Greetings, and welcome to the Balchem Corporation Second Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host Mr. Martin Bengtsson, Chief Financial Officer. Thank you, sir. You may begin.

Thank you, Laura. Good morning, everyone. Thank you for joining our conference call this morning to discuss the results of Balchem Corporation for the quarter ending June 30, 2022. My name is Martin Bengtsson, Chief Financial Officer; and hosting this call with me is Ted Harris, our Chairman, CEO, and President. Following the advice of our counsel, auditors, and the SEC, at this time I would like to read our forward-looking statement. This release does contain or likely will contain forward-looking statements, which reflect 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, Martin. Good morning. Welcome to our conference call. This morning we reported very strong second quarter results with both strong revenue and earnings growth. Our revenues of $236.7 million were up 17% and our adjusted earnings from operations were $46.7 million, up 13.6% versus the prior year quarter. Our second quarter net income of $29.8 million, an increase of 31%, resulted in earnings per share of $0.92 on a GAAP basis. On an adjusted basis, our second quarter non-GAAP net earnings were $34.4 million, an increase of 13.3% resulting in earnings per share of $1.07 on a non-GAAP basis. Cash flows from operations were $48.2 million for the second quarter of 2022, with quarterly free cash flow of $37.8 million. Overall, a great second quarter for Balchem with performance that highlights the strength and resilience of our business model. Before passing the call back to Martin to cover the detailed financial results by segment, I would like to make a few comments about our recent acquisition of Kappa Bioscience AS, or simply Kappa. As previously announced, on June 21, Balchem acquired Kappa, a leading science-based manufacturer of specialty vitamin K2 for the human nutrition industry headquartered in Oslo, Norway. With the acquisition of Kappa, we accelerate our strategic vision of building a global health and nutrition company, strengthen our Human Nutrition & Health segment and further support our higher purpose of making the world a healthier place. Kappa is a leading science-based manufacturer of vitamin K2 for the human nutrition industry. The company was founded by two brilliant chemists, who are both still active in the company, Inger Reidun Aukrust and Marcel Sandberg. They had noticed a growing need for vitamin K2 and set out to find a new, more efficient way of producing the vitamin on a large scale with improved purity in an efficient cost position. Together they invented a new chemical synthesis that laid the foundation for what has become Kappa today. Kappa's unique technology enables them to produce a highly pure vitamin K2 with leading quality and stability that is offered into the marketplace under the brand K2VITAL. Kappa's K2 is sold either as an oil or a powder but is also available as a unique double microencapsulated product under the brand K2VITAL DELTA, which provides superior stability in formulations compared to competitive products. Vitamin K2 is a vital vitamin needed by our bodies to support bone and cardiovascular health. It controls the transport and distribution of calcium, making sure the calcium gets to wherever it is really needed. K2 is important at all life stages from pregnancy to early life to old age. It is critical for building and maintaining healthy bones and teeth and, at the same time, preventing harmful calcium deposits in soft tissues. Additionally, vitamin K2 plays a significant role in immune function and protection, serving as a synergistic partner with vitamin D3. Together, vitamin D3 and vitamin K2 strengthen the immune system and support the body's capacity to manage inflammation. We are very pleased about this acquisition and the addition of Kappa's deep scientific expertise, patent portfolio and premium branded products. There are four strategically important elements to this acquisition. One, we fundamentally believe that K2 is an important and critical specialty vitamin for Human Nutrition & Health that will see strong growth for the foreseeable future, as the science further evolves and market penetration increases. Two, Kappa's market-leading science-based vitamin K2 position expands our portfolio of products and provides us the opportunity to expand both companies' sales to a broader combined customer base. Three, the combination of Kappa's strength in Europe and Balchem's strength in North America will provide an opportunity for accelerated growth for both the legacy Balchem products as well as Kappa's K2. We are already seeing some evidence of this in just the first few weeks. And four, we believe that the combination of the scientific expertise and market-leading positions of both companies will aid in the understanding of the interconnectivity between our existing portfolio of minerals and nutrients with vitamin K2 and, subsequently, our ability to provide enhanced solutions for our customers. This strategic rationale combined with a strong margin and growth profile of the business make Kappa a very attractive addition to Balchem. We acquired 100% of Kappa for an enterprise value of approximately NOK 3.2 billion prior to net debt and working capital adjustments. That translates to approximately US$320 million, which we funded out of our existing credit facility. In addition to the purchase price, the sellers have an opportunity to receive an additional earn-out payment in 2024, ranging from 0% to 16% of the enterprise value, based on growth and other performance targets established for the 2023 calendar year. This transaction represents an enterprise value to EBITDA multiple of approximately 18 times based on the 2022 forecast EBITDA, reflecting the strong growth trajectory we expect over the coming years. Kappa's forecast 2022 revenues are approximately US$50 million, with a strong growth and margin profile accretive to Balchem's overall profile. Kappa has a strong position in a rapidly expanding market, where vitamin K2 is expected to be one of the fastest growing vitamins over the next five years. The vitamin K2 market has been growing at rates exceeding 30% over the last few years and has now reached an approximate market size of $175 million in 2022. While we expect the growth percentages to moderate somewhat as the market gets larger, we still expect the K2 market to grow at rates exceeding 15%, compounded annual growth rates over the next five years. The transaction is expected to be accretive to Balchem's earnings per share in 2022 on an adjusted basis and accretive on a GAAP basis in 2024. I want to take this opportunity to give a warm welcome to Kappa's 75 plus employees into the Balchem family. The Kappa team is strong, experienced and committed. They know and understand the vitamin K2 market and have made the K2VITAL brand the most recognized and well-regarded brand in the vitamin K2 market through their commitment to quality, science, and transparent communication. We are very excited about what we can achieve together and the opportunities that lie ahead. And with that, I will now turn the call back over to Martin, to go through the detailed financial results for each of our segments.

