Bill Backus - Chief Financial Officer Ted Harris - President and Chief Executive Officer.

Brett Hundley - The Vertical Group Tim Ramey - Pivotal Research Tony Polak - Aegis Capital Francesco Pellegrino - Sidoti & Company.

Greetings, and welcome to the Balchem Corporation First Quarter 2017 Earnings Conference Call. At this time all participants are in a listen only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Bill Backus, CFO for Balchem Corporation. Thank you, Mr. Backus.

You may begin..

Ladies and gentlemen, thank you for joining our conference call this morning to discuss the results of Balchem Corporation for the quarter ending March 31, 2017. 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.

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

Human Nutrition & Health, Specialty Products, and Industrial Products contributed to the increase, with the drivers primarily being the result of one additional month of Albion sales, volume increases in choline nutrients, strong domestic and international plant nutrition sales and increased sales into the shale fracking market.

These increases were partially offset by reduced volumes in certain food and beverage segments and a decline in Animal Nutrition & Health sales. Our consolidated gross margin percentage was 32.3% of sales in the quarter, up 57 basis points from a 31.7% of sales level in Q1 of 2016.

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 $641,000 was 32.7% of sales, down 110 basis points from a 33.8% of sales level in the prior year comparative period.

The decline was primarily due to higher raw material costs within the current quarter across several of our businesses and increased competition in the monogastric business.

Gross margin percentage for the Human Nutrition & Health segment increased by 91 basis points, primarily due to the acquired Albion product lines generating a higher margin, along with the exclusion of prior year Albion acquisition accounting related to the fair value of acquired inventory.

Gross margin percentage decreased for the Animal Nutrition & Health segment by 204 basis points, primarily due to cost increases of certain key raw materials and the impact from increased competition, an unfavorable product mix and certain decreased volumes.

Gross margin percentage for the Specialty Products segment increased by 115 basis points, primarily due to the exclusion of prior year acquisition accounting related to the fair value of acquired inventory relating to plant nutrition, partially offset by plant nutrition sales, which carry low margins relative to the legacy Specialty Products business, along with an unfavorable mix and certain higher raw material costs.

Industrial Products gross margin increased by 470 basis points due to a more favorable customer mix and improved cost structure, partially offset by higher raw material costs. Consolidated operating expenses for the 3 months ended March 31, 2017, were $21.7 million as compared to $22.9 million for the three months ended March 31, 2016.

The decrease was principally due to the transaction and integration costs related to the Albion acquisition that were incurred in 2016 and reduced payroll and related costs, primarily offset by a favorable legal settlement in 2016.

Excluding noncash operating expense associated with amortization of intangible assets of $6.1 million, operating expenses were $15.2 million or 11.1% 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 $22.7 million, which increased $2.7 million or 13.7% compared with the prior year comparable quarter. This increase was primarily due to earnings growth in our Human Nutrition & Health, Specialty Products and Industrial Products segments, along with one additional month of Albion in 2017.

On an adjusted basis, as detailed in our earnings release this morning, earnings from operations of $29.8 million were flat with the prior year comparable quarter. Interest expense for the three months ended March 31, 2017, was $1.8 million, and our net debt on March 31st was $233 million.

The company's effective tax rate for the three months ended March 31, 2017 and 2016 were 25.1% and 33.9%, respectively.

The decrease in the effective tax rate is primarily attributable to the adoption of ASU 2016-09, which required excess tax benefits from stock based compensation to be recognized as a reduction to the provision for income taxes as well as lower tax rates in certain jurisdictions.

As previously noted, consolidated net income closed the quarter at $15.5 million, up $3.6 million from the prior year quarter.

This quarterly net income translated into diluted net earnings per share of $0.48 for the current year, an increase of $0.11 per share over last year's comparable quarterly result of $0.37, primarily the result of stronger earnings from operations and the aforementioned tax impact of the accounting standard adoption, which impacted GAAP results by approximately $0.05 per share.

On an adjusted basis and as detailed in our earnings release, our adjusted net earnings were $18.9 million or $0.59 per diluted share, up 3% compared with $18.4 million or $0.58 per diluted share in the prior year quarter.

Our first quarter results generated $35.8 million of adjusted EBITDA in the quarter compared with $35.5 million in the prior year, an increase of $345,000. Adjusted EBITDA for the quarter was 26% of sales, which was essentially flat compared to the prior year quarter.

