Greetings. Welcome to the Balchem Corporation Quarterly Conference Call for the Fourth Quarter 2019 Financial Results. At this time, all participants will be in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded.

At this time, I'll turn the conference over to Martin Bengtsson, Chief Financial Officer. Mr. Bengtsson, you may now begin..

Thank you, Rob and good morning everyone and thank you for joining our conference call this morning to discuss the results of Balchem Corporation for the quarter ending December 31st, 2019. My name is Martin Bengtsson, Chief Financial Officer; and hosting this call with me is Ted Harris, our Chairman, CEO, and President.

Following the advice of our counsel, auditors, and the SEC, at this time, I would like to read our forward-looking statements. 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 Chairman, CEO, and President..

Thanks Martin. Good morning and welcome to our conference call. Before I get into the quarter, I would like to reflect for a few minutes on some of the significant accomplishments the Balchem team achieved over the past year. 2019 was another strong year for Balchem.

Financially, we delivered sales of $643.7 million with year-over-year sales growth in three of our four segments. Human Nutrition & Health, Animal Nutrition & Health, and Specialty Products all delivered record sales performances in 2019.

These sales drove record adjusted net earnings of $103.7 million compared to $97.8 million from the prior year, an increase of $5.9 million or 6.1% and record adjusted EBITDA of $160 million, an increase of $0.7 million or 0.5% from the prior year. And free cash flow remained strong at $96.1 million in 2019. Strategically, we also had a good year.

As a company, we are striving to make the world a healthier place by providing innovative solutions for the health and nutritional needs of the world and at the same time, operating with excellence as strong stewards of all our stakeholders. We are making progress on choline, mineral, and amino acid nutritional understanding and awareness.

And our investments in new product development, external studies, and new science development are making a difference for the future advancement of our Human, Animal, and Plant Nutrition franchises.

Most notably, as a result of internal developments, we launched several new products to the market that are making a difference including a line of silica-free chelated minerals and an improved compaction Calcium Citrate Malate chelated mineral for Human Nutrition & Health.

We expanded our PetShure line of products for the companion animal market to include sensory inclusions for pet treats. And we introduced AminoShure XM, our next-generation rumin-protected methionine that delivers enhanced bioavailability and superior feed stability.

And we launched an organic chelated potassium micronutrient foliar applied product to fill out our line of organic micronutrients for plant nutrition.

At the same time, our external research and studies are also making a difference including work we are doing with our partners within Human Nutrition & Health on child cognition, the development of a choline biomarker, the exploration of the synergies between choline and DHA absorption, the invention of next-generation magnesium chelates, the development of a unique treatment for autism, and all of the work we are investing in to explore the broad-ranging benefits of choline, mineral, and amino acid nutrition for monogastric and ruminant species within Animal Nutrition & Health.

We also remain active on the acquisition front completing the acquisitions of Chemogas in May of 2019 and Zumbro River Brand Inc. in December.

We have effectively completed the integration of Chemogas into our Specialty Products segment and we have been realizing identified synergies as we leverage this acquisition to create a global performance gases business that services our customers' needs for ethylene oxide and other products worldwide.

We have also been progressing the integration of Zumbro and already realizing some synergies. And we further enhance our portfolio of solutions in the food and beverage industry, particularly through Zumbro's unique high-protein products and extrusion manufacturing capabilities.

Both of these acquisitions contributed nicely in 2019 to our financial performance and our strategic positioning and capabilities. From a corporate perspective, we significantly progressed our effort to consolidate our five ERP systems into one Microsoft Dynamics 365.

This $12 million initiative is critical for the continued growth and operational efficiency of the company.

After all of the planning, implementation started in earnest in 2019 as we significantly progressed to stage ERP implementation across our businesses and network of manufacturing sites, ending the year with approximately 60% of our users and revenues now on the new system.

This has been a tremendous amount of work, but we are very pleased with the progress to-date and we look forward to full implementation in 2020. We also executed a modest stock repurchase program to both offset the dilution associated with our equity incentive plan and provide a return of capital to our shareholders.