Thank you, Ted. As Ted mentioned overall, we delivered strong financial results in the second quarter. Our second quarter net sales of $236.7 million were 17% higher than the prior year. We delivered sales growth in all three segments: Human Nutrition & Health, Animal Nutrition & Health, and Specialty Products. We drove strong pricing performance across the portfolio recovering the continued inflationary increases that we're seeing across our manufacturing and distribution input costs. Our volumes were mixed across the portfolio, with volume growth in our human food ingredients, minerals and nutrients businesses, as well as our monogastric animal nutrition business, while we saw volume declines in our ruminant portfolio and our specialty products portfolio. The impact from foreign currency exchange, driven primarily by the weaker euro, had a negative impact on our sales growth of approximately 1.6%. Our second quarter consolidated gross margin dollars of $71.9 million were up $12.4 million, or 20.9% compared to the prior year. Our gross margin percent was 30.4% of sales in the quarter, up 99 basis points compared to 29.4% in the second quarter of 2021. Input cost inflation continues to be significant, and it's hard to predict at this time how this will evolve over the next few quarters. We've been fairly successful so far in raising average selling prices to help offset the inflationary pressures, but it continues to have a dilutive impact on margins. We're also starting to see some demand destruction in certain areas resulting from the increased prices. Consolidated operating expenses for the second quarter were $32 million, as compared to $28.9 million in the prior year. The increase was primarily due to higher compensation-related costs and higher advertising and marketing expenses. GAAP earnings from operations for the second quarter were $39.9 million, an increase of $9.3 million, or 30.5% compared to the prior year quarter. On an adjusted basis, as detailed in the earnings release this morning, non-GAAP earnings from operations of $46.7 million were up $5.6 million, or 13.6% compared to the prior year quarter. Adjusted EBITDA of $56.5 million was $6.3 million, or 12.6% above the second quarter of 2021. Interest expense for the second quarter of 2022 was $1 million, and our net debt was $357.4 million, with an overall leverage ratio on a net debt basis of 1.8. The company's effective tax rates for the second quarters of 2022 and 2021 were 24.1% and 24.3%, respectively, with no significant change year-over-year as various items largely offset each other. Consolidated net income closed the quarter at $29.8 million, up 31% from the prior year quarter. This quarterly net income translated into diluted net earnings per share of $0.92, an increase of $0.22 or 32.4% from last year's comparable quarter. On an adjusted basis, our second quarter adjusted net earnings were $34.4 million, or $1.07 per diluted share, up 13.3% compared with the prior year quarter. Cash flows from operations were $48.2 million, and we closed out the quarter with $76.2 million of cash on the balance sheet. As we look at it from a segment perspective, for the quarter our Human Nutrition & Health segment generated record quarterly sales of $131.6 million, an increase of 18.1% from the prior year. The increase was driven both by sales growth within food and beverage markets as well as higher sales within the minerals and nutrients business. Our Human Nutrition & Health segment also delivered record quarterly earnings from operations of $23.7 million, an increase of 24.6% compared to the prior year, primarily due to the aforementioned higher sales, higher average selling prices, and the timing of costs associated with the recovery from a flash flood event in the prior year, partially offset by higher manufacturing input costs and distribution costs. Excluding the effect of non-cash expense associated with amortization of intangible assets of $4 million, and excluding the prior year expenses related to the flash flood event, the second quarter adjusted earnings from operations for this segment were $27.7 million, an increase of 9.2%. Our Animal Nutrition & Health segment generated quarterly sales of $62.6 million, an increase of 14.9% compared to the prior year. The increase in sales was a result of higher sales in monogastric and companion animal markets, partially offset by lower sales in ruminant animal markets and an unfavorable impact related to changes in foreign currency exchange rates. We're currently seeing a mixed demand picture in our Animal Nutrition & Health business. In the US, we continue to see solid demand for our monogastric business as well as our companion animal business, while we see weaker demand on the ruminant side with dairy farmers struggling with profitability in this inflationary environment. In Europe, we've seen a slowdown in both monogastric and ruminant markets, as the inflationary environment and geopolitical tension in the region have generated a very volatile demand situation and some customer destocking actions in the quarter. Animal Nutrition & Health delivered earnings from operations of $7.6 million, an increase of 113% from the prior year quarter, primarily due to the aforementioned higher sales, higher average selling prices, and the timing of costs associated with the recovery from a flash flood event in the prior year, partially offset by increases in manufacturing input costs and distribution costs. Excluding the effect of non-cash expense associated with amortization of intangible assets of $0.1 million, and excluding the prior year expenses related to the flash flood event, the second quarter adjusted earnings from operations for this segment were $7.7 million, an increase of 49.7%. Our Specialty Products segment delivered record quarterly sales of $36.6 million, an increase of 7.7% compared to the prior year quarter due to higher sales of products in the medical device sterilization market, partially offset by lower plant nutrition sales, and an unfavorable impact related to changes in foreign currency exchange rates. Volumes into the medical device sterilization market increased sequentially for the third consecutive quarter but were slightly below prior year volumes. However, it's encouraging to see the gradual recovery in this business that was negatively impacted by the pandemic. Specialty Products delivered earnings from operations of $9.9 million, an increase of 2% versus the prior quarter. The increase was primarily due to the aforementioned higher sales, partially offset by increases in manufacturing input costs and distribution costs. Excluding the effect of non-cash expense associated with amortization of intangible assets of $1.1 million, and excluding the prior year expenses related to the flash flood event, the second quarter adjusted earnings from operations for this segment were $11 million, a decrease of 1.8%. Lastly, before turning the call back to Ted for closing remarks, I would like to share that on July 27, 2022, we entered into a new credit agreement with lenders in the form of a senior secured revolving credit facility due July 2027. This new revolving credit agreement allows for up to $550 million of borrowing and replaces the existing $500 million revolving credit facility from June 2023. Having this facility in place for the upcoming five years provides us with great flexibility to support the growth that lies ahead. I'm now going to turn the call back over to Ted for some closing remarks.

