Ted Harris - President and CEO Bill Backus - CFO.

Brett Hundley - Vertical Group Timothy Ramey - Pivotal Research Group Francesco Pellegrino - Sidoti & Company Mitchell Kapoor - Rodman & Renshaw Andrew Lane - Morningstar Dan Axelrod - Times Herald-Record Garo Norian - Palisade Capital Management Tony Pollock - Aegis Capital.

Greetings, and welcome to Balchem Corporation's Fourth Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr.

Bill Backus, Chief Financial Officer for Balchem Corporation. Thank you. You may begin..

Ladies and gentlemen, thank you for joining our conference call this morning to discuss the results of Balchem Corporation for the quarter ending December 31, 2016. My name is Bill Backus, Chief Financial Officer, and hosting this call with me is Ted Harris, our President and CEO.

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

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

The financial information that is referenced in this meeting was disclosed this morning in our quarterly press release.

Before I hand the call over to Ted to go through our consolidated results, I would like to remind everyone that given the first quarter's acquisition of Albion International, there are significant non-cash acquisition accounting items impacting our results in this quarter.

For this reason, we will focus our discussion primarily on adjusted results which facilitate comparability to prior year and sequential quarterly performance. 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 reflect for a minute on the full year performance and note that we are very pleased to report another full year of sales and adjusted net earnings growth, while delivering record cash generation from operations of $108 million and record free cash flow of $85 million.

In addition, we are pleased to declare a $0.38 per share dividend or $12.1 million this year that represented nearly a 12% increase per share. These 2016 results were accomplished despite the continued struggles in several [Indiscernible] markets.

During 2016, we also successfully completed the integration of Albion International into our company and have made significant investments in new production capacity and technology that leaves us well-positioned to continue our growth story in 2017 and beyond.

Moving on to the quarter, this morning we reported fourth-quarter consolidated net sales of $140.8 million, which resulted in fourth quarter net income of $15.9 million or $0.50 per share on a GAAP basis.

This result includes significant non-cash amortization expenses of $7.5 million for acquisition related intangible assets which were recorded in these fourth-quarter GAAP financial statements. The amortization expense is a direct result of acquisition, valuation and business combination accounting rules.

Consequently, our fourth-quarter non-GAAP net earnings of $21.4 million reported in our press release earlier this morning exclude this item to facilitate comparative evaluation of this current period operating performance versus the prior year period.

These non-GAAP net earnings of $21.4 million or $0.67 per share were up compared to the comparable prior year quarter of $21 million or $0.66 per share. Adjusted EBITDA of $37.7 million for the quarter was $4 million or 11.8% better than the $33.7 million posted in the prior year quarter.

Our adjusted EBITDA margin expanded to 26.8% up 140 basis points compared to 25.4% from the fourth quarter 2015. We delivered fourth quarter free cash flow $23.6 million, while also paying down $17.8 million of debt, including $9 million of accelerated payments.

This further reduced the outstanding balance on our revolving line of credit to $19 million from the $65 million we borrowed to partially fund the Albion acquisition. We are proud that the team delivered these strong earnings results, especially when viewed in light of the ongoing macroeconomic pressures in certain segments of our business.

The fourth quarter sales of the $140.8 million was 6% higher than the $132.7 million result of the prior year comparable quarter. This increase is primarily the result of contributing sales from Albion and volume increases in animal nutrition and health.

These increases were partially offset by the decline in industrial product sales resulting from reduced oil and natural gas fracking, lower average selling prices related to reduced raw material costs, unfavorable mix and reduced volumes in certain food and beverage markets.

Our consolidated gross margin percentage was 33.3% of sales in the quarter up 326 basis points from a 30.1% of sales level in Q4 of 2015.

Adjusted gross margin percentage, adjusted primarily for the previously mentioned amortization expense as a direct result of acquisition, valuation and business combination accounting rules of $639,000 was 33.8% of sales, up 360 basis points from a 30.2% of sales level in the prior year comparative period.

The improvement was primarily due to a favorable product mix and lower raw material costs. Gross margin percentage for the human nutrition and health segment increased by 122 basis points, primarily due to the acquired Albion product lines, generating a higher margin.

Gross margin percentage increased for the animal nutrition and health segment by 581 basis points, primarily due to increased volumes of favourable product mix and cost decreases of certain key raw materials.

Gross margin percentage for the specialty product segment decreased by 562 basis points, primarily due to the inclusion of the Albion plant nutrition sales, which carry lower margins than the legacy specialty products business, along with an unfavorable mix and certain higher raw material costs.

Industrial products gross margin increased by 12.4 percentage points due to a more favorable customer mix and improved cost structure. Consolidated operating expenses for the three months ended December 31, 2016 were $22.3 million as compared to $17.7 million for the three months ended December 31, 2015.

The increase was principally due to the inclusion of Albion operating expenses and amortization expense related to the previously mentioned acquisition. Excluding non-cash operating expense associated with amortization of intangible assets of $6.9 million, operating expenses were $15.4 million or 11% of sales.

Looking forward, we will continue to focus on tightly controlling our operating expenses and leveraging our existing SG&A infrastructure. U.S. GAAP earnings from operations were $24.6 million, which increased $2.4 million or 10.7% compared with the prior year comparable quarter.

