Balchem Corporation

Greetings and welcome to Balchem's fourth quarter year-end 2022 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 the call over to Martin Bengtsson, Chief Financial Officer. Thank you. You may begin.

Thank you and good morning everyone. Thank you for joining our conference call this morning to discuss the results of Balcombe Corporation for the quarter ending December 31st, 2022. My name is Martin Bengtsson, Chief Financial Officer, and hosting this call with me is Ted Harris, our Chairman, President, and CEO. Following the advice of our Council, Auditors, and the SEC, at this time I would like to read our forward-looking statements. 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 Bauchem'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 include non-GAAP financial measures. Please refer to the reconciliation 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. Before we get into the quarter, I would like to reflect for a few minutes on some of the significant accomplishments the Balchem team achieved over the last year. Overall, 2022 was another strong year for Balchem. Financially, we achieved record sales of $942 million, and many more. We also delivered record adjusted net earnings of $131 million, an increase of 12% and record adjusted EBITDA of $216 million, an increase of 14% from the prior year. In addition, We generated free cash flow of $89 million, while at the same time investing $49 million in capital projects to support our continued growth. Strategically, we had a very good year as well. In 2022, we strengthened our company with the acquisitions of Kappa Bioscience and Bergstrom Nutrition. The addition of vitamin K2 and methyl sulfonylmethane, or MSM, to our product portfolio will undoubtedly enhance our ability to provide innovative solutions for the health and nutritional needs of the world going forward. We continue to innovate, bring new products to market, and expand and strengthen the supporting science behind many of our products. We are pleased that our new product development metric that measures the percent of sales coming from products commercialized over the last five years and which really measures the vitality of our product portfolio once again was close to 28%, showing that we are indeed bringing new innovation to the market. A number of exciting new studies supporting the supplementation of choline, minerals including MSM, and vitamin K2 were published or completed in 2022 that augment existing science and bring new science to light that ultimately will support and strengthen our efforts to drive increased market penetration For example, while we have long known that higher levels of maternal choline intake is critical for infant cognition, a study published early in 2022 by Cornell University that suggested higher maternal choline intake has an enduring effect on cognitive performance through early childhood was truly groundbreaking. Additionally, Cornell also published a separate study in 2022 that showed the importance of having adequate levels of choline for DHA absorption or status. And while not published yet, the study at the University of North Carolina to identify a choline biomarker was completed. So hopefully we see the results of this study being published here in 2023. This will be an important step in helping to identify choline deficiency and the need for supplementation in individuals. Several important studies were published or initiated in 2022 enhancing the science around vitamin K2 and MSM as well. In December, the Journal of Dietary Supplements published a study conducted at the University of Arkansas for Medical Sciences that provides compelling evidence that Opti-MSM, our branded MSM, serves as a methyl donor, which means MSM would then join the club of methyl donors, choline, folate, and vitamin B12. So Opti-MSM is both a sulfur and a methyl donor, which makes it even more nutritionally efficient than was evident before this study. There were also several studies published or initiated related to vitamin K2 that go beyond the already established therapeutic area of bone health. These studies focused on vitamin K2's role in cardiovascular health, immune health, and muscle recovery, among others. We believe the science around vitamin K2 will continue to grow and help drive significant market expansion over the coming years as more and more studies are completed. Similarly, on the animal nutrition and health side of our business, we continue to invest in outside research to advance the science around our portfolio of nutrients for companion, production, and dairy animals. One study of note was published in May showing the effects of dietary rumen-protected choline supplementation on colostrum yields, quality, and choline metabolites from dairy cattle. This was research done with Reassure, our flagship brand of rumen-protected choline at Michigan State University. The research demonstrated an 80% increase in colostrum yield in Reassure supplemented cows without any decrease in colostrum quality. It also demonstrated a large increase in choline metabolites in the colostrum that would then be transferred to the newborn calf as it consumes her colostrum. Another reassure study conducted at the University of Florida and published in December in the Journal of Dairy Science showed the effects of maternal choline supplementation on performance and immunity of progeny from birth to weaning. The research demonstrated that calves born to reassure supplemented cows had improved health status and survival and increased growth through two years of age. Within our companion animal business, there were several studies published from Auburn University related to our innovative use of microencapsulation for our structure-forming line of products. The research demonstrated a cost-effective method for manufacturing nutritious pet products for greater sustainability by upcycling protein coproducts with the use of our microencapsulated calcium lactate with sodium alginate. These published studies, combined with the PetSure acidulants research from Kansas State University that was published in 2021, which demonstrated the value-added benefits of microencapsulated acids to control pathogenic salmonella in fresh meat pet foods, formed the foundation of our very successful customer-attended PetSure Imaginarium that took place in November at Auburn University with the Starkey Research Laboratory. Overall, we are very excited about the opportunities that exist with our portfolio of products, and we believe that as the Library of Science keeps growing, the market opportunities for our unique portfolio of products and technologies will grow as well. Additionally, We made important and significant new investments in plant and equipment in 2022, resulting in capacity additions for our human nutrition, animal nutrition, and plant nutrition businesses. Of particular note were the addition of European manufacturing capabilities for our human encapsulation product line as well as our plant nutrition products, which should enable accelerated growth in the region. All of these new investments will help support our continued organic growth as we further penetrate the markets with our product offerings. We also made significant progress in 2022 relating to the company's efforts to advance our environmental, social and governance or ESG initiatives. Balchem released its fourth sustainability report in 2022 in which we provided an update on our progress toward our 2030 goals to reduce both greenhouse gas emissions and water usage by 25%. And I am happy to report that we are well on our way to delivering on our goals. The report details many of the ways we are advancing our environmental, social and governance initiatives across the organization in alignment with widely accepted ESG reporting frameworks. Valchem's sustainability efforts are fully integrated into our business strategy, which remains unchanged as we continue to focus on our two main objectives, providing innovative solutions for the health and nutritional needs of the world and operating with excellence as strong stewards of our stakeholders. As a result of our efforts, Valchem was once again recently named one of America's most responsible companies by Newsweek Magazine for the third consecutive year. And lastly, in December, We announced another increase to our annual dividend, taking the dividend from 64 to 71 cents per share, an 11% increase year over year. This most recent increase marked the 14th consecutive year of double-digit growth of our dividend, which once again reinforced our commitment to our long-standing dividend strategy. All in all, another strong year both financially and strategically for Balcombe. 2022 was once again a year of unprecedented external market challenges, where the pandemic impact we experienced in 2020 and 2021 was followed by the war in Ukraine, significant supply chain disruptions, and rapidly accelerating inflation. The Valchem team was able to step up and deliver strong results, both financially and strategically, under these challenging conditions. once again proving the strength of our team and the resilience of our business models. I would like to take this opportunity to thank all of our employees and broad group of stakeholders who supported us and contributed to our success throughout the year. Thank you all. Now regarding the fourth quarter of 2022. This morning we reported solid fourth quarter results. A revenue of $233 million was up 9% and our adjusted earnings from operations were $43 million, up 13% versus the prior year quarter. Our net income of $21 million, a decrease of 14%, resulted in earnings per share of 66 cents on a GAAP basis. On an adjusted basis, our fourth quarter non-GAAP net earnings were $30 million, an increase of 9%, resulting in earnings per share of 94 cents on a non-GAAP basis. and we continued to deliver solid cash flows. Cash flows from operations were $42 million for the fourth quarter and quarterly free cash flow of $28 million. I am now going to turn the call back over to Martin to go through the fourth quarter consolidated financial results for the company and the results for each of our business segments.