Ted Harris - President and Chief Executive Officer Bill Backus - Chief Financial Officer and Treasurer.

Mike Ritzenthaler - Piper Jaffray Francesco Pellegrino - Sidoti & Company.

Greetings, and welcome to the Balchem Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Bill Backus, CFO for Balchem Corporation. Thank you Mr. Backus, you may begin..

Ladies and gentlemen, thank you for joining our conference call this morning to discuss the results of Balchem Corporation for the quarter ending December 31, 2015. My name is Bill Backus, Chief Financial Officer and hosting this call with me is Ted Harris, our President and CEO.

Following the advice of our counsel, auditors and the SEC, at this time I would like to read our forward-looking statement. 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.

The financial information that is referenced in this meeting was disclosed this morning in our quarterly press release. I will now turn the call over to Ted Harris, our President and CEO..

Thanks, Bill. Good morning, ladies and gentlemen, and welcome to our conference call.

Before I get into the quarter, I would like to briefly reflect on the full-year performance and note that we are incredibly proud to report our 12th consecutive year of sales and adjusted earnings growth while delivering record cash generation from operations of $104 million.

These 2015 results were accomplished despite the well documented oil and gas industry downturn along with a year marked by significant foreign-exchange headwinds.

During 2015, we also successfully completed the integration of SensoryEffects into our company and have made significant investments in new production capacity and technology that leaves us well positioned to continue our growth story into 2016 and beyond.

Moving on to the quarter, this morning we reported fourth quarter consolidated net sales of $132.7 million, which resulted in fourth quarter net income of $15.7 million or $0.49 per share on a GAAP basis.

This result includes significant non-cash amortization expenses of $6.8 million for acquisition related intangible assets along with transaction costs of $324,000. Both of which were expensed in these fourth quarter GAAP financial statements.

The amortization expense is a direct result of acquisition valuation and business combination accounting roles. While the transaction costs are related to the Albion International acquisition, which I will discuss shortly.

Consequently, our non-GAAP net earnings of $21 million or $0.66 per share reported in our press release earlier this morning excludes these expenses to facilitate comparative evaluation of this current period operating performance versus the prior-year period.

These non-GAAP net earnings for the fourth quarter 2015 compared to $21 million or $0.67 per share in the comparable prior-year quarter.

Our fourth quarter sales of $132.7 million or 18.4% lower than the $162.7 million result of the prior-year comparable quarter with the most significant driver of this decline being a $21.3 million reduction in sales in industrial products related to the significant downturn in the oil and natural gas fracking markets.

SensoryEffects achieved record fourth quarter earnings of $9.9 million on net sales of $70.3 million. The sales decline of $2.6 million was largely due to the negative impact of the warm winter weather on Powder Systems sales more than offsetting the positive impact on Flavors Systems.

Through the quarter, good progress was made on several core strategic growth platforms within SensoryEffects. First, we are pleased by the successful startup of our state-of-the-art continuous agglomeration unit in Defiance, Ohio.

The startup and quality validation process has gone very smoothly and in particular note the first production run delivered in spec product. The strategic growth investment complements the market-leading drying and blending of emulsified powders capabilities of SensoryEffects.

SensoryEffects will be able to better serve its existing and prospective customers through this broadening of our technology by also creating a low cost one-stop shop for high-quality finished powder solutions. In the coming weeks, we will conclude startup validation and begin commercialization of these new solutions.

Second, as previously discussed, our pharmaceutical delivery development efforts continue. We continue to work closely with the licensee of our technology who is in the process of performing a third phase 3 clinical for their drug to be utilized in the treatment of autism. Their new drug application is being filed with the U.S.

Food and Drug Administration and we are collaborating as required. To that end, we are in the latter stages of validating quality systems, supply chain, and manufacturing capabilities to ensure preparedness for the production of final validation batches by midyear and the initial launch demand upon FDA approval.

Third, we continue to be excited by the FDA's recommended daily intake for choline with an expectation of the final rule to be published shortly as evidenced by the March date noted on the FDA website.