This increase was primarily due to the inclusion of Albion and strong earnings growth in our animal nutrition and health segment. On an adjusted basis, as detailed in earnings release this morning, earnings from operations of $32.2 million increased $3 million or 10.3% from the prior year comparable quarter.

Interest expense for the three months ended December 31, 2016 was $1.7 million, all of which related to the debt financing of the sensory effects in Albion acquisition. Our net debt at December 31 was $243 million. Company’s effective tax rates for the three months ended December 31, 2016 and 2015 were 30.2% and 24.1%, respectively.

The increase in the effective tax rate is primarily attributable to discrete items and the timing of certain tax credits. As previously noted, consolidated net income closed the quarter at $15.9 million, up $200,000 from the prior year quarter.

This quarterly net income translated into diluted net earnings per share of $0.50 for the current year, an increase of $0.01 per share over last year’s comparable quarter results of $0.49 despite the aforementioned increase in tax rate which impacted result by $0.04 per share.

On an adjusted basis, and as detailed in our earnings release, our adjusted net earnings were $21.4 million or $0.67 per diluted share, compared with $21 million or $0.66 per diluted share in the prior year quarter.

As outlined in our earnings release, our fourth quarter results generated $37.7 million of adjusted EBITDA in the quarter, compared with $33.7 million in the prior year, an increase of $4 million or 11.7%. Adjusted EBITDA for the quarter was 26.8% of sales, a 140 basis point increase over the prior year quarter.

As previously noted, our cash flow remains strong, as we generated fourth-quarter free cash flow of $23.6 million and we closed out the quarter with $38.6 million of cash. This reflects scheduled principle in net accelerated payments on long-term debt of $17.8 million along with $4.3 million of capital expenditure funding in the quarter.

Before I hand the call back over to Bill to go through the segments detailed results, I would like to update you on a few of our key growth initiatives. The Albion integration has been successfully completed. We have achieved expected cost synergies and continue to work on delivering sales synergies and results to date have met our expectations.

We continue to work hard to fully recover from the fire we had in July of last year at one of the four sites we acquired as part of the acquisition.

While the majority of products were not impacted, or were quickly produced successfully other Balchem manufacturing sites or third parties, some of the products have proven to be more difficult to replicate, resulting in some back orders and delayed shipments.

We believe, we will ultimately fulfill all of these backorders, but we are experiencing some delayed sales on these select products. Awareness around choline and the reference dietary intake issued by the Food and Drug Administration continues to progress.

The national Institute of health, office of dietary supplements recently developed their first ever fact sheet on choline, and is proactively disseminating information on this essential nutrient, including through social media.

While we continue this research and leverage other benefits of choline, we believe the RDI and European Food Safety Authority first ever intake recommendations for choline along with the continued building of consumer awareness of this essential nutrient will drive the inclusion of VitaCholine, Balchem's premier brand of choline in supplementation and food fortification applications.

The third Phase III clinical trial for the Curemark drug to be utilized in the treatment of autism is progressing with continued recruiting now at 33 clinical sites across the country, up from 30 sites from our last report. We look forward to the completion of this clinical trial and the important milestone it represents.

In the meantime, the infrastructure and quality systems at the cGMP compliant production facilities are nearing completion, showing -- preparedness for the production of initial launch demand upon FDA approval.

And related to our collaboration with BASF, we are pleased that the FDA has now approved formic acid for use in poultry diets in the United States. Formic acid was recently introduced in the U.S. for swine and has been successfully used in poultry diets around the world. It is considered the most potent organic acid for feed certification.

Amasil formic acid delivers the feed hygiene benefits needed to meet consumer demands for safe food supply while also providing a solution to those introducing or moving to antibiotic free lines of business.

The collaboration with BASF signals our continued intention to provide science based innovative products to the animal nutrition and health markets. I am now going to have Bill Bacchus discuss the segments in more detail. Bill.

Thanks Ted. For the quarter, sales of our consolidated human nutrition and health segment were$75.9 million, an all-time record quarter and an increase of $5.5 million or 7.9% from the comparable prior year quarter.

The sales increase was a result of the contribution of the human attrition portion of Albion and volume increases in flavor systems, inclusions, choline nutrients and serial systems. This was partially offset by an unfavorable mix and continued softness in powder systems.

Sequentially from the third quarter of 2016, without the impact of Albion, we did see volumes in H&H increase 1.4% with a sequential improvement in Powder Systems, Inclusions and Choline nutrients.

Fourth quarter earnings from operations for this segment were $10.3 million versus $9.9 million in the prior year comparable quarter, an increase of $400,000 or 4%.

Excluding the effect of non-cash expense associated with amortization of acquired intangible assets of $6.1 million, adjusted earnings from operations for this segment were $16.4 million compared to $15.5 million in the prior year quarter, an increase of $835,000 or 5.4%.

Earnings from operations for the quarter were driven by the inclusion of Albion in volume growth in certain market sectors partially offset by the previously noted softness in the Powder Systems business.

The animal nutrition and health segment sales of $42.5 million increased 2.6% or $1.1 million on a 4.8% increase in volumes compared to the prior year quarter. Sequentially from the third quarter of 2016, sales increased $1.6 million or 3.9% on a 5% increase in volumes.

