted net earnings were $30,400,000 or $0.93 per diluted share, up $2,800,000 or 10.3% compared with prior year quarter. We generated quarterly free cash flow of $28,400,000 and we closed the quarter with $79,900,000 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 quarterly sales of $111,500,000 an increase of $14,000,000 or 14.4 percent from the prior year. The sales increase was driven both by strong sales growth within food and beverage markets as well as higher sales within the minerals and nutrients businesses. We are very pleased as well as continued strong sales within our Minerals and Choline Nutrients business. Our Human Nutrition Health segment delivered quarterly earnings from operations of $19,000,000 an increase of $3,500,000 or 22.7 percent compared to the prior year quarter, primarily due to the aforementioned higher sales and overall manufacturing efficiencies, partially offset by higher raw material and distribution costs and the costs associated with the recovery from the flash flood event that we experienced at our Verona, Missouri manufacturing site. Excluding the effect of non cash Thanks, Dan.
Thanks, Dan. Thanks, Dan.
Thanks, Dan. Thanks, Dan. Thanks, Dan.
Thanks, Dan. Thanks, Dan. Thanks, Dan.
Thanks, Dan. Thanks, Dan.
Thanks, Dan. Thanks, Dan. Thanks, Dan. Thanks, Dan. Thanks, Dan.
Thanks, Dan. Thanks, Dan. Thanks, Dan. Thanks,
Dan.
2nd quarter adjusted earnings from operations for this segment were $25,300,000 an increase of $5,000,000 or 24.6%. Our Animal Nutrition and Health segment generated quarterly sales of $54,500,000 an increase of $8,100,000 or 17.6% compared to the prior year. The increase in sales was primarily the result of higher sales in both monogastric and ruminants animal markets and a favorable impact related to changes in foreign currency exchange rates, which contributed $1,300,000 or 2.8% of growth to the segment. Our ruminant business grew volumes 31.8% and we continue to successfully drive penetration of our rumen protected encapsulated products in the market. In terms of dairy economics, Milk and milk protein prices have come down a bit during the Q2, but are still at relatively healthy levels where our products had a strong value proposition.
On the monogastric side, overall volumes were down slightly due to lower European demand for choline. However, The financial impact of this volume decrease was fully offset by higher volumes of U. S. Feed grade choline, Animal Nutrition and Health quarterly earnings from operations of $3,600,000 were down $2,900,000 were 44.6% from the prior year quarter, primarily due to increases in raw material and distribution costs and the costs associated with the recovery from the flash flood event at our Verona, Missouri manufacturing facility. Excluding the effect of non cash expense associated with amortization of intangible assets of $200,000 And excluding the direct expenses related to the Verona flash flood event of $1,400,000 2nd quarter adjusted earnings from operations for this segment were $5,200,000 a decrease of $1,400,000 or 21.8 percent.
As raw material escalations slows and given the pricing mechanism we have currently in place in the vast majority Our Animal Nutrition and Health customer contracts, we're expecting that margins will improve in this business segment as we progress through the second half of the year and into 2022. Our Specialty Products segment delivered quarterly sales of $34,000,000 an increase of $5,800,000 or 20.7 percent compared to the prior year quarter, primarily due to higher sales for products sold both to the medical device sterilization and the plant nutrition markets. The Specialty Products segment had 2nd quarter earnings from operations of $9,700,000 an increase of $1,700,000 or 21.5 percent versus the prior year quarter. The increase was primarily due to the aforementioned higher sales, partially offset by increases in raw material and distribution costs. Excluding the effect of non cash associated with amortization of intangible assets of $1,300,000 and excluding the direct expenses related to the Verona flash flood event, 2nd quarter adjusted earnings from operations for this segment were $11,200,000 an increase of $1,600,000 of 16.8%.
I'm now going to turn the call back over to Ted for some closing remarks.
Thanks, Martin. We are very pleased with Balchem's financial results reported earlier this morning, delivering all time record revenues in all three of our business segments. We achieved record 2nd quarter consolidated GAAP net earnings, record quarterly non GAAP adjusted net earnings, record adjusted EBITDA and strong cash flows from operations. All of this while facing continued higher raw material costs, Global logistics and distribution challenges and manufacturing disruption and inventory loss related to the flash flood event at our Verona plant. These strong results reported today continue to show that we are well positioned in attractive markets where we have the leadership and capabilities to be successful not only today, but also into the future.
I will now turn the call back over to Martin to open it up for questions. Martin?
