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Edited Transcript of BCPC earnings conference call or presentation 1-Aug-19 3:00pm GMT

Q2 2019 Balchem Corp Earnings Call

NEW HAMPTON Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Balchem Corp earnings conference call or presentation Thursday, August 1, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carl Martin Bengtsson

Balchem Corporation - CFO

* Theodore L. Harris

Balchem Corporation - Chairman CEO & President

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Conference Call Participants

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* Anthony Polak

Aegis Capital Corporation - MD of Wealth Management

* Brett Michael Hundley

Seaport Global Securities LLC, Research Division - Research Analyst

* Edward D. Marks

H.C. Wainwright & Co, LLC, Research Division - Research Analyst

* Lalishwar Mitra Ramgopal

Sidoti & Company, LLC - Healthcare Sell Side Analyst

* Lawrence J. Goldstein

SMP Asset Management, LLC - President

* Timothy Scott Ramey

Pivotal Research Group LLC - Co-Head of Consumer Research and Senior Analyst of Food, Beverage & Nutrition

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Presentation

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Operator [1]

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Greetings, and welcome to the Balchem Corporation's Second Quarter Financial Results Conference Call. (Operator Instructions) A question and answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Martin Bengtsson. Please proceed.

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Carl Martin Bengtsson, Balchem Corporation - CFO [2]

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Ladies and gentleman, thank you for joining our conference call this morning to discuss the results of Balchem Corporation for the quarter ending June 30, 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 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 the 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 over the call to Ted Harris, our Chairman, CEO, and President.

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Theodore L. Harris, Balchem Corporation - Chairman CEO & President [3]

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Thanks, Martin. Good morning, ladies and gentleman, and welcome to our conference call. This morning, we reported quarterly consolidated net sales of $161.6 million, which resulted in first quarter net income of $19.8 million or $0.61 per share on a GAAP basis. Our first quarter non-GAAP net earnings of $25.2 million or $0.77 per share reported in our press release earlier this morning exclude tax-adjusted noncash amortization and other items as detailed in our earnings release this morning of $5.4 million to facilitate comparative evaluation of operating performance versus the prior year. These non-GAAP net earnings of $25.2 million or $0.77 per share represent an increase of $0.7 million or 2.9% compared with the prior year quarter of $24.5 million or $0.76 per share.

We also delivered quarterly cash flows from operations of $26.3 million for the first quarter 2019 with quarterly free cash flow of $20.1 million. Our quarterly net sales of $161.6 million were 1.3% lower than the prior year comparable quarter. We achieved sales growth in 3 of our 4 segments with all-time record quarterly sales in Specialty Products, record second quarter sales in our Human Nutrition and Health and Animal Nutrition and Health segments, which were more than offset by the decline in our Industrial Products segment where our volumes related to oil and gas fracking remain low compared to prior year. The impact of foreign exchange to our sales was a negative $1.3 million due to the weaker euro, driving a negative 80 basis point impact to our year-over-year growth.

Our Q2 consolidated gross margin dollars of $53.9 million were up $0.5 million or 0.8% compared with $53.5 million for the same period in the prior year. Our consolidated gross margin percent was 33.4% of sales in the quarter, up 70 basis points from 32.7% in Q2 of 2018. The increase was primarily due to mix, partially offset by lower feed grade choline volumes and margins in the European monogastric business as a result of increased competitive activity.

Consolidated operating expenses for the second quarter 2019 were $27.5 million as compared to $26.4 million in the prior year. The increase was principally due to incremental operating expenses related to the Chemogas acquisition and increased bad debt expense. Excluding noncash operating expense associated with amortization of intangible assets of $6.1 million, operating expenses were $21.4 million or 13.2% of sales. Looking forward, we will continue to focus on tightly controlling our operating expenses and leveraging our existing SG&A infrastructure.

Second quarter GAAP earnings from operations were $26.4 million which decreased $0.7 million or 2.6% compared to prior year. On an adjusted basis, as detailed in our earnings release this morning, earnings from operations of $33.3 million were down $0.9 million compared to $34.2 million in the prior year. Adjusted EBITDA of $40 million was $0.6 million or 1.4% below the $40.5 million posted in the second quarter of 2018.

Interest expense for the second quarter 2019 was $1.5 million and our net debt was $186.9 million. The company's effective tax rates for the second quarter 2019 and 2018 were 20.3% and 21.5%, respectively. The decrease in the effective tax rate was primarily attributable to discrete items.