As previously noted, our cash flow remained strong, as we generated first quarter free cash flow of $19.9 million and closed out the quarter with $37 million of cash. This reflects scheduled principal and net accelerated payments on long term debt of $11.8 million, along with $2.9 million of capital expenditures funding in the quarter.

Before I hand the call back over to Bill to go through the segments' detailed results, I'd like to update you on a few of our key growth initiatives. We have clearly identified international expansion as an important strategic growth opportunity for several of our businesses.

On March 24, we entered into an agreement to purchase the assets of Chol-Mix Kft, a privately held manufacturer of dry choline chloride, located in Hungary.

This small acquisition will provide our Animal nutrition & Health segment with additional dry choline chloride capacity in Europe, geographical expansion opportunities in Eastern Europe, an interesting technical knowledge supporting the application of liquids on carrier.

We celebrated the one year anniversary of the Albion International acquisition in February. And as we look back on the last year, we are very pleased with the contribution of Albion to our strategic position, particularly in the Human Nutrition & Health segment.

We've achieved expected cost synergies and continue to work on delivering sales synergies, and results to date have exceeded our expectations. We are working hard to fully recover from the fire we had in July of last year at one of our four sites we acquired as part of the acquisition.

We indicated in our last earnings call that while the majority of products were not impacted or were quickly produced successfully at 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 made good progress in the quarter on these issues, although we are still experiencing some back orders and we have recently started construction on the permanent rebuild structure, which will expand a current site and results in the consolidation of the site where the fire took place.

Awareness around choline after the Reference Dietary Intake, RDI, was issued by the Food and Drug Administration and the European Food Safety Authority's announcement of first-ever intake recommendations for this essential nutrient continues to progress well. Our sales of VitaCholine increased 10% in the quarter.

We are most encouraged by the increase activity we are seeing in the marketplace around the inclusion of choline in new products as well as the activity to increase choline content in existing products.

This is evidenced by new product launch data for the United States, that suggest a measurable increase in new products coming to market that include choline.

While we continue to research and leverage other benefits of choline, we believe the RDI and EFSA intake recommendations, along with the continue building of consumer awareness, will drive the inclusion of VitaCholine, Balchem's premiere brand of choline, an infant nutrition 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, albeit at a slower pace than we would like.

Being one step removed from the process, it is obviously very difficult for us to estimate when exactly this trial will be concluded and ultimately when the completed NDA will be filed for review.

Given that is now almost midyear and the recruitment of patients continues at the 33 sites across the country, we now believe the likely time frame for our completed NDA submission to be toward the end of 2017 or even into the early part of 2018.

Despite the extended time frame, we remain optimistic about this novel treatment for autism and the opportunity it provides for Balchem. We're excited by the launch of a new line of specialty nutrients and unique processing additives developed for the pet food market, that is being sold under the brand-name PetShure.

This expansion complements and further expands line of products that we already offer in the companion animal space.

And in response to the recent approval of formic acid as an acidifying agent in poultry feeding systems, our commercial team has initiated numerous field trials to demonstrate the efficacy of Amasil, our collaborative product offering with BASF, in improving feed hygiene and offering a valuable tool to use, as producers shift toward more antibiotic-free production.

This recent activity on the poultry side is complementing further activity related to the preexisting approval for swine feed. Swine and poultry integrators are expressing strong interest to learn more about this technology into the U.S.

market, and we expect to complete many of these key field demonstration trials during the second and third quarters. I'm now going to have Bill Backus discuss the segments in more detail..

Thanks, Ted. For the quarter, sales of our consolidated Human Nutrition & Health segment were $73.1 million, a record first quarter and an increase of $1.6 million or 2.2% from the comparable prior year quarter.

The sales increase was a result of one additional month of the human nutrition portion of Albion and volume increases in choline nutrients and cereal systems. This was partially offset by continued softness in powder systems.

First quarter earnings from operations for this segment were $10.2 million versus $8.4 million in the prior year comparable quarter, an increase of $1.8 million or 21.8%.

Excluding the effect of noncash expense associated with amortization of acquired intangible assets of $6.1 million, adjusted earnings from operations for this segment were $15.8 million compared to $15.7 million in the prior year quarter.