Thanks, Martin. We are extremely pleased with Balchem's financial results reported earlier this morning and the strong second quarter of 2022. We delivered all-time record revenues with revenue growth in all three of our business segments and record adjusted earnings in what continues to be a very difficult market environment. We are also extremely pleased with the acquisition of Kappa and are excited to have the Kappa team join the Balchem team. Together, I know we will find new ways to make the world a healthier place. Despite continued disruptions within global supply chains, the extreme inflationary environment we are facing, and the broad market uncertainties, we remain cautiously optimistic about the remainder of the year given the strength of our market positions and the resilience of our business model. The Balchem team continues to do a fantastic job of finding creative solutions to challenges never seen before. I would like to once again take this opportunity to thank all of our employees for the incredible work they do for our company, our customers, and our key stakeholders. I would now like to hand the call back over to Martin, who will open up the call for questions.

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

At this time, we will be conducting a question-and-answer session. Our first question comes from the line of Bob Labick with CJS Securities. You may proceed with your question.

Good morning and congratulations on another strong quarter and on the Kappa acquisition.

Thanks a lot, Bob.

Absolutely. Yes. No, it's very exciting. So maybe starting there, could you tell us more about the drivers of growth for vitamin K2 and maybe how it's similar or different from the choline growth opportunity and maybe where they sell into versus choline and potential sales synergies going forward?

