Ted Harris - Chairman & CEO Bill Backus - CAO & Treasurer.

Brett Hundley - The Vertical Trading Group, LLC Francesco Pellegrino - Sidoti & Company, LLC Tim Ramey - Pivotal Research Group LLC.

Greetings, and welcome to the Balchem Corporation Third Quarter 2017 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bill Backus, Chief Accounting Officer 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 September 30, 2017. My name is Bill Backus, Chief Accounting Officer, and hosting this call with me is Ted Harris, our President and CEO, and Terry Coelho, our Chief Financial Officer.

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..

Thanks, Bill. Good morning, ladies and gentlemen, and welcome to our conference call. Before I begin discussing the third quarter results, I would like to officially welcome our new CFO, Terry Coelho, to the team. Terry has been with us for a little over two weeks, and we are extremely pleased to have her on the Balchem team.

I am looking forward to having you meet her over the coming weeks and months. This morning, we reported third quarter consolidated net sales of $150.7 million, which resulted in record third quarter net income of $16 million, or $0.50 per share on a GAAP basis.

This result includes significant non-cash amortization expenses of $6.7 million for acquisition-related intangible assets which were recorded in the third quarter GAAP financial statements. The amortization expense is a direct result of acquisition, valuation, and business combination accounting rules.

This quarter also includes an $813,000 favorable tax benefit compared to the prior year due to the adoption of updated share-based payment accounting. In addition, the current quarter includes $228,000 of transaction and integration costs.

Consequently, our third quarter non-GAAP net earnings of $20.4 million, or $0.63 per share, reported in our press release earlier this morning, exclude these items to facilitate comparative evaluation of this current period operating performance versus the prior year period.

These non-GAAP net earnings were 4.6%, or $896,000, above the comparable prior year quarter of $19.5 million, or $0.61 per share. We delivered third quarter free cash flow of $26.9 million, and also paid down $40.3 million of debt, including $31.5 million against the revolver.

We have now fully paid down the outstanding balance on our revolving line of credit from the $85 million we borrowed to fund the acquisition of IFP and partially fund the acquisition of Albion. Our third quarter sales of $150.7 million were 9% higher than the $138.5 million result of the prior year comparable quarter.

Sales growth in 3 of our 4 reporting segments, Human Nutrition & Health, Specialty Products, and Industrial Products, contributed to the increase, with H&H achieving an all-time record quarter and Specialty Products achieving a record third quarter.

The primary sales drivers were increased sales into the shale fracking market within Industrial Products; the added sales from the IFP acquisition; strong growth in human choline nutrient sales volume; increases in powder systems and human chelated mineral sales within Human Nutrition & Health; as well as both strong plants nutrition and higher repackaged gas sales within Specialty Products.

These increases were partially offset by a decline in sales within the Animal Nutrition & Health segment and in flavor systems sales within Human Nutrition & Health. Our Q3 consolidated gross margin dollars of $46.2 million were up $1.5 million, or 3.4%, compared with the same period in the prior year.

On an adjusted basis, adjusted this year primarily for the previously mentioned amortization expense as a direct result of acquisition valuation and business combination accounting rules, of $722,000, gross margin dollars were $46.9 million, up $1.3 million, or 2.8%, compared with the prior year quarter.

The increase was primarily driven by the higher sales, partially offset by unfavorable segment, product, and customer mix, higher raw material costs within the current quarter across all of our segments, and certain plant inefficiencies. Our consolidated gross margin was 30.6% of sales in the quarter, down 160 basis points from 32.2% in Q3 of 2016.

Adjusted gross margin was 31.1% of sales, down 180 basis points from 32.9% in the prior year comparative period. The decline was primarily due to the aforementioned mix, higher raw material costs, and certain plant inefficiencies.

Gross margin percentage for the Human Nutrition & Health segment decreased by 100 basis points, primarily due to mix, lower powder and flavor systems volumes which drove certain plant inefficiencies, and higher raw material costs.

This was partially offset by stronger gross margins across our human nutrients product lines, including choline nutrients, chelated minerals and other nutritional products, primarily driven by higher volumes.