In addition, we are encouraged by the recent European Food Safety Authority, EFSA, proposal for first ever intake recommendations for choline for European consumers. We are also pleased that the EFSA analysis that lead to this decision included reliance on data obtained from a Cornell University study which we supported.

Activity in the marketplace is encouraging and the RDI and now EFSA recommendations should spur further interest in choline enrichment for both supplements and food fortification.

The Animal Nutrition and Health segment sales of $41.5 million decreased 11% or $5.1 million compared to the prior-year comparable quarter while increasing $1.5 million or 3.8% sequentially from the third-quarter 2015.

Segment volumes increased approximately 4% year-over-year and 7% sequentially from the third quarter 2015 on particularly strong global monogastric species volumes and sequentially improved ruminant species volumes on continued strength in ReaShure as penetration rates of this industry-leading ruminant protected choline product continue to expand.

While other nutritional products are being challenged by lower milk and milk protein prices as well as the strength of the dollar and subsequently lower export volumes.

As previously discussed, we have been expanding our Verona, Missouri facility and we recently completed that expansion and brought online another feed encapsulation unit for our ReaShure brand. This expansion will position us well to satisfy the increased demand for ReaShure created by the aforementioned further market penetration.

We are very pleased with this successful expansion and the knowledge that as we grow this market we will not be constrained by insufficient capacity.

In the fourth quarter, specialty products achieved an all prime quarterly earnings record of $6.2 million on sales of $13 million with favorable margins, mix, and costs more than offsetting a 6.7% decrease in sales.

Industrial product sales decreased $21.3 million or 73% from the prior-year comparable quarter primarily due to significantly rose volumes sold of choline and choline derivatives for oil and natural gas fracking in North America. Additionally, average selling prices were lower as a result of pressures related to the recent industry activity downturn.

Rig count has declined approximately 70% from the peak and our volumes have followed a similar trend. Earnings for industrial products were down $4.2 million to $0.2 million. Our consolidated gross margin percentage was 30.1% of sales in the quarter, up 300 basis points from a 27.1% of sales level in Q4 2014.

The gross margin improvement was primarily due to a favorable product mix and lower raw material costs, which were partially offset by the impact of previously noted lower volumes.

Gross margin percentage for the SensoryEffects segment increased by 370 basis points primarily due to improved product and customer mix, lower raw material costs, and plant efficiencies.

Gross margin percentage decreased for the Animal Nutrition and Health segment by 150 basis points primarily due to an unfavorable product mix partially offset by cost decreases of certain key raw materials.

Gross margin percentage for the specialty products segment increased by 490 basis points primarily due to mix and cost decreases of certain key petrochemical raw materials. Industrial products gross margin declined by 820 basis points reflecting the reduced volumes and lower average selling prices.

Consolidated operating expenses for the three months ended December 31, 2015 were $17.7 million or 13.3% of net sales as compared to $17.1 million or 10.5% of net sales for the three months ended December 31, 2014. The prior-year comparable quarter included the benefit of a $2.9 million net legal settlement.

Excluding non-cash operating expenses associated with amortization of intangible assets of $6.4 million and transaction costs of $324,000, operating expenses were $11 million or 8.2% of sales. Looking forward, we expect to leverage off of our existing SG&A infrastructure and exercise tight control of our all controllable operating expenses. U.S.

GAAP earnings from operations were $22.2 million, a decrease of $4.8 million or 17.7% compared with the prior-year comparable quarter. On a non-GAAP basis as detailed in our earnings release this morning, earnings from operations of $29.2 million decreased $2.1 million or 6.7% from the prior-year comparable quarter.

As previously noted, consolidated net income closed the quarter at $15.7 million down from $90 million in the prior-year quarter. This quarterly net income translated into diluted net earnings per share of $0.49, as compared to the $0.61 we posted in the comparable quarter of 2014.

On a non-GAAP basis, and as detailed in our earnings release, our adjusted net earnings for the quarter were $21 million or $0.66 per diluted share, compared with $21 million or $0.67 per diluted share in the prior-year quarter.

Interest expense for the three months ended December 31, 2015 was $1.5 million and related to the term loan for the acquisition of SensoryEffects. The term loan has a remaining balance of $297.5 million as of December 31. Our net debt at December 31 was $213 million.