Consolidated net income closed the quarter at $19.8 million, up $0.2 million from the prior year quarter. This quarterly net income translated into diluted net earnings per share of $0.61 for the current year, flat with last year's comparable quarterly result of $0.61.

On an adjusted basis, and as detailed in our earnings release, our second quarter adjusted net earnings were $25.2 million or $0.77 per diluted share, up $0.7 million or 2.9% compared with $24.5 million or $0.76 per diluted share in the prior year quarter.

We generated quarterly free cash flow of $20.1 million, an increase of 16.7% compared to the prior year quarter, and we closed out the quarter with $41.7 million of cash on the balance sheet, which reflects revolving loan and acquired debt payments of $32.2 million and capital expenditures of $6.2 million in the second quarter of 2019.

Before passing the call back to Martin to cover the detailed results by segment, I would like to update you on a few of our key strategic activities and growth initiatives. Last quarter, we announced the definitive signing of an agreement to acquire Chemogas NV, a privately held specialty gases company headquartered in Grimbergen, Belgium. On May 27 of this quarter, we formally closed this acquisition. Chemogas, with its production facilities in Europe and Asia, is a strong fit with our existing ethylene oxide repackaging business within the Specialty Products segment. We are focused on leveraging this acquisition to create a global specialty gases business that services our customers' needs for ethylene oxide and other products worldwide, which we will call Balchem Performance Gases.

A cross-functional integration team has been tasked with pulling the business together efficiently while ensuring the continuation of the high level of performance of the Chemogas business of the recent years. As we work to integrate Chemogas into Balchem, we see potential synergies on revenues, manufacturing and raw material costs, and SG&A, and are working hard to realize those synergies over the coming months. We're excited about the opportunities this acquisition creates for Balchem.

Within our Human Nutrition and Health segment, as we have discussed on previous calls, Balchem invested in a follow-on study to the Cornell University Choline Supplementation Study during pregnancy to see if the cognitive benefits seen in the first year of life during the initial study persist into later childhood. The researchers at Cornell have conducted extensive neurologic and cognitive testing on the same children who are now 7 years old, who are now affectionately referred to as the Chol-Kids. We are pleased to report that the preliminary results have been presented at several international scientific meetings and show that an increasing maternal choline does indeed improve attention, memory, and executive function at 7 years of age. This is highly consistent with the large body of animal data demonstrating the lasting effect of maternal choline on cognitive function in offspring. The results have been submitted to peer review journals and we look forward to their publication hopefully by the end of the year. We are extremely excited about the results of this study and believe that these findings will further advance the awareness and use of choline for mother and child health.

With regards to CureMark and their work to develop a unique treatment for autism, we were pleased with the results of their recently completed stage III clinical trial also known as the Blum trial. These results were presented on May 3 at the International Society of Autism Research Meeting in Montreal. The presentation titled Pancreatic Replacement Therapy with CM-AT is associated with reduction in maladapted behaviors in preschoolers with autism. It was presented by Dr. Deborah Pearson, Professor of Child and Adolescent Psychiatric at the University of Texas Houston. 190 preschool children ages 3 through 6 years old meeting the established criteria for autistic disorder participated in this randomized, double-blind, placebo-controlled 12-week clinical trial. The objective of the study was to ascertain if behaviors such as irritability and hyperactivity in preschoolers with autism could be improved with CM-AT. After the relatively short timeframe of 12 weeks, the participants in the Blum trial who received CM-AT showed statistically significant reductions in maladapted behaviors associated with autism, specifically in irritability, hyperactivity, and inappropriate speech relative to the placebo group.

Dr. Joan Fallon, CEO of CureMark, summarizes the findings of the Blum trial in her press release dated May 6, 2019, as follows -- "Our data suggests that CM-AT has an effect on core and noncore symptoms, including communication, in children ages 3 through 6 with autism. These are promising findings given the limited treatment options for this youngest patient population."

Balchem continues to work closely with CureMark to prepare their Biologics License Application for filing with the FDA and to ensure that patients enrolled in ongoing open-label trials have a ready supply of CM-AT.

And lastly, as we have discussed in previous quarters, we have embarked on an important project to consolidate our 5 ERP systems into one, Microsoft Dynamics 365. This $12 million initiative is critical for the continued growth and operational efficiency of the company. After a year or so planning, implementation started in April of last year, first with financial consolidation and then with a staged ERP implementation across our businesses and network of manufacturing sites. We now have almost 1/3 of our users and revenue on a new system and believe we are on schedule to have 100% of our company on the new system by this time next year.

I'm now going to turn the call back over to Martin to go through the detailed results for each of our segments.