Earnings from operations for the quarter were driven by the inclusion of one additional month of Albion and volume growth in certain market sectors, partially offset by the previously noted softness in the powder systems business.

The Animal Nutrition & Health segment sales of $38.1 million decreased 2.9% or $1.2 million on flat volumes compared to the prior year quarter.

Global monogastric species sales, including feed grade choline products, decreased $629,000 or 2.3% from the prior year comparable quarter, primarily due to lower average selling prices, resulting principally from reduced formula pricing based on previous quarter lower raw material costs and increased competitive activity.

Sales of product lines targeted for ruminant animal feed markets decreased by $525,000 or 4.2% compared to the prior year comparable quarter due to lower ruminant volumes resulting from customer preordering in the fourth quarter 2016 in advance of our January 1 price increases.

Weakening dairy economics and a significant inventory correction at a large customer, which were partially offset by continued sales growth of 8% in our flagship product line ReaShure. Milk protein prices in particular have declined and the USDA has recently decreased its milk price forecast for 2017.

We remain confident long term in Animal Nutrition & Health, as we continued to prove the value of our existing product portfolio, while focusing on introducing new and novel products to satisfy attractive end market demands through both organic development and strategic alliances.

ANH quarterly earnings from operations were $5.4 million, a decrease of $1.2 million or 17.7% from the prior year comparative quarter. The decrease compared to the prior year quarter was a result of the noted lower sales and cost increases of certain key raw materials within the current quarter.

The Specialty Products segment achieved record first quarter sales of $18.8 million for the 3 months ended March 31, 2017, as compared with $17.1 million for the 3 months ended March 31, 2016.

The increase of 9.8% was driven by strong domestic and international plant nutrition sales, along with the extra month of sales from the acquisition of the Albion business. Specialty Products achieved quarterly earnings from operations of $6.5 million versus $5.3 million in the prior year comparable quarter, an increase of $1.2 million or 22.2%.

Excluding the effect of noncash expense associated with amortization of acquired intangible assets of $757,000, adjusted earnings from operations for this segment were $7.2 million compared to $6.8 million in the prior year quarter, an increase of $426,000 or 6.3%.

In the Industrial Products segment, sales increased $496,000 or 6.9% from the prior year comparable quarter, primarily due to significantly higher sales of choline and choline derivatives used in shale fracking applications, partially offset by the lack of sales to our St.

Gabriel CC company LLC partner, which occurred in the first quarter 2016, in advance of the joint venture becoming operational. Compared sequentially to the fourth quarter 2016, sales increased $1.6 million or 25.5% on a 39.9% increase in volume.

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

Our earnings from operations for the Industrial Products segment were $722,000, an increase of $488,000 compared with the prior year comparable quarter and primarily reflects a favorable customer mix and an improved cost structure. I'm now going to turn the call back over to Ted for some closing remarks..

Thanks, Bill. We are pleased that in the first quarter of 2017, we delivered solid results with adjusted net earnings of $18.9 million and first quarter free cash flow of $19.9 million even while facing a challenging business environment, particularly in the Animal Nutrition & Health segment, but also across other market sectors.

Our continued strong cash generation enabled accelerated debt payments of $3 million above and beyond the regularly scheduled payments of $8.8 million, reducing our net debt to $233 million on March 31st or approximately 1.5 times 12-months trailing adjusted EBITDA, further strengthening our balance sheet.

The accelerated debt payments of $3 million reduced our outstanding revolver balance to $16 million from the $65 million that were borrowed in February 2016 to partially fund the Albion acquisition. While top line 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, of particular note, our rising raw material costs, the ongoing uncertainty in the oil and gas markets and the strong U.S. dollar, impacting exports amongst others.

We are, however, pleased with the progress made on our key strategic growth initiatives, and we will continue to strengthen our company by focusing on these initiatives, exercising disciplined 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 concludes our call today. And now I'd like to open it up to questions..

[Operator Instructions] Our first question comes from the line of Brett Hundley of The Vertical Group. Please proceed with your question..

Ted, thank you for your comment on CureMarks. I didn't have to ask it. And we can move into the current parts of your operating business. So I really wanted to focus my questions on ANH, just given some of the challenges that you mentioned.

So first, if I can just ask, did you say ReaShure was up 8% in the quarter?.

