Greetings, and welcome to the Balchem fourth quarter 2015 earnings conference call. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. 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 31st, 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 council 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 rules, 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 were 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 system sales, more than offsetting the positive impact on flavor 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 of particular note, the first production run delivered in-spec product. This 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 while 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 III 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 mid-year 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 led 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 rumen-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-time 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 Products sales decreased $21.3 million, or 73%, from the prior year comparable quarter, primarily due to significantly reduced 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 of 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 over 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 $19 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 31st, 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 at December 31. Our net debt at December 31 was $213 million. The company's effective tax rate for the three months ended December 31st, 2015, and 2014 was 24.1% and 24.5% respectively. This decrease in the effective tax rate was primarily attributable to a more favorable research and development tax credit, beneficial state tax rate changes, utilization of state tax credits, and a change in the apportionment related 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 continued to strengthen, and our cash flow remains strong as we generated $25 million in cash from operation 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 our 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 nutrition 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. We're already seeing some evidence of this in just the first few weeks. 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 creates some leverage opportunities, particularly with our specialty product segment and our fumigation and pasteurization technologies.
Four, Albion's leading amino 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 quarter. Flavor 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 a 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 strengthened 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 expenses. We are pleased with the fourth quarter SensoryEffects results, especially when considering previously mentioned top-line challenges, in part driven by our efforts to cull lower margin business and certain customer softness in their market space, particularly the single-serve coffee and specialty beverage market. This segment has continued to see margin expansion as we realize improved efficiencies, manage supply chain costs, and improve the value proposition of our product portfolio. The opportunities presented by our pipeline and the aforementioned agglomeration, PureMark, RDI and EFSA first-ever intake recommendations, along with the Albion 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 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 8.8%, sequentially from the third quarter 2015. The decline from the prior 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 nutritional ingredients in 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 market and gain market share, and develop new and novel products to satisfy global market demands. A&H 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 Products 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 at 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 year 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 continued to incur additional expenses pursuing other new end market applications. In the Industrial Products Segment, sales declined 73% from the prior comparable quarter as volumes sold of 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. 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 the 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 Products 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 the solid earnings result as we realized overall improved margins due largely to an improved product mix, lower raw material costs, and a focus on management of base costs. Cash flow remained strong, and during the quarter, we generated $25 million in cash flow from operations. Both our SensoryEffects and Specialty Products segments reported record fourth quarter earnings, and Specialty Products delivered an all-time record quarter.
The Animal Nutrition and Health segment's volume growth was encouraging in a difficult dairy economic environment, and we are very pleased with the continued strength in our ReaShure brand as we further penetrate the market with our leading rumen-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 drive 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. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. 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 four aspects on the rationale for the acquisition. I'm guessing that the lowest hanging fruit on the revenue synergy side is the breadth of offerings, so sales of minerals to existing customers. Is there a way, a framework, that you're thinking about the potential size of the revenue synergies there?
Yeah, Mike, thanks for the question. You're right, that really is the low-hanging fruit. We have some, I think, low-hanging fruit from a cost synergy perspective as well. 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. We definitely see the broader portfolio selling to that now broader customer base as low-hanging fruit. We're targeting a kind of relatively modest percentage of Albion sales for synergistic sales. I think you could think about five percentage points of increased sales based on sales synergies associated with the combination of the portfolios.
Okay. That's helpful. Keeping with SensoryEffects, excluding FX, what was the organic growth in 4Q? Then I guess maybe as an underlying question there about which categories. You had expounded on a few in your prepared remarks, but I think the year-over-year comp in organic growth would be helpful.
Right. 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 in SensoryEffects, again, going back to the culling activities and as well as some of the issues that we had in the specialty beverage segment, particularly at one single-serve customer. We were down about 7% in the first half of the year, the second half of the year, we were about flat with Q3 being up a little bit and Q4 being down. 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.
We see going forward in Q1 of 2016 and the first half to 2016, I think we'll start to see some positive growth year-over-year, that will only increase as the year goes on with the kind of getting some of that year-over-year comparable relative to culling and the one customer behind us as well as agglomeration and some of our other growth initiatives now part of our sales going forward.