The company’s effective tax rate for the three month ended December 31, 2015 and 2014 was 24.1% and 24.5% respectively.

This decrease in the effective tax rate was primarily attributable to more favorable research and development tax credit, beneficial state tax rate changes, utilization of state tax credits, and a change in the apportionment relating to state income taxes.

As outlined in our earnings release, our fourth quarter results generated $33.7 million of adjusted EBITDA in the quarter, which translates to 25.4% of sales, a 350 basis point increase over the prior-year quarter and equals $1.06 per diluted share.

Our balance sheet continue to strengthen and our cash flow remains strong as we generated $25 million in cash from operations and closed out the quarter with approximately $85 million of cash. And this reflects scheduled principal payments on long-term debt of $8.8 million along with $13.2 million of capital expenditure funding in the quarter.

Before I turn it over to bill, I’d like to briefly discuss a recent acquisition of Albion International. We are very pleased about this acquisition and the addition to our company of Albion’s deep scientific expertise, broad patent portfolio, and premium branded products.

Excluding cost synergies, there are four other strategically important elements to this acquisition. One, Albion’s market-leading human mineral nutritional offering expands our human nutrition product portfolio and provides us the opportunity to expand both companies sales to a broader combined customer base across a broader geographic reach.

They are already seeing some evidence of this in just the first few we.

Two, 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 mineral and choline nutrition and subsequently our ability to provide enhanced solutions for our customers.

Three, the addition of plant nutrition to our portfolio is a natural fit with human and animal nutrition and create some leverage opportunities, particularly with our specialty products segment and our fumigation and pasteurization technologies.

And four, Albion's leading acid chelated mineral technology and manufacturing capabilities combined with our existing chelated mineral capabilities for our animal nutrition and health segment will enable and facilitate expansion of our animal nutrition business.

This strategic rationale combined with the attractive margin and growth profile of the business, as well as the expected first year accretion of the acquisition make Albion a very attractive addition to Balchem. I’m now going to have Bill Backus discuss the segments..

Thanks Ted. As previously noted for the quarter, sales of our consolidated SensoryEffects segment was $70.3 million, a decrease of $2.6 million or 3.6% from the comparable prior year quarter.

Beverage system sales were higher as demand for our products benefited from lower dairy prices and the relatively warm weather extending the ice cream season, while powder systems sales were down impacted negatively by the mild winter weather and its impact on hot specialty beverage systems, as well as the continued weakness at our large customer.

Encapsulated ingredients for baking and food preservation in both the domestic and international food markets also showed significant strength even with the negative impact of the strength in dollar as there was a 14.2% increase in sales over the comparable prior-year quarter.

Record fourth-quarter earnings from operations for this segment were $9.9 million versus $7 million in the prior comparable quarter, an increase of $2.9 million or 40.7%. Earnings from operations from this segment increased due to an improved product and customer mix, lower raw material costs, and lower operating experience.

We are pleased with the fourth quarter SensoryEffects results, especially when considering previously mentioned topline challenges in part driven by our efforts to call lower margin business and certain customer softness in their market space, particularly the single-serve coffee in specialty beverage market.

This segment has continued to see margin expansion as we realized improved efficiencies, managed supply chain costs, and improve the value proposition of our product portfolio.

The opportunities presented by our pipeline and the aforementioned agglomeration Curemark RDI and have a first-ever intake recommendations along with the Alpheon acquisition will help fuel future growth for this segment.

As noted the animal nutrition and health segment sales of $41.5 million decreased 11% or $5.1 million, compared to the prior-year comparable quarter, while increasing $1.5 million or 3.8% sequentially from the third-quarter 2015.

Global monogastric species sales including feed grade choline products decreased $2.7 million or 8%, primarily due to lower average selling prices of monogastric products driven by lower raw material costs along with the impact of foreign currency.

Lower feed prices and favorable economic conditions provide incentive for broiler integrators to expand production and the USDA has increased its 2016 broiler production forecast as eggs set and chicks placed for grow-out have increased from 2015 levels.