Sales of product lines targeted for ruminant animal feed markets increased by $2.9 million or 23.7% compared to the prior year comparable quarter, largely due to strong growth of our flagship ReaShure product line. Milk and milk protein prices have improved and the USDA has recently increased its milk price forecast for 2017.

Feed costs remain low and this coupled with higher milk prices has resulted in improved dairy farm income over feed costs and subsequently more favourable conditions for nutritional ingredients.

Global monogastric species sales, including feed-grade culling products, decreased $1.8 million or 6.4% from the prior comparable quarter primarily due to lower monogastric average selling prices, resulting principally from reduced formula pricing based on lower raw material costs, and increased competitive activity.

Due to stronger production driven by lower feed costs and strong international demand for relatively low-priced meat protein, the USDA has further increased its export forecast for 2017. Monogastric volumes did increase 3.5% from the prior year comparable quarter, and were also up 5.2% sequentially from the third quarter 2016.

We remain confident long term in animal nutrition and health as we continued to prove the value of our existing product portfolio while introducing new and novel products to satisfy attractive end market demands to both organic developments and strategic alliances.

ANH quarterly earnings from operations were $8.1 million, an increase of $1.8 million or 29% from the prior year comparative quarter. The increase compared to the prior year quarter was a result of a noted higher sales volumes, favorable product mix and cost decreases of certain key raw materials.

The specialty product segment achieved quarterly sales of $16.2 million for the three months ended December 31, 2016, as compared with $13.0 million for the three months ended December 31, 2015, an increase of 24.3% due to the contribution from the Plant Nutrition portion of Albion.

Specialty Products achieved quarterly earnings from operations of $5.3 million versus $6.2 million in the prior year comparable quarter, a decrease of $849,000 or 13.8%.

Excluding the effect of non-cash expense associated with amortization of acquired intangible assets of $800,000 adjusted earnings from operations for this segment were $6.1 million compared to $6.3 million in the prior year quarter, a decrease of $203,000 or 3.2% due to unfavourable mix and higher raw material cost.

In the Industrial product segment sales decreased $1.7 million or 22.1% from the prior comparable quarter, primarily due to significantly reduced volumes, sold choline and choline derivatives for oil and natural gas fracking in North America. Compared sequentially to the third quarter 2016, sales were flat.

There remains significant uncertainty in the oil and gas industry and while the rig count in the United States continues to trend up, we still expect headwinds to continue although year-over-year comparatives should start to improve here in 2017.

Our earnings from operations to the industrial products segment were $930,000, an increase of $707,000 compared with the prior comparable quarter, and primarily reflects a favorable customer mix and an improved core structure. Sequentially, earning from operations increased by $403,000.

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

Thanks, Bill.

We are pleased that in the fourth quarter of 2016 we were able to deliver strong earnings with adjusted EBITDA of $37.7 million and fourth quarter free cash flow of $23.6 million, even while facing a challenging business environment, particularly in the oil and gas business within industrial products, but also across other market sectors.

Our continued strong cash generation enabled accelerated debt payments of $9 million above and beyond the regularly scheduled payments of $8.8 million reducing our net debt to $243 million on December 31, or approximately 1.6 times 12 months trailing adjusted EBITDA, further strengthening our balance sheet.

The accelerated debt payments of $9 million reduced our outstanding revolver balance to $19 million from the $65 million that were barred in February to partially fund the Albion acquisition. And while topline challenges remain, we delivered year-over-year revenue and operating earnings growth in three of our four segments.

The Global macroeconomic environment continues to present challenges to our company, a particular note is the ongoing uncertainty in the oil and gas markets, the strong U.S. dollar impacting exports and rising raw material costs among others.

We are however, pleased with the progress made on key strategic growth initiatives and we will continue to strengthen our company by focusing on these initiatives, exercising discipline, cost management and seeking value creating acquisition opportunities. I would now like to hand the call back over to Bill who will open up 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..

Ladies and gentlemen, at this time we will be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Brett Hundley with Vertical Group. Please proceed with your question..

Hey, good morning Ted and Bill..

Hey, Brett..

Thank you for taking my questions. I have kind of a two-part question on H&H and then I want to ask you a question about Curemark. So, on H&H, there’s kind of a lot going on in the sales line there in my opinion with just some different businesses that are performing are going in different directions I should say.

And then you also have Albion and revenue synergies that you're chasing there. You have choline potentially starting to get better this year and into 2018.

So, I was wondering if maybe with all that as a backdrop if you can maybe guide us a little bit on what we should expect from a topline growth standpoint for the H&H segment? And then I have a question on the margins..

Yes, Brett, you’re right. There is a lot going on certainly in the quarter we have the contribution about Albion that we were pleased with in H&H. And then many of the different businesses, cereal systems, labor systems, choline nutrients, inclusions, also a nice volume growth quarter over quarter. We did see certainly some price deflation in there.

So while we saw volume growth we saw some sales decline across that group of businesses.

And then, those positive results were offset by a continued year-over-year decline in the powder systems business, which again are driven by things that we’ve talked about in the past, one, the loss of one of our customers to a competitor, the warm weather, and we’re also seeing the transition to PHO-free solutions in that business creating opportunity for us but also causing some stagnation in that market a little bit year-over-year as all of our customers plan for, anticipate for the transition to PHO-free.

