Greetings, and welcome to Balchem Corporation's quarterly conference call for the fourth quarter 2018. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr.

Bill Backus, Chief Accounting Officer for Balchem Corporation. Thank you. 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, 2018. My name is Bill Backus, Chief Accounting Officer. And hosting this call with me is Ted Harris, our Chairman, CEO and President; and Martin Bengtsson, our Chief Financial Officer.

Following the advice of our counsel, auditors and the SEC, at this time, I would like to read our forward-looking statement. This release does contain or likely will contain forward-looking statements, which reflect Balchem's expectation or belief concerning future events that involve risks and uncertainties.

We can give no assurance that the expectations reflected in forward-looking statements will prove correct, and various factors could cause results to differ materially from our expectations, including risks and factors identified in Balchem's Form 10-K. Forward-looking statements are qualified in their entirety by this cautionary statement.

I will now turn the call over to Ted Harris, our Chairman, CEO and President..

Thanks, Bill. Good morning, ladies and gentlemen, and welcome to our conference call. I would like to start by officially welcoming our new Chief Financial Officer, Martin Bengtsson, to the team.

Martin has been with us for a little over three weeks, and we are extremely pleased to have him on the Balchem team and look forward to his contributions to our company over the coming months and years. At the same time, I would like to thank Bill Backus for filling in as interim CFO for the last few months. Thank you, Bill, and welcome, Martin.

Before I get into the quarter, I would like to reflect for a few minutes on the full year 2018 performance and note that we are very pleased to report another full year of sales and adjusted net earnings growth. 2018 was a very strong year for Balchem.

Financially, we delivered record sales of $643.7 million, an increase of $48.9 million or 8.2% from the prior year, with year-over-year sales growth in each of our four segments. Human Nutrition & Health, Animal Nutrition & Health and Specialty Products all delivered record sales performances in 2018.

These record sales drove record adjusted EBITDA of $159.9 million compared to $147.8 million from the prior year, an increase of $12.1 million or 8.2%, and record adjusted net earnings of $97.7 million, an increase of $16.1 million or 19.7% from the prior year. And free cash flow remains strong at $99.5 million compared to $83.1 million in 2017.

Strategically, we also had a very good year. As a company, we're striving to make the world a healthier place by providing innovative solutions for the health and nutritional needs of the world and, at the same time, operating with excellence as strong stewards of all of our stakeholders.

We are making progress on choline, mineral and amino acid nutritional understanding and awareness, and our investments in new product development, external studies and new science understanding are making a difference for the future advancement of our human, animal and plant nutrition franchises supported by our $11.6 million investment in R&D in 2018, an increase of $2.3 million compared to 2017 to further support our future growth.

Of particular note, in 2018, are the 7-year Caudill follow-on study at Cornell University to explore the enduring cognitive benefits in older children, whose mothers received choline supplementation during pregnancy and early nursing. The $2.6 million NIH grant to Dr.

Stephen Zeisel of the University of North Carolina's Nutrition Research Institute to study and develop a test to determine choline status in humans and the studies demonstrate that feeding ReaShure, Balchem’s rumen-protected choline, during the transition period results in full lactation benefits as well as healthier, faster-growing calves.

We believe the results from these studies will support the positive benefits of some of our core products and help drive increased awareness and demand in the market.

We also continue to find high demand in customer partnering opportunities within the health and nutrition segments of our food ingredient business, where we are bringing consumer value through clean label formulas, plant protein solutions and the delivery of healthy oils and fats.

We're strongly engaged with leading companies across the nutritional beverage and healthy snack markets creating good growth opportunities for the company.

And while the CureMark team’s data analysis and preparatory work for the NDA filing has progressed slower than we anticipated, we believe 2019 will be a pivotal year for this important and unique treatment for autism.

And behind the scenes, the Balchem team has continued to progress our manufacturing and supply chain preparedness for the ultimate launch of the product, while continuing to manufacture additional trial quantities of the encapsulated enzyme for rollover participants from previous trials.