Monogastric volumes did increase 5.4% from the prior-year comparable quarter and also increased 4.6% sequentially from the third quarter 2015.

Sales of product lines targeted for ruminant animal feed markets decreased by $2.5 million or 16.7% from the prior comparable period while increasing $1 million or a 8.8% sequentially from the third-quarter 2015.

The decline from the prior-year comparable quarter was most notably from decreased sales of AminoShure and NitroShure and primarily due to the noted challenging global dairy market dynamics and the strength of the dollar, which subsequently impacts our export volumes.

While low milk prices have persisted for some time, milk protein prices fell to new historic lows in Q4 further challenging the inclusion of international ingredients and feed rations. These dynamics have been particularly challenging for us when coupled with the strength of the U.S. dollar.

While these global market dynamics have been increasingly impactful, we were pleased that we were able to deliver 12% growth of our flagship ReaShure product line through these tough conditions. We believe these dynamics to be relatively short-lived and expect overall milk and milk protein prices to rebound.

We remain confident long term as we prove the value proposition of our innovative and efficacious product portfolio further penetrate the marketing and gain market share and develop new and novel products to satisfy mobile market demands. ANH quarterly earnings from operations were $6.2 million, a decrease of $817,000 or 11.6%.

This decrease was a result of the noted lower sales and unfavorable product mix, partially offset by cost decreases of certain key raw materials. The ARC Specialty Product segment posted quarterly sales of approximately $13 million for the three months ended December 31, 2015 as compared with $14 million for the three months ended December 31, 2014.

A decrease of 6.7%, and primarily due to order timing and year-end destocking activities in several key customers. Our quarterly earnings from operations were $6.2 million, which was an all-time record quarter. This was an increase of $430,000 or 7.5% over the prior comparable quarter.

This increase is due to mix, cost decreases of certain key petrochemical raw materials, and tight control of selling and administrative expenses. During the quarter, we continue to incur additional expenses pursuing other new end market applications.

In the industrial product segment, sales declined 73% from the prior comparable quarter as volumes sold the various choline and choline derivatives for industrial applications notably for shale fracking, decreased due to the well-publicized significant downturn in the fracking market.

Additionally, average selling prices were lower as a result of pressures related to this industry activity downturn and operators desire to curb hydrocarbon production costs. There is significant uncertainty in the oil and gas industry and our expectations are that headwinds are likely to continue through most if not all of 2016.

We will look to continue to leverage the competitiveness and efficacy of our products capitalizing on opportunities to gain additional market share through both our existing product portfolio and a development and introduction of more cost-effective alternatives while also aggressively managing supply chain costs.

However, as indicated, we remain cautious about this industry. Our earnings from operations for the industrial product segment were $223,000 a reduction of $4.2 million compared with the prior comparable quarter and primarily a reflection of the reduced volume and lower average selling prices.

I'm now going to turn the call back over to Ted for some closing remarks..

Thanks, Bill. Our fourth quarter adjusted net earnings once again highlight the strength of our business model. Given the headwinds we continue to face, particularly in our industrial products segment.

While sales have certainly been impacted by these headwinds, the continued resiliency of our business was evidenced by this solid earnings result as we realized overall improved margins due largely to an improved product mix, lower raw material cost and a focus on management of base costs.

Cash flow remains strong and during the quarter, we generated $25 million in cash flow from operations. Both our SensoryEffects and Specialty Product segments reported record fourth-quarter earnings and specialty products delivered an all-time record quarter.

The animal nutrition and health segments volume growth was encouraging in a difficult and very economic environment and we are very pleased with the continued strength in our ReaShure brand is we further penetrate the market with our leading ruminant protected choline solution.

Strategically, I am pleased with the aforementioned Albion acquisition and progress being made on our important capital investments as well as our other growth platforms. At the same time, while we integrate Albion into Balchem we will continue to seek value creating acquisitions to strengthen and expand our existing market positions.

Looking ahead, while the macroeconomic headwinds we experienced in Q4 are likely to continue for the next several quarters, we will continue to driver our strategic growth initiatives and add value to the markets we serve, capitalize on supply chain strengths and control selling general and administrative spend.