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Carl Martin Bengtsson, Balchem Corporation - CFO [4]

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Thanks, Ted. For the quarter, our Human Nutrition and Health segment achieved a record second quarter sales of $85.9 million, an increase of $0.9 million or 1% from the prior year. The sales increase was primarily driven by higher sales in our Human Nutrition and Pharma business, particularly choline nutrients for the infant formula and supplement markets, and our ingredient solutions business partially offset by a decrease in Cereal Systems sales. Human Nutrition and Health segment also delivered record second quarter earnings from operations of $12.3 million, an increase of $2.7 million or 27.4% compared to prior year primarily due to higher sales, favorable mix, and lower operating expenses. Excluding the effect of noncash expense associated with amortization of acquired intangible assets of $4.9 million, adjusted earnings from operations for this segment were $17.2 million, an increase of $2.1 million or 14% compared to $15.1 million in the prior quarter.

Sales for our Animal Nutrition and Health segment were $43.5 million, an increase of 3.4% or $1.4 million compared to the prior year, and a record for the second quarter despite the one-time benefits we saw in prior year due to the Chinese choline supply disruptions.

Sales of product lines targeted for ruminant animal feed markets increased by $1.2 million or 12% compared to the prior year, driven by increased volumes.

Sales into the global monogastric species market increased $0.2 million or 0.8% from the prior year with higher sales of chelated minerals being partially offset by a decline in feed grade choline product sales.

The impact of foreign exchange is most notable in our ANH segment with a negative $0.8 million impact in the second quarter, driving a negative 2% impact to year-over-year growth. Animal Nutrition and Health quarterly earnings from operations of $5 million were down from the prior year quarter of $7 million primarily due to lower volumes and margins in the European monogastric business as a result of increased competitive activity negatively impacting pricing and margins, and also due to increased operating expenses driven by investments in sales, marketing, and research and development in our ruminant business.

Specialty Products second quarter sales were $24.9 million as compared with $22.9 million for the prior year quarter. The increase of 8.9% was driven by higher sales of ethylene oxide for the medical device sterilization market due to both the contribution of Chemogas and higher legacy volumes, partially offset by lower volumes in the plant nutrition business driven primarily by unfavorable weather conditions. The Specialty Products segment achieved all-time record quarterly earnings from operations of $8.9 million versus $8.7 million in the prior year quarter, an increase of $0.2 million. Excluding the effect of noncash expense associated with amortization of intangible assets of $1.1 million, second quarter adjusted earnings from operations for this segment were $10 million compared to $9.4 million in the prior year. The increase was primarily driven by higher sales, partially offset by higher operating expenses driven primarily by the Chemogas acquisition.

In the Industrial Products segment, sales of $7.3 million decreased $6.5 million or 47% from the prior year primarily due to reduced sales of choline and choline derivatives used in the shale fracking applications. As logistical solutions for oil and gas transportation are completed around the Permian Basin, we believe that fracking activity will start to improve in the second half of 2019, but we've not seen any indication of that yet. We remain cautious about this historically cyclical market and it's hard to accurately forecast the ups and downs. Our earnings from operations for the Industrial Products segment were $0.9 million, a decrease of $1.7 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.

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Theodore L. Harris, Balchem Corporation - Chairman CEO & President [5]

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Thanks, Martin. In the second quarter, we delivered year-over-year revenue growth across 3 of our 4 segments with solid consolidated net earnings and cash flows from operations while facing certain previously noted comparative headwinds within our monogastric business, as well as our oil and gas business. 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 very excited about the acquisition of Chemogas NV. The combination of our 2 companies clearly creates the global leader in the critical supply of ethylene oxide to the medical device sterilization industry, which will significantly enhance our ability to service and support our customers on a more global basis.

We are pleased with the progress made on our key strategic growth initiatives in Q2 2019, and we believe that we are well positioned to capitalize on the growth opportunities in our markets. We will continue to strengthen our company by focusing on our core strategies, exercising disciplined cost management, and seeking value-creating acquisition opportunities.

I would now like to hand the call back over to Martin, who will open up the call for questions. Martin?

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Carl Martin Bengtsson, Balchem Corporation - CFO [6]

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

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Questions and Answers

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Operator [1]

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At this time, we will be conducting a question and answer session. (Operator Instructions) Our first question comes from Brett Hundley of Seaport Global Securities.

