Balchem Corporation (BCPC) Earnings Call Transcript & Summary

My name is Ram Selvaraju. I'm the Managing Director and Senior Healthcare Equity Research Analyst here with the firm. It's my pleasure to be joined here today by members of Balchem Corporation's management team. Balchem Corporation, ticker symbol, BCPC, is traded on the NASDAQ. We cover the company with a buy rating at 12-month price target of $145. Stock is currently trading in the low $120 per share range. I'm joined today by Ted Harris, Chief Executive Officer; and Martin Bengtsson, Chief Financial Officer. Gentleman, it's a pleasure to have you with us.

Thanks for having us, Ram. We're looking forward to it.

So I wanted to start off by giving our audience a very brief overview of Balchem and why we felt it to be an interesting company to follow. It's somewhat of an unusual beast within our coverage universe. I think many in our audience know me as a coverer of biotech companies, and Balchem is not a biotech company. But I think what impressed me about Balchem initially, I think I've been acquainted with the company for roughly 7, 8 years now, was that several investors had originally told me about it, indicated to me that it had a very lengthy track record of steady, sustained growth and operational performance excellence, and indicated to be how durable its businesses were, but also that they represented good opportunity for growth. So I took a closer look at the company, eventually decided a couple of years ago to begin following it formally. And I think we've all been very pleased with the performance of the company during that time span. But I think, in particular, I want to highlight 2 things. First of all, the diversification inherent with the company's businesses. I understand that the company focuses primarily on the Nutrition & Health spaces, both within human and animal as well as within the domains of Specialty Products and Industrial Products, and does a great deal of work primarily with an ingredient known as choline, which Ted, I believe you're going to elaborate on as we get into some questions here. But really, this allows the company to do a lot within select several areas where it is, in many ways, a recognized brand leader, recognized provider of quality products and certainly doesn't do anything like what I typically see with development-stage biotechs. Clearly, it's a very established company with a lengthy track record of revenue and earnings growth, pays a dividend, which I don't think any of the other companies I covered actually can say. So it's very different from what my group typically focuses on. But I think the main thing I also want to highlight here is how well the company has performed over the course of the COVID-19 pandemic. While many other companies have struggled to address, negotiate their way through the new business realities of multiple economic shutdowns, concerns over the pandemic and so forth. Balchem, I think, has demonstrated a remarkable degree of resilience and indeed, has, in fact, driven over the course of this time frame. And I also feel has certain aspects within its businesses that may actually benefit from long-term health concerns among the public that relates specifically to the pandemic. So with that introduction, I thought that I would hand it over to Ted to kind of give a brief overview of his time at Balchem, some of the most notable achievements of the company, particularly culminating in very impressive 2020 financial results report that was issued only some days ago, and maybe give a brief description of what he feels lies ahead for the company. I also want to point out one other thing. The one biotech like aspect of the company, which I think often goes overlooked is the fact that they have a partnership with a company called CureMark on a potential drug to treat autism. I don't think that this is something that Balchem management themselves talk a great deal about. But certainly, it's one potentially exciting future aspect and driver of potential upside that may well turn out to be a significant contributor of value to shareholders. Ted, please take it away.