We also completed the integration of innovative food processors that we acquired in 2017 and added Bioscreen Technologies, S.r.l.

into the Balchem portfolio in August of 2018, broadening our capabilities and product portfolio of highly engineered encapsulated nutritional ingredients such as ReaShure, NitroShure, NiaShure and AminoShure-M and L for the European dairy market. Both of these acquisitions contribute nicely to our strategic capabilities.

Additionally, we fully recovered from the fire we had in Clearfield, Utah through the start-up and qualification of our new manufacturing annex at our Ogden, Utah facility.

We entered into a new credit agreement with our lenders in the form of a senior secured $500 million revolving credit facility, enhancing our strong financial profile and providing increased flexibility. We embarked on a significant undertaking to consolidate our five ERP systems into one, Microsoft Dynamics 365.

And we also initiated an effort to bring all of the important environmental, social and governance work that Balchem has been focused on for many years in our first environmental, social and governance sustainability report that we look forward to bringing you in 2019. All in all, a strong year for Balchem, both financially and strategically.

Now, with regard to the fourth quarter of 2018. This morning, we reported quarterly consolidated net sales of $163.5 million, which resulted in fourth quarter net income of $20.3 million or $0.63 per share on a GAAP basis.

Our fourth quarter non-GAAP net earnings of $25.1 million or $0.77 per share reported in our press release earlier this morning exclude non-cash tax-adjusted amortization expense and excess tax benefits from equity compensation of $4.8 million to facilitate comparative evaluation of this current period operating performance versus the prior year period.

These non-GAAP net earnings of $25.1 million or $0.77 per share represent an increase of $3.3 million or $0.09 per share above the prior year quarter of $21.9 million or $0.68 per share. We also delivered record quarterly free cash flow of $33.6 million, up 57.6% over the same period in the prior year.

Our quarterly net sales of $163.5 million were 2.7% higher than the $159.3 million result of the prior year comparable quarter with record fourth quarter sales in 3 out of our 4 reporting segments with Human Nutrition & Health and Animal Nutrition & Health both achieving all-time record quarterly sales.

Our Q4 consolidated gross margin dollars of $51.3 million were down $0.3 million or 0.6% compared with the same period in the prior year of $51.6 million. Our consolidated gross margin percent was 31.4% of sales in the quarter, down 100 basis points from 32.4% in Q4 of 2017. The decrease was primarily due to higher raw material costs and mix.

Raw material cost increased approximately $3 million to $4 million in the quarter versus prior year, due in particular to higher petrochemical costs as well as several other key raw materials.

We believe that our pricing actions were able to offset approximately half of these increases in the quarter, with the commercial team focused on recovering the remainder over the next several quarters or as contract terms permit.

Consolidated operating expenses for the fourth quarter 2018 were $24.1 million as compared to $25 million in the prior year. The decrease was principally due to a reduction in certain compensation-related expenses, partially offset by increased investment in research and development.

Excluding non-cash operating expense associated with amortization of intangible assets of $5.6 million, operating expenses were $18.5 million or 11.3% of sales. Looking forward, we will continue to focus on tightly controlling our operating expenses and leveraging our existing SG&A infrastructure.

Record fourth quarter GAAP earnings from operations were $27.3 million, which increased $0.6 million or 2.2% compared to prior year. This increase was due to earnings growth in Human Nutrition & Health, Specialty Products and Industrial Products.

On an adjusted basis, as detailed in our earnings release this morning, earnings from operations of $33.6 million were flat compared with the prior year. Adjusted EBITDA of $39.6 million was $0.4 million or 1% below the $40 million posted in the fourth quarter of 2017.

Interest expense for the fourth quarter 2018 was $1.7 million, and our net debt on December 31 was $101.7 million. This net debt reflects a fourth quarter pay down of $22 million on our revolving loan, and our net debt leverage ratio as of December 31 was 0.64.