Yeah, 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. I'm just curious about what you think about as a good organic growth target for 2016, I guess particularly for the ruminant animals with ReaShure continuing its penetration, we've got continued challenging dynamics internationally.
You're certainly right about that, we're 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. 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, 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. 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.
Morning, guys.
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?
Yeah. Did you have the EBITDA for each section?
Bill, do you have
Francesco, 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. It'll be in the Q in the 10-K as well, right?
We don't report EBITDA in the 10-K.
Okay.
It's a non-GAAP measure, and we don't show non-GAAP measures in our 10-K. We're really only showing non-GAAP measures in our press release.
Okay. Quickly on the industrial products 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?
Yeah, I think you're absolutely right. It's a combination of volume and pricing, with volume being the mass majority for sure. That's been the bigger impact. Pricing, it 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 rig count 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 of 488. I think the prediction is it's going to go there. 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. I think that to your point, we're more likely to see volume decline than further price decline at this point.
You cited the de-stocking 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 some of the 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. 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. 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 of that one customer. We highlighted it just because it was highly unusual compared to historical practices with that one customer and that one SKU.
I think you mentioned something about a favorable product mix shift occurring in the specialty products. Given that you sell EO, DAS, and POs in there as well, right?
Yes.
What type of mix shift could we be seeing that drove margins up?
There is really two kinds of mix. One would just simply be customer mix, and one is indeed product mix, and our margins are different depending whether it is EO or PO. Also some of the containers or SKUs have different margins. There can be mix within product, and PO generally is a little bit lower of a margin than EO. As I said, some different container sizes have different margins. 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 of 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 does not really seem like there is going to be anything that makes or breaks Balchem. I do not 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 do not know, is it educate consumers? Is it apply for federal grants? What exactly is the ramp-up?
I know speaking with Bill in the past, this is not exactly like when vitamin D or something was included on an RDI. It is choline, and there might be Some consumer education that needs to happen. I am guessing just over the next couple of weeks, how will that conversation take shape? Because I would have thought it might have already have occurred.
Yeah
with management over at Balchem. 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, essential nutrient than choline. We have some certainly explaining to do. 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. What it does is it lends a whole lot of credibility to what we've been marketing to the marketplace over the years.
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. We see this being a very, 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. There are a couple of years for companies really to 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. We're already working hard with all of those companies today.
The announcement, again, whether it's March or April, really is just kind of a formality, if you will, because we're working actively in the marketplace towards something that is well known to be about to happen.
Just to, I guess, maybe add a couple of things to that question then . You said how there would be a human benefit if choline was included as an RDI. The one thing I'm starting to question is, I think for so many years growing up, you're ingrained with, if you want to have stronger bones, you drink more milk. I'm wondering if maybe choline is going to have to be repositioned against maybe this ingrained story that everyone's told when they're growing up. I understand choline also does help with milk production. Maybe does the 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.
Right. Yeah, I think your question even speaks to the fact that choline is not as well known as vitamin D. While choline and animal nutrition helps cows to produce more milk, it's really unrelated to that in the human area. It provides nutrition to aid in liver health as well as cognitive health, as well as cell structure. It has many different nutritional benefits in humans that are quite different to why it's consumed in animal health. We have obviously some educating to do there. Again, the fact that the FDA is coming out and saying that Americans are deficient. Now EFSA is coming out and saying Europeans are deficient. We all should supplement with additional choline, again, is very, very positive.
In conjunction with, as you said, our own initiatives to educate the marketplace, again, it will undoubtedly help increase the growth of a product line that we've been growing at 10% a year for quite some time in human nutrition. We already have pretty good growth. 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.
It's okay. It's good evidence there's the work we need to do.
Well, I cover the name. I wonder how many other people are going to be out there.
Yeah
Understand what the benefits could be. One of the last things from your prepared remarks were how you guys are still out there looking for acquisitions. With acquisitions, obviously, you're going to be paying up for these valuations. I know when you acquired SensoryEffects, you guys paid what? Like 10.7 times EBITDA?