Yes. Yes, that's correct..

Okay. So I think that's a slowdown may be from where you've been trending more recently. You can correct me if I'm wrong.

I wanted to ask you if ReaShure was a part of any preordering and just get a comment from you on where you believe you're headed with that product specifically?.

Yes. Brett, 8% was the growth that we delivered in Q1. I think that came off of about 17% in Q4. And Q4 -- as Q1 kind of got further along, we realized that the price increases we announced for January 1st did create some preordering and ReaShure was one of those products that we announced January 1 price increase.

So that impacted the 8% growth in Q1, for sure. But we're still very bullish on ReaShure and choline nutrition and the dairy industry. We continue to believe that product line should grow at double-digit rate in 2017 as it has for the past few years. And really that's all about moving from approximately 25% of the cows in the U.S.

to something significantly higher than that and really beginning to more significantly penetrate the European market. So we see a lot of growth ahead for ReaShure and see the 8% as low for what we should be delivering for ReaShure going forward..

That's really helpful. And you can maybe speak about Q1 in the context of your beliefs longer term and maybe incorporate what you believe is more transitory and what maybe something more structural or something here with us for longer than expected.

But can you just address, I guess, volumes? And I know you pointed out competitive activity on the mono side, but can you just talk to maybe volumes across ANH specifically or broadly? And then competitive activity within mono and kind of are volumes in line with where you think they should be at this point? Do you think that competitive activity is more transitory? And what would be your expectation for volumes on the ANH side longer term?.

Right. Maybe there's a lot in there. But obviously, we are somewhat disappointed with Q1 results in ANH, or Animal Nutrition & Health, after what were really two very, very strong quarters in Q3 and Q4 of last year. And really, we have four things fundamentally going on.

One was, what we talked about the impact of the January 1 price increases that clearly played a role in the 24% ruminant growth that we delivered in Q4 and some of the reduction that we saw here in Q1. We are experiencing increased competition in monogastric business on choline, in particular, both from the Chinese as well as Eastman.

This will likely persist for some time, where as we think the impact of preordering with price increases, that's behind us. So that one's behind us. Competition in monogastric, we believe, will continue for some time.

We mentioned that one of our largest customers in the ruminant side of the business informed us earlier this year that they have too much inventory and that they need to destock, which resulted essentially in no orders with that customer in Q1. We believe that, that will continue in Q2 and orders will pick back up in Q3.

So we have a little bit more to go on that one. But after Q2, we see that one going away. And then, dairy economics have not improved like we thought. I think in our last call, based on milk prices, milk protein prices in November, December and January, things were trending up, and they've come back down.

And in some cases, actually, below where they were at the same period prior year. So that has started to impact, particularly our amino acid product line that tends to be more impacted with lower milk protein prices than, for example, ReaShure. That is not immune, but has not been impacted as much.

So we remain very bullish on the business long term, but we're facing a few difficult quarters here, including these results. Overall, we should be getting back to your specific point about volume. I think the volume that we're delivering in monogastric is about what we think we should be delivering.

That market is growing at about 3%, 2% to 3% and that's about what we grew in Q1 from a volume perspective.

We had been growing a little faster than that most of last year and that was because of a shortage in the marketplace of betaine, a product called betaine that we have talked about a little bit in the past, that can be used as a substitute for choline at times.

And that benefit our volumes and so we were delivering 4%, 5% and 6% type growth last year at times, but we're back to more normal growth. And we see that really continuing in monogastric. In ruminant, we continue to believe we should be growing at double-digit rates. We delivered that through, throughout 2016.

We didn't do that here in Q1 for some of the reasons that we talked about. The destocking of that one customer is very significant and was a surprise to us and impacted us pretty heavily.

But we continue to believe that we should be growing at double-digit rates, volume rates in the ruminant space, as we further penetrate the market with our products..

That's really helpful. And I'll yield the floor.

I just want to ask Bill, just given the commentary today from you guys, would it still be your opinion that Balchem can grow earnings in 2017? And would there be any comments that you will give us as far as pacing of quarters from a qualitative standpoint?.

Yes, we definitely can still grow earnings in 2017, for sure. I mean we have some of these initiatives still in place that we talked about previously, even like conglomeration as an example, and what that should be able to do and add sales and earnings.