We largely offset the dilution by repurchasing approximately 230,000 shares at an average cost of $88.58 per share.

This stock repurchase program is one component of our overall capital deployment strategy that focuses primarily on investing in organic growth opportunities that provide an attractive return, augmenting our organic growth through strategic M&A where appropriate, paying down debt and maintaining a strong balance sheet and retaining and growing our dividend to our shareholders.

And lastly, Balchem released its first Sustainability Report in 2019 which captures the company's commitment to managing our environmental, social and governance or ESG performance.

While this is our first formal Sustainability Report, we have spent the past 50 years passionately engaged in developing and delivering innovative solutions for the health and nutritional needs of the world, while operating our facilities and businesses to the expectations of all of our stakeholders.

Our ambition is to build a stronger and more vibrant company that meaningfully contributes to making the world a healthier place and this report shares the foundation we have built and communicates our commitments to these objectives. We look forward to making further progress on our ESG initiatives in 2020 and into the future.

All in all, another strong year for Balchem both financially and strategically and we look forward to continuing our momentum into 2020 and beyond. Now with regard to the fourth quarter of 2019.

This morning we reported record quarterly consolidated net sales of $166.5 million, which resulted in fourth quarter net income of $20.4 million or $0.63 per share on a GAAP basis.

Our fourth quarter non-GAAP net earnings of $28.4 million or $0.88 per share exclude tax-adjusted non-cash amortization and other items as detailed in our earnings release this morning of $8 million to facilitate comparative evaluation of operating performance versus the prior year period.

These record non-GAAP net earnings of $28.4 million or $0.88 per share represent an increase of $3.3 million or $0.11 per share compared with the prior year quarter of $25.1 million or $0.77 per share. We also delivered quarterly cash flows from operations of $33 million for the fourth quarter 2019 with quarterly free cash flow of $26.3 million.

Our quarterly net sales of $166.5 million were 1.8% higher than the prior year comparable quarter. We achieved sales growth in three of our four segments with all-time record quarterly sales in our Human Nutrition & Health and Animal Nutrition & Health segments.

And fourth, record fourth quarter sales in our Specialty Products segment which were partially offset by the significant decline in our Industrial Products segment where volumes related to oil and gas fracking remained low compared to prior year.

The impact of foreign exchange to our sales was a negative $0.7 million due to the weaker euro driving a negative 43 basis point impact to our year-over-year sales growth. Our Q4 consolidated gross margin dollars of $54.3 million were up $3 million or 5.9% compared with $51.3 million for the same period in the prior year.

Our consolidated gross margin percent was 32.6% of sales in the quarter, up 125 basis points from 31.4% in Q4 of 2018. The 125 basis point increase was primarily due to mix and certain lower raw material costs. Consolidated operating expenses for the fourth quarter 2019 were $30.7 million as compared to $24.1 million in the prior year.

The increase was principally due to incremental operating expenses related to the Chemogas and Zumbro acquisitions, increased transaction and integration costs, higher bad debt expense and a non-cash restructuring charge in the Human Nutrition & Health segment.

Excluding non-cash operating expense associated with amortization of intangible assets of $6.4 million, operating expenses were $24.3 million or 14.6% of sales. Looking forward, we will continue to focus on tightly controlling our operating expenses and leveraging our existing SG&A infrastructure.

GAAP earnings from operations for the fourth quarter were $23.6 million, a decrease of $3.6 million or 13.2% compared to prior year. On an adjusted basis, as detailed in our earnings release this morning, earnings from operations of $33.1 million were down $0.5 million or 1.4% compared to $33.5 million in the prior year.

Adjusted EBITDA of $40 million was $0.4 million or 1% above the 32 -- $39.6 million posted in the fourth quarter of 2018. Interest expense for the fourth quarter of 2019 was $1.2 million and our net debt was $182.9 million with an overall leverage ratio on a net debt basis of 1.1.

The company's effective tax rates for the fourth quarter 2019 and 2018 were 8.9% and 19.5% respectively. The decrease in the effective tax rate is primarily attributable to discrete items, particularly related to tax reform clarifying regulations, incremental R&$, tax credits and certain lower state taxes.