Gross margin percentage decreased for the Animal Nutrition & Health segment by 280 basis points, primarily due to unfavorable product mix, certain decreased volumes, and cost increases of certain key raw materials.

On a sequential basis, Animal Nutrition & Health gross margins improved 290 basis points on higher ruminant volumes and increased monogastric average selling prices.

Gross margin percentage for the Specialty Products segment was flat, primarily due to the exclusion of prior-year acquisition accounting related to the fair value of acquired inventory for plant nutrition, partially offset by an unfavorable product and customer mix and certain higher raw material costs.

Industrial Products gross margin increased by 360 basis points due to higher volumes, partially offset by higher raw material costs. Consolidated operating expenses for the three months ended September 30, 2017 were $23.1 million as compared to $21.7 million for the three months ended September 30, 2016.

The increase was primarily due to the inclusion of IFP operating expenses, additional R&D spend, and increased transaction and integration costs, partially offset by a reduction in the amount of non-cash operating expense associated with amortization of intangible assets.

Excluding transaction and integration costs of $228,000, and non-cash operating expense associated with amortization of intangible assets of $5.9 million, operating expenses were $17.2 million, or 11.4% 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 $23.1 million, which increased $109,000, or 0.5%, compared with the prior year comparable quarter. This increase was primarily due to earnings growth in our Specialty Products and Industrial Products segments.

On an adjusted basis, as detailed in our earnings release this morning, earnings from operations of $29.9 million decreased $970,000, or 3.1%, from the prior year comparable quarter, specifically due to lower earnings in our Animal Nutrition & Health segment for the reasons previously noted.

And this was only partially offset by gains in our Specialty Products and Industrial Products reporting segments. Interest expense for the three months ended September 30, 2017 was $2.0 million, and our net debt on September 30 was $201 million.

The company's effective tax rates for the three months ended September 30, 2017 and 2016 were 22.5% and 32.5% 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 decrease to the provision for income taxes; a purchase price reduction related to the SensoryEffects acquisition; as well as reduced liabilities and tax rates in certain jurisdictions.

The tax benefits associated with the adoption of ASU 2016-09 have been adjusted out of adjusted net earnings to aid in comparability of results to prior period. As previously noted, consolidated net income closed the quarter at $16 million, up $2 million 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 $0.06 per share over last year's comparable quarterly result of $0.44.

On an adjusted basis, and as detailed in our earnings release, our adjusted net earnings were $20.4 million, or $0.63 per diluted share, up 4.6% compared with $19.5 million or $0.61 per diluted share in the prior year quarter.

Our third quarter results generated $35.7 million of adjusted EBITDA, or 23.7% of sales in the quarter, compared with $36.6 million, or 26.4% of sales, in the prior year, a decrease of $886,000.

As previously noted our cash flow remains strong as we generated third quarter free cash flow of $26.9 million and closed out the quarter with $34.7 million of cash.

This reflects principal payments on long-term debt of $40.3 million, including accelerated payments of $31.5 million along with $6.9 million of capital expenditure funding in the quarter. Before I hand the call back over to Bill to go through the segment's detailed results, I would like to update you on a few of our key strategic initiatives.

As previously noted on June 1, we purchased IFP, a privately held manufacturer of agglomerated and microencapsulated food and nutritional ingredients located in Minnesota. We are in the process of integrating this small, but highly synergistic acquisition, and have been pleased with the integration efforts to date.

We are already realizing synergies, and fully expect to achieve the results projected for this acquisition. Relative to the Albion Clearfield fire recovery efforts, we are pleased to say the expansion project at our Ogden, Utah facility to replace the Clearfield facility is largely complete.

The build out and mechanical capabilities are substantially in place. We are in an equipment and product qualifying stage and we should start commercial production late in the year.

In the meantime, we continue to utilize interim manufacturing capabilities, including leveraging the acquired IFP assets and know-how, to make some of our products at one of our newly acquired IFP manufacturing sites in Minnesota.

