Greetings. Welcome to the Balchem Corporation's Fourth Quarter 2020 Financial Results Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.

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

Thank you, Rob. Good morning everyone. Thank you for joining our conference call this morning to discuss the results of Balchem Corporation for the quarter ending December 31, 2020. 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 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 Chairman, CEO and President..

Chemogas and Zumbro River brands, which are now fully integrated both from a business and functional perspective. We have delivered the targeted synergies that we were hoping to achieve, and we are very pleased having them be part of the Balchem family.

Both businesses were negatively impacted by the pandemic as Chemogas experienced lower demand due to fewer elective surgeries and Zumbro saw lower demand due to the pandemics impact on food services. But we view these impacts as temporary in nature and are excited about our positioning and ability to capture the demand as it returns.

In 2020, we also made a small investment in the emerging area of precision nutrition with an investment in a leading startup gene guided nutrition company called SNP Therapeutics.

Balchem is a strategic investor with SNP and we have secured a commercial agreement for our minerals and nutrient portfolio for when the company ultimately commercializes its personalized solutions. From a corporate perspective, we significantly progressed our effort to consolidate seven ERP systems into one, Microsoft Dynamics 365.

This initiative is critical for the continued growth and operational efficiency of the company. We have successfully completed 20 out of 23 site deployments across our businesses and network of manufacturing sites ending the year with approximately 92% of our 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 believe that we will be able to complete implementation of the project this year. 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 purchase – repurchasing approximately 137,000 shares at an average cost of $98.54 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 were appropriate paying down debt and maintaining a strong balance sheet and retaining and growing our dividend to our shareholders.

Further in our continuing effort to advance our environmental, social and governance efforts Balchem released its second sustainability report in 2020 and proudly joined the United Nations global compact.

The commitment to the global compact principle is another step in our continuous improvement journey relative to our corporate, social responsibilities and achievement of our higher purpose of making the world a healthier place. We look forward to making further progress on our ESG initiatives in 2021 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 2021 and beyond.

Now with regard to the fourth quarter of 2020; this morning we reported record quarterly consolidated net sales of $180.7 million, which resulted in fourth quarter net income of $22.2 million or $0.68 per share on a GAAP basis, while delivering record quarterly cash flows from operations of $48 million.

Our quarterly net sales of $180.7 million where 8.5% higher than the prior year comparable quarter, and we're an all time record with growth in all three segments. The impact of foreign exchange to our sales was a positive $1.7 million primarily due to the stronger Euro driving a positive 104 basis point impact to our year-over-year sales growth.

Our Q4 consolidated gross margin dollars of $56.8 million were up $2.5 million or 4.5% compared with $54.3 million for the same period in the prior year. Our consolidated gross margin percent was 31.4% of sales in the quarter, down 119 basis points from 32.6% in Q4 of 2019.

The 119 basis point decrease was primarily due to mix and manufacturing inefficiencies due to the COVID-19 pandemic. Consolidated operating expenses for the fourth quarter of 2020, were $27.9 million as compared to $30.7 million in the prior year.

The decrease was principally due to lower transaction and integration costs and lower selling expenses driven by reduced travel and a decrease in bad debt expense, partially offset by certain higher compensation related costs GAAP earnings from operations for the fourth quarter with $28.9 million, an increase of $5.3 million or 22.3% compared to the prior year quarter.

On an adjusted basis as detailed in our earnings released this morning, non-gap earnings from operations of $36.1 million were up $3.1 million or 9.3% compared to $33.1 million in the prior year. Adjusted EBITDA of $43.6 million was $3.6 million or 8.9% above the $40 million posted in the fourth quarter of 2019.

Interest expense for the fourth quarter of 2020 was $0.8 million, and our net debt was $79 million with an overall leverage ratio on a net debt basis of 0.5 times. Strong cash flow in the fourth quarter enabled the company to make $30 million of payments toward its revolving debt.

The company's effective tax rates for the fourth quarter 2020 and 2019, where 21% and 8.9% respectively.

The increase in the effective tax rate was primarily attributable to the prior year benefiting from discrete tax benefits, particularly related to tax reform clarifying regulations and certain higher state taxes and lower tax credits in the current year. Consolidated net income close the quarter at $22.2 million, up 8.7% from the prior year quarter.