Consolidated net income closed the quarter at $20.4 million, up 0.2% from the prior year quarter. This quarterly net income translated into diluted net earnings per share of $0.63 for the current year flat with last year's comparable quarterly result of $0.63.

On an adjusted basis and as detailed in our earnings release, our fourth quarter adjusted net earnings were $28.4 million or $0.88 per diluted share, up $3.3 million or 12.9% compared with $25.1 million or $0.77 per diluted share in the prior year quarter.

We generated a quarterly free cash flow of $26.3 million and we closed out the quarter with $65.7 million of cash on the balance sheet. I'm now going to turn the call back over to Martin to go through the detailed results for each of our segments..

Thank you, Ted. For the quarter, our Human Nutrition & Health segment achieved all-time record quarterly sales of $90.3 million, an increase of $3 million or 3.4% from the prior year. The sales increase was primarily driven by higher sales in our Ingredient Solutions business, partially offset by lower Cereal Systems volumes.

Our Human Nutrition & Health segment also delivered fourth quarter earnings from operations of $9.2 million, a decrease of $3.1 million or 25.3% compared to the prior year, primarily due to several discrete items including certain manufacturing inefficiencies, higher bad debt expenses largely attributable to the Dean Foods bankruptcy and a non-cash restructuring charge associated with the exiting of a small underperforming product line, partially offset by the aforementioned higher sales.

Excluding the effect of non-cash expense associated with amortization of acquired intangible assets of $4.8 million, $1 million of restructuring cost and an inventory valuation adjustment of $0.1 million adjusted earnings from operations for this segment were $15.2 million, a decrease of $2.4 million or 13.8% compared to $17.6 million in the prior year quarter.

Our Animal Nutrition & Health segment delivered all-time record quarterly sales of $48.4 million, an increase of 2.8% or $1.3 million compared to the prior year. The increase in sales was driven primarily by higher volumes and improved product mix within both our monogastric and ruminant businesses.

Ruminant sales were up approximately 7% and we're encouraged by the rise in Class III milk prices to levels not seen since 2014 which is a welcome change from a long period of poor dairy economics, creating a healthier environment for us to market our unique line of products for the health and nutrition of dairy cows.

Monogastric volumes were up approximately 5%, but we continue to experience competitive price pressure in Europe and we expect this to continue in the near term.

The impact of foreign exchange is most notable in our Animal Nutrition & Health segment with a negative $0.4 million impact in the fourth quarter, driving a negative 0.8% impact to year-over-year growth.

Animal Nutrition & Health quarterly earnings from operations were an all-time record of $9.4 million, up $2.4 million or 34.9% from the prior year quarter, primarily due to the aforementioned, higher sales and certain lower raw material costs partially offset by the continued competitive pressures on pricing in the European monogastric business.

Our Specialty Products segment delivered record fourth quarter sales of $24.0 million as compared with $17.6 million for the prior year quarter.

The increase of 36.8% was driven by higher sales of ethylene oxide for the medical device sterilization market due to both the contribution of Chemogas and higher legacy product sales, partially offset by lower volumes in the plant nutrition business.

Specialty Products segment also achieved record fourth quarter earnings from operations of $6.2 million versus $5.8 million in the prior year quarter, an increase of $0.5 million or 8%.

Excluding the effect of non-cash expense associated with the amortization of intangible assets of $1.7 million, fourth quarter adjusted earnings from operations for this segment were $7.9 million compared to $6.5 million in the prior year an increase of $1.4 million or 20.7% The increase was primarily driven by the aforementioned higher sales, partially offset by mix and higher operating expenses due to the Chemogas acquisition.

In our Industrial Products segment sales of $3.8 million decreased $7.8 million or 67.3% from the prior year quarter, primarily due to reduced sales of choline and choline derivatives used in shale fracking applications.

We continue to experience significantly lower demand within the Industrial Products segments, not only due to slower fracking activity, but also due to operators starting to recycle more fracking fluids, as well as eliminating additives where possible in order to reduce costs and preserve cash.