We continue to work hard to progress awareness around choline, the Reference Dietary Intake issued by the Food and Drug Administration, and the European Food Safety Authority's first ever intake recommendations for this essential nutrient. A recent survey conducted by the Council for Responsible Nutrition of adults in the U.S.

age 18 and older on choline consumer awareness showed a 26% increase in awareness and an 8% increase in choline usage.

This is certainly encouraging, and shows that our consumer awareness strategy, along with the benefits of the egg industry promoting choline, and the American Medical Association announcing their support and advocacy for the inclusion of choline in all prenatal vitamins to help maintain normal neural development of the fetus, are having an impact.

We will continue our VitaCholine market development activities through both consumer awareness and strategic expansion of our sales channels.

Within our Animal Nutrition & Health segment, we were also encouraged by new data from a recent field research study conducted at the University of Florida demonstrating full lactation benefits of ReaShure, Balchem's rumen-protected choline in dairy cows.

This adds to what already is an extensive library of field trials showing the benefits of ReaShure, but introduces new evidence of the broader benefits of this important nutrient beyond the transition cycle of a dairy cow.

This will certainly help in our efforts to expand the penetration of ReaShure into dairy herds across the globe, and to also explore the implications of dosing choline throughout the full lactation cycle. This study has been accepted for publication in the Journal of Dairy Science, which should be published later this year or early next year.

The third Phase 3 clinical trial for the Curemark drug to be utilized in the treatment of autism continues to progress, and we are pleased to confirm that in September, full enrollment for the trial was achieved.

This is obviously an important milestone, and means that the 14 week double-blind, randomized, placebo-controlled Phase 3 study will be complete by year's end, making way for NDA submission in the first half of 2018.

In the meantime, Balchem remains focused on our manufacturing and supply chain preparedness for the ultimate launch of the product, while continuing to manufacture additional trial quantities of the encapsulated enzyme for patients in the ongoing Phase 3 clinical trial, as well as rollover participants from previous trials.

We are encouraged by the progress made over the past few months toward critical milestones within this key growth initiative. 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 $81.4 million, an all-time record quarter and an increase of $6.4 million, or 8.6%, from the comparable prior year quarter.

The sales increase was primarily driven by added sales from the IFP acquisition, strong choline nutrients volumes, and higher chelated minerals and powder systems sales, partially offset by lower flavor systems sales.

Third quarter earnings from operations for this segment were $10.4 million, essentially flat compared with the prior year comparable quarter.

Excluding the effect of non-cash expense associated with amortization of acquired intangible assets of $5.8 million, third quarter adjusted earnings from operations for this segment were $16.2 million compared to $16.5 million in the prior year quarter.

Earnings from operations for the quarter were driven by the aforementioned sales growth and stronger gross margins across our human nutrients product lines, including choline nutrients, chelated minerals, and other nutritional products, primarily driven by higher volumes, offset by unfavorable mix, higher raw material costs, and certain lower powder and flavor systems volumes, which drove certain plant inefficiencies.

Supply chain optimization and recovery of higher raw material costs through pricing actions continues to be an important focus area of this business. The Animal Nutrition & Health segment sales of $38.0 million decreased 7.1%, or $2.9 million compared to the prior year comparable quarter.

Sales of product lines targeted for ruminant animal feed markets decreased by $2.1 million, or 15.2% compared to the prior year, primarily due to lower ruminant product volumes resulting from challenging dairy economics, particularly in North America where milk protein prices remained low in the third quarter.

Also contributing to the decreased ruminant product volumes was order timing for ReaShure. We are encouraged to see a recent improvement in dairy economics, particularly in milk protein, which increased from September to October by $0.41 to $2.10 per pound, the highest price we have seen since very early in 2017.

This was a 41.3% increase in the milk protein price over the average third quarter price, which is encouraging relative to the economics supporting the inclusion of amino acids in feed rations.

Global monogastric species sales, including feed grade choline products, decreased to $791,000, or 2.9% from the prior comparable quarter, primarily due to reduced chelated mineral sales related to lower exports and order timing.

ANH quarterly earnings from operations were $5.2 million, a decrease of $1.6 million from the prior-year comparative quarter. The decrease compared to the prior year quarter was a result of the noted lower sales, along with cost increases of certain key raw materials.