This quarterly net income translated into diluted net earnings per share of $0.68 for the current year quarter, an increase of $0.05 from the last year's comparable quarterly result of $0.63.

On an adjusted basis, our fourth quarter non-GAAP net earnings of $26.9 million or $0.83 per share exclude tax adjusted non-cash amortization and other items as detailed in our earnings release this morning of $4.7 million to facilitate comparative evaluation of operating performance versus the prior year period.

These non-GAAP net earnings of $26.9 million or $0.83 per share represent a decrease of $1.5 million for $0.05 per share compared with the prior year quarter driven by a significantly higher tax rate this year, compared to last year's unusually low tax rate. Additionally, we generated quarterly free cash flow of $35 million.

And we closed out the quarter with $84.6 million of cash on the balance sheet. I am now going to turn the call back over to Martin to go through the detailed results for each of our segments.

Martin?.

Thank you, Ted.

For the quarter, our Human Nutrition & Health Segment achieved strong quarterly sales of $103.8 million, an increase of $13.5 million or 15% from the prior year, the sales increase was driven by strong sales growth of chelated minerals and coleen nutrients, higher sales within food and beverage markets and beneficial impact from the Zumbro acquisition we closed in December 2019.

Our Human Nutrition & Health Segment also delivered fourth quarter earnings from operations of $16.3 million, an increase of $7.1 million or 76.9% compared to the prior year, primarily due to the aforementioned higher sales and lower operating expenses.

Excluding the effect of non-cash expense associated with amortization of acquired intangible assets of $4.9 million, adjusted earnings from operations for this segment were $21.1 million, an increase of $5.9 million or 38.9% compared to the prior year quarter.

Our Animal Nutrition & Health segment also delivered strong quarterly sales of $50.9 million, an increase of $2.4 million or 5% compared to the prior year quarter. The increase in sales was primarily the result of higher sales in the ruminant species markets, where we continue to see strong demand for encapsulated rumen-protected products.

In terms of dairy economics, milk and milk protein prices continue to see higher volatile and have fluctuated quite significantly, but remain at overall healthy levels. Monogastric sales were essentially flat in the fourth quarter, after a strong half of the year.

We experienced sales growth and chelated minerals and our PetShure branded products for the companion animal market, but this was offset by softness in the feed grade calling.

Animal Nutrition & Health quarterly earnings from operations of $8.5 million were down $1 million or 10.1% from the prior year quarter, due to lower gross margin in the monogastric business units primarily due to certain higher all material costs and manufacturing inefficiencies due efficiencies due to the COVID-19 pandemic.

Excluding the effect of non-cash expense associated with amortization of acquired intangible assets of $0.2 million. Adjusted earnings from operations for this segment were $8.7 million, a decrease of $1 million or 9.9% compared to $9.6 million in the prior year quarter.

Our specialty products segment delivered quarterly sales of $24.4 million as compared with $24.0 million for the prior year quarter.

The increase of 1.4% was primarily due to higher sales in the plant nutrition business, partially offset by lower sales of ethylene oxide for the medical device sterilization market would have been negatively impacted by reduced elective surgical procedures during the pandemic.

We expect specialty products will continue to be negatively impacted by the reduction in elective surgeries for the duration of the pandemic, but with gradual improvement over time.

The specialty product segment had fourth quarter earnings from operations of $5.5 million versus $6.2 million in the prior year quarter, a decrease of $0.8 million or 12.5%. This decrease was primarily due to mix and manufacturing inefficiencies related to the aforementioned lower sales of ethylene oxide for the medical device sterilization market.

Excluding the effect of non-cash expense associated with amortization of intangible assets of $1.6 million. Fourth quarter adjusted earnings from operations for this segment were $7 million compared to $7.9 million in the prior year, a decrease of $0.9 million or 11.1%. I'm now going to turn the call back over to Ted for some closing remarks..

Thanks, Martin. We are extremely pleased with Balchem's financial results reported earlier this morning. In the fourth quarter, we delivered record consolidated sales with revenue growth in all three of our reportable segments and record adjusted EBITDA.