I would now like to hand the call back over to bill who will open the call for questions.

Bill?.

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

At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Mike Ritzenthaler of Piper Jaffray. Please proceed with your question..

Yes, good morning. On Albion, Ted, you mentioned for aspects of the rationale for the acquisition. I'm guessing that the lowest hanging fruit on the revenue synergy side is the breadth of offering of sales of minerals to existing customers.

Is there a way of framework that you are thinking about the potential size of the revenue synergies there?.

Yes, Mike thanks for the question and you're right that really is the low hanging fruit. We have some low hanging fruit from a cost synergy perspective as well. But as we look at our customer base and their customer base, there is some overlap. But there are a lot of new customers that come to Balchem with the acquisition.

So, we definitely see the broader portfolio selling to that now broader customer base as low hanging fruit. And we’re targeting a relatively modest percentage of Albion sales for synergistic sales. But you could think about five percentage points of increased sales based on sales synergies associated with a combination of the portfolios..

Okay. That's helpful. Keeping with SensoryEffects, excluding FX what was the organic growth in 4Q? And then I guess maybe as an underlying question there about which categories you had expanded on a few in your prepared remarks, but I think the year-over-year comp in organic growth would be helpful..

All right. So, as we said, earlier in the year as we were seeing declines year-over-year. I think in the first half of the year we saw about a 7% decline in sales and SensoryEffects again going back to the calling activities and as well as some of the issues that we had in the specialty beverage segment, particularly at one single-serve customer.

So, we were down about 7% in the first half of the year. And then the second half of the year, we were about flat with Q3 being up a little bit and Q4 being down. So, I think year-over-year on a pro forma basis of course, I’m talking about the first half was down about 7%, the second half was about flat.

And we see going forward in Q1 of 2016 in the first half of 2016, I think we will start to see some positive growth year-over-year and that will only increase as the year goes on with getting some of that year-over-year comparable relative to calling and the one customer behind us, as well as agglomeration and some of our other growth initiatives now part of our sales going forward..

Yes, that makes sense. Switching over to animal nutrition if I could, it looks like pricing broadly is going to be flat.

At least if you look at some of the futures curves for 2016 versus 2015 and I'm just curious about what you think about as a good organic growth target for 2016? I guess in particularly for the ruminant animals with reassure continuing its penetration, but we’ve got continued challenging dynamics internationally..

You're certainly right about that. But we are targeting about a 5% growth in that market. That’s less than we would like to see given the solutions we have in that market space, but ReaShure, if you look at ReaShure, our growth in the U.S. alone in 2015 was about 18%.

That was muted when you look globally, partly because of the dollar and our export sales to something more like 12%. We see that continuing through 2016.

And really, the difficulty will be around other exported products and other products and how long it takes for the dairy economics to really come back, but kind of taking a fair look at ReaShure combined with our other ruminant solutions and where we are year-over-year, I think that 5% is probably a good target..

All right fair enough. Thank you, Ted..

Thanks, Mike..

Our next question comes from the line of Francesco Pellegrino of Sidoti & Company. Please proceed with your question..

Good morning, guys..

Good morning..

Good morning..

I was wondering if you could quickly go over the EBITDA for each section, if you have that handy?.

I'm sorry could you repeat that Francesco?.

Did you have the EBITDA for each section?.

Bill, do you have..

I don't have that in front of me right now, handy. But I can certainly take a look and give you a call back..

Okay.

And it will be in the 10-K as well, right?.

We don't report EBITDA in the 10-K..

Alright..

It's a non-GAAP measure and we don’t show non-GAAP in our 10-K. We only show non-GAAP measures in our press release..

Okay.

Quickly on the industrial product segment, I saw that it was a mix of volume and pricing and I'm wondering going forward how much more can you guys be giving up on pricing?.

I think, you're absolutely right, it's a combination of volume and pricing with volume being the mass majority for sure. So that's been the bigger impact. Pricing has been measurable. And I don’t see that going down a whole lot further. I see the bigger impact probably being volume, if there is any downside to where we are today.