Thank you, Ted. This now concludes the formal portion of the conference. At this point, we will open the conference call for questions.
Thank Our first question is from Mark Connelly with Stephens. Please proceed.
Thank you. Ted, last quarter, my question about normalization of hospital activity was probably premature. Are you seeing any retrenchment at hospitals in terms of suspending elective surgeries and sort of reversing that early normalization?
Thanks for the question, Mark. And the short answer is no, we are not yet. But as we All can reflect maybe on the news of the last few days. It's obviously continues to be a rapidly changing environment relative to the pandemic and the delta variant. So while we're not seeing that today, we're watching it closely.
I would say we're pleased with the sterilization business has been slowly returning. Volumes are up both year over year and sequentially. But I would also say it has been a little bit lumpy In that return, and it continues to be a bit lumpy, I think, As we see real demand return with increased elective surgeries, but also the replenishment of Supply chains that were depleted during the pandemic. But again, the short answer is no, we're not seeing that yet. But obviously, that could be a possibility going forward, so we need to watch that closely.
Yes. Suchu, Deersh, we're hearing from a number of companies that the wellness push with The surge in vitamin supplements last year has slowed and in some cases reversed. How does that affect your expectations for the Nutrien part of
Certainly, The pandemic and the focus on immunity boosting minerals and vitamins has benefited our Nutrients business over the last year or so. We have not Yet seen a slowdown in demand. We are seeing the growth Year over year is slower than it was last quarter, for example. So we're seeing a slowing in the growth year over year partly because we're now comparing to Quarters that saw some benefit last year, but demand remains Very strong and at this point in time, we continue to believe that the changing in consumer behavior Relative to increased attention to these types of products and supplementation will continue, but certainly the year over year growth will wane as we saw In Q2, but we're still very pleased with the strong demand for our products.
I hope you continue to buck that trend. And just one last question. Your market share in cone and the animal market, You saw a nice boost this quarter. What are the biggest challenges to driving penetration rates? And how do you decide how aggressively to go after that on sort of a year over year basis?
So again, as you're well aware, there are 2 very different aspects to our Choline business for the animal market, one certainly is the monogastric market that includes companion animal, Swine and poultry primarily, we have very strong market share in the U. S, Strong market share in Europe. We really don't have much presence in Asia and South America. So our business It's primarily a North American and European business. And our business there tends To grow with the market, I would say that there is some share to be gained.
But really, I think the opportunity is more around driving increased Usage of choline, there are alternatives. We've talked about betaine in the past. So replacement of betaine, which grows the overall choline market That would grow our business. Using science to show that choline should be Instead, at higher dose levels than it currently is. That also would drive higher demand For us and increased usage for choline.
So those really are more of the growth drivers in the monogastric And the feed grade choline, the companion animal business obviously is growing Very quickly with the overall market that is certainly showing up in our results. So that's really how we're driving growth There, from a penetration perspective, choline is very highly penetrated in those markets. Most companion animal products Include choline, most poultry swine diets include choline. So it's not so much penetrating the market. It's very different to our sort of highly engineered encapsulated choline that we sell into the dairy industry where we feel As though in North America, choline is only penetrated, Let's say 40% at this point in time and in Europe it's still less than 5%.
So that's really where we have an opportunity to be very aggressive about driving penetration. And it's again a lot By developing new science, bringing our old science to customers and convincing nutritionists that there's a significant payback and benefit of Feeding choline. And we're learning through new studies that choline is important For more than maybe just we originally positioned it as a fatty liver product that Addresses fatty liver, we've recently done a study that shows that choline may be very beneficial to heat stress in Cowles. And that really could bring a very different value proposition to choline and therefore help Penetration and broaden the use of choline. So I think the opportunity to really Drive increased penetration and be very aggressive, both in Europe and the U.
S. For that is really where our focus is. And we're doing that through science. We're doing it through more nutritionists on our staff, more salespeople on the ground, boots On the ground matters here, and that's where we're focused.
Super helpful. Thank you,
Tim. Thanks, Mark.
Our next question is from Bob Labreck with CJS Securities. Please proceed.
Good morning and congratulations on nice quarter and execution.
Thanks, Phil.
I want
to start on the human nutrition side. How would you characterize the food and beverage, the flavors and powder sales? Are they back to Pre COVID levels yet and what are the growth drivers that you're focused on from here?