The company's effective tax rates for the fourth quarter 2018 and 2017 were 19.5% and negative 71.2%, respectively. The increase in the effective tax rate is primarily attributable to Q4 2017 reflecting the initial implementation benefit of tax reform.

Additionally, in Q4 2018, the effective tax rate was negatively impacted by recently proposed IRS regulations further limiting the utilization of foreign tax credits, which had a $2.1 million catch-up effect in the quarter and will be an ongoing limitation subject to changes in IRS regulations.

We expect our adjusted effective tax rate to be approximately 25% to 26% for 2019 versus our adjusted effective tax rate of 22.7% in 2018, due primarily to the reduction of certain benefits associated with clarification of tax reform.

As previously noted, consolidated net income closed the quarter at $20.3 million, down $21.6 million from the prior year quarter with the prior year quarter benefiting significantly from tax reform.

This quarterly net income translated into diluted net earnings per share of $0.63 for the current year, a decrease of $0.67 per share over last year's comparable quarterly result of $1.30.

On an adjusted basis and as detailed in our earnings release, our fourth quarter record adjusted net earnings were $25.1 million or $0.77 per diluted share, up $3.3 million or 14.9% compared with $21.9 million or $0.68 per diluted share in the prior year quarter.

As previously noted, our cash flow remains strong as we generated record quarterly free cash flow of $33.6 million and we closed out the quarter with $54.3 million of cash on the balance sheet.

This cash balance reflects the growth in net earnings and $5.9 million of capital expenditure funding in the quarter as well as revolver pay down payments of $22 million. Our cash flow was particularly strong in the fourth quarter due to the favorable timing of several capital expenditure and working capital items.

These items totaled approximately $8 million and will likely reverse in the first quarter of 2019. I'm now going to turn the call over to Martin to go through the detailed results for each of our segments..

Thanks, Ted. For the quarter, sales from our Human Nutrition & Health segment were $87.3 million, a record quarter and an increase of $4 million or 4.8% from the prior year.

The sales increase was primarily driven by higher powder systems and flavor systems sales into food and beverage markets, increased chelated minerals sales and higher choline nutrient sales. The revenue growth was primarily due to increased volumes with choline nutrients experiencing growth, both domestically and internationally.

Fourth quarter earnings from operations for this segment were $12.3 million, an increase of $0.2 million or 2% compared with the $12.1 million in the prior year, primarily due to the aforementioned higher sales and lower amortization, partially offset by an unfavorable mix and certain higher raw material costs.

Excluding the effect of noncash expense associated with amortization of acquired intangible assets of $5.3 million, fourth quarter adjusted earnings from operations for this segment were $17.7 million compared to $17.9 million in the prior year quarter.

The Animal Nutrition & Health segment achieved all-time record quarterly sales of $47.1 million, an increase of 5.7% or $2.6 million compared to the prior year. Sales of product lines targeted for ruminant animal feed markets increased by $1.7 million or 13.3% compared to the prior year, primarily due to higher sales volumes.

Despite the poor economic environment in the dairy market, particularly in North America, our ruminant business performed well on continued growth in ReaShure as well as improved international demand.

Specifically relating to ReaShure, the market-leading rumen-protected choline, we were once again pleased to deliver double-digit volume growth year-over-year based on ReaShure's compelling value proposition. Sales into the global monogastric species market increased $0.8 million or 2.6% from the prior year, driven by average selling prices.

As we've noted in prior calls, we benefited approximately $3 million in Q4 of 2017 and approximately $4 million in Q1 and Q2 of this year from supply disruptions of choline out of China. As we also previously indicated, this benefit would diminish through the second half of the year and this indeed has occurred.

In Q3 of 2018, we saw only modest benefit from lower Chinese exports and in Q4, we received essentially no benefit from Chinese supply disruptions as their exported volumes have been restored. In fact, the Chinese suppliers have fully returned to their market and they are regaining their share on lower prices.