On a positive note in the powder systems business it was nice to see a sequential growth that we’ve really seen sequential growth in that that business unit over the last few quarters. So, while we’re still seeing some year-over-year decline in powder systems. We’re seeing some sequential growth which was nice to see.

And so, as we go forward I think that that the year-over-year comparisons in the powder systems business will get better and we should be able to start to see more of that mid single digit type growth rate in H&H that we’re looking for, which is a combination of growth in Albion, growth and choline nutrients, some improvement in the powder systems business and continued performance in flavors and encaps and inclusions and cereal..

That’s really helpful. I appreciate it. And then, staying with H&H I wanted to maybe talk about mix a little bit and really the margin structure of that business.

As I think about the last few years and we view segments of course on EBT basis is as you give information, but the last two years you've had H&H margins, kind of just sub 22%, and our expectation is that you would really start to see that that segment step up a little bit in coming years from a margin standpoint and a lot of that's just related to some of the choline [ph] that you've done in recent years, maybe a greater mix of choline products relative to maybe some more commoditized sensory effect products and maybe potentially some additional synergy.

I could be wrong on that. I thought that there is potential for more Albion cost synergies going forward may be related to a common ERP system this year, but again I could be wrong.

So, anyway, I just wanted to revisit mix and margin structure with you in H&H and make sure I was on the right track with potentially expecting margin improvements for that segment in 2017 and 2018?.

Yes. I think, Brett, you’re I think headed in the right direction there. If you think about that the growth that we talk about, obviously Curemark will ultimately be reported in H&H and given that revenue stream which really is largely going to be margin that will have a incredibly material impact on the margin profile of that segment.

So putting that aside for a second the businesses that should be growing little bit faster than others in that segment; choline nutrients, the Albion products do tend to have a little bit higher margin than the average.

So, we should see some slow mix and margin improvement over 2017 and to 2018 based on just the margin difference in those different business sectors..

And last question from me, you kind of walk me into – excuse me, my Curemark question.

As you alluded to in your prepared remarks last week Curemark announced enrolment procedures at three new sites for CMAT and I'm just curious, does this push potential FDA approval firmly in the H217 or even beyond and in your view?.

We actually you know, our reflection on the press release and our discussions with Curemark view the announcement of the three additional sites actually is a positive step. I think the more sites that are recruiting that quicker will get to the 300 participants in study and the quicker the study will be concluded.

But I do think that that the ultimate approval by the FDA is more of a second half -- late second half 2018 timeframe than any earlier than that. But I'm not sure that’s specific announcement is a signal that things are going more slowly than anticipated, we actually of view it as positive..

And I just want to make sure I head you correctly. You just said that you think that approval would be a late second half 2018.

Did you mean 2017?.

I did mean 2017, yes, if I said 2018 I apologize for that..

All right. Thanks so much for taking my questions..

Thank you. Our next question comes from the line of Timothy Ramey with Pivotal Research Group. Please proceed with your question..

Thanks so much.

I’m assuming you’ve given some thought to what a quarter adjustment tax with you to your operations, can you just give us a little bit of your perspective on how that might have puts and takes on the business?.

We certainly have, Tim, thanks for the question. And we don't believe, obviously, I'm not sure any of us really understand all the macroeconomic implications of such a move. But we are not a large importer of raw materials and really at the end of the day we’re not a large exporter of products.

Do note that higher the strength of dollar impacts our ability to export, but in the grand scheme of things it's a fairly small part of our company. So, we don't think that a border tax would have a very material impact on our company as best we can assess the today..

I guess, the only thing I would add, Tim, is to the extent that finished products coming in obviously that may be a little more competitive from a currency standpoint or the Chinese import in choline for example, if there's something that increases their cost because of the tax then that may make us a little more competitive against some of that, and so that might help us here domestically with the sales..

Yes. That was sort of what I was getting at was – there is meaningful Chinese choline volume coming in and since the -- you know that is probably very much a price driven business. It seems like that volume would be disadvantaged right away.

Have you thought through more on what that would mean or is it just too hard to contemplate with that?.

Yes. And I think we see -- absolutely it would hurt them. The problem we've experienced the times with the Chinese is trying to really understand what they're trying to accomplish with their pricing. I mean they do things that we clearly wouldn't do and so trying to understand irrational pricing strategies can be difficult.

So I think we're hopeful that if this occurs from that perspective that would be beneficial. We can’t sit here and say that we wouldn't expect them to just continue to take even less margin and continue to the sort of dumb product into the country.

So I think that that's the thing we can really get a complete handle on because again we would view some of the things they do is maybe irrational..

Right. And Bill, if I could follow-up on sort of Brett question there, but maybe for a total company perspective, with the benefit of an acquisition you basically have flat sales this year and a lot of that was down pricing due to pass-through impacts, so I understand that.

Can you help us kind of understand what you're thinking is from a total company perspective on can we return to growth in 2017 without the benefit of another acquisition?.

Yes. I think we absolutely can. I mean there is certainly certain product lines organically we expect to grow. I’m going exclude oil and gas obviously from the equation because I still don't know where that's going to windup. But as I indicated the comparative should get better because of how low it did get.