Thanks so much, Ram. And that's a great introduction, and I appreciate all those kind words about our company. And I think you have described the company well. It is a unique company that has consistently driven strong results. We're about 52 years old. We went public in the very, very early stages of our existence. I think we had about $1 million of revenue when we went public. It was the entrepreneurs that started the company. Felt like they'd made it if they went public. And so everything we've done has really been as a public company in the public's eye. And with that 50-plus-year history, we're really proud of the company that we have become over those years. And you specifically, sort of, talked about the evolution of the company since I joined. I joined the company about 6 years ago after -- and it's hard for me to believe. But 35 years or so, in the specialty ingredients, specialty chemicals space. And when I joined Balchem, we really did describe ourselves as a diversified mini conglomerate. We had, at that point, a fairly sizable industrial business. We had our sterilization business. And then we had a Food & Animal Nutrition business and Human Nutrition business. And we were fairly diversified. And I think it was an accurate description of the company being a diversified mini conglomerate. I think in the last 6 years, partly very deliberately on our part, but partly because that oil and gas business largely went away, we have become a much more focused health and nutrition company. Our oil and gas business, again, partly because fracking has reduced partly because there's been some cost controls that have eliminated one of our solutions, for clay stabilization. Partly also because of the acquisitions that we've made over that time. We really have become a very focused health and nutrition company. We even will say that 98% of our revenue is health and nutrition related. And we think that that's a really good place to be. We really like the markets that we're in. We have very strong positions in the markets that we're in. And we believe that the health of those markets and the strength of our position will allow for significant growth into the future. But you also described one of our strengths as still having diversification in it. And so while I said that we're more focused than we once were, within health and nutrition, there is plenty of diversification within our company that indeed has allowed us not only to survive and thrive the pandemic, but also react very well in past recessionary environments and difficult macro economic times. Fundamentally, the health and nutrition markets that we serve are markets that aren't overly affected by recessionary environments or other type macroeconomic challenges. People tend to continue to buy infant formula for their children, which is a very important market for us. They tend to buy poultry and pork products. That is a very important market for us where we sell our nutrients and minerals for the health of those animals. They tend to continue to drink milk, where we sell some very highly technical products that provide nutrition to dairy cows. And that continues to grow. And then the food platform, the more typical food platform, also is really focused on products that people continue to consume through difficult times. So I do think we really do have a company that is resilient from a business model perspective, market-focused perspective. But the pandemic certainly was something that we had never seen. None of us have ever experienced before. And I'm really proud also of the resilience of the Balchem team through all of this. And I know a lot of companies probably say that. But it's been a tremendous amount of work, just keeping our employees healthy, keeping our factories operating, keeping our shifts staffed so that we can continue to manufacture the products that we do. And that's been just an incredible herculean task for the company. So I'm also very proud of the resilience of the team along with the resilience of the business model. And indeed, we did post record revenues and EBITDA for Q4 and certainly for the year as well. And so we're very proud of that. There are parts of our company that clearly benefited from the pandemic, and there are parts of our company that were clearly negatively impacted by the pandemic. And as we look at all of those puts and takes, as we call them, we would say we -- they even themselves out, generally speaking, and the results that we delivered in 2020 and in Q4 were effectively normalized by the puts and takes, and we think are sustainable. But specifically talking about some of those puts and takes on the positive side, our minerals and nutrients for human nutrition clearly benefited. There's no question that people are more focused on their personal nutrition. We sell a very high end, what we call, chelated minerals, which are effectively minerals that have high absorption, high bioavailability. And there are certainly some minerals that are thought to be immunity boosting minerals such as zinc, selenium, iron. And those products all sold incredibly well for us and clearly benefited from the pandemic. We sell some food products into companies like Keurig Dr Pepper that make the Keurig K-Cup products. And while we don't make any coffee-related products, we make the non-coffee systems that are in K-Cup, so like chai tea or apple cider or hot chocolate. And that business has boomed with people not going out to Starbucks every morning, but making their own cup of coffee, and we benefited from that. I think people working from home are feeding their pets more. Our pet food business benefited from the pandemic. But we also had some significant negatives, too. Our sterilization business was very much negatively impacted because of lower numbers of elective surgeries that impacted our business quite significantly, and that's actually one of our most profitable businesses. So that hurt. And we have quite a bit of our food business tied to food service-related products. And everything tied to food service was negatively impacted. We did pay extra bonuses to our factory workers, our front-line workers, as we call them, and that had some impact. So you can see, as I go through all of that, there are clearly some puts and takes that were very logical, make a lot of sense. And -- but when you kind of wrap it all together, given the diversity that we still have in our more focused company on health and nutrition, we were able to thrive through this pandemic. And I think as you said, and I know some of your questions will hit on this, I think, some of that will indeed be sustained. I know I've kind of gone on for a little bit, but I also wanted to just talk a bit about the notable successes that you mentioned in your opening that I would highlight over the last 6 years. I think one, I've already talked about, is that focusing of our strategy on health and nutrition. And that's been very important both externally for obvious reasons but also internally. I think we know who we're not. We know where we're not going to spend resources, where we're not going to spend M&A activity. We're much more focused as a company on health and nutrition. And I think that's a notable accomplishment. I think some of the acquisitions that we've made over the last 6 years have been quite notable. I think, in particular, I would point to our acquisition of Albion Minerals that allowed us to -- we were already a chelated mineral manufacturer for animal nutrition, but we bought the premier brand for human nutrition, and it really expanded our portfolio of nutrient solutions for our customers. And we're no longer just talking about choline, which is an essential nutrient, used to be called vitamin B4, has lots of opportunity, lots of growth potential. But we're now also talking about magnesium and selenium and zinc and iron, and those nutrients are also needed in infant formula and in nutritional beverages and in supplements and in prenatal vitamins and so forth. So we have gone from, and this is maybe too negative, a one-trick pony to a company that really has a nice portfolio. I wouldn't call it necessarily broad, but it's a nice portfolio of solutions that we can talk about. And then another M&A that's worth noting is we acquired a company in Europe called Chemogas that really grew our sterilization business, which was almost singularly focused on the United States and made it much more of a global business. And I think that strengthened our strategic position, that allowed us to service our customers on a global basis. We're able to drive some synergies and also, I think, protected our franchise from others who might have been seeking entry from outside. So I think that was a very important and noteworthy accomplishment as well along the last 5 years or so. So maybe I'll stop there and see where you'd like to take us, Ram.