So we saw a much more normal demand pattern in Q4 of 2018 than we really have all year.

Animal Nutrition & Health quarterly earnings from operations of $7 million were down from the prior year quarter of $8.1 million, driven by lower volumes and margins in the monogastric business, due to increased competitive activity in Europe, increased raw material costs and unfavorable mix, only partially offset by the benefit of the higher ruminant sales.

The Specialty Products segment achieved record fourth quarter sales of $17.6 million as compared with $16.5 million for the prior year quarter. The increase of 6.2% was driven by higher sales of ethylene oxide for the medical device sterilization market as well as modest growth in plant nutrition.

Specialty Products quarterly earnings from operations were $5.8 million versus $4.8 million in the prior year quarter, an increase of $1 million.

Excluding the effect of noncash expense associated with amortization of intangible assets of $769,000, fourth quarter adjusted earnings from operations for this segment were $6.5 million compared to $5.6 million in the prior year, an increase of 17.3%. The increase was primarily driven by the aforementioned higher sales and an improved mix.

In the Industrial Products segment, sales of $11.6 million decreased $3.3 million or 22.2% from the prior year quarter, primarily due to reduced sales of choline and choline derivatives used in the shale fracking applications.

We believe the primary driver of the decline has been slower fracking activity in the Permian basin along with continued efforts to cost-reduce fracking fluids through dilution. We do expect this business to pick back up in the second half of 2019 as logistical solutions for oil and gas transportation are completed around the Permian basin.

But as we've discussed in the past, we remain cautious about this historically cyclical market.

Our earnings from operations for the Industrial Products segments were $2.2 million, a slight increase of $0.1 million compared with the prior year quarter, due to a higher average selling prices and improved mix in certain lower operating expenses offsetting the aforementioned lower sales volumes and increased raw material costs.

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

Thanks, Martin. In the fourth quarter, we delivered year-over-year revenue growth across 3 of our 4 segments with strong consolidated net earnings and free cash flow. Our net debt has been reduced to $101.7 million as of December 31 or 0.64 times 2018 adjusted EBITDA, further strengthening our balance sheet.

With current economic uncertainties, we're pleased that our strong balance sheet and revolving credit facility provide us the flexibility to capitalize on both organic and acquisition opportunities. Our strong fourth quarter results once again highlight the strength and resilience of our business model.

We are, however, facing increased competitive activity in the European monogastric market, a slowdown in fracking within the Industrial Products segment at least for the first half of the year and continued uncertainty across most of the markets we serve from a macroeconomic perspective.

We will be watching these macroeconomic developments closely as they evolve and implement mitigating strategies where possible. We are pleased with the progress made on our key strategic growth initiatives in Q4 and throughout 2018, and we believe that we are well positioned in the markets we serve.

In 2019 and beyond, we will continue to strengthen our company by focusing on our key strategic growth initiatives, exercising disciplined cost management and seeking value-creating acquisition opportunities. I would now like to hand the call back over to Martin, who will open up the call for questions.

Martin?.

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

[Operator Instructions] Our first question comes from the line of Brett Hundley with Seaport Global Securities..

Martin, welcome to Balchem. Look forward to working with you, and I guess, will put you on the hot seat right away. I wanted to ask you a balance sheet question. Every time I ask or asked Bill this question, I kind of got the same answer. So I'll try with you as well. You guys have close to $100 million in net debt now.

You're meaningfully below EBITDA on that measure. Your forward cash generation potential is really attractive. So you have a lot of optionality, and I know, Ted, you were just talking about potential inorganic growth.

But even beyond that, have you guys thought about other sources of shareholder return in what has become a high-multiple ingredients world? And a lot of times we focus on dividend or something like that, but I also wanted to ask you about R&D. Because I think your R&D spend is around $10 million a year.

But are there opportunities for you to really lean in on this, for example, leveraging some of the work that you've done with CureMark?.