We're not seeing any recovery in the fracking activity at this time and we're not expecting any recovery in the short term. As such, we remain cautious about this historically cyclical market.

Our earnings from operations for the Industrial Products segment were $0.3 million, a decrease of $1.8 million compared with the prior year quarter due to the lower sales volumes. I'm now going to turn the call back over to Ted for some closing remarks..

Thanks Martin. In the fourth quarter we delivered year-over-year revenue growth across three of our four segments with strong consolidated net earnings and cash flows from operations, while facing the previously noted challenging market conditions within oil and gas and certain discrete cost items in Human Nutrition & Health.

Our net debt leverage ratio of 1.1 times adjusted EBITDA strong balance sheet and revolving credit facility provide us the flexibility to capitalize on both organic and inorganic growth opportunities. We have strong positions within the markets we serve and we believe we are well positioned to generate healthy growth over the years to come.

We are pleased with the progress made on our key strategic growth initiatives in Q4 and throughout 2019. And we'll continue to work on strengthening our company by focusing on our core strategies, exercising disciplined cost management and seeking value-creating acquisition opportunities.

And now I'd like to hand the call back over to Martin who will open up the call for questions.

Martin?.

Thank you, Ted. This now concludes the formal portion of the conference. At this point we will open up the call for questions..

Thank you. [Operator Instructions] Thank you. Our first question today is coming from the line of Brett Hundley with Seaport Global. Please proceed with your question..

Hey, good morning, guys..

Hi, Brett..

Hi, Brett..

I have a few housekeeping questions, if we can move through them pretty quickly because I do want to ask you a couple of questions about the HNH segment.

So just first Martin is your tax expectation for 2020 still in that 24% range? And, if so maybe I can flip the question to both of you because by my math that's going to present about a $0.20 headwind to EPS for 2020, which could play around with the optics on the EPS line.

But if that is the case I know you don't want to give formal guidance but would your expectation at least be that that you would intend to grow EBITDA during 2020?.

Brett, let me comment on the tax rate, first. I would say that, around 23% is based on what we know today, where we see the tax rate for 2020. You saw obviously in 2019, we were able to drive a much lower rate due to some discrete items. But if we just take, what we know today, I would plan for about 23% from a tax rate perspective.

On your question regarding, whether we're planning on growing EBITDA, I would say, we're quite well positioned where we sit today in terms of our outlook for 2020 in putting some nice growth to both our top line and our bottom line in 2020..

Thank you for that. And the other one, I wanted to ask you was on Chemogas. Can you explain that contribution in Q4 on the top line? Your Specialty segment grew net-net by about $6.5 million.

Would you put the contribution from Chemogas in that same ballpark?.

Yeah. Chemogas contributed to approximately $7 million you round to the closest full million. Where you had a little bit of a downtick was on the plant nutrition part of Specialty products..

Okay. Perfect. Perfect. And maybe I'll go into my questions on HNH and then get back in the queue. But – so my first question on HNH. Thank you for calling out the Dean Foods bankruptcy during the quarter. I want to try and understand that discrete item a little bit better and then also ask about the manufacturing inefficiencies.

So have you changed your exposure to Dean at all given the announcement? There is some talk that DFA could come in and buy some assets.

But have you changed your exposure there at all? And given that they have lined up some financing, would you expect the risk profile or that particular discrete item to go away in subsequent quarters here? I'm sorry that, I'm asking you a question about a specific customer.

And then secondly, the circumstances around the manufacturing inefficiencies are they tied at all to the ERP implementation, or would it be something else where you can give us confidence that we might not see the – see them in subsequent quarters?.

Yeah. Let me comment quickly on the bad debt Brett first, and I'll let Ted chime in as well. In terms of the exposure we have obviously changed the terms so we're not taking any risk with Dean at the moment. We're still delivering product to them since they need our ingredients, but they're paying us in advance now.

So there's – we're not building up any exposure to them or DFA in this case that's looking to acquire them. And the second part of the question going into the manufacturing and efficiency is it related to the ERP? I would say no. It doesn't have anything to do with the ERPs.