We also generated record cash flows from operations, while continuing to face and overcome significant challenges and uncertainties related to the global pandemics. We further strengthened our already strong balance sheet this quarter by reducing our net debt by $35.6 million finishing the quarter with a net debt leverage ratio of 0.5 times.

These very strong results reported today, show that we are well positioned and attractive markets where we have the leadership and capabilities to be successful, not only today, but also into the future. 2020 was a unique and challenging year for all of us.

I would like to once again, take this opportunity to thank each and every one of the approximately 1,400 Balchem employees across the world who help make it happen every day. Thank you all very much. I would now 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 conference call for questions..

Thank you. [Operator Instructions] And our first question is from the line of Mitra Ramgopal with Sidoti. Please proceed with your questions..

Yes. Good morning and thanks for taking the questions. I just wanted to start with on the Animal Nutrition segment. I know you highlighted higher raw material costs and the manufacturing efficiencies; and I was just curious in terms of your ability.

What you're still thinking that raw material costs this year thus far and your ability to maybe mitigate the impact via price increases or other initiatives?.

Yes. Mitra, thanks for the question. Thanks for joining today. I'll maybe start and then have Martin get into some specifics around the raw material cost increases. But overall we really were very pleased with the A&H performance. It really is actually was the strongest quarter of the year, both from a revenue and earnings perspective.

So we really feel good about the growth that we delivered and the overall earnings, obviously it was down a little bit compared to an extraordinary Q4 last year that was impacted somewhat by higher raw material costs, and some of the inefficiencies we're experiencing at the plants.

This is one business that we do have relatively good ability to raise prices, but it takes about a quarter or so to really get the full increase. So in times of rising raw materials, we tend to be in an unfavorable lag situation, but ultimately we are able to get there.

We have appropriate contracts with our customers with our customers that we can pass on raw material cost increases. So we are in a negative lag period that we'll get out of once raw materials stabilize somewhat, but maybe Martin can give you a few specifics..

Yes. I think the impact of raw metric to the fourth quarter was unfavorable, a little less than $0.5 million on a year-over-year basis. Earlier in the year we saw favoribility from raw materials. In the first quarters of the year then us sequentially turned the other way, where it's now unfavorable.

And as you look at it, sequentially quarter-over-quarter you're seeing that trend. So that depends a little bit how things proceed here, but to Ted's point, we do have the ability to pass quite a bit of this through to our customers, but it is with a lag between the swings when raw materials are falling, we see a little bit of benefit.

And when they're rising, we see a little bit of a negative impact on our gross margins due to that lag. So hopefully that helps answer your question a little bit..

And certainly we are experiencing as I think many others are. Raw material increases across the Board, and so we expect ourselves to be in somewhat of this negative lag mode for a few quarters..

Yes. I think maybe there is one thing to add as well that.

You have the raw material piece, and you're also seeing quite a bit of what I would call increases on the logistics and distribution side, where a lot of the COVID impacts that disrupted that shortages of containers and shipping lines, et cetera, you're seeing pressure there on the cost and how long that will last, I think will sort of go hand in hand with the duration of the pandemic before that normalizes.

So I think that's transitory in nature, but, but it's there at the moment putting some pressure on the cost..

Okay. No, that's great. Thanks. And on the human nutrition side, I know you continue to see nice growth within the food and beverage markets, but the food service relates to markets remain.

We can, I was just wondering what's your thoughts on that piece of the business in terms of when you might expect that to start being a tailwind again in light of the uncertainties around the pandemic still?.

Yes. So, certainly again really pleased with the Human Nutrition & Health results overall. That 15% revenue growth was really a great result for the quarter. Despite as you point out the fact that we are seeing negative impacts from food service still.

I would say that food service is that we are starting to see some signs of recovery in food service and – which, I think is logical what we're all seeing in our daily lives and that's encouraging. So we are starting to see some of those customers place orders for products.

And we think that much likely a specialty products, sterilization business will be a slow recovery. So I think that we're – it's going to take two or three quarters for that to fully recover. But we at least have started to see some recovery there..

Okay. Now, that's great. And then on the specialty products business, the one thing we've been hearing is elective procedures not quite back at pre-COVID levels, have really picked-up substantially over the last few months.

And I'm just curious in terms of what you're seeing halfway through the first quarter this year and your expectations as your go through 2021 for this segment?.