Yes. That was a good question. Thank you. I have been here three weeks, we've had some of these discussions and primary purpose is always to grow organically and inorganically as our course provided. We did raise the dividend in 2018 what was paid. But it is not our primary path to just raise the dividend and give the money back.

Primary strategy for us is to grow organically and inorganically. And having reviewed the strategy as it looks right now with Ted and the team, I think there are good opportunities out there to deploy the cash through those channels..

Yes. And maybe I'd just add to that, Martin, that, Brett, as I mentioned earlier, we significantly increased our R&D investment in 2018, and our budget for 2019 has a similar significant increase in R&D spending, primarily through both internal new product development, but also external studies.

We really do see that doubling down is a term, I guess, I'd like to say here on the efficacy of whether it's choline or minerals, both for human and animal applications, really pays off.

Some of the increased investment, for example, that we made in 2018 in the animal world that really showed a whole new value proposition for ReaShure, for example, relative to the health of newborn calves and their growth rates, et cetera, we are finding can accelerate penetration of that market take us from the dairy market into the beef market.

And so we really feel as though we're doubling down on those types of investments. And the acquisition opportunities are still out there, and I would describe our portfolio of acquisition opportunities as pretty healthy. And yes, multiples in certain situations are pretty lofty.

But we do have, what we think is, a pretty healthy acquisition pipeline and can get some deals done in the short term..

Okay. And then actually that leads me into another question that I wanted to ask you, Ted, which was about your animal business. So the top line there was really solid for the quarter.

I had, what I'll call, some normal like seasonality baked into my number, but I was also trying to be mindful of some of the tougher comparisons that you guys talked about that started in Q4.

And you mentioned ruminant volumes in the release, you guys talked about maybe -- I think you said that some international business was getting a little bit better for you. I think that was the comment on the animal side.

Are things starting to pick up a little bit from a macro standpoint? Did anything surprise you in the quarter?.

So obviously, we were pleased with the revenue growth, as you mentioned, Brett, almost 6% revenue growth despite the increased competitive activity in Europe, specifically from the reentry of China. Our volume was, however, down in the monogastric business at least in part due to that increased competitive activity.

So that's disappointing, and we will see that clearly in Q1 and Q2 of 2019 because those really were the peak quarters last year of the supply issues coming out of China that we benefited from. What we were excited about was the growth in ruminant.

Ruminant has been tough for really the last few years and to have delivered 13% revenue growth in that market. What we have seen is things not getting worse, which is good and the international markets are a little bit better. So ReaShure growth in the quarter was good at almost 10%, again in a very, very difficult market environment.

That just shows the strength of that value proposition that makes sense even in bad economic times. But as you mentioned, we also saw significant growth in our international business, which really is a combination of Asia, Europe and the Middle East.

Some of it was timing, we -- when we were shipping internationally, we ship in full containers, and that can swing things a little bit from one quarter to the other. But all in all, I think we're getting traction in international markets with our ruminant products.

The international markets are a little bit healthier than the US markets, and so combined with the strong value proposition of ReaShure in North America and increased opportunity internationally, we think that 2019 can be a favorable year for our ruminant business. But we are concerned about monogastric.

There's no question, we have very difficult comps in Q1 and Q2 given the benefits that we saw in 2018. I think the fundamental business is fine. We're just going back to, kind of, the pre-Chinese supply issue period, and we're going to see that in our comps for the next couple of quarters..

Okay. That's really helpful. I mean, it's good to see ruminant turning back on to a degree. The last question I have for you is going to come a little bit out of left field.

But we're covering cannabis right now over here on our side, and one of the things that we're increasingly seeing is a lot of energy and a lot of attention paid to cannabinoid development outside THC, right? So delivering cannabinoids, like CBD and CBC and CBG, as therapeutic approaches for a number of illnesses.