Sure. I think at this juncture, given Balchem's focus on the Nutrition & Health space, it probably behooves us to go there first. So you mentioned within the chelated minerals space that some of these products are seeing healthy upticks in growth because of pandemic-related concerns over immune system function and the desire for immunity boosting products. So I was wondering whether you could elaborate on that a little bit further and maybe point us to specific elements of the Balchem product lineup within chelated minerals that you're seeing particularly elevated customer interest in? I mean the obvious one that comes to mind is zinc. But any others that you think are particularly notable here?

Yes. I mean, I think most people have heard through the pandemic vitamin D3, zinc and maybe even Elderberry. And of course, we're not sellers of herbal extracts like Elderberry, where we don't make vitamin D3. But zinc, we are an important player in. And we did have months where our zinc sales were up 200%, 300% through the pandemic. So zinc was really 1 of the big 3 that has been recommended relative to immunity boosting. But in the mineral space, selenium is also thought to have immunity boosting properties as well as iron. And we feel as though those products, zinc, selenium, iron are really in our sweet spot. And maybe it's worth just stepping back for 1 second and talking about what is -- what are chelated minerals? What is chelation? And really all that is, as you would think, a metal is an inorganic material that the body has a hard time absorbing. And so what we do is we take that inorganic mineral and put it in an organic molecule that the body can better absorb. And we put it in an amino acid that the body knows and absorbs well. And that's what we do. And that's what we do very well. And for example, on zinc, we have studies that show the bioavailability of our zinc to be very, very high relative to competitive products out on the market. Iron as well. Iron is a market-leading product that really has very strong bioavailability. And so we do think we have strength in this, market dynamic in that. We make these minerals that are immunity boosting, but also that our products have higher bioavailability, which -- and the chelation process also helps reduce interference that you oftentimes hear about taking this product with that product and an interfering with one another. But when you chelate them, that helps reduce that interference. So that's also another benefit from our strong chelation process. So we think that this has been a good trend for us. It's been obvious in our results, and we have a good position to -- in the marketplace to meet that trend.

Yes. So I think for our audiences benefit, those of you who are not as familiar with Balchem's finances, I think that the Human Nutrition & Health business contributed about $400 million to Balchem's over $700 million revenue base in 2020. First of all, I think it's important to note the degree to which Human Nutrition & Health has become the major contributor to Balchem's revenue mix. I think it's also important now to emphasize and maybe give our audience a bit more color on. The fact that Balchem's chelated mineral products are just an example of the ways in which effectively the positioning of Balchem within Human Nutrition & Health is very pervasive. There's a lot of ways in which what Balchem does can effectively find its way to the end user, the end customer. So I was wondering if you could maybe describe that a little bit more to us? Who are Balchem's end customers? How do Balchem's chelated minerals make their way to the end consumer? And how does Balchem anticipate its relationships with those customers evolving over time so that maybe as Balchem's footprint only continues to grow in the Human Nutrition & Health space, Balchem winds up capturing more of the value chain there?