So yes, I think that, again, just a high level we're pleased with Specialty Products. This quarter was the first quarter in a few where we've actually delivered some growth in that quarter year-over-year. Albeit it was because we had a very strong plant nutrition quarter and the sterilization business was still down year-over-year.

But it was less down than it has been. And so, as we have said before, really since the second quarter we've seen very gradual, small improvements in our sterilization business since Q2.

And if we just look at our North American sterilization business if you will, it was down about 4% revenue wise in the quarter and that is down less than it was last quarter. And so we have seen steady improvement. And we did see weeks there and months that were more like down 10% or 15%.

So having the full quarter down only 4% is certainly a strong sign that that business is starting to recover. We still believe that it's going to be somewhat slow. We do think that maybe three quarters ago, we probably were communicating more that there was this huge pent-up demand and all of a sudden it would pop back.

Well, that proved to not really be the case. And I think there are some people who just still are not comfortable going to the hospitals and are going to delay elective surgeries, as long as they possibly can. So, I think it's going to be more of a steady, gradual recovery.

We do look at this very, very closely, and the last few weeks have been a little bit better than the previous few weeks, again just giving more confirmation that we're in this slow recovery. So, we think that that will actually, as we start to lap Q2, will be a little bit of a benefit for us in 2021..

Okay. No, that's great. And then just switching on the acquisition front, I know it's hard to get specific on it.

But I was just wondering about your appetite now in terms of the pipeline you are seeing and how would you characterize the competitive environment, given the past year in terms of the impact of COVID?.

Yes, I think that, obviously M&A is an important part of our growth focus. Firstly, we're really focused on making the internal investments and driving that organic growth, but acquisitive growth and inorganic growth has been an important part of our growth as a company, and will continue to be.

There's no question that we were scratching our heads a little bit in the early days of the pandemic around how are we going to complete an acquisition, given the remote nature of business today. And obviously lots of companies have figured out how to do that. And I think that we have certainly gotten over that hurdle and are comfortable doing that.

There's lots of activity out there that you can see by the numbers. So, there are companies being sold and bought. And we think our pipeline is reasonably healthy. Now we're kind of back believing that we can actually do a transaction and it's all about having a willing seller and a willing buyer at the same time.

But we think our pipeline is pretty healthy and we continue to review opportunities. And we're hopeful that we'll be able to really can contribute to our strategic position the strength of the company and our growth profile by making some acquisitions in the coming a year or so..

Okay. Thanks for taking the questions..

Thanks, Mitra..

Thanks, Mitra..

Our next question comes from the line of Bob Labick with CJS Securities. Please proceed with your question..

Good morning. This is Stefanos Crist calling in for Bob..

Hey, Stefanos..

Good morning.

So, can you maybe talk about new products in 2021 maybe where you are and has there been any impact from the pandemic on what your goals are for the year?.

Sure. Again, new products are really important to Balchem on our sustainability report, we report out on the percent of sales coming from products launched in the last five years. Just kind of as a preview of that. I think that that number will end up being close to 25% again which we're very proud of. So new products are important.

We have been able to keep our R&D labs, and facilities, and teams operating throughout the pandemic, which was really important to us given how important R&D and new products are to us. So as far as people coming into the labs and continuing to advance the work, we have done really well.

Some of our external studies, which we also rely heavily on definitely slowed during the pandemic. As university research studies, and so forth slowed, I would say by and large that's all back to a healthy level. So, we didn't lose any momentum internally, and now we've got the momentum back externally.

And I think we'll continue to bring new products to the marketplace.

We're very focused on bringing next generation improvement products across our animal nutrition line and really bringing new functional products in the human nutrition line, where I talked about in my opening remarks that the graphs status that we were able to get on three of our key minerals and we're really excited about the markets and applications that really opens up for us that we've never really been able to go after without that status.

So, feel pretty good about it. We lost some momentum on the external, but I think we're back on track and it'll be an important part of our 2021..

Perfect. Thank you. And I'll just squeeze in one more. You had pretty good stable, strong, free cash flow this year.

How should we think about that in 2021?.

Hi Stefanos, it's Martin. Yes, I think, you should continue to expect strong cash flow generation and good conversion of profits into cash as you have seen in the past. I'm not expecting anything structurally to change that would, change that story. If you think about it from generating the cash from operations, that's going to happen.