Yes. So, again, thanks for your comments. We really are excited about the addition of Kappa to Balchem. The drivers of growth really are around the science behind vitamin K2. It's clearly an essential vitamin needed by our bodies for support of bone health and cardiovascular health with an aging population. These important factors become increasingly important. So, I mean, that's an important driver in itself. It's just the overall aging population. But another important driver is just increased science and knowledge around the effectiveness of K2 and the importance of K2. I also talked about in the prepared remarks the synergy between K2 and vitamin D3. As the world becomes more aware and focused on immunity and building immune systems, vitamin K2 plays a really important role relative to building immunity, particularly given its synergistic effects with vitamin D3. I would say those are two really important overall drivers of growth: one is the aging population; and number two is the kind of awareness around immunity and the desire for people to continue to focus on building their immune systems. I guess thirdly, just the overall science behind K2 is evolving, which I think is a key driver. All of that touches on some of the obvious synergies, and we're really excited to take K2 and include that in our portfolio to bring to our existing customers. Similarly, Kappa has access to customers that we haven't necessarily penetrated over the years and we're really excited about the Kappa leads and relationships and so forth to bring our mineral and choline technology. We don't feel like there are a lot of cost synergies necessarily even from a procurement perspective; the raw materials are very, very different from ours. I'm sure we will find some cost synergies as we go, but it's really more about market synergies and those synergies I described.

Okay. Great. That's really helpful. And can you talk about the choline market size right now relative to K2? What does it take to get to that higher level and then beyond for choline?

Yeah. So when you look at choline, the one big difference about choline is that choline also has a role in animal nutrition that is very, very significant today. We think of the choline market probably as being about $500 million from an overall market size for choline. The human choline market is far less than that; it's probably more like $50 million. K2 today is primarily a human nutrition vitamin. We do think that there may be some elements in animal nutrition that may make a lot of sense, but that's really not part of the opportunity today. So that hopefully gives you kind of a size comparison.

Okay. Great. I'll ask one more and then I'll jump back in the queue, changing subjects a bit. Over the last several quarters, you've had to raise your prices due to rising raw material costs. You noted some modest demand destruction for the first time. Could you share what you've learned about the price elasticity curve? Given your leadership position in many areas, how do you anticipate prices will behave if raw material costs eventually decrease?

It's a complicated but really good question Bob. We're really pleased with the market positions that we have that have allowed us by and large to raise prices and recover the majority of our input costs. We're still behind. And we still see margin degradation. So we have a ways to go. We're continuing to raise prices selectively. We're raising prices August 1 in certain areas. So we're behind, but we believe that we have the market positions and the ability to offset the cost increases. I wouldn't say that anywhere we've recognized that we were under-pricing and we were doing a poor job of pricing in the past, but I think what we have substantiated is that we are bringing differentiated products to market. We do have strong market positions, and that we have been by and large able to raise prices. Why we're behind is typically because of a contractual agreement that forces us to be behind because we have a quarter lag based into our contracts. It will obviously be very interesting to see how the market evolves. As raw materials do flatten out, there's no question there will be some price increases that we may give back to our customers. We expect to see some margin expansion as we get ahead of that on the way down.

Got it. Super. Okay. Thank you. I'll hop back in queue. Thanks.

Thanks.

Our next question comes from the line of Ram Selvaraju with H.C. Wainwright. You may proceed with your question.

Hi. Thanks very much for taking my question. I wanted to ask you a little bit about the broader long-term strategy in human health and nutrition based on not only the Kappa acquisition but also what you're seeing as emerging trends in the space that you expect Balchem to be particularly advantageously positioned to capitalize upon.

Again, thanks for your questions Ram. The Kappa acquisition is right there in the middle of the bull's eye relative to the margin profile, relative to the specialty nature of it, relative to the strength of the brand, relative to the science behind it. It is an essential nutrient that adds to our health and nutrition focus. So, I do think that it's quite clear in the bull's eye of what we want to do. There are plenty of those kinds of nutrients on the animal side that are also in the middle of the bull's eye. We continue to have a pipeline of various acquisitions in it and investments in technology that may include medical foods and broader food ingredients. So, we are looking at a broad array of acquisitions to strengthen our company as a whole, but this is firmly in our focus.

Just to clarify, when do you expect the principal patents from Kappa to expire?