It is worth noting that certain key raw material costs remained relatively low in the third quarter last year, leading to higher margins and earnings.

On a sequential basis, results for the Animal Nutrition & Health segment improved, with sales up 2.6% and earnings from operations up $1.4 million, or 39%, on higher ruminant species volumes and improved monogastric margins.

We remain confident long term in the Animal Nutrition & Health segment, and we are encouraged by the sequential improvement in both sales and earnings, along with the improving dairy economics and the recent positive data from the University of Florida that Ted referenced earlier.

The Specialty Products segment achieved record third quarter sales of $17.3 million for the three months ended September 30, 2017 as compared with $16.5 million for the three months ended September 30, 2016. The increase of 4.8% was driven by strong plant nutrition sales and higher repackaged gas sales.

Specialty Products achieved quarterly earnings from operations of $5.6 million versus $5.2 million in the prior year comparable quarter, an increase of $370,000, or 7.1%.

Excluding the effect of non-cash expense associated with amortization of acquired intangible assets of $758,000, record third quarter adjusted earnings from operations for this segment were $6.4 million compared to $6.3 million in the prior year quarter, an increase of 1%.

This increase was driven by the higher aforementioned sales, partially offset by an unfavorable product and customer mix and higher raw material costs. We are actively raising prices to help mitigate the increased raw material cost, as well as other rising costs, where contract terms permit.

In the Industrial Products segment, sales increased $7.9 million, or 128.1%, from the prior year comparable quarter, primarily due to the significantly higher sales of choline and choline derivatives used in shale fracking applications. Compared sequentially to the second quarter 2017, sales increased $2.8 million or 25.2%.

Our earnings from operations for the Industrial Products segment were $2.1 million, an increase of $1.6 million compared with the prior year quarter, and primarily reflects the aforementioned higher sales, partially offset by certain higher raw material costs. We have now had five consecutive quarters of sales growth into the oil and gas industry.

While we remain cautious about this industry, we are certainly pleased with the recovery to date of our Industrial Products volumes and profits as recounts have improved. I'm now going to turn the call back over to Ted for some closing remarks..

Thanks, Bill. We delivered year-over-year revenue growth in 3 of our 4 segments, and operating earnings growth in 2 segments, with overall third quarter revenues of $150.7 million, adjusted net earnings of $20.4 million, and free cash flow of $26.9 million, despite significant challenges, particularly within the Animal Nutrition & Health segment.

On our last call, we noted that we had experienced some working capital degradation and needed to refocus on improving our balance sheet. In Q3, we were able to drive some improvement, and our strong cash generation enabled accelerated debt payments of $31.5 million above and beyond the regularly scheduled payment of $8.8 million.

This reduced our net debt to $201 million as of September 30, or less than 1.4x 12 months trailing adjusted EBITDA, further strengthening our balance sheet.

With the third quarter accelerated debt payments, we have now fully paid down our outstanding revolver balance from the $85 million that were used to finance the acquisition of IFP in June and partially fund the Albion acquisition in 2016.

In addition to the challenges we are facing within the Animal Nutrition & Health segment, the global macroeconomic environment continues to present headwinds to our company. As previously indicated, recovery of higher raw material costs through pricing actions continues to be an important focus of our business teams.

And we recently announced a price increase for both animal feed and industrial grades of choline chloride. Additionally, we are pleased with the progress made on our key strategic growth initiatives and the integration of IFP.

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 now concludes the formal portion of the conference. At this point, we will open the conference call for questions..

[Operator Instructions] Our first question comes from Francesco Pellegrino of Sidoti & Company..

Hi, there guys. The first thing that I wanted to touch on was the tax rate in the quarter, only because I know the reconciliation you guys do in the press release, you sort of add back the effects of the ASU 2016-09. And when you just add it back, I'm getting -- your GAAP tax rate is 22%. I'm getting a tax rate after the add backs of 27%.

And there's commentary in the press release that said that certain jurisdictions are contributing to the lower tax rate.