Right. So you're absolutely right. And I think taking a look at our customer base is a good way to look at our business as a whole. But within Human Nutrition & Health, we have 4 or 5 business areas that I think have distinctly different customers. One that we've been talking mostly about today really is our minerals and nutrients business. And so there our large customers are infant formula manufacturers. So companies like Mead Johnson, Abbott, Danone, Nestlé, for their infant formula businesses. And we, again, largely sell choline into that market, but hope to sell more minerals. We also, in that business, sell a significant amount of products to supplement manufacturers. It could be a multivitamin manufacturer. It could be a single supplement. It could be prenatal vitamin manufacturers. Doctor's Best is a very important customer of ours. They're one of the largest Internet brands on Amazon for supplements. Solgar, Pharmavite, SmartyPants, kind of some fun names there. Ritual, NEED, these are all companies that make prenatal vitamins, multivitamins and so forth. Those are the companies that we're working with there. But we also sell those products into food -- traditional food companies, and I'll raise the name Danone again. Danone has a branded milk called Horizon, and we're really excited that they have recently launched a milk really focused on young children, called the Growing Years. That includes choline. So it's now fortified with choline. And our expectation and certainly hope is that nutritional beverages, food fortification will be an increasing opportunity for us going forward. That's still probably the smallest part of that nutrition business. But we think that it has significant growth opportunity. And we're working with each of those customers in one way or another to grow our brand and grow our business. So for example, we're also excited that with Danone and the Horizon Growing Years milk, if you look at the back of the label, it includes our VitaCholine logo, which is our brand name for our choline. And so again, we're very excited for a company like Danone, such a big consumer brand to include our VitaCholine on their products. So we're increasingly working with these big brand companies Pharmavite, is another example where we're looking at joint marketing efforts, efforts where we can do campaigns together to build awareness on choline, spread the word on choline, get choline included in more products. Getting a little off topic here a little bit, but we've recently had some very interesting marketing campaigns that we've launched. And when you have those podcast-type things and open it up to the world, you expect the college student here and there and various niche players, but we're also getting big name brands like some that I've already mentioned, join these marketing campaigns, which I think is really exciting. But anyway, back to Human Nutrition & Health, that's one business within our Human Nutrition & Health business. Another big business within that is our encapsulated Ingredients and Vitamins business. And encapsulation actually was the genesis of our company. The entrepreneurs that started our company had patents around encapsulation, and that's how they started our company. Still a very important part of our company where we're encapsulating, yes, sometimes vitamins, even choline, to provide some sort of functional benefit, whether it's protection, taste masking or some sort of slow release profile to it. The biggest part of that business, however, is where we're encapsulating preservatives for either meat or baked goods. And I always use this example. It's just easy to understand if a producer of a muffin wants to have some shelf life for that muffin extended shelf life, they will put an acidulant in it. And it's much easier if that acidulant is included in the dough and the premix before it's baked. But if you did that, it would kill the yeast, it wouldn't rise, you'd have a pretty ugly muffin. So what we tend to do is encapsulate that acidulant could be citric acid, for example, or ascorbic acid, and it protects it and so it sits there in the dough, it's works effectively. And then when it's heated, that melts away and the acidulants released and in the finished muffin, you've got a nice-looking muffin and it's now got some a little bit lower pH, which gives it some shelf life. That's a very important business. And our companies there are oftentimes the big meat companies, the big bakery companies, Bimbo, Pepperidge Farm, and we're selling direct to all of these companies. And then we have kind of a third chunk of business, I would describe, as our -- what we call our Powders and Flavors business, where we are effectively making fat-based systems for various beverages and so forth. So the best example is, I already talked about it, is Keurig Dr Pepper. We make essentially all of the non-coffee beverage systems for K-Cups for Keurig Dr Pepper. Hot chocolate is a great one to get your mind around. So that includes flavors. That includes some mouthfeel properties to it. We manipulate the particle size of that system so that it dissolves completely within, whatever it is, 23 seconds that the water is pouring through there because you want that takeup to be fully evacuated. And so that's an example. Another big brand company, we also make there Yuhu beverages. We make various parts of ice cream for companies like for Unilever even and so forth. So those are areas where we do work with those companies on new flavor systems. How do we make a peppermint pumpkin flavor, K-Cup system? How do we make a chocolate swirl for Talenti's ice cream, which is now owned by Unilever that has sprinkles in it or what have you? And we're really good at formulating and developing those kinds of solutions with those companies. And we also have the last business there as a Cereal business where we actually make cereal. We buy corn. We'll flake it. We'll code it. And we'll actually even put it in boxes to be shipped off. And we're a contract manufacturer that work with companies like Kellogg's and General Mills, largely on their organic or gluten-free type cereal systems. And there, we do promote -- we have choline included in a flake product, for example, and trying to promote some of the nutritional products that we sell. So leveraging our strong position, leveraging our relationships with these big brand companies, trying to do some joint marketing is all an important part of how we're trying to grow the business.