When you have a multitude of patents, we have some that expire in 2036, some in 2029, and kind of through that time frame. We feel good about the length of patent protection. There's a lot of trade secret proprietary information as well. There's work that's been done recently to optimize the synthetic path that has been very deliberately decided not to patent that will give protection for many years to come.

Okay. And then just a very quick question for Martin on the debt side. I understand that you did acquire some debts in the conjunction of the Kappa acquisition transaction. I just wanted to see if you could give us a quick snapshot of the current debt picture overall and if you're looking to restructure or refinance any of the Kappa debt or if you feel that it's okay to go forward servicing it as usual.

In terms of the debt that Kappa carried at the time we acquired them, it was in round numbers about $30 million, which we paid down at closing. So Kappa no longer has any debt in the Kappa entities. Obviously, we increased our debt as we funded the transaction. If you look at Balchem's overall balance sheet right now, it will show about $430 million or so of outstanding debt, which is just part of our normal revolving credit facility. We feel that we're in a good position there. Our expectation is that we'll pay that down pretty quickly. We follow what used to be the LIBOR, it's now the SOFR plus a margin spread on the debt we carry.

And just lastly, on the currency markets picture. Can you just comment a little bit on what you expect continued strength in the US dollar to mean for your ongoing businesses?

From the currency perspective, the strong dollar obviously has a translationary impact on our European business. However, it has a lesser impact as we do a lot of our sourcing and sales locally for our regional businesses. So it shouldn't change things too much.

All of the competitive products are either made in Europe or in Asia. Therefore, we don't really see this arbitrage opportunity significantly impacting Kappa.

Our next question comes from the line of Mitra Ramgopal with Sidoti. You may proceed with your question.

Yes. Good morning. Thanks for taking questions. First, I know we're only a month into the third quarter, but maybe you can give us a sense of what you're seeing on the manufacturing input and distribution costs relative to 2Q and maybe your expectations for the rest of the year on that front?

From an inflationary and input cost perspective, it has continued on an upward trend. As we look back, it has continued to tick up a little bit every month as we've gone through the year. It would be hard for me to sit here and say that it has plateaued and started to significantly decrease. Some raw materials have turned around, but overall, it's unfortunately still pointing upwards.

Okay. No, that's very helpful. Thanks. And Ted, I know you had highlighted there are a couple of areas that were a little soft in terms of the lower ruminant sales and also on plant nutrition. Just curious in terms of your expectations for the remainder of the year and longer-term outlook there?

Yes. I mean clearly the ruminant has been a little bit softer. We've seen that on some of the previous calls. Dairy farmers struggle with profitability in this inflationary environment. In terms of other businesses, many of them are still doing very well with strong demand and strong order books here as we go forward. We're obviously very cautious as we keep seeing higher costs, and we've been pricing up. The order books are looking pretty healthy at the moment.

Okay. No, that's great. And then just coming back to the Kappa acquisition. I was just curious if you need to hire additional personnel in terms of sales, etc. to support the growth there, or is just that something you can immediately leverage given your existing workforce?

The simple answer to that is, no, not really. We are hopeful that the entire Kappa team remains as part of Balchem and engaged. Kappa was growing really rapidly. We will be hiring - you mentioned salespeople - as part of the existing Kappa plan, and we will be executing on that and adding people as Kappa intended. There will clearly be some synergies, but at this point in time, we don't see the need to augment that.

Okay. Thanks. And then just finally on Kappa again. I think, Ted you had mentioned $175 million market potential numbers. Is that the U.S. now for the U.S. or is that global?

That's our estimate for the global market of K2. We believe that Kappa had approximately a 30% market share of the global market.

Okay. Thanks for clearing that up. And again, congrats on a really nice quarter given the environment.

Thanks, Mitra.

Our last question comes from the line of Tony Polak with Aegis. You may proceed with your question. Ladies and gentlemen, we have reached the end of today's question-and-answer session. I'd like to turn this call back over to Mr. Ted Harris for closing comments.

Not sure what happened to Tony there. But Tony, if you'd like to talk, give us a call; we're happy to answer any questions you might have. So once again, thank you very much for joining our call today. We really appreciate your support as well as your time. We look forward to reporting our Q3 2022 results in late October or early November. In the meantime, we will be presenting in a few conferences the Sidoti Fall Conference on September 21 and 22, and the Baird Global Industrial Conference on November 8, 9, and 10 in Chicago. So we hope to see some of you there. And in the meantime, thanks again for joining today and have a great day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.