Going forward, what should we be thinking about as an effective tax rate for the company, if we don't even look at the noise in regards to the amortization of intangibles, everything that you're adding back with these onetime costs. Because historically I thought a 33% tax rate was where the business was operating at.

And it looks as if some things are improving, just based upon these jurisdiction things that you called out in the press release..

Yes, Francesco. It's Bill. There is absolutely some items that were going to be, I'll call them permanent. They're not just discrete items within the quarter. There are some discrete items, too.

But some of these things like the tax rates, which were related to states and even foreign jurisdictions with Italy, are going to remain embedded in our rate, and we should see an improving rate going forward.

So I would expect the effective tax rate in Q4 and going into next year to somewhere be in the -- excluding the impact of any tax reform act, of course, should be in the 31% to 32% range is what you could use for your model..

31% to 32%. Okay. And then in the Human Nutrition & Health, a couple of times you guys touched on the plant inefficiencies as contributing to the EBIT margin contraction.

Could you just dig in a little bit more about that? I assume it's attributable to the lower powder sales, or is it the flavor sales?.

Sure, Francesco. We were pleased with the overall revenue growth in H&H. I think up about 9%. And within that, we had several product lines that were up very nicely. Choline sales were up close to 30%. Minerals were up -- actually powder systems sales were up, but unfortunately, powder systems volumes were down.

And this is somewhat reflective of our strategy to evolve the business away from mature products to more specialty products, and that comes typically with higher prices, higher margins, but on lower volumes.

And so we are experiencing at 2 of our 18 plants across our network some lower utilization issues, as well as obviously resulting absorption issues. And that was reflected in this quarter's margins, particularly in H&H. I think the positive news is that we have 18 sites across the company. We just purchased two relative to IFP.

We purchased three with the Albion acquisition.

And we clearly do have some overlap and some similar capabilities across multiple plants, so we believe we have a significant opportunity to look at our plant as a complete network and drive some optimization and efficiencies across the entire network, and as I said, feel like we have some good opportunities to offset these inefficiencies we experienced this quarter in coming quarters..

I don't want to split hairs here, but -- so it's fair to say that these are plant inefficiencies as compared to manufacturing inefficiencies..

No. I would say they're really manufacturing inefficiencies. I'm using that word plant really to mean manufacturing site inefficiencies, yes..

And in your response, you said that choline nutrition volumes in the Human Nutrition & Health segment were up 30%..

Yes, they were. They were, and we're very excited about that. Looking at the full year, sales are up about 13% or so. So it's going to be -- some of our products are a little bit lumpy as they grow. But Q3 happened to be a particularly good quarter for choline for human consumption. But overall year to date, we're up about 13%.

And we think that -- Q4 last year was not the best quarter for choline, so we should realize even higher than the year-to-date 13% growth in choline. So we're quite encouraged by the choline growth.

I think we've said in previous quarters last year that we should start to see some benefits from the RDI and our increasing awareness efforts in 2017, and expect to see even more in 2018..

Okay. Just jumping over to the Specialty Products segment. This has been really a standout segment for the company. And I noticed you highlighted some strong plant nutrition sales domestically as well as abroad.

What percentage of sales in this segment are attributable to plant nutrition?.

Bill, do you want to give a –.

Yes. It's probably 20%..

So call it 20%, Francesco..

Okay. And last question for me. Before you opened the call for questions, you started discussing the balance sheet. And the balance sheet's really strong, especially after the fact that you were able to pay down the entire revolver during the third quarter. In some views, you could even say significantly under levered.

While the deals that you've been doing like the IFP deals are very nice, they're just modestly accretive to EPS. And I know that the company just redid the way that they report their business segments.

Would you be willing to take on another acquisition of some significant size that was transformative to the way that maybe the SensoryEffects acquisition was three years ago?.

Francesco, I think the simple answer to that is, yes, if we were to find the right acquisition that strengthened our market position, strengthened the company significantly. I think as we have indicated in the past, we have made several acquisitions, but our first focus really is driving organic growth.

We have a strong pipeline of acquisitions that really is made up of very small deals, but also transformative ones.