Just coming back to choline and specifically VitaCholine, I was wondering if you could just kind of recap some of the recent developments on the public -- scientific publication front, which, in particular, sort of appear to indicate that A, choline should, if anything, be used more widely than it currently is and should be administered at higher doses, cumulatively speaking, than was historically considered to be optimal? So this has created, I think, an impression overall that the choline market currently has significant growth potential. There should wind up being untapped demand simply because historical nutritional requirements that were defined for choline were too low. And I was wondering whether you could maybe elaborate on this for us and give us a sense of what growth potential you see in the choline business, particularly, as you pointed out, it is such a fundamental driver of the HNH business segment for Balchem?

Yes. So we think that the potential growth for choline can be extraordinary. If you -- and these are just very round numbers, Ram, so don't necessarily hold me to it. But if the total market for human choline is $50 million, we think it can be $300 million. And how do we get to a number like that? Well, it is going through the various therapeutic categories that choline serves. Yes, starting with infant formula. Choline has been known for years and years to provide important neural tube development properties, infant cognition properties. And choline is naturally occurring in breast milk. And so it has been included in infant formula for a very long time. But the full extent of the benefits of choline are really just starting to be understood. And while infant formula is, I would say, largely penetrated because most infant formulas include choline, we do have some expectation that over time the amount of choline could be increased in infant formula. But that's probably not the biggest opportunity for choline. The bigger opportunities are where it really is not being used. And it's almost odd to even think. But historically, choline was not really included in prenatal vitamins. And I think that we have -- that is one area where I think we're very proud of the success that we've had over the last 5 years. I think 5 years ago, very little choline and prenatal vitamins. Today, most new choline -- new prenatal vitamins that are coming out certainly would include choline, and many older brands are coming out with new versions that include choline. And it's widely understood that a prenatal vitamin regimen should include choline. And so that's a market where greater penetration is still an opportunity despite the success over the last few years. But that's still just focusing on really infant and child cognition, neural tube development and so forth. We really think that there are some studies that point to significant benefits for adult cognition and choline levels and the importance of choline relative to adult cognition, but that market has not been tapped at all. And we need additional studies. We need additional awareness. And we're working on all of those things. But that would be an enormous market if we were able to open that up. Another therapeutic category where choline is rarely mentioned should be is in fatty liver. Fatty liver is the condition that is all too common, particularly in the U.S. And the reason that we sell choline into the dairy industry is to address a condition in dairy cows that is incredibly common, and that is fatty liver. And choline is known to essentially metabolize or move the fat that gets clogged up in the liver, away from the liver, frame the liver up and making the liver operate more healthily. And that certainly is also true in humans. And there are studies around this as well. But choline is rarely part of that discussion, and it should be, it needs to be and we're working really hard on that. Multivitamins still are an opportunity for us that are not fully penetrated, that we need to more deeply penetrate. And then also fortified foods like the Danone, Horizon milk opportunity is significant. So while choline has been around a long time, we really think we're still in the very, very early stages of the evolution of choline. It was just in 2016, the FDA recognized choline as essential nutrients and put a daily recommended intake on choline. EFSA in Europe followed very quickly. So -- but we've only had that in place for 4 or 5 years. We don't have a biomarker. And as I'm describing this, I'm thinking of vitamin D. Vitamin D was in a similar position at one point. FDA came out, said it was a nutrient of concern and central nutrient. A biomarker was developed and the market really took off. We started funding that ended up receiving an NIH grant, a biomarker development project in the University of North Carolina where they're working hard to develop a biomarker for choline. And why is that important? It's important so that when doctors do blood work and test on you, they do it today, and they can see you're deficient in iron or vitamin D or whatever, tell you to go home and take a supplement. There's no such thing for choline. We need that. So my point being, we're in the early stages of the evolution of choline, and we really believe there's lots of opportunity by further penetrating existing markets that already understand choline and use choline, but also developing new therapeutic markets that -- where there's already some good science, we just need to leverage that.