We feel like the market is where it is. We just saw the latest recount data came out today for last week and it was down again to I think 502 rigs, which is getting close to the 1999 all-time low. That was kind of a 488 and I think the prediction is it is going to go there. So, we see volume is going to stay very low.

Pricing, it is a little bit related obviously to raw materials as well. Raw materials could continue to decline further based on the sustained lower petrochemical and oil costs, but I think that to your point, we're more likely to see volume decline than further price decline at this point..

Okay. Just to move on to the specialty products segments.

So, you cited the destocking activities at several key customers, and I would assume this just occurs with most of your customers at year-end? Why was it more of an emphasis for the fourth quarter of this year as compared to maybe prior years?.

I think you're absolutely right. That's kind of a common strategy of suppliers and actually we probably do it on the other side of things.

But this year, a couple of our customers, one in particular, found themselves really over the course of the second part of the third quarter, and all of the fourth quarter we got very few orders on one particular SKU because over time they had just lost control of that supply chain and built-up significant inventories of, as I said a particular SKU.

So, it was a very unusual situation. We see that coming back as we speak in February. But it even went into January to some extent in that one SKU, that one customer. So, we highlighted it just because it was highly unusual compared to historical practices with that one customer and that one SKU..

When you talked, I think you mentioned something about a favorable product X shift occurring in the specialty products.

Given that you sell Didn't ETO and PTO is in there as well, right?.

Yes..

What type of mix shift could we be seeing that drove margins up ?.

Well there are really two kinds of mix. One would just simply be customer mix and then one is in the product mix. And our margins are different depending whether it is EO or PO. And also some of the containers or SKUs have different margins. So there can be mix within product and PO generally is a little bit lower of a margin than EO.

And then as I said, some different container sizes have different margins, but then we also obviously have some mix from a customer perspective and both customer and product mix came into play in Q4..

Okay. You mentioned that on the horizon maybe within the next couple weeks we could be seeing some sort of recommendation coming in regards to an RDI for choline.

Now just based on some of the past conversations that we’ve had it doesn’t really seem like there is going to be anything that makes or breaks Balchem? I don't want to get ahead of myself here, but if there were to be a favorable ruling, what would the ramp-up be for Balchem, given that you guys have such a large market share of the human grade choline industry? I would think a lot of this would fall on Balchem's shoulders to maybe, I don’t know is it educate consumers, is it apply for federal grants, what exactly is the ramp-up? Because I know speaking with Bill in the past, it isn't exactly like when vitamin D or something became - was including on an RDI, it's choline and there might be a little bit of some consumer education that needs to happen.

I am doesn’t just over the next couple of weeks, how will that conversation take shape? As I would have thought it might have already have occurred with management over at Balchem, So, just a little bit of color would be helpful?.

Sure. I think you're right in that it’s not a vitamin D, but there are some similarities. When it was announced that the FDA had clearly identified that Americans were deficient in vitamin D and they now recommended a daily intake, sales skyrocketed.

Vitamin D is a better-known nutrient, central nutrient than choline, so we have some certainly explaining to do. But, we do see this dramatically fueling growth over the coming years.

Having said that, the announcement, whether it occurs in March or maybe April knowing that the FDA sometimes is delayed, that announcement unto itself won’t result in sales the very next day, but what it does is it lends a whole lot of credibility to what we have been marketing to the marketplace over the years and really the big names in the industry are going to get on board in a much more significant way than maybe they have in the past.

So, we see this being a very significant tailwind, but with a ramp-up period, with the announcement in the coming weeks companies and labels will not have to be in compliance until 2018. So there are a couple of years for companies really to kind of leverage this announcement and start fortifying their products and get the benefit from the labels.

Having said that, most significant companies are well aware that this is pending, well aware that this is absolutely going to happen, and so we are already working hard with all of those companies today and the announcement again whether it's March or April really is just kind of formality, if you will, because we are working actively in the marketplace towards something that is well known to be about to happen..

Just I guess maybe add a couple of things to that question. You said how there would be a human benefit if choline was included as an RDI.