And if the right one comes alone, and we feel like we can acquire it for a reasonable price and get an appropriate return on it, we certainly believe we've got the management capabilities, as well as the financial strength to do a transformative deal. But it obviously needs to be the right one.

We are not a company that's sitting here and saying we think we're too small and we have to do something like that. But there are opportunities out there, and if one comes about, we will seize on it..

Just as a follow up.

So you'd be willing to go outside of your core business then, like you did with SensoryEffects?.

I'm not sure I would say that Francesco. We think that we like the legs to our stool, if we can use that analogy. We're not looking for a fifth leg to the stool. And we think there are plenty of nice, small and/or transformative acquisitions within our core. So that really is our focus area..

Francesco, one quick clarification just on the plant nutrition. Just because of seasonality, it's probably more like 25% of the segment is plant nutrition..

For the year or quarter?.

That's on an annualized basis, so that takes into account seasonality..

Our next question comes from Tim Ramey of Pivotal Research..

Hi. Just one follow-on on the effective tax rate. If we put let's say 31.5% in for the fourth quarter, Bill, that brings in the full year tax rate at right around 30%.

Would you, relative to your guidance of 31%, 32% being kind of normal, should we just think about the difference between that full year rate and normal as the lumpiness of ASU 2016-09, or how should we think about that?.

No, that's sort of trying to carve out the 2016-09. It's really related to some other one-offs that we had. We had this purchase price adjustment, which is one-off item that was a gain that we had that was not taxable.

And then we actually had some other adjustments for state purposes where we had filed voluntary disclosure agreements, and that resulted in the relief of some liabilities and some penalties in interest that we had for uncertain tax positions. And that's a little bit of a onetime pick up also, and now we'll normalize going forward.

So you're getting a little bit of one-offs here in 2017 that I obviously won't count on in 2018. But we have done some things, again as I indicated, some tax planning that has resulted in a better rate, as well as just -- I don't want to take all the credit for it.

There's just been some state rate change and some state apportionment that turned out to be favorable, and we should still reap the benefits of that next year, too. That's why it's up from the 30% on a full-year basis, but not quite back to the 33% we used to have..

Got it, thank you. Is there anything relative to Mr.

Fitzpatrick's fourth quarter retirement that would be lump in terms of ASU 2016-09 effect, or is that not predictable from his employment agreement?.

Yes, it's not predictable. There's going to be -- at some point, there'll be some exercises but it all depends on when it occurs. It all depends on the stock price obviously. I'm not going to sit there and try to project him, obviously, because it's very difficult to do.

But in the end, as we indicated earlier this year, we've tried to carve this out to be fair to everyone looking at these numbers because we didn't think it was right to take the benefit. And so any likely benefit from Mr. Fitzpatrick having equity comp will be carved out as an adjustment so that we can have a true look at what the results are..

Okay. And relative to the IFP deal, I think that's the only acquisition year over year right now.

Can you help us understand what part of third quarter sales would have been attributable to acquisitions?.

Sure. And you're correct; that really is the only significant year-over-year acquisition impact. We did make that very small acquisition earlier in the year, Chol-Mix, but it's almost immaterial. So IFP really is the only year-over-year.

And as we said, the IFP annual revenues were about $20 million, so about $5 million a quarter, and we were slightly ahead of that in Q3..

Our next question comes from Brett Hundley of The Vertical Group..

Good morning, guys and welcome to Terry as well. I had a few questions. I wanted to go back to the balance sheet discussion that you were having with Francesco. Bill, sorry if I missed this.

Can you give me a sense of where you expect CapEx to finish for the year?.

We should be somewhere probably around $26 million, $27 million is I think what we're expecting to do here with the significant project being related to the build out, the expansion that Ted mentioned in Ogden, Utah for the replacement of the Clearfield facility..

So that -- I thought that the majority of that was finished. That implies still a pretty robust number for Q4 from a CapEx standpoint..

Yes, it implies somewhere around, I think we're about $18 million, $19 million here through, year to date through September. But there's going to be -- it's a lot going on in the fourth quarter related to this. There's still some other projects we're working on, too, and there's always the normal maintenance stuff that occurs.