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Brett Michael Hundley, Seaport Global Securities LLC, Research Division - Research Analyst [2]

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I wanted to start on the human choline side. Martin, you had mentioned in your prepared remarks how your HNH segment sales were in part driven by higher nutrition and pharma business noting choline in the supplements there. And just as a follow-on to your last call you both were talking about the choline findings that you referenced earlier today, and I just wanted to get an understanding of how conversations might be going between you guys and your customer set in light of these choline findings. I know they still need to be published, but can you just take us through some of the conversations that you're having and give us a sense for how you see your pipeline developing there? That would be really helpful.

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Theodore L. Harris, Balchem Corporation - Chairman CEO & President [3]

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I'll take a stab at that, Brett. We were really pleased with the increased choline nutrients sales in Q2. Sales were up approximately 12% year-over-year in the quarter after a bit of a soft start to the year in Q1. The conversations that we're having with the customers today really are at, I think, a higher level than they have been in a long time, at least in part fueled by the original Cornell study that we've talked about, as well as the follow-on study relative to the 7-year-olds. This is getting a lot of attention and are really encouraging results relative to the sustainability at least till 7 years of the cognitive benefits of maternal choline. So this is getting a lot of attention. We're talking, I think, at a higher level scientifically with our customers.

And as we've talked about before, as we look at our pipeline, the prenatal vitamin area really is front and center as far as the best and most significant opportunity for us here and now. Two years ago choline was rarely included in prenatal vitamin regimen. I think that's dramatically changing. We've seen big name brands, like Pharmavite with Nature Made, come out with new prenatal vitamins including choline, and even on the label promoting the fact that the new product contains choline.

So really, from our perspective, it's pretty exciting and positive. And that's the here and now, but it is opening up other discussions around multivitamins, adult cognition, fatty liver opportunities, and even issues associated with diabetes. So these are all things where choline can play a role and prenatal vitamins is kind of first on the docket, but it's all creating, I think, a higher-level discussion that's kind of leading us down this path of growth.

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Brett Michael Hundley, Seaport Global Securities LLC, Research Division - Research Analyst [4]

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And Ted, I don't know if you agree with this, this situation kind of reminds me of another one that I've seen out there. One of your ingredient peers for a long time had been producing this product, squalene, and it had a number of skin benefits, a number of other benefits. And the company kind of instead of waiting for its traditional customer set to develop the products it went out itself and developed branded CPG products using squalene and really kind of created a consumer buzz for the product. And then that just created more and more sales itself into the ingredient channel with its customers. When it comes to choline, have you guys thought any further about developing branded CPG products yourself, or is this something where you generally want to remain a B2B seller?

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Theodore L. Harris, Balchem Corporation - Chairman CEO & President [5]

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We have thought about that, Brett, and while it remains an option for us, we are really focused on that B2B sales opportunity working with leaders like Pharmavite and thinking about cobranding. We are getting some of our customers to include Balchem or VitaCholine as our brand for choline on their labels, and even doing kind of comarketing with those companies. So that really is our focus today and we really do feel like we're getting their attention as well as the industry's attention, and that's our primary focus at this point.

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Brett Michael Hundley, Seaport Global Securities LLC, Research Division - Research Analyst [6]

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Great. And then one more from me and I'll jump back in queue. I wanted to ask you a question on your animal business. So if we can talk about pricing and formulas on the Animal Products side. The energy complex has just kind of been bouncing around all over the place as of late. Do you expect relative stability for your product pricing on the animal side as you move into 2020 here?

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Theodore L. Harris, Balchem Corporation - Chairman CEO & President [7]

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Yes, we do. We've obviously seen in late 2017, early 2018, an unusual situation where supply out of China dried up and our prices moved up, as did our volumes in filling that void. Clearly, they have come back now and you're seeing that in our margins in the business, and so pricing is down. And that really is somewhat uniquely to our European business where the Chinese play a major role, but elsewhere our feedstocks are relatively stable. Our pricing is relatively stable and we see that carrying on into 2020. And we see that the European situation has kind of gone to sort of a new normal and we don't expect any significant changes.

We were really pleased with the revenue performance of Animal Nutrition in Q2. The fact that we were actually able to grow our monogastric business despite that year-over-year comp issue was encouraging for us. Our ruminant business had a good quarter. So overall we are pleased and specifically relative to pricing we think we don't really see anything right now materially impacting it. And demand should continue as it has. The African swine fever situation hasn't significantly impacted our demand picture, although we are starting to see signs of integrators in the U.S. and Europe increasing production, and that should start benefiting supply. We've actually just recently done a study around choline balancing and found that some of the corn and soybean choline contents are not as they were in the past and could require little increases in choline inclusion in diet.

So all-in-all, we feel reasonably good about the business and specifically to your question around pricing.