I think right now, I think the hardest thing for us to predict is probably some of the raw materials that we're dealing with. If you look at the trend and where they are at, we had, we knew they were going to be upcoming into the year. They actually turned out to be a little bit better through some things we were able to accomplish.

But in the end, I think, that's probably the biggest concern we'd have right now and where they wind up going. If they continue to go up, then we lag behind any ability that we might have to pass-through price increases, we'll lag behind. If they flatten out or decrease, then, obviously, we're going to benefit from that perspective.

So it's kind of hard to tell you that which quarters are, from a trend standpoint, I think, we're dealing right now in Q2. It's still the raw materials we talked about here. And it sort of hard to predict other than the forecast that we look at and where we'll be in Q3 and Q4.

But for sure, I do think we'll be able to finish the year at higher earnings..

[Operator Instructions] Our next question comes from the line of Tim Ramey of Pivotal Research..

First, Bill, a clarification, I think, on the comments you made on betaine versus choline. It's been a while since I thought about that. But I think you said that betaine production was tight for a couple of quarters and that helped choline, but that's normalizing now.

Did I get that right?.

Yes, that was me, Tim. This is Ted. It's obviously complicated, but betaine essentially was scarce all of last year. And betaine tends to be a product that goes kind of oversupply, undersupply and so forth. And last year, in 2016, it was quite scarce. And so many customers pulled away from using betaine and moved to choline.

And that allowed us to grow our choline business more. We're seeing the same thing this year. Betaine is kind of naturally sourced from sugar beet and so it's kind of driven by the crop, but it's also driven by -- there's sort of a limited supply and what the alternate uses are.

And right now, the use for it overseas, specifically in Asia, they're willing to pay significantly higher prices than the U.S. poultry market. And so the majority of betaine is headed overseas. And we don't see betaine as being a concern in 2017 either..

Okay.

That accelerates choline growth for you or just it's a steady state versus '16?.

Yes, now, it's a steady state, because it accelerated growth as -- in 2015 and 2014, there was a small portion of the market that switched from choline to betaine. And essentially in 2016, they switched back. And in 2017, though we believe, at this point, based on what we see, they'll stay with choline in large part..

Got it. Thanks for that. And just a comment you made on the ASU 2016-09 at the top of the call. Did you -- did I hear you right to say you excluded that from the adjusted EPS number? Or it is included? I would assume it's included since it's going to -- there every quarter on a go forward basis..

We actually excluded it. And so our adjusted earnings per share would have been about $0.65, if we had included that in our adjusted EPS.

So we've spent a lot of time benchmarking and looking at what other companies have done and certainly talking to our external auditors, and felt as though the majority of companies we saw were excluding that adjustment. It's noncash. It's volatile..

Now we have two. So we're trying to just carve it out, so you can get a better picture of operating earnings as opposed to having that in there. So when you go forward, it's difficult to predict what it will be, for sure. The factors that go into it.

And that's why we made a decision just to exclude it and have maybe a more fair comparison for everyone out there..

And that will be your practice going forward? So I shouldn't add that back..

That's correct, yes..

Okay. Again, in my experience so far, people are including it. But you are absolutely right. It does introduce volatility that's unpredictable..

Yes, we just thought it was maybe a more conservative approach and kind of in the spirit of adjusted EPS..

Right. In terms of the -- I understand what you're saying about ruminant and the customer dislocation.

But focusing for a second just on the end market, you feel that ReaShure can continue to grow even with somewhat sloppy outlook for milk and dairy economics generally?.

We really do. And, Tim, what that's really based on is last year, certainly at the beginning of the year, dairy economics really were not very good either. And yet, we were able to grow at double-digit rates.

And really the reason that is, Tim, is that what ReaShure does is it certainly addresses issues in cows, fatty liver in particular, that cause a cow to produce less milk. And so if you address the fatty liver by feeding it ReaShure, the cow ultimately will produce more milk.

And we have found that even in low milk price times that dairies want to produce more milk, particularly in the U.S., particularly in countries that are not subject to quotas and so forth. So ReaShure has managed to fare quite well through the poor dairy economics. What have not are other nutrients that we supplement.

For example, amino acids that tend to have a bigger impact, not on the amount of milk produced, but on the milk protein within the milk. And if milk protein prices are really quite low, then the dairy will be reluctant to put in the high cost ingredient to produce more milk protein, because any milk protein that's not sold just gets lost in the milk.