So our sales in aggregate certainly are back and ahead Of pre COVID levels, we've been growing nicely. If you just look at the food business, so you exclude nutrients, We were up about 17% in the quarter. And that's really as a result, I think of just Good solid fundamental growth in the markets that we serve. I think certainly some of our growth initiatives are Coming to fruition there. But there's also a bit of a replenishment of the supply chain that is happening.
There is a return of demand associated with those parts of the market that were depressed Because of the pandemic, specifically food service, which I think in aggregate, we would say is probably not Quite back to pre pandemic levels, but getting close. We've certainly seen it come back nicely. And also lastly, no real decline in the aspects of the business that benefited somewhat from the pandemic. So, it's really fairly kind of broad based Growth that we're experiencing and certainly our sales levels are higher than our pre pandemic levels, but We don't believe all of the foodservice business is fully back and we also don't believe Some of the benefits that we have seen that we expect to slow down a little bit, we believe that they're still there and they Haven't waned fully yet. So we feel good about the growth in the overall business in human nutrition health In the quarter and expect that we can continue to drive nice growth for the rest of the year.
Okay, great. Yes, sticking with the Human Nutrition and Health, the margins remain very strong on an adjusted basis as well, well above prior levels. Is that a benefit from mix? Or how are you thinking about the kind of margin profile in H and H going forward?
Let me start and then Martin can add to or correct me. But Certainly, mix is playing a role in the margin performance of the business. But we're also seeing, if you recall, in probably 2019, 2018, we talked A fair bit about manufacturing inefficiencies that we were struggling in certain areas from an efficiency perspective in some of their Human Nutrition Health Plans and really our business teams and our Supply chain and operations teams have really done a good job of addressing many of those inefficiencies. And so as you saw in the prepared remarks, we're seeing some favorable manufacturing efficiencies, It's partly driven by higher volumes, but also partly driven just by eliminating some of those inefficiencies that we we're experiencing. So mix for sure is part of it, addressing some of those inefficiencies is also a big part of it, Offset somewhat by the higher raw material costs that while clearly Very significantly impacting our Animal Nutrition business are also impacting human nutrition in a material way.
So Martin, I'll pass it back to you with any other color.
No, maybe the only thing I would add there is that our human business are the ones that have been best enabled to date to also pass through the raw material increases to their customers. So they've seen less of an impact there. So the efficiencies that Ted mentioned have therefore been able to shine through and show up in the P and L. So that's maybe what I would add there.
Got it. Great. And then maybe last one for me, I can jump back in queue. On the last call, we talked about your pivot marketing spending and how you were reallocating dollars.
Can you
give us any examples of what you're doing now? I know it's still relatively new, if there's any way to quantify the outcomes or if you're happy with the result so far? Any update on that initiative?
Yes. We really are happy. It's I have to do say I have to say, it's still all relatively new. So we're not necessarily seeing a lot of Fruits from our labor at this point in time, but we're really pleased with the team that was built. We are seeing we had a campaign, for example, This quarter for with BIN Beverages for the use of our branded choline, which we Viticholine as well as our Albion Minerals.
We've also kind of introduced A bit of an indulgent product, but in our encapsulates and inclusions business, glimmer variegates that are getting Some attention that basically are glimmering pieces of that you can put into ice Cream and treats and things like that, that are pretty cool and like I said, getting some attention in frozen desserts and so forth. So, yes, we are excited about the types of things that we can do based on Market research that we're doing in house right now as well as the market expertise that we're bringing to our customers and the market. So I think there's a lot more to come there because this is all new, but Early signs are very positive. And we continue to be excited just about the new launches that our customers Our launching out there of products that have our products in them. Premier Nutrition, for example, just launched a new SKU that includes choline and a protein beverage.
And That really is a leading consumer brand in the protein beverage segment. And there are various other launches that we're excited about. So, So, I think overall, we're really headed in the right direction from a marketing perspective and something that It was really missing in the past for us.
Got it. Sounds super. Thank you very much.
Thanks.
Our next question is from Mitra Ramgopal with Sidoti and Company. Please proceed.
Yes. Hi, good morning and thanks for taking the questions. First, I just want to get a sense as you look at gross margin, clearly Seeing some pressure from the, as you mentioned, higher raw material and distribution costs. And I was just curious, as we look out to the second half of the year, if we should Anticipate maybe some improvement off of 2Q or it's still too early to get a sense as to how that plays out?
Yes. Good morning, Mitra. This is Martin. I think when you think about where the pressure is coming from, obviously, the raw materials is The big one and it's significant. We saw almost above $9,000,000 of inflation in 2nd quarter on like for like items year over year, which is a huge number when you think about it and nothing that we've ever seen in the past.