Yes, something like that.
Albion was right around there, 10.5 or 10.7 times. What are you guys looking at for valuations, given that valuations in this market are rather stretched? Looking at Albion, given that the SensoryEffects deal happened 2 years ago at 10.7 times, 2 years later, we've had valuations run, but you were still able to acquire something within the same type of valuation metrics. What are you guys really seeing out there? Are there a lot of opportunities out there, but they're just expensive? Is it just a timing thing? Just a little bit of insight on that would be helpful. I'll jump back in queue.
We're 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. Yes, you're absolutely right. Assets are more expensive today than they were a year ago and 2 years ago. We do find ourselves walking away from assets that we see as being a bit too rich and with extraordinarily high multiples. Acquisitions in the 8 to 10.5, 11 times range are probably the kind of values that we're going to be looking at with the higher valuations being higher growth, stronger margin, better balance sheet, and as well as certainly, strong synergies. 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. There are assets out there at reasonable valuations.
You said, just before I jump back in queue, this, I promise, will be my last question. You said you judge it on a return on investment. I'm guessing this is something that is internal that the company measures. Could 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? 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 as having a better return on investment? Because 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.
Yeah. Obviously, Francesco, very different acquisitions. I would describe one as much more transformational-
Yeah
than the other. But 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, this is Deborah in for Robert. Thank you for taking my questions. I want to continue with the questioning regarding Albion. Just for our modeling of the segments, perhaps you could give us some guidance on how the Albion sales might be split amongst your segments.
Sure. Thanks, Deborah, for the question. Sorry, I think last time we had some issues getting to your question. I'll ask Bill to answer at least the first part of that question.
Hi, Deborah. It's likely going to be split between the SensoryEffects segment for the human side and our Specialty Products segment for the plant side. We're somewhere around probably 60% human and maybe 35% plant, there's some other little things in there also besides that. That's kind of a split of what it should be on a go-forward basis, obviously, with an intent of growing both businesses.
Okay. Very good. Thank you. It looks like their, 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? Maybe give us some guidance on what their cost situation might be and what their gross margin might be.
Yeah. Our expectations, and you're right, their adjusted EBITDA margins are probably somewhere around 20%. We obviously have expectations through some synergies to bring those margins up, hopefully, through the sales synergies also, we're going to see some growth there and some volume and some leveraging of throughput from that standpoint also, because they do have capacity. We do anticipate, and are hopeful that there'll be a margin expansion. As far as gross margins go, they're sort of in the high 40% range. That kind of gives you an indication of where they're at, which compares favorably to some of our product lines. 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. Then I'd 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. I was wondering if that was a matter of just lower spot prices that might be transitory in nature, or was that the result of some just sharp negotiating supply chain arrangements that could be more permanent in nature?
Yeah. It's a combination of both, Deborah. Raw material costs, particularly petrochemical, but really across the board, really moved down as the year progressed. We've seen continuing declines in raw material costs across the board as the year progressed and as we go into Q1 of 2016, we're seeing that similar trend. We have negotiated several, I would say, relatively significant new contracts that started more January 1st rather than Q4 that will make some of those declines more permanent in nature. It's really a combination. We've managed to, as the year progressed, leverage across SensoryEffects, more kind of permanent type cost reductions across SensoryEffects that are structural in nature. Really a combination of both, but we have to say that generally raw materials are just down in the industry and we've benefited from that.
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. In the industrial segment, you mentioned that you could see lower volumes in the quarters going forward because of the reduced rig count that seems quite persistent. Are there any buttons you can push, levers you can pull that will help to reduce your costs in that segment?
There are, unfortunately, there's no silver bullet or grand button to push. We do have two plants, two manufacturing facilities that manufacture the products that largely go into oil and gas, so we can leverage both assets. We can take extended work outages. We can make sure that we're not spending any money on overtime. We're 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.
The 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. A combination of those factors really is where we've 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 the audio portion of the conference. I would like to turn the conference back over to management for closing remarks.
Yeah, 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.