We had a – I would call it unusually high-yield losses, and of spec material in the fourth quarter particularly within our ingredient solutions business which was no result of the ERP implementation. We've addressed a number of these here in the fourth quarter, and we're still working through some of them here, early in the first quarter.

So we would expect to be back up and running as normal here in the foreseeable future..

Yeah. We – I'll just kind of add-on to Martin's comments. We had about $4 million of what I would describe as unusual additional costs in our Human Nutrition & Health business in Q4. We already spoke about the bad debt, which again round numbers was about $1 million.

That really is behind us highly unusual for us to have bad debt, a very rare occurrence in our business. We don't have any further risk associated with Dean Foods. And at least, we do have – and we don't like to rely on hope at some hope that we may get some of that back over time as a critical vendor to Dean Foods or DFA.

We had the $1 million of restructuring which was a non-cash event. This is a part of a plant that made a very specific product. It's underperforming and we just decided to exit that business, because we really needed the room to add some additional equipment to really try to grow a new piece of business.

And then we had the manufacturing efficiencies where – which again were about $2 million rounding out the $4 million. And I think Martin covered those well. Obviously, that was a significant hit to Q4. But we understand what they were. They were completely internally driven and we do believe they are partially behind us.

And over the course of Q1 we will address them in full and those issues will be behind us..

Okay, that's really helpful. And so if I can maybe just summarize the last part there including maybe any normal seasonality that we see in the model, we can build a bridge potentially from Q4 to Q2 and maybe there will be some improvement in the Q1 margin, Q4 relative to Q2 and then we should be back at kind of that full run rate margin in Q2.

Is that fair?.

Absolutely..

Okay. Okay, perfect. And then just my last question before I jump back in the queue Ted. I thought that the Zumbro acquisition was really interesting. And I wanted to ask about it in the sense of the nature of your B2B business in the HNH segment. And I mean, what Zumbro signifies is nothing new.

You guys have been involved in what I'll call co-manufacturing for a while now. And as I look at your HNH business I kind of think about it in multiple ways. I think you guys have that B2B business, where you sell ingredients to food manufacturers and the like.

And then you also seemingly are moving into this business where you can have B2B options into the retail set, where you almost operate as a private label producer and co-manufacturer.

Do you think that I'm describing it well there? And does Zumbro further signify a potential move by Balchem where you see more and more opportunities on the co-man side, given growth and maybe even a potential margin profile there? I hope that question makes sense..

Yes it does, Brett. But I don't think that the Zumbro acquisition signifies a move more towards co-manufacturing. I think the way we view the Zumbro acquisition was really I think twofold. One is they had some unique capabilities in an area where we're already engaged. They're extruding products we extrude products.

And they have a unique product offering and high-protein extruded products for snacks, snack bars and so forth. And we've struggled to get into that side of the market before. So this is an example of really not pre-manufacturing. It's an example of us manufacturing a unique product and offering it to the snack market.

And we liked that capability and we thought that it would be synergistic with our other capabilities and allow us to have a broader offering to the snack market. Yes there is a co-manufacturing part of this.

And I think the strategy there was an opportunistic opportunity to consolidate the market somewhat, take costs out and improve the operating performance of Zumbro by integrating it with the larger Balchem. And those really solely were the two strategic lenses I guess that we looked at the Zumbro acquisition through and ultimately decided to do it..

That’s great. Thanks for the clarification. I’ll jump back in the queue..

Thanks..

Next question is from the line of Ram Selvaraju with H.C. Wainwright. Please proceed with your question..

Hi. Thanks very much for taking my questions. Maybe we could start off with Zumbro.

I was just wondering what you had disclosed regarding the metrics surrounding that acquisition if any?.

So maybe I'll just kick this off and then Martin can give you specifics. So we had signed an agreement with the former owners of Zumbro, initially to not announce specifics but we are free to disclose some specifics to you now. So Martin can go ahead and share with you some of the numbers..

Yes. No absolutely. The enterprise value we paid sort of on a cash-free debt-free basis for Zumbro was $52 million. So that represents a multiple of about nine times 2019 adjusted EBITDA for them and 1.6 times sales. So it's a sub-10 multiple that we paid for this acquisition.