And we've passed through a lot of that, not all of it. We've passed through in terms of pricing, call it about $7,000,000 of this. We still end up with a couple of 1,000,000 of gross margin pressure. When we think about that raw, Is it going to go away? I don't know when it will go away, if it will go away and to what extent the prices will start Coming down, it's just hard to tell right now.
For us, it is primarily around chemicals, it's around oils, It's around some proteins that we buy, etcetera, where we're seeing just commodity price increases That are pretty significant. So I think it's going to be a matter of how that curve develops. So will it happen in the 3rd quarter, Q4, will it be in 2022? It's almost impossible to say. And in the meanwhile, we're really focused On getting the right pricing in the market and recovering our costs around this.
As Ted pointed out before, we're not really differentially Impact versus our competition, we're all in the same boat here, which makes it a little bit easier for us also to go out and recover some of these costs. From a production standpoint and an efficiency in our supply chain network, our plants have been running well. We had the flood event, but that's more of a Discreet unique event that you can't necessarily control, but apart from that, our plants have been running Very well in the last few quarters and we anticipate that to continue. You mentioned the distribution costs, Which are just like the raws, seeing significant increases just with all the disruptions and Containers being in the wrong places and prices going up, etcetera. And for us, that was when you look at it on a year over year basis, call it a 50, The basis points impact to our profitability from that.
And you would have to think that Supply and demand will balance and prices will come down to more normalized level at some point. It's not like suddenly all the containers are gone, but they're in the wrong places at the moment and the system is not working well. So I just can't say whether that's going to happen Q3, Q4 or 2022, But you would have to think that it will start normalizing at some point. So that's a little bit what we're Living through at the moment. It's managing the rolls, getting the pricing in the market, passing that through And just trying to be efficient on the distribution side, while obviously ensuring that our own backyard in terms of how we run our plants is running very And that's kind of where the attention is at the moment.
No, that's great. I definitely appreciate the color there. And then on the ERP platform, I believe that's almost done in terms of the implementation. I was wondering if you're all So to see some efficiencies there or is it a little too early yet?
No, we're definitely seeing efficiencies. I mean, we're, call it, 98% 99% done. We have 2 international smaller locations to go in the implementation that we plan. So we plan to be done this year in 2021 Yes, on budget as well, I should point out because we're pretty proud of that since that's many times not the case in ERP implementation. But if we take a step back and ask ourselves why did we do this in the 1st place, right?
For us being on 5 systems and with acquisitions that grow into 7 systems, Just getting that down to 1, just from a business continuity, it's very important. Some of these other systems were closer to the end of life And we really need to have a modern system in place. There's a lot around the controls and the security, which we feel very good about at the moment Just in terms of that enhanced visibility and controls. And also, just from a cybersecurity and all the attention around that, trying to stay on top of it And managing that situation is a lot easier for us having one system to manage them than many. And then like the growth and scalability as we're growing as a business, growing on this one platform enable us to actually do that Cannot be prohibited.
And lastly, from a cost perspective, which was not the primary incentive why we did the 365, We're seeing some efficiencies there. We're doing a lot more with the resources we have in terms of not needing to add resources as we've grown here over the last 2 years. And we've also made some smaller organizational changes in some areas in terms of efficiencies. But I would not call that out as the key big driver of trying to take cost out. It's more to build a proper platform that Supports our growth, our controls, and just the continuity of the business.
Okay. No, that's great. And then finally, I guess, a little over time, I assume, with this with the ERP, it probably makes it a little easier Digest new acquisitions and I was just curious if you had any update in terms of activity levels you might be seeing on the acquisition front.
Yes. I think that activity levels are Reasonably high again. As I've said probably in the last few calls, As we entered 2020, things really did slow down in the market, but also At Balchem, we were struggling with how do we complete a transaction in a remote environment. And I would say we're very much through that and the market is busy and active And we are as well. So we continue to feel good about the pipeline of opportunities That we see out there and the specific opportunities that are active.
We're spending a fair amount of resources focused on our inorganic Growth, obviously, our primary focus is driving the organic growth of the company, but we are Spending, I would say back to pre pandemic levels amount of resources and time on inorganic opportunities.
Our next question is from Ram Selvaraju with H. C. Wainwright. Please proceed.