And given the work that you guys have done with encapsulation, I just wanted to ask you if that's something that's on your radar in any way? Or our view is that these cannabinoids are going to increasingly be used as an active ingredient for a number of therapeutic purposes? And given the technology and the leadership position that you have with lipid encapsulation and delivering active ingredients to important parts of the body, I just wanted to see if that was on your radar in any way..

Thanks, Brett. Absolutely on the radar, and maybe this is overstating it, but I've, sort of, put together a task force of folks from really multiple businesses because it impacts even our plant nutrition business, which is in Specialty Products, and what, if anything, should we be doing more to take advantage of the plantings and growings.

We do know that some of our minerals end up in that marketplace today, but should we be doing more? Can we be doing more to certainly the health and nutritional part and the supplement business as well as the ingredient business, where we're encapsulating ingredients, we're spray drying.

And we really see opportunities across those three business units for us. We just don't know exactly how significant they are. We're trying to understand the regulatory environment, which is a little bit complex because while the farm builders change, there's still FDA restrictions and so forth.

So we -- definitely on our radar screen, and we're trying to work through what really is the opportunity for Balchem, so that we can do the right thing and take advantage of it if there is an opportunity. So we're working hard on that right now..

Our next question comes from the line of Ram Selvaraju with H.C. Wainwright..

Just a few quick items. I wanted to see if you could just breakdown for us what you specifically anticipate should be the principal drivers of international choline feed supplement sales going forward? Secondly, I wanted to touch on a relatively minor item but may have potential significance for you going forward.

I presume that you're familiar with the recent issues that Sterigenics has faced in Willowbrook, Illinois regarding their ethylene oxide plant. And I wanted to know what your thoughts were on that.

If this represents potentially a harbinger of broader concerns in the ethylene oxide space or if this may, in fact, actually create a potential opportunity for you guys, given that Sterigenics has had to shut down their facility? Philosophically, I wanted to know whether you expect to prioritize debt pay downs versus dividend payouts going forward.

And then if you expect, pursuant to the comments you made about the shale fracking industry and transportation, logistics around the Permian basin, if you expect any broader-spectrum factors to lead to global recovery of the shale fracking industry during the course of 2019 or if transportation logistics in the Permian basin are really the main factor we should be paying attention to? And then finally, maybe this is a question for Martin.

It would be very helpful if you could give us a sense of how we should be thinking about the effective tax rate going forward, since obviously, that's been complicated in the past by the tax-cut policy, but wanted to know if that's going to return to a more steady-state level and going to be easier for us to model going forward..

Okay. Hopefully, we could capture everything there, Ram. If we didn't, remind us of those. I'll leave the -- maybe the effective tax rate question to you, Martin, at the end. And maybe I'll go backwards since it's easier to remember. But the shale fracking market, obviously, oil price plays a major role. Oil prices have been bouncing around 50s to 60.

If there were to be a spike in oil prices, we do think that would have a positive impact on our business, and obviously, that can be caused by a number of things. We, in our plan for 2019, are not expecting that, and we get most of our information from, kind of, the standard industry views out there.

And we think oil prices are likely to hover in the 60s. And that will -- alone will not have a significant impact on our business. So right now, we really think that, that business is being a bit artificially depressed as the market waits for the completion of these pipelines.

And that once the completion of the pipelines happens, the drilled uncompleted wells, there will be a little bit of a surge to release product from those. So we will see a pickup in the second half. So that's really the primary factor that we are counting on in our plan for 2019.

Maybe I'll jump to the first question around growth in choline, maybe particularly in international markets. Choline, you really have to think about in the monogastric business as well as in the ruminant business being very different.

And we expect that the growth in the monogastric business in international markets will largely be driven by demand for pork and poultry products. Choline is included in diets for poultry and swine in almost all parts of the world. So there's not a lot of penetration that can further happen.