We do expect Zumbro to be accretive to us both from a GAAP and an adjusted EPS perspective in 2020. And in terms of synergies, we expect to drive about 5% of their revenues in synergies but the majority of that is cost synergies that we have a pretty clear line of sight too..

Okay, perfect. That's very helpful.

And while we're on the subject of synergies I was wondering if you could just give us an updated picture on the realized and projected synergies, if any in the wake of the Chemogas acquisition and integration?.

Sure..

Yes. So, again, Martin, you can.

Yes, I can..

Clarify that. But we had said similarly about 5% of sales relative to synergies. And I would say in the middle of January, late January we really – I think we're operating at a run rate of that amount. And so it took us the remainder of 2019 to get the costs out. But it's early here in Q1, I think we're operating at that run rate.

Martin you can maybe give some specifics?.

Yeah. No that's -- that is a factual statement..

Okay. And that….

Okay. And that was really a combination of largely of costs, organizational costs and purchasing costs. And we do have some sales synergies. They're coming, but the cost synergies really have added up to the total number already, so yeah..

Okay. And then just a couple of other quick ones.

I was wondering, if you could comment on whether you're seeing additional interest internationally within the HNH segment for your choline products, particularly in light of the possibility of potentially combining them with existing supplement courses or supplement regimens to supplement products sold by folks internationally particularly for example in the Asia Pacific region.

And if you think that there might be potential for additional collaborations that could be synergistic with or incremental to your existing HNH business because of the recent clinical data that's been presented advocating for enhanced incorporation of choline into some of those regimens..

Yeah. The short answer is absolutely. We think that we have strong opportunity in the Asia Pacific region Europe and in the Americas based on the clinical data that has been developed -- is being developed. And we really believe that the opportunity at hand as we speak is first and foremost in the prenatal vitamin world.

And the companies that we're working with tend to be fairly global. They may be run regionally but fairly global. And we do see products being introduced in one region leading to opportunities in another region.

For example, P&G, I think formally Merck just launched a new prenatal vitamin that includes a fairly nice dose of choline in it and this is a product that's been on the market for years. It's just been relaunched now to include choline. And that came from work that was done in the Americas and so forth.

So we do see the interest in nutrition globally as a real opportunity for us and we are seeing specific opportunities get across the goal line in really each of the regions..

Okay. And then just two other quick items. On the European monogastric pricing front, can you comment on whether you expect to see trends that have already emerged continue to persist in 2020, or whether you think there might potentially be additional improvement on that front? And then lastly with regard to the Industrial Products segment.

Because of the challenges that's -- that have been seen in the fracking industry, which don't appear to be going away anytime soon, are you strategically reevaluating Balchem's positioning in that business line on a more comprehensive basis? And would there potentially be the possibility that you might look to exit that business entirely, or are you still hopeful that at some point a turnaround will ensue? Thank you..

Sure. Let's start with monogastric in Europe. And from our perspective, obviously, much of this is being driven by China and competitors from China. And they're being impacted significantly by the African swine fever, and now probably to some extent by the coronavirus.

And so it's -- I guess part of my answer is it's really an uncertain environment and it's fairly hard to tell. But our perspective is that the situation is relatively stable. We are seeing higher prices now out of China, which we don't necessarily want to take to the bank.

But I think it's an encouraging sign that may be driven by internal logistics within China driving up raw material costs and so forth because of the coronavirus not 100% sure about that. But we think minimally it's stable, potentially some positive signs of things changing a little bit there.

And -- but we're certainly kind of planning on at least it being stable where we've seen it for the last few quarters and having to deal with that for the entirety of 2020. But some positive signs. Relative to fracking, we do continue to believe that choline is an important part of the clay stabilization mix.

And we do feel if and when the market comes back there's an opportunity for growth. But having said that, we're always looking at our businesses from a strategic lens. You saw us actually divest a small business in 2019 that was underperforming and we just didn't feel like it had future growth to it and so we did decide to divest it.