And I don't see a significant depletion coming from working capital based on what we're doing. From a CapEx perspective, we spent a little over $30 million or $32 million, $33 million in 2020. I think you'll see that call it in that $35 million range here in the year as we go forward.

We're putting in almost $20 million or so in investments in various capacity and growth opportunities for us, or even more than that. But that's still not a dramatic change that should change sort of our ability to generate cash. So, the short answer is, I think, you should expect more of the same..

Perfect. Thank you so much. And thank you for taking my questions..

Thank you..

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

Thanks.

Can you hear me?.

Yes, Ram..

Hi. .

Okay. Hi, thanks. And congratulations on a very solid year. Just wanted to ask a few questions regarding first of all, Human Nutrition & Health.

I was wondering in the context of the pandemic and the market interest that is being shown with respect to things that boost the immune system, whether there are specific elements of your product lineup that you see benefiting, for as long as pretty much the pandemic lasts.

And particularly in the context of concerns that are emerging over variants that may evade vaccines, ongoing, continued accumulation of new infections, and so on and so forth.

Could you comment on that please?.

Yes, absolutely, that was an important part of our year. And while at a very, very high level, we'll talk about the many, many puts and takes to our business and our P&L this year largely offsetting one another. Some of the puts or the good guys were very significant.

And you are honing in on one of them right now in the Human Nutrition & Health space, our chelated mineral sales, where of course we have the leading brand of human chelated mineral sales, we continue to sell it under the Albion brand. Our sales for the year were up over 25%.

Now we're used to double digit growth in that business, but not 25% type growth. So, there's no question that that business has been materially benefiting from the immunity boosting nature of these products. And just, anecdotally, for example, there were some months we make chelated zinc, as you would assume.

And there were some months where our sales of zinc were up 350% year-over-year. So, that's been a very positive and choline, as well, we believe has really benefited in the Human Nutrition & Health space. Our Q4 sales, for example of choline, were up 25%, for the whole year we were up about 15%.

And traditionally we've been up maybe high single digits just around 10%. So clearly there has been some benefit there.

And I think the big question is, how long will that continue? And I guess we'll see, but I do think that there will be a maybe permanent is the wrong word, but a lasting element to this as people really do, seem to be taking more supplements, more immunity-boosting supplements. And I think and we think that that will continue for some time.

And I would say we haven't really seen unlike, we're seeing some of the reverse elective surgery starting to come back, Food Service starting to come back. We're not necessarily seeing the minerals growth waning. So, we think it will be around for a while..

So, in addition to that I was wondering if you could comment on your plans with respect to potentially more aggressive marketing of the choline product lineup, particularly within the context of Human Nutrition & Health, given the most recent clinical findings regarding the health benefits of choline.

And if you expect any of these potential initiatives to be a centerpiece of the Human Nutrition & Health business in 2021?.

Yes, for sure. Absolutely. And I think that we have struggled as a company, with really driving that marketing, there’s marketing campaigns and that marketing messaging. And I think finally we have really started to materially change how we market and that really started with acquiring the right personnel, the right capabilities.

And we've dramatically kind of boosted our marketing capabilities in 2020. We have a new leader for marketing, who's built a team around him. And we're really excited about that new team and those resources focused on marketing, both our choline products and our minerals.

And we have started to have some new campaigns that we've never really, I think, effectively had in the past. In the fourth quarter, we – there's a study around the benefits of choline for cognition, obviously in children and infants, well-proven, we talk a lot about that. But also for e-sports.

And so, we recently had a significant campaign around e-sports. And some of the significant supplement manufacturers are getting excited about the possibilities for choline within e-sports. And so, you are going to see more out of us in 2021.

Some of our marketing expense historically, we feel like given our new knowledge and expertise, was kind of inefficient. We will be spending more overall, but the money that we spend will be spent more efficiently than it was in the past.

So, it's not going to be a dramatic increase in spend, but we have a renewed energy and excitement around marketing and H&H and our ability to drive awareness and market penetration. So certainly more to come, we'll make a point of talking about some of those campaigns in the coming quarters..

And Ram, if I can make a quick point.