And we have seen some bright spots there, but it’s still very uncertain. I think that we’re hopeful even like Ted mentioned the PHO-free initiative here in food and that starting -- those formulations are starting to occur. There’s being -- the reformulations are occurring, we’re part of that.

And I think that's been probably a big part of some of the softness we've experienced in H&H more than anything. So, we would expect hopefully to see something happening there, that’ going to maybe help the growth rates. Choline nutrients is getting closer and closer to the labeling requirement and that should obviously help also.

So, we do certainly see certain market sectors that we believe should grow organically. I think there is always going to be some of the stuff that's uncertain as I mentioned oil and gas, but we are hopeful and see some bright spots on the horizon..

And Tim, we certainly see the oil and gas market have stabilized and in fact in the last few sequential quarters has improved the debt, so in 2016 we saw a $30 million revenue negative impact associated with the decline in oil and gas, and of course we firmly believe that that is behind us and really freezes up to show some healthy organic growth numbers across the company in 2017..

Perfect. Okay. Thank you..

Thanks..

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

Good afternoon guys..

Good afternoon, Francesco..

So, I guess, and I’m not sure maybe Bill gave this in the prepared remarks, is there a way to quantify without being distributed to the company in 2016 top line?.

Yes. If you look at the press release that we put out for Albion, we talked about Albion being about $50 million in revenue.

We saw about 3% growth on the Albion business year-over-year, that was as we’ve talked about in the past, the combination of significant growth from the human nutrition part of Albion and some decline in the plant nutrition business, but if you look at the whole business it grew about 3%..

Okay, 3%.

I know when you did acquisition early in 2016 I'm yet spoken about Albion doing about $54 million in sales in 2015, you have just mentioned that they use a 50 million base, is there a nice neat number that we can talk about for 2016 and I know that all a valid gun was really in the first quarter of 2016 as well?.

Yes. I mean, Albion, if you kind of take that, I would take that 54 and add 3% and subtract a month and you're probably pretty good..

Okay. Just the follow-up on some of the Curemark commentary and some of the questions that Brett had asked, so if enrolment is still happening for the second Phase III trial.

I was viewing it more as a second-half 2018 of them, but you're saying that the FDA could come out with the decision in the second half of 2017 even though we haven’t closed enrolment yet in the first half of 2017.

Am hearing things right?.

Yes. I think that -- obviously this is a very hard enough item to forecast. You’re talking about the FDA. You’re talking about a clinical trial. It's trying to recruit 300 childhood patients. And so it certainly takes time.

And we don't have given the sort of arms length approach to these sorts of such trials, as we don't have asked that access to specifics as far as where they are in the recruitment. But we continue to believe that it’s really 14-week trial.

Once the 300 patients is recruited and we believe that that should be winding down by midyear and then if you think about the conclusion of that study and the submission of results and so forth that late in the second half of this year 2017, we can reasonably expect some move by the FDA..

So, by the time the trials come to an end you would expect rather quick turnaround that sounds like instead of being more of one half 2018 decision, because I would think that the data would be compiled towards the latter end of 2017?.

This is kind of a fast-track process and that's what we've come to understand.

We’ve actually spend some time with outside consultants trying to really more deeply understand these kinds of trials and so forth and believes that with the fast-track status and this trial as it stands today that is a reasonable assumption to make, and that’s the one that we’re making and going with, and that’s leading our work relative to manufacturing and quality controls and so forth and making sure that we have our manufacturing processes up and running in time for a late second-half approval..

Okay. I guess just to shift back some of your legacy business, it looks as if you made some pretty good progress when it comes to the volume within the ruminant monogastric business, in fact volumes I think in the press release you had mentioned were up about the ruminant monogastric end market. I think, Bill had said monogastric volume were up 3.5%.

I think was it monogastric pricing was down, should that would ruminant pricing was up, but is that more of a factor of you raising prices or just the product mix shift maybe the more profitable reassure as compared to like the amino acid business.

How safe really we viewing that that pricing for the ruminant end market that you’re selling into right now? And how it’s changing?.

You know, you’re right. We had a very good record in our animal nutrition business. We did see volume growth of about 3.5% in monogastric business and about 14% in the ruminant business. Revenue was down in monogastric as you talk about based on a combination of increased competition as well as lower raw material costs that we pass on.

Ruminant sales were up 24%, so again you're right in saying that that price was up.

We did have a price increase on one of our products in the quarter that had some impact, but the majority of it really is mix related and within our ruminant space we do have a very wide array of product pricing anywhere from products that are priced at $4 to $5 a pound to products that are priced at less than a dollar a pound.

So, you can see quite a big mix impact there and so the majority of that price inflation that you see there is really mix driven..

I known in the past when we talk about the ruminant market we think about Balchem's high market share whether it's for choline or whether it’s for amino acid.

And when we look at back in like the summer of 2016, so really low milk protein prices then toward the tail end of 2017 we started to see the run go about that crucial $2 per pound level, run up to $2.70 in December.