Very, very interesting. And I think some of the people in the audience may remember the way things developed with another supplement, that's now considered absolutely essential in the prenatal nutrition space called folic acid. So it's not as though this kind of thing hasn't happened before. It's not as though this kind of thing hasn't been seen before. I was wondering if you could maybe comment on Balchem's interest in 3 areas within Human Nutrition & Health that might potentially in the future be considered growth opportunities for you? I mean you talked about infant formula, and I was wondering, in particular, whether you view Balchem's strategy within this space as being in any way analogous to what a company called Martek previously did some years ago. Those with long memories will recall that Martek was ultimately bought out for $1 billion by a firm called Royalty DSM, and Martek's flagship brand was something called life'sDHA. It was an omega-3 fatty acid. So they effectively pursued a sort of like intel inside approach to the infant formula market. And I was wondering whether that might be something that could be applicable to Balchem's endeavors within infant formula? Secondly, I was wondering about the prospect of Balchem ultimately becoming involved in the medical food space. This is something of a little known topic for many people. I personally only became familiar with it about 6, 7 years ago. But essentially, the medical food category is somewhere between drugs and nutritional supplements. So it's regulated more heavily by the FDA. As many people who will recall are seeing late night in commercials and things like that. Nutritional supplements are not directly supervised by the FDA. Medical foods are. But medical foods don't make the kinds of claims that drugs do. They're not subject to the same degree of oversight. The amount of -- or the burden of proved, so to speak, is lower for a medical food. But those are generally much more, I would say, durable franchises, much more difficult to compete directly against. And of course, in many cases, they involve premium pricing even relative to nutritional supplements, which are already pretty highly priced products for the most part and enjoy pretty healthy margins. And then the last aspect of this would be within the context of the medical field, the hospital community, in particular, I know that various companies, whether it's Johnson & Johnson or Nestlé, have a presence in those areas where it's really with respect to medical nutrition within the context of the hospital. But that's, for example, an area of the beverage market, which is not sort of mass market, not sort of broad consumer base, but that again represents potential for growth, high margins, specialized distribution channels and so on. So those 3 spaces, whether it's on the infant formula side, on the medical food side, on the hospital-based medical nutrition side, are those potentially areas where Balchem could get more involved? We could say -- see Balchem develop more of a presence in the coming years?

Ram, I think the short answer is yes. There was a lot in that question. And I wish in a way I could show you an internal diagram that we have started to focus on as part of our strategic plan within our Human Nutrition & Health business. And it basically has 3 circles next to one another. And the first one is food, and the second one is really nutraceutical, and the third one is pharma. And each of those circles overlaps to some extent. And to some extent, what you're talking about are some of those overlap areas. And absolutely, we have a good food business. We have a very good nutraceutical business. We have some pharma opportunities. You talked about CureMark early on. That clearly would be in the pharma space. But we do have significant interest in those overlap areas, particularly medical foods and so forth. If you bring up Martek, I mean, I think that's been a very, very successful company. One of the studies that we hope will have a published paper this year speaks to the fact that adequate choline levels are essential for DHA absorption. And Martek, of course, is focused very much on DHA. And so to some extent, there really is some important synergy. You happened to mention Martek and DHA, but very much synergy there with how DHA functions and the levels of choline in the body. So I think there is a synergistic element there. And when we think about the metabolism of choline or we call it the single carbon metabolism and choline donates, methyl groups to the body, and the body then does various things with it. Folic acid is important in all of that. DHA is important in all of that. Vitamin B12 is important in all of that and choline is central. And so there is some strategic envelope or opportunity, if you will, around all of those nutrients, all of those type products. So I wouldn't necessarily say it leads us to an infant formula strategy, but it leads us to a single carbon metabolism strategy and desire to, again, add more solutions to our portfolio if at all possible. That doesn't mean to say we wouldn't be interested in including a specialty vitamin as part of our portfolio, that maybe is not necessary for a single carbon metabolism, but yes, I think that Martek DHA example, is very good, and it really speaks to one study that we're doing right now that we think is very positive and effectively shows that really to have strong absorption of DHA, you need high levels of choline, which, again, we need to use, right now, given our product portfolio, we need to figure out how to leverage that into selling more choline to help DHA absorption. And we think there's a real opportunity there. Just specifically on the medical foods. The SNP Therapeutics, very small investment we made this year. Ultimately, the goal of SNP Therapeutics, at least today, and I think that this will evolve, is to effectively get into the medical foods space based on personalized genetic understanding and developing those personalized medical foods for patients, I guess, for lack of a better word. So I think that there is a real opportunity there long term. I think the move toward personalized nutrition, I think, leads you to the medical food space. And we see that as a real opportunity and want to be part of that and made this small investment. And the investment was less important than sort of getting on the train. With our investment, we got on the train, and we're going to see where this goes, but we're pretty excited about where it can go. And then I guess, lastly, on that, I actually even talked about in the last earnings call that we received GRAS status for several of our minerals. And typically, you would need that sort of status in order to participate in a medical food. So I think that that's one reason that we went through all of that effort to get GRAS for those minerals so that we can start to really explore medical food type -- medical food/pharma type of opportunities. So yes, I think it's an interesting opportunity for us that we're exploring.