But we don't have any plans at this point. This is a complicated business for us, because it's very synergistic with our Animal Nutrition and Health business and the product that it manufactures. It manufacture -- we're essentially selling choline, which is very similar to the choline that we're selling in the Animal Nutrition and Health space.

But we'll continue to look at it strategically and relative to what we think the growth opportunity is long-term versus the investment and cost of remaining in the business..

Great. Thank you very much..

Thank you. [Operator Instructions] The next question is from the line of Mitra Ramgopal with Sidoti. Please proceed with your question..

Yes. Hi. Good morning. Thanks for taking the questions. First just want to start to the housekeeping one. I'm not sure if you could give on the impact of the transaction and integration costs for the quarter..

In terms of just total transaction costs?.

Yeah. Yes, the impact on that from a dollar..

Yeah. We had a -- in the fourth quarter about sort of $1 million $1.2 million on transaction costs in the fourth quarter..

Okay. Thanks. And then on the ERP, I know you said you're about 60% finished with that or is the 60% of the business is on the system. I was just wondering when you expect to have that completely finished.

And I was sort of looking for maybe early 2020, but it sounds like it might go beyond that?.

Yeah, I think that what we've -- what we're targeting today is I would say mid-2020 as opposed to early 2020 maybe late summer. We do have some flexibility here to kind of manage this time line as we see fit. But the current time line has us fully implemented excluding, I would say, Zumbro at this point in time the new acquisition by late summer..

Yeah. Okay..

Our Chemogas are now part of the plan..

Yeah..

Okay. Okay. Thanks.

And just to be clear I think Ted, obviously, it's a little too early to determine any impact on coronavirus, but do you think it could potentially have you benefiting similar to what we saw with the disruption back a couple of years ago?.

Obviously, it's tough to say. But I would say, we're watching it very closely and it's just hard to predict. Our direct exposure is relatively limited. We have about $5 million of sales into China. We buy about call it $10 million of raw materials from China all of which we are somewhat concerned about.

We are seeing some impact on that $5 million with lower orders. We think that this -- that is just temporary, but it's starting to impact what is a relatively minor part of our overall company's sales.

We've been taking proactive actions trying to build a little bit of inventory of raw materials and finished goods to give our supply chain a little bit of a buffer. We're starting to see even some sea shipments and container availability issues shipping from Europe to the Middle East, because of issues in China.

So there is some indirect impacts as well. And I would not describe any of them as major at this point, but we're watching it very closely, and as I said trying to execute on some mitigating strategies where possible.

The positive upside that maybe you referred to sort of yet to be seen, but it's just another complexity of buying products from China for our customers who look at our products versus Chinese supplied products, and there could ultimately be some positive lift there for us. But again, that's really yet to be seen.

We certainly haven't seen any yet, and probably more focused right now on those direct impacts. But you're right, there could be that positive impact as well going forward. We'll have to see..

Okay. No that sounds great.

And then I was just curious in terms of any real updates on the autism front as it relates to the drug development?.

Yes, there's nothing significant to update you all on relative to that. We are in the process, as we have been, in trying to build our supply chain for ultimate launch of the product.

But, I know, that CureMark is in the midst of raising additional funds and kind of moving their plans forward, while we work with the consultants that we need to work with in order to prepare our part for the BLA and that's really where we are and nothing new to report of significance there..

Okay.

And then, finally, I just -- Martin, how should we think of CapEx for 2020?.

$30 million to $35 million range..

Okay. Perfect. Well, thanks again for taking the questions. That’s it for me..

Thank you..

Thanks, Mitra..

Our next question is from the line of Brett Hundley with Seaport Global. Please proceed with your question..

Hey. Thank you for the follow-up. Just had two of them. As we look out at 2020 and your plant nutrition business, I would expect this year to be much more normalized. I guess, we'll find out.

But just as a reminder, should we expect you to lap some of those issues from 2019 in Q2 this year, or was there some in Q1 as well?.

For plant nutrition specifically, Brett?.

That's correct, yes..