And so that one is definitely more susceptible to the dairy economics. And that's the one that last year we saw some bigger impacts during the low periods and then picking up a little bit when prices picked up. Milk protein prices are right now about $1.80 and good protein prices are above $2.

And much below $1.80, it doesn't make a whole lot of a sense for nutritionists to add some of the amino acids..

And then just finally, was there a specific FX impact that you could call-out in the quarter? And does this new acquisition help you with sales in Europe that might otherwise have FX impacts?.

Yes, Tim, it's Bill. To answer the first part of your question, the FX impact was really minimal on the quarter year-over-year. So there really wasn't much going on with the euro versus where it was last year. I think the facility that we have now in Hungary, for sure, can help us. I mean, if we can produce some local currency that can be a good thing.

It obviously gives us some expansion opportunities, not only in the dry choline chloride, which we needed, but there are some other opportunities for us over there, also. So it certainly gives us some flexibility, which maybe helps us to manage some, any foreign currency impacts we might be dealing with at any point in time.

But the first quarter was really not much of an impact year-over-year..

[Operator Instructions] Our next question comes from the line of Tony Polak of Aegis Capital. Please go ahead..

Could you give us an idea of the volume that the plant in Hungary is doing?.

You want to cover that, Bill? The volume for the plant in Hungary, it's about 3,000 tons, I believe. We feel that, again, it's quite a small acquisition, but provides us additional capacity in Europe. It provides us expansion opportunities in Eastern Europe. And they also have some pretty interesting technology.

And we think, as we combine their existing sales with growth that we're going to bring to that asset, that will add about $5 million of revenue to us next year, and it's about 3,000 tons of capacity..

Yes, a little bit less what....

In terms of the fire, and you said they had some back orders and integration problems.

Could you quantify that in terms of dollars that you're missing in terms of orders in this quarter or this year?.

Sure. I would say, just to kind of picking on one of your comments here, integration really has gone remarkably well. And we're very, very pleased with integration overall. Relative to the fire, we believe that we were impacted in Q1 by about $1.2 million of essentially orders that we could have filled in the quarter, if we had full operations.

So they were deferred to Q2. We have, as I've also said, we've just started the construction of the new site that will be completed by the end of the year. So we think we have a few more quarters of delayed orders, if you will, that are impacting the business, but it's about Q1, it was about order of magnitude of $1.2 million..

Okay.

And is there a status on insurance on that?.

We received some of the proceeds. We're still working on settling some of the items that are open. But we've absolutely received some cash payments in advance of the final settlement..

And how is that treated in terms of, is that extraordinary income or is that just flow to the income statement normally?.

Yes, we had some write-downs, obviously, of what was destroyed. It's really just offsetting that. We had booked receivables at that time for where we were at. Certainly, if we wind up with anything in excess of what we expected, that would just wind up being blow the line of other income..

We have one follow-up question from the line of Tim Ramey of Pivotal Research. Please go ahead..

Yes, I just was looking for a little bit more information on PetShure.

And what you think the market opportunity is there?.

Sure. Yes, we're really quite bullish on the pet or companion animal market, I guess, as we say. And about a third of our existing monogastric business is companion animal. But it really is our basic choline, liquid choline and dry choline product.

And what we've done here, obviously, the pet food market is growing faster than the overall markets, probably growing about double what the monogastric market is growing as a whole, and so we have launched a line of products. One of which is a non grain, non GMO choline chloride, which is very unique to the marketplace.

And you probably see a lot of ads on TV about non grain pet foods, and so that's important development. And then very interestingly, we're using a lot of our food ingredient and ingredient solutions formulation expertise to develop products for pet food. So they are encapsulated products. They provide functionality and so forth.

And it really as the pet food market moves to non grain, non GMO, fresh, that really kind of plays into what we're trying to do here. And we are targeting about $30 million of growth just in these new products that we've introduced over the next four to five years.

So that's kind of the order magnitude, and these products would all be higher margin products than our base monogastric products. So we're quite excited about this and think it's a good growth opportunity for the monogastric business that has been kind of relatively steady growth over the years..

And what specifically is PetShure? It is a -- it's a non-GMO choline chloride?.