Then they come in a bit in January to $2.20 and we’re going back to that crucial mark of $2 per pound where a lot of decisions are being made by I guess dairy producers. But when I think about the fact that your market penetration here in the U.S.

is rather low but it's still strong at 25% I think in past calls you even gone on and just said, you know this going to be an incredible runway for us for incremental business down the road, how is the company approaching or maybe how are you guys doing with new account wins and maybe convincing some of these ruminant or dairy producers just start incorporating choline reassure, amino acid into the diet, because it just seem as if when there is more profitability for ruminant producers, dairy producers that’s going to be what really can contribute to some outside growth in the segment.

And I know it just seem like we’re constantly kicking the can down the road about when that's going to occur.

Just really was wondering if you add any commentary or some color into [Indiscernible]?.

Yes. I think the best indication; Francesco that I can give is that our reassure volume for example in the quarter grew about 20%..

Right..

So that’s I think a very strong indication that we’re doing a nice job of increasing penetration, and that really is largely coming from new cows and not so much existing cows consuming more. It's really coming from new cows. So I think we are doing a good job of further penetrating the market, increasing number of cows that are on the one reassure.

And so I think that's the kind the best indication that we can give, that I think we’ve got a really good sales team, technical team calling on the right nutritionist in the dairy market developing the right data in our clinical studies to support the use of choline in particular in dairy cows.

And that growth we saw that through 2016 really and fairly poor dairy economics and as you appropriately point out those conditions are improving and we’ve seen milk price has picked back up and no milk protein prices also pick up nicely as well.

And we think that there could be some ups-and-downs here in 2017 but the majority of experts are forecasting significantly improved dairy market conditions in 2017 over 2016..

So, I just want to confirm and I think just looking at the 20% increase in volume sales to the ruminant end market is a good data point to look at.

And is it wings with new customers or are you just dealing share, because I know when we start talking about international producers and international producers of choline, you start talking quality issues that you sort of have a differentiated product for.

So I just want to make sure that you're growing the category as maybe – as compare to maybe just dealing share..

I think when we talk about reassure particularly, you can count on that being us growing the market and it's not a share shift or anything like that. It’s thus adding reassure in new cows and really creating demand..

Okay, perfect. That’s it from me. Thanks again guys..

Thank you..

Thank you. Our next question comes from the line of Mitchell Kapoor with Rodman & Renshaw. Please proceed with your question..

Hi, there. Thanks for taking my question. I just wanted to know how you expect your dividend to evolve in 2017 versus 2016 and if you had considered doing a share buyback in place of that dividend? Thanks..

Yes. For the past I think it was five years. We’ve increased our dividend. I think our intension would be to continue to payout a dividend and hopefully be able to continue increasing it at the same rate. As far as a share buyback it's really sort of not who we believe we are from the capital allocation standpoint.

We've historically done the dividend, but I think we and I think most of our investors would prefer that we take our cash and find ways to grow the business whether it's organically or inorganically and its less likely we’re going to do a treasury buyback or do something beyond the dividend that we do other than that normal increase like I’ve said we’ve made.

So, I won’t say, never, because you just don’t know what could happen but it's really not in our plans as far as capital allocation..

Sure. Thank you. I really appreciate that..

Thanks..

[Operator Instructions] Our next question comes from the line of Andrew Lane with Morningstar. Please proceed with your question..

Hi, Bill, Ted, how are you?.

Good.

How you’re doing, Andrew?.

Great, great. First of all, regarding to Curemark opportunity, its obviously a challenged to invest on the production side and preparation for what's inherently and on certain outcome on the approval fronts, and maybe this was something you are discussing with that the consultants you mentioned.

But if CMAT would be approved, could you estimate the total incremental cost commitment that would ultimately be required and then what percentage of those costs have already been spent before the approval process plays out or maybe from a different angle at what percentage of total costs related to the opportunity are you waiting to spend until the approval process is completed?.

So, Andrew, the costs for manufacturing this product are fairly minimal. There in the now low couple million dollar type of range. So given our annual CapEx of say $25 million it's really not a significant portion of that and we have to-date spent the majority of that already in anticipation of approval. So there's very little else to spent.

It’s more kind of validation protocols and validation batches that we need to go through which are time-consuming and resource consuming, but there’s really not a whole lot more capital. I do think if the ultimate sale of CMAT is very successful as we certainly hope it is.

We may look to have a secondary manufacturing site as a backup, and so we might be looking to spend again that kind of money once again as a duplicative site, but that’s kind of the order magnitude that we’re looking at..

Okay, great. Thanks. And then regarding the FDA's Reference Dietary Intake and the EFSA's dietary reference values for choline, its tough to know what the magnitude of this opportunity would ultimately be for the H&H segment over the long run.

Would you be able to provide some commentary to help frame our expectations for how impactful these developments could ultimately be on segment results if the product mix does indeed shift significantly more towards choline based products?.

Yes. It is hard you know one way that we look at it. We look at other essential nutrients, vitamins, minerals that may be a been in a similar position and you can Omega 3, vitamin D or other sort of benchmark type product.

Vitamin D of course was wildly successful and when the FDA came out and said that Americans were deficient in vitamin D and should supplement and they – it was kind of one notch up from choline. They said it was the nutrient of concern, they have not quite said that for choline.

But we can, we look at those sorts of growth rates, what happened to those essential nutrients and vitamins and so forth when approved.