I think where I've seen a significant change and improvement is how we have gotten better at talking to our customers around how they can be successful with our products as opposed to just selling the ingredient, really going to them with the research and the understanding of the end markets and how they position our ingredient as part of a broader campaign that's very attractive to them.

And that was a skill set we didn't really have in the past that we have acquired during the year and it's really starting to pay dividends for us..

And then just very quickly, one more on the Human Nutrition and Health front, you were talking that earlier on in the Q&A with respect to possible opportunities on the M&A front.

And I was wondering if given the continually increasing interest overall in the supplement arena whether you're specifically targeting potential strategic acquisitions in the H&H space in order to broaden the supplement lineup. And then I had a couple of other questions on the Specialty Products front..

So the short answer to that is yes. And you're right. It is a very active space. It is – I'm not sure I love this word, but it's frothy, prices are high and there is a lot of competition out there. But we do feel like we have a good pipeline and we have some good opportunities that we're working on.

But yes, I think those core nutritional products, the lines that we have whether it's in animal nutrition or human nutrition are really the bullseye so to speak of our M&A focus and strateg, that doesn't mean to say we won't do things outside of that bullseye that make a lot of sense.

But building out our nutritional portfolio, adding geographic reach to our company are all important focus areas for M&A. So, absolutely, yes..

Okay.

And then just a couple of related questions with respect to the ethylene oxide business, firstly, I was wondering whether you had visibility on when the elective surgical procedures aspect is going to improve and when you're likely to see an impact of that reflected in your core business particularly in light of the pandemic, if you're looking at this and saying, well, it's too early to say what the picture is going to look like in 2021? And also I wanted to know if you could perhaps comment on the incoming administration, clearly there's more of an accent on environmental issue, protection of the environment, et cetera.

And I was wondering whether you think that had any potential legislative implication for the ethylene oxide business? Thank you..

So relative to elective surgeries, I already started by saying that that business in Q4 was down 4% and we are seeing the business recover. We really have two good ways to get data information around it.

One is just significant contact with our customers and talking to them and understanding what their backlogs look like and what their forecast looks like and how busy they are.

And I would say anecdotally from that we're seeing or getting feedback that things are starting to improve that there is a move toward building some inventory of sterilized equipment for ultimate use whereas the mode has been largely reducing inventories given the uncertainty.

And we're seeing that as I've articulated in our numbers, but we also do have access into specific numbers. They tend to be a little bit delayed around surgical procedures that are happening. And those statistics also would lead you to say there's a slow improvement versus the Q2 trough or low point that we saw.

So we can kind of triangulate it a little bit from customer feedback and some data and get a sense that, okay, we're down 4%. We don't think that's going to get worse at this point based on everything that we know and that we should see a modest improvement over the coming quarters from that.

Relative to the new administration, I think that there are lots of aspects to the new administration that we're very closely watching and whether it's around tax policy, whether it's around trade relations with China, both of which would impact us with any significance shifts.

But also as you mentioned relative to environmental regulations and focus area and clearly we believe that the Biden administration will have a more significant focus on environmental controls and so forth. They are starting to make some interim appointments.

And so we're starting to get a sense for who those people are and so forth, but stepping back we really haven't over the last few administrations – when the Trump administration came in, we didn't necessarily see a dramatic change.

You would think on the surface you might, but we didn't see a dramatic change when the Obama administration came in relative to the Bush administration.

So while there're clearly differences in focus, we're not expecting a wholesale shift in approach, but we're watching it closely and I think we'll just have to see every time where they choose to focus and change direction.

Most of the people that we deal with in the EPA are kind of professional EPA people and aren't changing with the changing administration. So that's at least some stability and encouraging..

Okay. And then lastly, very quickly, Martin, I was wondering if you could provide any directional guidance on the effective tax rate for 2021, if you expect it to stay the same as where it was in 2020, go up a little bit.

I'm not expecting there to be any significant decrease obviously, but any directional guidance you could provide on that would be very helpful. Thank you..

Yes. I think as you build your models and so on from a GAAP tax rate or effective tax rate I would use 22% to 23% for your modeling purposes if you're using a non-GAAP or adjusted tax rate, I would use 23% to 24% for your models. And I think that would be your directionally best bet.