But the one thing I'm starting to question is, I think for so many years growing up you are ingrained with if you want to have stronger bones you drink more milk and I'm wondering if maybe choline is going to have to be repositioned against maybe this ingrains story that everyone is told when they are growing up.

And I understand choline also does help with milk production, but maybe does consumer just default to drinking more milk when they see what the benefits of choline could be.

That's the only I guess discrepancy that I'm seeing about maybe educating the consumer and maybe a default that they go to an alternative product that they've known for years to have the same benefits as choline..

I think your question even kind of speaks to the fact that choline is not as well-known as vitamin D. And while choline and animal nutrition helps cows to produce more milk, it's really unrelated to that in the human area and it provides nutrition to aid in liver health as well as cognitive health as well as kind of cell structure.

And so it has many different nutritional benefits in humans that are quite different to why it’s consumed in animal health.

So we have obviously some educating to do there, but again the fact that the FDA is coming out and saying that Americans are deficient and now EFSA is coming out and saying Europeans are deficient and we all should supplement with additional choline again is very, very positive and in conjunction with, as you said, our own initiatives to educate the marketplace again it will undoubtedly help increase the growth of the product line that really – that we’ve been growing at 10% a year for quite some time in human nutrition.

So we already have a pretty good growth and we see that just accelerating with the RDI from the FDA as well as now EFSA..

All right. That was helpful. I guess I’m one of the first to be educated on the benefits of choline right now on this call. But….

It’s okay. It’s good evidence of the work we need to do..

Cool, and I cover the name. So I wonder how many other people are going to be out there trying to understand what the benefits could be..

Yeah..

But one of the last things from your prepared remarks were how you guys are still out there looking for acquisitions.

And with acquisitions obviously you were going to be paying up for these valuations and I know when you acquired SensoryEffects, I mean you guys paid what like 10.7 times EBITDA?.

Yeah, something like that, 10.6 [ph]..

And Albion was right around there, 10.5 or 10.7 times. What do you guys looking at for valuations given that valuations in this market are rather stretched.

And looking at Albion, given that the SensoryEffects deal happened two years ago at 10.7 times and two years later we’ve had valuations run, but you're still able to acquire something within the same type of valuation metrics.

What do you guys really seeing out there? Are there a lot of opportunities out there, but they're just expensive, is it just the timing thing? Just a little bit of insight on that would be helpful and then I'll jump back in the queue..

We are kind of looking probably a little bit less at the multiple and more around the return on investment and making sure that it meets a reasonable return on investment for us. And yes, you're absolutely right, assets are more expensive today than they were a year ago and two years ago.

And so we do find ourselves walking away from asset we see as being a bid too rich and with extraordinarily high multiples.

Acquisitions kind of the 8 to 10.5, 11 times range are probably the kind of values that we are going to be looking at with higher valuations being higher growth, stronger margin, better balance sheet, and as well as certainly strong synergies. And we do see opportunities out there.

And we are very deliberate in our prepared words to say that we're going to continue to look at additional acquisitions. Obviously we've got some work ahead of us to integrate Albion, but we continue to assess other opportunities and we see acquisitions as an important part of our growth strategy.

And there are assets out there at reasonable valuations..

You said just before I jump back in queue and this I promise will be my last question, you said you judge it on return on investment. So I'm guessing this is something that is internal that the company measures.

Can you just maybe give us a little bit of insight in which was a better deal in your opinion the Albion acquisition or the SensoryEffects? And I guess what I’m trying to get at and I don’t know if you can share this with us is which one do you see is having a better return on investment? I guess that would be did you pay more for Albion given the SensoryEffects acquisition or did you pay less? I’m just trying to put it into perspective..

Obviously, Francesco, very, very different acquisitions. I would describe one as much more transformational….

Yeah..

…than the other. When you look at the multiples, they were similar multiples. When you look at the return on investments, they were similar return on investments but again very different acquisitions and that’s why it's kind of hard to just compare based on a couple of metrics..

Okay. Perfect. Thank you, guys..

Thanks..

Our next question comes from the line of Robert Maltbie of Singular Research. Please proceed with your question..