So broiler, layer growth -- expected growth rates really are the drivers and we think of that as being more like 3%. Obviously, depends on the region, but numbers like that internationally. The choline that is encapsulated that we sell into the ruminant market is very different. We've talked in the past about penetration in the US being close to 30%.

So 30% of the herds use an encapsulated choline to address fatty liver and ultimately so the cow produces more milk. Those penetration rates are much lower internationally.

And so we can see and really forecast, over time, a significant growth, double-digit growth in our rumen-protected choline in international markets as we increase penetration into the dairy industry from what we would estimate, a little difficult to estimate, but in Europe, that is less than 5% to a much higher level and probably in the rest of Asia something even less than that.

So we view the growth opportunity of rumen-protected choline, which comes obviously with higher margins, as being double-digit significant growth opportunity for us. Hopefully, that answers your question there. Your next question was around Sterigenics, and we do supply to Sterigenics.

So we repackage ethylene oxide and sell that to companies like Sterigenics, who are using it to sterilize medical devices. The Sterigenics facility, as some of you might know, has been shut down by the EPA in Illinois. And we, as I said, do sell to Sterigenics. They're about 1.8%, a little bit less than 2% of our total sales in that business.

So it's not a significant impact on the company. And while we're watching the situation very closely to understand really what's going on, we are participating actively with various stakeholders, the EPA, ACC and others, to make sure that accurate information is being used as they assess that situation.

But at this point in time, we really don't see it having far-reaching impact on the sterilization market. There really is no adequate replacement for ethylene oxide in medical device sterilization.

So this could result in lower emission levels being regulated, and if that is ultimately the case, obviously, we will quickly work to adapt our practices so as to make sure we meet those new regulations. And obviously today, we're completely in compliance with all regulatory regulations. But that's really how we view the Willowbrook situation.

We're watching it closely. It is an important customer to us, but not material to our total business.

We don't see it expanding beyond Willowbrook right now and -- but we're actively involved with all the right parties to make sure that ultimately the right data is out there, the right information is out there, so EPA can make the right decision around future emission levels. I think, that was -- go ahead, Ram..

Yes. Thank you very much. That's very, very helpful color. I really appreciate that. Just the question on the effective tax rate, please..

Yes. For the year 2018 around, we had an effective -- or non-GAAP effective rate of 22.7%, so just below 23%. As we look forward to '19, we're estimating that non-GAAP adjusted rate to be 25% to 26% due to some benefits we saw in 2018 that we don't expect to repeat in '19.

And there are primarily two types of benefits that we don't expect going forward. As you all know, tax reform in 2017, we had a lot of provisions that were estimated in the 2017 year-end, which then after further clarification and guidance issued in '18 resulted in, for us, beneficial adjustments in '18.

So we saw some of those adjustments in '18 true-ups that we don't expect to continue in '19. And also, we had favorable R&D tax credits in '17 and '18 related to the rebuilding following our fire we had in Clearfield. So we had higher-than-usual, for us, R&D tax credits that we don't anticipate going forward.

So that's why when we look towards the future, we see that non-GAAP adjusted tax rate more in the 25% to 26% range versus the, sort of, 23% we were this year..

And would that likely be a number that we can use beyond 2019? Or you don't have visibility that far?.

I think we can all agree that the tax reform regulation -- I think, it will be in that range. But as we've seen over the last year, there are a lot of changes and new guidance and clarifications coming out. So assuming no further changes, I think that's fair to use..

And Ram, I do want to get back to, I think, you squeezed another question in there, and it gets to Brett's point a little bit too, around priorities as far as debt pay down versus dividend and so forth. And Martin answered it earlier.

Clearly, our first priority is investing in organic growth as you've seen by this significant increase in R&D spending. Secondly would be acquisitions that strengthen our position and provide growth opportunity for us. We are committed to the dividend. So likely you will see that continue with a modest increase as we've done for so many years.