Just to kind of wrap up on the nutritional front, I was wondering if you could just explain for us a little bit the core differences between marketing choline on a human level versus marketing choline at the animal level?

Yes. That's one where I think that there probably are more similarities than differences in a way. When you look at the markets, both have very mature parts to the market. So almost all pet food includes choline. It's been known for years. It's been essential nutrient for pets. And so the pet food market is very, very highly penetrated. So barring us being able to come up with research that says you're putting in, just make up a number, 2 parts of choline into that, that can. And we think you should put 3 parts in that choline -- in that can. That obviously would grow the opportunity for us. But barring that, we're largely growing with the market because it's fully penetrated. Same with infant formula. By and large, China being the exception, which is a huge market, and there isn't a whole lot of choline in Chinese infant formula that we're working on that. But everywhere else, it is. So basically, we're stuck to some extent growing with the market. It's growing healthily, so it's good, but we're stuck with growing the market. But also, both have huge opportunities. So dairy industry, we talk a lot about. I already mentioned fatty liver. That's typically why choline is fed to dairy cows just before giving birth to their calves and just after because it's very common for them to develop fatty liver. And what happens when they develop fatty liver, they -- their metabolism goes down, they eat less, they produce less milk. So we prophylactically address fatty liver, and the cow produces more milk. We're only in 35% of the cows in the U.S., and that's our home market. We're only in 5% of the cows in Europe. Huge penetration opportunity there. But it's a very technical sale. So we've got nutritionists who are typically selling to nutritionist, selling on data, selling on studies. And typically, it's -- okay, that study was done in European cows. What about American cows? And so the marketing is similar in that. We have to have really credible, strong research. We need to have partnerships with influencers, the top university professors, the world-renowned experts. We really need to have our act together from a legitimate science perspective. And I would say that's the same thing in the human area, when we're trying to get -- I mean choline included in the fatty liver discussion, well, who are the industry experts in fatty liver? What symposiums are they speaking at? What is the, again, make -- what is the industry association for fatty liver that we need to start educating and building awareness around? And then there is obviously some basic marketing as well. How do you partner with the big brands, like we've already mentioned on the consumer side like Danone and how do you partner with maybe some even of the big dairies or the big nutritionist on the animal side? So I actually think that there are probably more similarities than differences. Obviously, we have animal experts focused on the animal side and human. But I would say, increasingly, we're learning more and more from each other. And I mean as silly as it might sound, some of the cognitive benefits that we know so well in the human side is starting to be looked at on the animal side as maybe important benefits of choline that haven't been focused on in the past that could open up opportunities. So hopefully, that answers your question.

No, no, that's a very nuanced answer. And I think that really sets the stage for our audience because it's very clear from listening to you explain these various aspects that there's just as much opportunity, just as much growth potential on the animal side as there is on the human side. We shouldn't be thinking about this in terms of, well, the human growth potential just massively outstrips the animal potentially. The animal market...

I don't think so. I don't think so. Yes.

So I wanted to talk a little bit about the business strategy as this pertains to M&A because Balchem has long been known for pursuing a very deliberate, assiduous, more kind of bolt-on and tuck-in acquisition strategy as opposed to doing kind of mega mergers and growth solely by acquisition. I mean if we look at Balchem's historical performance over the past several years, I think both predating your tenure and during the entire course of your tenure, we can't really say that Balchem's growth has been entirely dependent on acquisitions because it hasn't. We can also say that Balchem's acquisition strategy has paid off in many respects by significantly broadening the scope of its existing businesses. I mean you pointed out the case of the Albion Minerals acquisition. You mentioned the Chemogas acquisition. I think one of the other acquisitions that clearly turned out to be a contributing factor to the company's operating performance was the acquisition of Zumbro, which was at the end of 2019. But looking ahead, 2 aspects here involved. Firstly, where strategically and what area of Balchem's business do you intend to prioritize M&A if that's within human health and nutrition or not? And then secondly, conversely, whether you're looking at the non-nutrition related aspects of Balchem's business? I think this was something that came to mind as I cruise your fourth quarter and full year 2020 corporate presentation, earnings-related corporate presentation. When we think about over 80% plus of the revenue base of Balchem being nutrition-related products now. When we think, in particular, what happened with the Industrial Products business that you were in, given the challenges you mentioned regarding the fracking space, is it really time for Balchem to consider focusing all of its energies on the nutrition area, whether that's Human or Animal, and divesting other legacy businesses that are non-nutrition related, which are looking increasingly noncore, which wasn't the case a couple of years ago? So those are the kind of the 2 levels in which I was hoping you could maybe address, Balchem's M&A stances.