Hello. That’s Robert Maltbie and this is Debra in for Robert. Thank you for taking my questions.

I want to continue with the questioning regarding Albion just for modeling of the segments perhaps you could give us some guidance on how the Albion sales might be split amongst your segments?.

Sure. Thanks, Debra, for the question, and sorry I think last time we had some issues getting to your question, but I will ask Bill to answer at least the first part of that question..

Yeah, hi, Debra. It’s likely going to be split between the SensoryEffects segment for the human side and our specialty products segment for the plant side. And we are somewhere around probably 60% human and maybe 35% plant and there's some other little things in there also besides that.

But that’s kind of a split of what it should be on a go forward basis and obviously with an intent of growing both businesses..

Okay, very good, thank you. And it looks like there – at least their historic numbers, it looks like their EBITDA margin is slightly lower than that of the existing Balchem business.

Do you anticipate changes in their profit margins and maybe give us some guidance on what their cost situation might be and what their gross margin might be?.

Yeah, I mean, so our expectations – and you're right, I mean, their adjusted EBITDA margins are probably somewhere around 20%.

We obviously have expectations through some synergies to bring those margins up and hopefully through the sales synergies also we are going to see some growth there in some volume and some leveraging of throughput from that standpoint also because they do have capacity.

So we do anticipate and are hopeful that the margin – there will be a margin expansion. As far as gross margin go, I mean, they are sort of in the high-40% range.

So that kind of gives you an indication of where they're at, which compares favorably to some of our product lines and obviously we have some that are higher and some that are lower, but they fit very nicely in from that standpoint and that’s a testament to their patent portfolio, their science, and what they do very well..

All right, very good. And then I would like to shift the question to the gross margins and the costs in the fourth quarter for Balchem. You mentioned several times in your opening remarks that you benefited from lower raw materials costs.

And I was wondering if that was a matter of just lower spot prices that might be transitory in nature or was that the results of some sharp negotiating supply chain arrangements that could be more permanent in nature?.

It's a combination of both, Debra. Raw material cost particularly petrochemical, but really across the board really moved down as the year progressed. So we have seen continuing declines in raw material costs across the board as the year progressed and as we go into Q1 of 2016 we are seeing that similar trend.

We have negotiated several, I would say, relatively significant new contracts. It started more January 1 rather than Q4 that will make some of those declines more permanent in nature. So it's really a combination.

We’ve managed to, as the year progress, leverage across SensoryEffects more kind of permanent type cost reductions across SensoryEffects that are structural in nature. So really a combination of both. But we have to say that generally raw materials are just down in the industry and we have benefited from that.

And obviously our pricing practices and value propositions have enabled us by and large to hold on to those raw material reductions by keeping our prices where they were..

Excellent, thank you. And then, in the industrial segment you mentioned that you could see lower volumes in the quarters going forward because of the reduced rig count, it seems quite persistent.

Are there any buttons you can push or levers you can pull that will help to reduce your costs in that segment?.

There are, but unfortunately there is no silver bullet or grand button to push.

We do have two plants, two manufacturing facilities that manufacture the product that largely go into oil and gas, so we can kind of leverage both assets, we can take extended work outages, we can make sure that we are not spending any money on over time or not covering vacations like we ordinarily would.

Those are the primary ways as well as really aggressively seeking process cost reductions in our plants. We’ve recently introduced a new low-cost product in the marketplace. We don’t expect that to dramatically turn things around, but it does provide our customers with a lower cost, very effective product.

That is another way to provide our customers with some cost reduction. So a combination of all of those things. Going back to your earlier question, negotiating new contracts for raw materials, that based on current market demand is also something that we’ve been working hard on. So a combination of those factors really is where we have been focused..

All right. Thank you very much for taking my questions..

Great, thank you..

Thank you..

At this time, we have no further questions in audio portion of the conference. I would like to turn the conference back over to management for closing remarks..

We just want to thank everyone for joining us again for this quarter. Again, we are pleased by certain things certainly there are things we need to work on, but again we just want to thank everybody for being on the call with us and we look forward to speaking with you again..

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time..