And then it is paying down debt, we still have a fair amount of debt. But arguably, we're a little bit under levered. But you'll see us continue to pay down debt until we really find that significant growth opportunity to invest in. We are planning a modest repurchase program to eliminate the dilution associated with our equity incentive plan.

We've benchmarked this concept with our peers and feel as though it's a balanced approach to both offset dilution and provide a return on capital to our shareholders. So we are planning that in 2019 and that is something that we have not historically done, but feel like it really makes sense, given our current debt situation in the current market.

So that is a little bit of it that we are planning on adding..

Yes, I mean, I can say, philosophically, that I've always been more in favor of share buybacks as opposed to dividend payouts because there is a tax advantage to the shareholder. But that's just my philosophy, you don't have to share it..

[Operator Instructions] Our next question comes from the line of John Krulock with Millrace Asset Group..

I had a question just on the margin profile going forward, how to think about it, given that you're talking about the increased European competition, the frac slowdown? Just trying to understand, not anything super near-term, but just what's the right way to think about, kind of, gross margins and operating margins?.

Yeah. I think the way to think about that long term is that we do feel as though long term we should see low [Technical Difficulty].

I'm sorry, yes..

Yes. There should be slow, modest improvement in margin, really driven by the fact that the parts of our company that, to your point, sort of, mid to long term are growing faster than the other parts really are the higher-margin product lines.

So whether it's the minerals and choline and the human portfolio that certainly bear higher margins than the food ingredient pieces, they're growing faster than the food ingredient pieces.

The rumen-protected products within our Animal Nutrition & Health portfolio come with higher margins and are going to be growing at a higher growth rate than the others. Specialty Products, really the growth rate is more modest there, but where we do have higher growth is in the plant nutrition business and that has very high margin profile.

So I think that specifically your question is around longer term and I think that, that's a fair way to look at the margin profile of the company. Obviously, we're going to see some quarter-to-quarter and short-term issues. Obviously, we saw about a 100 basis point impact in our margin in Q4 from higher raw materials.

And we believe that, that will come back at some point in time, of course. And we're facing this monogastric issue, particularly in Europe, that's causing some margin compression. So we're going to have some things like that.

But if you're talking long term, we should have some margin expansion opportunity in the business given those pieces that are growing faster than others..

Great. Thank you.

And then just lastly, I don't think you broke out organic versus inorganic, but if you could -- could you do that for Q4? But either way, and if not, could you just address what kind of -- what you're planning as far as acquisitions in 2019 and beyond?.

So on the organic versus inorganic growth, really you can assume that the growth in Q4 was all organic. Any significant benefit from IFP, certainly, was behind us since we bought them in mid year of 2017. And as we stated, the overall impact of Bioscreen was fairly minor.

So I think it's safe to assume that the majority of the growth in Q4 was clearly organic. And as far as the pipeline, really all I can say is that we do feel as though there are opportunities out there despite the lofty multiples that we have seen.

And we're working really hard to find opportunities that strengthen our existing positions, provide geographic expansion opportunities and provide new growth opportunities. But you won't see, sort of, far-flung acquisitions. We're not really looking for a fourth or fifth leg to our stool.

You're going to see us focus on building out our existing businesses, maybe adding a new technology to our portfolio of existing products to offer to similar customers, those kinds of things. And as I said, we do see opportunities like that out there..

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Harris for any final comments..

Thank you very much, and I just want to say thank you all for joining our call today. We're really pleased with the 2018 results and are now fully focused on driving our growth initiatives forward in 2019 and maneuvering through the macroeconomic challenges that we do face.

Just like to let you all know that Martin and I'll be in Boston on March 12 with Sidoti on a non-deal roadshow and at the Seaport Global Annual Transports and Industrials Conference on March 21 at the Biltmore in Miami. And also we'll be presenting at the BMO Capital Markets Annual Farm to Market Conference in New York City on May 15 and 16.

So hope to see at least some of you at one of those events. And if not, I appreciate again listening in on the call and look forward to talking to you next quarter. Thanks..

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