Again we don't think that the choline will necessarily follow the vitamin D path, largely because awareness is low and as we’ve talked about the past we’re spending a lot of time and money and resources on increasing the awareness of choline and building awareness out there with all the right folks, but it still quite low.

But we think that business today is about $20 million including the instant formula portion of that business and I think that we should expect as a management team and we should be able to double that business in the course of three to five years if we’re successful in building awareness and leveraging the RDI in the marketplace, so there is internal goals that we’ve set for ourselves..

And with regard to that kind of general growth rate you would be aiming for, would include the inclusion of choline and prenatal vitamins, it seems like that that could be a huge growth driver going forward?.

Yes. Absolutely, it’s an area that that it's surprising that choline has not been traditionally included in prenatal vitamins and that's probably one of the areas with the strongest clinical data supporting choline. There's been a recent study at Cornell University that’s getting wide publication and discussion that speaks to just that.

And actually one of the real benefits of the Albion acquisition is Albion minerals have been in prenatal vitamins and again we have not been successful over the years of getting choline there, but we’re really leveraging those relationships from the Albion business as well as the new data and results from Cornell University and so forth to have much more significant dialogues with the prenatal vitamin guys that we've ever had in the past.

So I see that as may be one of the earlier wins and potentially one of the that the wins that we could talk about here in 2017 and I think those kinds of wins will help you early awareness and hopefully ultimate acceptance of choline and things like multivitamins and so forth, this general multivitamins..

Very helpful. Thanks. Congratulations on a solid quarter..

Thank you, Andrew..

Thank you. Our next question comes from the line of Dan Axelrod with Times Herald-Record. Please proceed with your question..

Hey, gentlemen, how is it going?.

Good, Dan..

Hey, you talk about investments in new manufacturing capabilities, new product development and possibly strategic acquisitions, which of those is the priority?.

I think the priority for us really is the internal organic growth that's where we in the majority every time. We see the higher ROIs particularly given the value [Indiscernible] today.

So I would say we spend most of our time there both from a investing capital in new assets like we did in 2016 as well as building our R&D capabilities which I’d see us making more progress in 2017 and 2018 but that doesn't mean to say we’re not spending a fair amount of time on acquisitions.

We do see strategic acquisitions is a way to strengthen our position and grow our company as well, but certainly primarily we’re looking at organic investments and as we dated in our prepared remarks we feel good about some of the capital investments in particular that we made in 2016..

So Ted, can you talk to me of them more about those organic investments?.

Well, its kind of a long list of investments though one we’ve talked about quite a bit is there continuous agglomeration unit, our design to Ohio plant that really provides us with kind of increased market particle size, manipulation capabilities than we’d have in past and we’re quite encouraged by that new technology.

To vary sort of nuts and bolts things like we invested in a core generation plants in our Italian operation that allowed us to move our folks fuel oil to natural gas that is contributing nicely to child nutrition, quality systems upgrades in their leading Pennsylvania sites and other investments like you that we added new extruder capability at our cereal system plants in Lincoln, Nebraska that’s allowed us to expand that business somewhat, so those kinds of investments some you know is smaller than million dollars and some as big for example in the Gamma [ph] Eastern it’s $15 million or so..

Talk to me about the fracking and the gas market and how it’s affected earnings and what you are expecting in the future?.

Sure. You know obviously it’s had a significant impact I think as we said when Tim asked this question just in 2016, revenue was impacted by $30 million along with reduction oil and gas. And that industrial segment at its peak was $100 million in revenue in 2014 and this year the Q4 results were about $25 million.

So, and it’s really been commensurate reduction in earnings as well. So that’s been the significant impact on the company over the last couple of years. As far as going forward, we’ve had three quarters where we’ve been flattish. We’ve seen some modest uptick here in last quarter or so, and we see that continuing in 2017.

We’re certainly not bullish on this business in 2017 if oil prices were to spike we would see some further improvement but we can’t see some modest growth continuing in 2017 from where we’ve been in the last couple of quarters and from a profit perspective in the last quarter or so we have actually started to see some albeit from a pretty small base some pretty nice margin and in bottom line profit improvement in their industrial segment Q4 we highlighted that as well, and I think we’ll hold onto that, I would expect going into 2017 and be able to leverage that, that higher margin position that we’ve had in the last couple of quarters as revenue continues to pick up a bit..

The fire and the backorders, can you talk a bit about that, and just give a touch of background about, when was the fire again, and when do you anticipate fully recovering from that because you said you are still dealing with some of the fallout?.

Yes, we had the fire in July of last year and essentially destroyed a complete site that we had. And again, we had again overall we are quite pleased by the recovery, but some of the products have proven more difficult to replicate than we expected.

We saw in Q4, we thought about $1 million of revenue was pushed out into 2017 and likely we’ll see a similar impact here in Q1.

We are in the midst of finalizing plans for rebuild, not at that existing site, but at another Balchem site and so should fully recover we expect by the third quarter of 2017, but I think every week that goes by or getting a little bit better and hope to see that, that sort of million dollar push if you will for the quarter to start to decline over the coming months..

Which site was it and where are you rebuilding?.

It was the Clearfield site and we’re not quite ready to announce exactly where we’re rebuilding, but it will be likely at another Balkem site..