But we do think that's what's going to wind up being the end result here as we finalize and finish this, the M&E coming in, put in service and being qualified, obviously the final buildout. So that's why we think it's going to wind up at that point for the full year..

Okay. And soo while Q4 free cash might not be as large as I had expected if you do continue to kind of run at this rate going forward, you are going to drive some continued nice free cash flow levels. You brought down your revolver post deals that you've made here recently.

And so I guess my question is, do you guys see yourselves as more reactive on the M&A front here going forward? It sounds like you very much continue to put organic growth opportunities at the forefront.

But assuming that you are able to well handle CapEx related to that with your strong free cash flow, and assuming maybe that you are a little bit more reactive, or even if you are proactive, that you don't find opportunities that appease you strategically or from a valuation standpoint, how do you think about your balance sheet where it is right now? Because it is very safe.

It could arguably be under levered.

Do you start to look at the dividend or a special dividend? Can you take us through how you think about the balance sheet where it is, excluding the organic growth opportunities that you'll already fund year to year?.

I think it's a little too soon for us to think about a huge uptick in the dividend. We are obviously coming up on our December board meeting where we'll discuss this. And as you know, Brett, we've increased our dividend every year for quite a number of years, and we'll certainly be looking at it again.

I think we have these conversations at least once a month in terms of capital allocation, what we're going to do. We knew we were coming up on paying the revolver balance down. We knew we were going to be left with a term loan. And I think we still view ourselves as a company that wants to grow organically first.

And I think it's sort of even indicative of that, with the R&D spend going up here, we spent some more money on projects, things that we know that are worthwhile and there was a little bit more spend there. But just in general, we're going to try to find those organic growth opportunities, whether it's PP&E or R&D.

And secondarily, we are very proactive on the acquisition front. We're not reactive. We are constantly talking to investment bankers, whether they're boutique shops or large investment bankers looking at opportunities that are out there for us, and we continue to consider that part of our growth strategy for sure.

If we get to the point where things are really stagnant, or we're just sitting there saying we're not going to pay a multiple for something we don't see as being accretive enough, then we'll continue to have these conversations about increasing the dividend or buying back shares. But we believe that's not what most of the investor base.

We don't think it's who we are. And so we'll constantly have these conversations. And the other thing to consider as part of what we want to do in terms of even paying down the term loan is we're less than two years away from the maturity of the facility, so we're having discussions about that right now. We got a really good facility.

We're happy with what we're paying on the interest. But in the end, if it makes sense to pay down the term loan, we will, knowing that we can easily go out and tap the debt capital markets. The pro rata markets have been very good to us.

And we really don't think we're going to have a problem getting financing, even if we start to pay our term loan down and have built up less cash. Whether it's a transformative acquisition that we're going to do something different than what we already have, or just these bolt-ons, we think we're well-positioned to take care of it.

And I think the dividend, again, and then the treasury shares, we'll have some discussions, but it's really not our first priority. That's been our capital allocation strategy, and it's going to continue to be our capital allocation strategy..

Okay. I appreciate that. And then I just have two other questions. One is on choline in the H&H side. Conversations that I have with investors, I would describe it as there generally seems to be maybe some confusion -- I don't even know if that's a good word -- but just some concern about the trajectory of that business.

And as you mentioned, Ted, it's at a, I think you said a 13% growth rate year to date, but that really kind of jumped in Q3. You also characterized Q3 as kind of an easy comparison. And I'd be curious if you could take us through the choline business on the human side and maybe just what you're seeing.

I think a lot of us expected growth to really pick up related to that RDI, and the visibility has become I think challenged quarter-to-quarter on how that business is progressing.

And so any confidence that you can put behind that, or even any examples that you can put behind your choline business maybe starting to gain more and more traction would be helpful. So that's my first question. And then just my second question is on the animal business. You guys mentioned timing again.

And I've heard that timing word come up a number of times here. And I'm curious if the animal business is getting harder and harder to read. Just structurally, if there's something structural that's making that business harder to read and model and creates more lumpiness to the business.

Or if timing orders, timing issues are a function of maybe the current marketplace and the way that it is. Thank you..