Right. Sure. Well, to give myself a little break and to prove that Martin is not just a face. He's a great Chief Financial Officer. I'll have him at least start to answer that, and maybe I'll chime in as well. So Martin?

All right. Let's talk a little M&A. Yes, I mean, you're absolutely right that M&A has clearly played an important part of our history, and I envision it will continue to play an important part for us. It's high up our focus list of where we spend time. And it's both on the human side and the animal side. So it's not that we're just looking at one side and not the other. And within those human and animal sides, it is more on the nutrition side of human and it would be more on, call it, the ruminant side of animal that are more science driven, more opportunity to really differentiate yourself, in some aspects, faster-growing markets, higher-margin business, just more attractive spaces for us to go. It doesn't mean we're ignoring other opportunities, whether we do some geographic growth or expansion in existing businesses because it makes sense to do that or drive some scale or bolting on some adjacent technologies to what we already have. Well, we will do that when the opportunity is there. But we're clearly focused on both human and animal. And you asked a little bit around it's only going to be health related, et cetera? And are we going to start divesting non-nutrition or health-related businesses? In the short term, probably no. There are clearly parts of our portfolio where, as we do our portfolio reviews, that we do all the time, you could argue are not as much in the bulls eye as some other of our businesses from a strategic perspective. I would say there are smaller parts of our portfolio and not larger parts. But there is some benefit to a little bit of scale for us. We're still a relatively small company, $700 million of revenue. And I think those type of discussions of divesting some of the smaller businesses will probably move up the priority list as we get bigger. So as we do some other acquisitions and gain further scale, we'll probably maybe think a little bit more about those divestitures. But at this point in time, they're doing pretty well, those businesses. They're contributing. They're contributing to our scale. So the short answer would be that in the very, very near term, I would say, no. Unlikely.

Okay. The other aspect of this, of course, is, let's say, for example, that Balchem continues to be a net buyer, which has kind of been the way the company has operated for the last several years. Recently, one of the more notable attributes of the company's financial stance has been reduction in debt, reduction in leverage. And now I think you're down to like 0.5x on the debt leverage ratio. So is this sort of the stance you intend to continue to maintain over the course of, say, this year? Or are you looking at this as an opportunity to potentially counts on an acquisition if such an opportunity came across your line of sight, because you do have such a low debt leverage ratio and you can clearly refill the tank as it were in order to have more firepower if the appropriate opportunity erodes?

Yes. I mean as we look about our capital allocation strategy a little bit, which -- that hasn't changed recently. And I don't think it will change in the near-term either where we're focusing on organic growth first, whether it'd be on CapEx or R&D or geographic investments in our expansion. And then we're going to complement that with M&A, so to speak, on top of the organic spend. Continue to pay a dividend. We are committed to the dividend. We've been paying. We've been growing that for the last over 10, 11 years, and we intend to continue to pay that and grow that. And then we have been paying down debt. We're generating strong cash flows. We paid down debt, and it's now come down to that 0.5 or so at the end of the year that you mentioned in terms of debt leverage. But we view that as a little bit of temporary in nature because as we look at the M&A pipeline, the things we're pursuing, we're certainly hopeful that some of these opportunities will result in a transaction, but we can't control the if and when, since there's obviously a seller on the other side of the transaction. I think this low debt leverage is a little bit temporary in nature and will go up as we do transactions. So if you're sort of asking the question of, okay, well, shouldn't you just be levering up taking that cash and do like a special dividend or a larger stock buyback or something of that nature? We think we'll generate a better return for our shareholders by using that money for M&A since we think there's enough opportunities out there for us. We're not too worried about this low leverage at the moment. We think that's going to go up again.

No. I think, just to be clear, I'm definitely of the motor and school when it comes to utilization of cash. And certainly, those companies that typically return all of their excess cash to shareholders or lever up simply in order to pay a special dividend. I don't think are thinking imaginatively or creatively or in the long run. And I think Balchem has established a foothold in some very stable, rapidly growing markets, and it's incumbent upon you to find ways to continue to grow and capitalize on those positions. But if we think about the debt leverage ratio potentially going up again, I mean, you have kind of an ideal range, which would be most appropriate and that would allow you to be as flexible as you would like to be in the context of M&A. And if so, what's that number? Is that between 1 and 2 or higher than 2? Just give us a sense.