Thanks very much for taking my questions. Just a couple of minor housekeeping ones. I think these are probably for Martin. Can you just comment on how the accounting treatment is going to look like for whatever insurance Recovery you're able to accomplish in the wake of the flash flood events in Verona, Missouri. How is that potentially going to show up from a P and L perspective and also from a cash flow perspective.
And can you comment at this time on when you talk about partial recovery, what does that mean, half percent, 10% approximately?
Yes. So In terms of recovery, I'll answer that first. We do expect, I can't guarantee it since we haven't gone through it with It would be reasonable to expect that we would recover our costs with the exception of the insurance Right. So there's a $2,000,000 deductible. So our costs left the $2,000,000 is what we expect to recover.
We had about, call it, dollars 3,800,000 of impact in the second quarter. We expect another $1,500,000 of costs Show up in the Q3. So take those 2 and deduct $2,000,000 That's what we expect to get back. From an accounting perspective, where you would see it at the moment in the Q2, right, is you see it in our COGS Almost exclusively in terms of where the negative impact has hit in cost goods sold, the 3,800,000 We adjusted it out for adjusted earnings as an adjustment. As we go forward and have insurance recoveries, our intention is also to adjust out Those recoveries, so that is an apples for apples, right?
We adjusted out the negative impact now. We will adjust out the insurance recoveries as we go forward. From a cash flow perspective, obviously, it will be positive cash flow when we receive the insurance recoveries as we've had negative cash outlays here in this period. But most of this is flowing through Call except the moment since that's where we're having our expenses. I don't know if that answers your question wrong or not.
Happy to add any additional.
No, that's very helpful. So whatever the impact is going to be, both the negative impact and the positive impact, The vast majority of it is going to be on the COGS line?
Correct.
Okay.
And you would anticipate that, A, there's not going to be any further negative impact after this quarter is over and B, that you will get the insurance proceeds before the end of this year. Is that reasonable? I
would just clarify that in saying we do expect The Q3 to have $1,500,000 of negative impact, we have $3,800,000 in the second Quarter, we expect another $1,500,000 in the Q3 of negative impact. When we will get the insurance recoveries, I don't want to comment on that because Sometimes it moves relatively quickly. Sometimes it's a longer process. I don't know whether we will see any in the Q3, whether it will come in the Q4, whether it will come early in '22, I just don't have that knowledge as to when exactly the process will conclude. So It will depend on the process there.
No, that's fair. Secondly, I wanted to ask in a general sense about The medical sterilization business and if you believe that we are now seeing Level of activity in that domain, level of demand in that arena, which is commensurate with steady state demand or if you expect there to be further tailwinds going forward, given the current status of the pandemic, some normalization around that. Just wanted to get a sense of where you think things stand on that front.
Yes. So while we've seen really improvement quarter on quarter for 3 or 4 quarters now, I would say that we're still not back to steady state and a pre pandemic level. And certainly, elective surgeries Are the drivers here and I do think while hospitals are Allowing elective surgeries and there's room for elective surgeries. I do think Some people still are choosing to not have an elective surgery, just for concern about going to the hospital. So The business has improved quarter on quarter.
We feel good about that, but I would not say that it's back to pre pandemic levels and we do think that there is more improvement that we will see in subsequent quarters Barring any very significant kind of change in the progress that we've been making relative to the pandemic and any Mandates around elective surgeries that could stall the Slow recovery or cause it to regress. But as I said earlier, We are not seeing that today in our orders or hearing that from our customers. We're still seeing that sort of slow, steady recovery.
Great. Thanks. And then just to revert back to Martin once more, not sure if I missed this. What is your guidance regarding effective
So we're at about 23.1 year to date and I think around there 23 plus or minus a little bit is the right
Great. Thank you very much and congrats on an excellent quarter despite these challenges with the flash
Thank you, Ram.
Thanks, Ram.
We have reached the end of our question and answer session. I would like to turn the conference Back over to Mr. Harris for closing remarks.
Thanks, Sherry. Once again, thank you very much for joining the call today. We really are very pleased with the 2nd quarter 2021 results that we released today and the ongoing progress we're making on our key strategic growth initiatives. We really appreciate your time. We look forward to reporting out Q3 results in October.
In the meantime, we will be presenting at the Jefferies 2021 Industrials Conference next week and later in the year was signed up for the Baird Industrials Conference in November and the Stephens Annual Investment Conference in December. I'm sure we'll attend some other conferences. But hopefully, we'll see some of you at the virtual Conference next week, the Jefferies 1 and if not there and one of the other ones. So thanks again for joining today. Have a great