It always varies a little bit, depending on what kind of discrete items happens in the year and so on. So it's hard to predict, but that's a very reasonable number to use sort of all other things equal..

Great. Thank you very much..

Thank you..

Our next question comes from the line of Mark Connelly with Stephens. Please proceed with your question..

Thank you. Just a couple of things. You mentioned operational issue. There is a number of companies are telling us that the operational issues became worse in the fourth quarter. So I'm wondering if you can give us a sense of what's affecting you and whether it's affecting you or your customers..

So I would say we're amongst those other companies.

We – through a lot of hard work and specific actions, we felt like getting through Q2 and Q3 was going to be the toughest part, but Q4 and I would say into Q1 has been very difficult as the second or third wave depending on what you want to call and really ramped up particularly in this country, but also in Europe just caused more people being out either sick or being quarantined.

We've really struggled through the fourth quarter to complete shifts and really get the appropriate number of people at our manufacturing sites such that we could produce product that at normal rates. That was kind of the primary, I would say, manufacturing inefficiencies. So you're paying more and overtime. You're paying more in temp labor.

You're really doing whatever you can to get people in. That has waned somewhat. And it's kind of consistently with what we're seeing with number of positive tests coming down dramatically and hospitalizations starting to come down and that's being reflected. And while it's still something that we're managing, it has waned a little bit.

And now what's being replaced or what's replacing that is more of the logistical issues around truck availability and particularly international shipment, container availability and ship availability.

And just those inefficiencies when you're expecting something to take three weeks and it takes six weeks, and that would be inbound raw materials, and obviously outbound finished goods. So all of those things, you start to pay expediting charges for freight and so on and so forth.

And so those are the kinds of issues that we've been talking about and seeing. And yes, I would say, things ramped up in Q4 more so than Q2 and Q3..

So are your backlogs of deliveries getting higher?.

I would say in Q4 that really wasn't the case. We're starting to see some of that today. The big storm in the southern part of the U.S. is certainly not helping. We have one of our largest sites is in Southern Missouri. And it's really being affected by the storm.

We have raw materials that are coming out of Texas that's being affected, but that aside that's obviously temporary. By and large we're managing it inefficiently and it’s the reason we'd sort of talked about the inefficiencies. But the backlogs are not extreme or extraordinary, but maybe a little bit higher than they normally would be..

That's really helpful.

If we switch gears to looking at market penetration, we've talked a lot about M&A, but where do you think the biggest untapped market penetration is within the existing portfolio?.

That might immediate what comes to mind Mark is really two areas and I'll start with the animal nutrition and health. Our microencapsulated rumen-protected choline product that we sell under the brand ReaShure. We've been selling that product now for 20 years. And are very proud of the fact that in the U.S.

we are that product, rumen-protected choline, is probably in about 35% of the cows in North America. There is absolutely no reason that that shouldn't be 50% or 60%. And so being able to double that business through further market penetration is real.

And when you take that to Europe, very different market, lots of different reasons why the penetration is much lower, but it's only about 5% in Europe. And again, no reason that that shouldn't be 25% in Europe, maybe it won't be at the level that the U.S. market is.

And then we have other products in that area as well that are similarly penetrated in the market. So short answer in animal nutrition is there is so much that the world is learning around nutritional supplementation of animals and the health benefits that it can bring relative to growth and mortality and so on and so forth.

So, we really do think there is tremendous penetration growth there. And then on the animal side, it's somewhat similar. The awareness around choline is still nowhere near where it should be. The discussion around choline tends to be where it has been historically. We're on an infant formula, infant cognition and kind of cell repair and so forth.

And there's very little discussion around the benefits of choline for addressing fatty liver or adult cognition and penetrating those markets would be tremendous. And so, there's lots of penetration there and I could say the exact same thing on the mineral side.

Without that GRAs status on those minerals, we really never could talk about medical food applications and our infant formula applications we now can. And so, I guess probably what you're hearing in my voice is we really think that there is a lot of penetration, additional penetration within both animal nutrition health and human nutrition health.

So while we talked earlier about M&A activity, maybe adding additional products to our portfolio, we don't necessarily feel like that's a must do because there is still significant growth opportunity within our existing product lines, somewhat reliant on us building awareness and driving that penetration..