Yes. I mean, it was a down year. And, obviously, if we don't have the same wet spring in California that will certainly help.

We also had a destocking happening in India with one of our major customers there that destocked during 2019, that held too much inventory coming into the year, so you would expect that to normalize as well as they burn through their inventory this year.

So I do think we will lap it over the first and the second quarter and get back to a more normal run rate for plant nutrition. Now, again, I can't guarantee weather in this case. But barring anything unusual there, I do expect it to be back to normal..

Okay. And then, on the ANH segment, I wanted to ask you Martin. I mean, the way I'm looking at my model and looking at year-on-year sales growth, I see the potential for Q1 to be a particularly strong performance on the sales growth side in ANH.

I mean, you have an easy comp in Q1 and it just feels like you're building some real momentum sequentially in both ruminant and mono. So, I guess, I wanted to run that by you and see if you would moderate my expectations at all, or if indeed, you do believe that you could see quite a strong sales growth number in ANH during Q1..

Again, not knowing your exact numbers, I think, you're absolutely right. We've really had strong couple of quarters out of ANH and it's really been a fundamental change in market. The launch of particularly AminoShure XM that’s driving growth and I think a few wins that we've had across the market as well.

So it's a combination of things, all that we believe are sustainable. The performance in Q4 really was very strong, because if you recall Q4 of last year was a very strong quarter. And so, to lap that and build off of that, we were very pleased.

And to show some growth in the year, given 2018's positive gains that we saw from the lack of the Chinese in the market in Europe, really was encouraging and milk prices seem to be -- they've come down a little bit from the peaks in Q4, but they are staying at a healthy level, now protein prices are a healthy level.

And we do expect a strong year out of our ANH business building off the last couple of quarters of strength and having that momentum continue through 2020..

That’s helpful. I appreciate it. You guys are doing great job. Keep up the good work..

Thanks a lot, Brett. I appreciate it..

Our next question is from the line of Tony Polak with Aegis Capital. Please proceed with your question..

Good morning..

Hey Tony..

Could you give us a little more update on the CureMark in terms of the timing on when they actually file the Phase III results? And what is the time line expected there?.

Yes. So, again, it's somewhat hard for us to exactly predict. But our expected time line would be for late 2021 maybe into 2022 filing of BLA.

That's certainly the time line that CureMark has us on relative to getting the supply chain in place, getting all of their quality controls and paperwork in order such that we or really CureMark would be ready to file along that sort of time frame. So, that's what we're working toward at this point..

Okay.

And I assume their plan is to go it themselves as opposed to selling it to a big pharma?.

This is now just speculation on maybe Ted Harris' part, but I can't help but think that they would be looking at both options. There's no question based on what we see that they are doing, they are prepared to go it alone.

They believe the market in this case the autism market and the concentration of kind of the medical communities there allows them to go it alone. So we definitely see signs in what they're doing and who they're hiring and their plans that they're preparing to go it alone.

But I can't help but think that they will or are exploring either licensing or selling this to big pharma. Again, that's a little bit of speculation there. We're not on their board. We're not privy to that. But we certainly believe that they're probably exploring both options..

Okay.

Can you tell me how much they're planning trying to raise at this fundraising? Do you know that?.

I don't know the exact number that they're trying to raise. I do not know that Tony..

And do you know how many employees they have presently?.

I do not know how many employees they have presently. I think, I would speculate it sub-10, but I'm not 100% sure of that..

Okay. Thanks. Great results..

Thanks, Tony..

Thank you. At this time, we've reached the end of our allotted portion of question and answer and I'll turn the floor back to management for closing remarks..

Yes. Once again I just like to thank you all for joining our call today and your continued interest in our company. Also, I'd like to let you know we will be attending several conferences over the next few months. On March 10, we will be attending the JPMorgan Industrials Conference in New York City.

On May 14 also in New York City, we will be attending the 15th Annual BMO Farm To Market Conference. And we're headed to Boston on a non-deal road show with CJS on March 24. So, hope to see some of you at one of these events over the next few months. And otherwise, we look forward to reporting out Q1 2020 results in early May.

So, thanks again for joining..

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