And it was in what segment, it was affecting?.

It’s exclusively affecting our human nutrition and health segment. The fire had no impact on the animal, I’m sorry the plant nutrition business..

And what was that plant making?.

It was a Clearfield Utah plant and it was actually doing two things, one it was packaging most of the human nutrition mineral business and we very quickly replaced that at our other sites and add colors.

That was also granulating some of our powdered products and so we were taking, we sell some of their products with outers [ph] and then we granulate some of these powders to sell them as granulated products and this performs the granulation and like I said we’ve been able to replicate that elsewhere in many cases, but not in all..

Thanks very much gentlemen.

Thank you..

Thank you. Our next question comes from the line of Garo Norian with Palisade Capital Management. Please proceed with your question..

Hey guys, you touched on raw material costs couple of times, I was wondering you know what your outlook is across the board so to speak for 2017 and the impact of business?.

Yes, its you know it is a little bit of a confusing story, because we are still seeing some year-over-year declines from some raw material costs. So we talked about that in animal nutrition for example, but I think sequentially we are starting to see some raw material increases, raw materials that are driven by natural gas.

For example, we are starting to see a pickup based on higher natural gas prices, obviously it’s positive to see natural gas coming down over the last few days or so, but higher natural gas prices are driving some of the our petrochemical feedstock prices up as well just supply demand across some of our food systems, products.

For example, casing [ph] higher dairy prices are driving casing prices up, kind of a supply demand imbalance is driving corn syrup prices up. Typhoons in Indonesia and the Philippines are driving coconut oil prices up.

So those kinds of impacts we are seeing in our business and we are expecting to see them through 2017, so we’ve been in a several year period of raw material declines and we see ourselves now in a period of raw material increases, so we are actively working on raising prices where contracts permit and we have a lot of price increase activity going on, so we can mitigate the impact on the businesses as best as possible.

But the raw material increases are real and felt we needed to talk about it..

Okay, so just and [Indiscernible] way of kind of netting it off and it would – would one expect overall impacts for the margin of the business to be kind of more positive, negative or neutral as you know assuming you guys the majority of the price increases that you are working on?.

You know I think we would like to say overall it should be neutral and you know as we talked with I think Brett earlier, we should see some mix improvement over the course of the year and into 2018 it should help margins.

We are raising prices aggressively where we can so that we don’t see margin reductions, but there are some segments that that’s proving to be more difficult.

So I think your kind of term sort of on average when you netted all out, we are hopeful that we’ll see sort of neutral impact but we will see some variance from one business, one segment to another..

Sure.

And in the response to your prior question, you had referenced kind of about a $25 million CapEx, I didn’t know if I was talking about you know where you guys were for 2016 or if that also was a good look for 2017 might be?.

Sure, that was you know kind of an average number. I think we ended up the year in 2016 at around $24 million and I think previously we’ve talked about $28 million in 2017..

Okay. Great. And then just the last question from me, it looked like maybe missing it, but your receivables picked up a bit – to the fourth quarter, is there anything going on there, is it just a little bit of timing or....

Yes, some of it is timing for sure and I think typically at year end in particular you know we kind of do the same thing.

You are expecting customers to hold onto cash, they are using that once a year type opportunity at the end of the year to not pay so our average days go up you know on the AR side and you know we kind of offset that on the AP side, but in the world today for sure, you know customers are trying to get better and better terms for themselves to and that’s just part of the home negotiation around pricing and just what we want to do from a selling standpoint..

Got it. Thanks so much..

Thank you..

Thank you. Our next question comes from the line of Tony Pollock with Aegis Capital. Please proceed with your question..

Good afternoon. Could you comment a little more on the merger, acquisitions and landscape out there.

Do you know you still spend a few minutes every conference call discussing that?.

Sure. As I said you know our primary focus is on organic investments, but we do spend a fair amount of time looking at acquisitions, common knowledge, you know acquisition prices are very high today, but I think that does not from my perspective eliminate opportunities.

I think we just got to have to dig deeper and find opportunities that make sense for us, and I would say we have a very very robust acquisition pipeline.

We spend a lot of time on it, it’s almost exclusively focused on human nutrition, health, and animal nutrition, health and we are you know assessing a number of opportunities and we kind of – we have kind of a strategic filter approach if you will and we’ve talked in the past, we are really looking at strengthening the position of our businesses, geographic expansions is important to us, technology enhancement is important to us, kind of growth and skills and capabilities is important to us and we are finding despite you know high prices generally speaking opportunities out there to do all of those things.

And, that’s how we are looking at acquisitions.

We apply our typical sort of hurdle rate to acquisitions, and obviously these high multiples makes it hard to hit a 12% return, but you know we are committed to that, and we are committed to finding opportunities that allow us to meet those financial hurdles while you go again addressing those strategic opportunities I talked about..

Great. Thanks..

Thanks, Tony..

Thank you. Mr. Harris, there are no further questions at this time. I will turn the floor back to you for final remarks..

Great. I would just like to say, thank you all for participating. I apologize that we went over a little bit, but we had a lot of good questions and it’s good that we had a chance to go through all those.

We certainly appreciate your interest in our company and look forward to reporting out to you through the course of 2017 on our strategic and financial progress. So thank you again..

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