PetShure is actually our brand name that we're using broadly across all of these products. So we have launched about nine products and they all come under the brand name PetShure. So we do have a product that is called PetShure choline, that is a non-grain, non-GMO choline product under that PetShure brand -- that market..

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

So, I think, you've addressed pretty well, just some of the struggles of the legacy business. And I just want to dig a little bit deeper into Albion, because it seems as if the extra month with Albion, if I look back into the first quarter of 2016, I think, it contributed something like $20 million in sales over the two months in that quarter.

So I would just think that maybe the extra month contributed an incremental $10 million. In this first quarter, if you back that out, you have revenue down 7%. And as I said, I just want to dig deeper into Albion.

What type of growth rates -- organic growth rates are we talking about right now with Albion, because they seem pretty attractive, I would think?.

Yes. Let me just take a step back here with you Francesco. I think there's some seasonality in here for sure and their numbers with the plant nutrition. So I can tell you that the January, the extra month of January was only about $3.5 million of additional sales. So you got to take that into account when you're looking at the plant site.

I mean, there's a lot more that comes into all of the Albion between specialty and human..

Right. And that's what I'm talking about with the one additional month. It's only about $3.5 million or so for January..

So January was only 3.5 million, but when I looked at what it contributed to February and March of last year, it was that much higher?.

That's right. Between plant nutrition and the fire, I think, you have two things going on. Plant nutrition last year was not as good as where -- we've achieved this year, but it's just that seasonality of when that's occurring. And that as Ted indicated before also, some of these sales being deferred from the fire so....

Okay.

Knowing that now, I guess, maybe then just looking at February and March, what are we looking at for organic growth throughout again?.

I think it is attractive as you indicated, and we expect to grow this business in sort of the high single digit growth rate that's really what we expect. We've accomplished probably a little more than we've expected here in this past year. And I think that's really sustainable from our perspective..

Are you getting margin expansion from Albion enables the leverage of legacy business into that margin expansion? Or I'm just trying to figure out, why margins were so impressive in specialty as well as in the human nutrition and trying to maybe, trying to figure out how much of that was associated to Albion?.

Yes, absolutely. In the Human Nutrition & Health segment, for sure, it creates margin expansion overall for the segment. It's a better margin than any other businesses we had in HN&H. Conversely, on the specialty side, it's actually lower than the legacy ARC business. And I think you've realized just how high those margins are in legacy ARC.

So in the end, though those gross margins, as we had indicated in the past, are typically in the 540% range and we really believe they are sustainable and there is room for expansion too.

I mean, as we have better throughput and continue to increased our volume going through the plans, there's no reason to expect, not to expect that we couldn't expand margins..

Okay. Within the Human Nutrition & Health segment, I'm sure that you guys headed to higher volume sales of choline nutrients.

Is there any way to sort of quantify what the volume increase of the human grade choline market was on a percent basis?.

Yes, we grew volume about 10%. And actually, I'm sorry, 12%. Revenue was 10%. So volume was 12% in Q1. And so we were quite pleased with that..

Okay. And I just want to revisit the dairy economics that you're hitting on a little bit earlier with Brett And I know this has been something that Trump has been trying to take on by instituting lumber tariffs ironically.

But maybe could you just discuss briefly the different margin structure for your ReaShure and amino acids business, if you have this type of data available within Canada as compared to the U.S. Because I would think that Canadian market is much more lucrative..

That's one you're stumping us with Francesco. I don't know what the margin differential is in Canada for us in ReaShure nor in the other products. I would say the vast majority of our business is in the United States. And so our business in Canada remains quite small.

But we can get back to you on that, but I think that it is a fairly small part of our overall U.S.-Canadian business. Canada is a small piece..

There are no further questions over the audio portion of the conference. I would now like turn the conference back over to Mr. Ted Harris for closing remarks..

Thank you. I'd just like to, again, thank everybody for joining us this morning. I'd like to remind you that our annual meeting will be held on June 13 at the Michelangelo Hotel in Manhattan at 4:30 p.m. We hope that we will see some of you there.

We also will be presenting at the Vertical Group's Ingredients Conference on May 17 and the Houlihan Lokey Industrials Conference on May 18, both in Manhattan. So hopefully, with those 3 events, we can see some of you there. Otherwise, we will talk to you next quarter. Thanks again..

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