Brett, on the choline nutrients within H&H, I would say that we are increasingly excited about what we're seeing in the marketplace. Sales and volume was up 13% or so year to date, and so that's really positive to see. And maybe it's increasing here as the year has progressed, as Q3 growth shows.

But to me what I think is more exciting, and I think why the team is increasingly optimistic, is just the level of awareness that seems to be improving out there. The fact that we've now talked about a couple times the American Medical Association coming out with such strong advocacy for choline, that is really very positive.

The recent Council for Responsible Nutrition study that showed increased awareness, as well as increased usage. And awareness there is still relatively low. It was sub-25% of the surveyed folks were aware of choline, but it was up significantly from the prior year.

And then the data that we have around the number of new products that are coming out with choline I think is really encouraging. And this is all without I would say significant homerun from our perspective of inclusion of choline in a major brand multivitamin or prenatal vitamin or what have you.

And so this is a lot of singles and doubles and new product launches and various supplements and nutritional beverages and so forth that are coming out with choline included. But we do see some of those homeruns happening over the course of the next few years.

And I think that we really from the beginning said that 2017, we should see some very nice growth. In 2016, our volume and revenue for choline was about flat. And I think that we'll see very nice double digit growth in 2017, and we should see higher growth in 2018, again as awareness increases as we get a win or two that I might call a homerun.

So we're pleased with what we're seeing in the market, and I think our sales organization and marketing team are more excited today than they were a year ago. So hopefully that gives you a little bit of color from what we're thinking about in that business.

The other thing we're doing, and part of the increased R&D spend there, is we are spending money on a few clinical studies around choline. And one that I think is particularly important is around trying to identify a biomarker for choline.

One of the issues with choline, if you will, is that when you go have your annual physical, a doctor can't run a test to see whether or not you're deficient in choline. And we have started a clinical study just around that specifically, and believe that we can identify a biomarker.

And that would be a really, really important tool to help advance the growth in choline. So again, lots of evidence in the marketplace of increased awareness. We're spending money on various trials to help support the effort. We're starting to see some growth in our revenues. So we're pretty encouraged about the future of choline.

Relative to Animal Nutrition & Health, Animal Nutrition & Health has been obviously disappointing for the last few quarters. We had an excellent 2016 in our Animal Nutrition & Health business. And at the end of the day, we were really pleased with the improvement in Q3 relative to Q2.

Sales were up almost 3%, and earnings were up I think 30-plus percent sequentially, but obviously still down year-over-year. Milk prices are starting to improve. Milk protein prices improved in the last month pretty significantly as Bill talked about, and that all should help provide some tailwind to our growth.

And really we've had kind of two primary issues in the business. One has been our ruminant volumes have been down, which primarily has been related to the poor dairy economics, but also that one customer that was destocking. That's behind us. That customer destocking is behind us.

But the dairy economics are still playing a role, but we're seeing some signs of improvement, and the improvement in ruminant volumes sequentially is a nice piece of evidence relative to that. And then the ongoing improvement in milk protein prices I think is positive.

And then the second part has been on the monogastric side where we've seen increased competition. And while that business has continued to grow pretty nicely, we've seen significant margin erosion. That improved somewhat in Q3 as well, with margins in monogastric picking up nicely over Q2. Still down over prior year, but up over Q2.

And we announced a price increase in September, which really is the first price increase in that business for quite some time, and we're in the midst of raising prices in that business. We're also encouraged about our efforts there to offset some of those higher costs. We believe we're well-positioned in the animal nutrition health business.

It's a core part of our company. We're optimistic about the long term. We've had a difficult couple of quarters, but we're starting to see some signs of recovery both on the ruminant side, as well as the mono side..

Ladies and gentlemen, we have reached the end of our question and answer session. I would like to turn the call back over to Mr. Ted Harris, CEO, for closing remarks..

Thank you. I just really want to end by thanking everybody for joining our call today and your continued interest in our company. We look forward to our next call, which will be in February, to update you on the progress of our strategic initiatives, as well as to report out on our Q4 and full year results. Thank you again for joining..

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