Balchem Corporation

Greetings and welcome to the Balcombe Corporation second quarter earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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.

Thank you, Laura. Good morning, everyone. Thank you for joining our conference call this morning to discuss the results of Balcombe Corporation for the quarter ending June 30th, 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 Valchem'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 Valchem'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.

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 Balcom, 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, Thank you very much. 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 Raden Alchrist 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 and at 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 K2 Vital. K2 is sold either as an oil or a powder, but is also available as a unique double microencapsulated product under the brand K2 Vital 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. Thank you for joining us. Thank you very much. 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, CAPA's market-leading science-based vitamin K2 position expands our portfolio of products and provides us the opportunity to expand both companies' sales to a broader combined customer base. The combination of CAPA's strength in Europe and Valchem's strength in North America will provide an opportunity for accelerated growth for both the legacy Valchem products as well as CAPA'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 positions 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 Valchem. We acquired 100% of CAPA for an enterprise value of approximately 3.2 billion Norwegian kroner prior to net debt and working capital adjustments. That translates to approximately 320 million US dollars, 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 US dollars 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% compound annual growth rates over the next five years. The transaction is expected to be accretive to Valchem's earnings per share in 2022 on an adjusted basis and accretive on a gap basis in 2024. I want to take this opportunity to give a warm welcome to CAPA's 75-plus employees into the Valchem family. The CAPA team is strong, experienced, and committed. They know and understand the vitamin K2 market and have made the K2 Vital 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.