That's really helpful. Thank you very much..

Thanks Mark..

Thank you. Our final question is from the line of Tony Pollock with Aegis. Please proceed with your question..

Good morning..

Hi, Tony..

Can you give us a little more clarity on the SNP acquisition, what you put in there, how much money, and what they do?.

Sure, Tony. We're really excited about SNP Therapeutics. It's not something that we've done a lot of in the past, these kinds of investments. We invested approximately $350,000 I would call that sort of seed money. It's obviously a pre-revenue company, but it really fits extremely well with who we are and where we want to go.

And the founder of SNP Therapeutics is Dr. Zeisel, from the University of North Carolina. He's probably heard us mentioned in the past who – in many regards he's probably the leading human choline nutrition expert in the world. And we have worked with him for quite a long time. He is doing that NIH granted study relative to the biomarker.

He's done quite a few other studies relative to choline. And essentially what his mission is to study gene makeup. And I'm probably not the best person to get into all the details of this, but study gene makeup of people to understand where there are errors in their gene makeup that may inhibit their ability to absorb and metabolize choline.

And he calls them snips. And that's partly where the SNP Therapeutics comes from. But people who have these genetic errors don't necessarily know they have these genetic errors and maybe aren't taking enough choline supplementation. And so, we really like this for a couple of reasons.

One it's being led by somebody who have tremendous amount of respect and faith in. Number two, he's really leading this starting from a choline perspective. That's where all his research is. He has these algorithms that that put into this genetic modeling to really study people who have that snip or error relative to choline absorption.

He's expanding that to other snips that inhibit other nutrient absorption. But it's starting with choline and who better to fund them to some extent and be a partner than the leading choline company in the world, Balchem. So, we're pretty excited about it. It is a long ways off.

The ultimate goal would be for them to do genetic testing on people and then establish a personalized nutrition platform for those people. And ultimately even to make those medical foods or supplements for those individuals based on their genetic makeup.

And we would supply the products that we make choline, minerals and so forth into those products that they would ultimately sell. So it's a long ways off, but we think we're really excited about it, and we think it's important for us to be part of this journey..

One more question speaking of a long way off, is there anything to do with the autism drug?.

So there is a little bit new there and it is really just around our own preparedness and what we think today is the timing relative to the filing of the BLA. We have always planned on manufacturing this product through a third-party. We are not a pharmaceutical manufacturer. This is a pharmaceutical product and we needed help and expertise.

And we have moved to a different provider of that service, one that we are very, very confident and really bring sort of world renowned capabilities in manufacturing pharmaceuticals in these kinds of products. So we have over 2020 shifted from one party to another and we're very pleased with that.

And we really did it just from a confidence level around quality and capability.

And number two as I've spent time with Joan Fallon over the last few months relative to timing, we really do feel, and this is consistent with now what we've been saying at least for some quarters that there's a good chance that she will be in a position to file the BLA this year. And I think if it happens this year, it will be late in the year.

It may leak into next year, but they right now have all hands on deck focus on filing the BLA. Prior to this, they were talking about doing additional studies or clarifying studies or this and that. But I think partly because of the pandemic, they are singularly focused at this point in time, I would say, on filing the BLA.

And so, we're hopeful that that will happen this year. And so, I think there is a little bit more light at the end of the tunnel relative to that. And obviously that's a very important milestone that doesn't do anything unto itself, but it's an important milestone. And then that would be in the hands of FDA and we'll go from there.

But that's – those are just a couple of updates that I think are noteworthy..

Great. Thank you..

Thanks, Tony..

Thank you. At this time, I'll turn the call back to Ted Harris for closing remarks. .

Okay, thanks, Rob. Once again, just thank you very much for joining our call today and more importantly your continued interest in our company. We really are extremely pleased with our full year 2020 results as well as the Q4 cap on those strong results. And we really appreciate your time today.

We look forward to reporting out on Q1 2021 results in April. And in the meantime, we will be attending just a few virtual conferences of note, the H.C. Wainwright fireside chat next week, February 24, and then the J.P. Morgan Industrials Conference on March 15th. So, hopefully, we can virtually see some of you at one of those events.

And in the meantime thank you again for joining today..

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