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Brett Michael Hundley, Seaport Global Securities LLC, Research Division - Research Analyst [8]

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I'm sorry. Did I hear you correctly that you said the European situation is normalizing from Q2 as it relates to Chinese competition?

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Theodore L. Harris, Balchem Corporation - Chairman CEO & President [9]

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Yes, yes.

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Operator [10]

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Our next question comes from Tim Ramey at Pivotal Research Group.

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Timothy Scott Ramey, Pivotal Research Group LLC - Co-Head of Consumer Research and Senior Analyst of Food, Beverage & Nutrition [11]

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I guess I'm going to sort of continue where Brett left off on the animal side, if I could. I'm wondering if margins can recover. Is what you mean by stabilizing, that margins can recover from the levels in the 2Q for that segment or we're sort of stabilizing at those margins? I know you don't give specific guidance, but it would be helpful to know if we're flatlining or recovering.

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Theodore L. Harris, Balchem Corporation - Chairman CEO & President [12]

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So I think that we have an opportunity in Q3 to recover some margins from Q2. When I talk about stabilizing, I'm really talking about the competitive dynamics. The Chinese are clearly back. They came back slowly at first and now are back. They have largely recaptured the share that they're going to capture, and I think we should see some margin benefit in Q3 of that stabilizing. So I do think Q2 is a little lower than what we'll ultimately see going forward.

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Timothy Scott Ramey, Pivotal Research Group LLC - Co-Head of Consumer Research and Senior Analyst of Food, Beverage & Nutrition [13]

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Sounds good. And the longitudinal study on choline and infants, can you explain a little bit more about what the dose was or would it be consistent with your current view of what prenatal supplementation should be on choline? I mean, that was a long time ago, so views may have changed.

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Theodore L. Harris, Balchem Corporation - Chairman CEO & President [14]

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So actually the dose that was fed to the pregnant women in the third trimester was a high dose of choline. It was really double what is known today as the kind of the daily recommended intake for women. So it was a high dose of choline that generated the favorable positive results. And so that's part of the opportunity and task we have ahead. When choline is included in a multivitamin, it's often included at, let's say, a 55 milligram level. That's about 10% of the daily recommended intake but maybe only about 5% of what the Cornell Study would suggest that a pregnant woman should be taking. And so we see that as an opportunity. Okay, we'll take the inclusion of the 10% of the daily recommended intake, but how do we increase that, how do we actually get as part of the daily regimen for prenatal vitamins to be a standalone choline single tablet or even 2 single tablets to get to that significantly higher dose.

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Timothy Scott Ramey, Pivotal Research Group LLC - Co-Head of Consumer Research and Senior Analyst of Food, Beverage & Nutrition [15]

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Just doing the math on what you just said, it sounds like something closer to a gram is what this trial.

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Theodore L. Harris, Balchem Corporation - Chairman CEO & President [16]

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Yes, yes.

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Operator [17]

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Our next question comes from Raghuram Selvaraju of H.C. Wainwright.

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Edward D. Marks, H.C. Wainwright & Co, LLC, Research Division - Research Analyst [18]

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This is Edward Marks on for Ram. I appreciate you taking the questions. Just a few for me, spreading out a little bit. Just wondering with the ban on ethylene oxide products in Illinois, just wondering how this might prevent Sterigenics from reopening its facility and just how this might impact your presence in the arena, especially after the Chemogas acquisition that might then hopefully considerably expand the ethylene oxide possibilities.

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Theodore L. Harris, Balchem Corporation - Chairman CEO & President [19]

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So we have talked -- but thanks for the question. Obviously, this is an important issue and we're spending a lot of time on this, and there certainly has been a lot of progress made in the last 3 months or so. So after the Sterigenics site in Willowbrook, Illinois, was shut down in mid-February, I think it was, they have finally come to an agreement with the State of Illinois which will enable the facility to resume operations. So we view that as a very positive step. So it is not a ban on ethylene oxide. They have lowered the exposure limits for the State of Illinois, and Sterigenics believes with some additional equipment and so forth that they can in fact meet those new lower emissions standards. So they are planning on reopening. Obviously, their plan needs to be approved by the Illinois EPA before they reopen, but from our understanding they're moving forward and certainly plan to reopen.

Certainly, from our perspective, the shutdown of this facility was brought about by a pretty seriously flawed risk assessment that the U.S. EPA Integrated Risk Information System, or as it's called IRIS, published in December of 2016. And I think also very positively in the last few months the American Chemistry Council has filed a petition with the EPA seeking correction to the risk assessment that was done by IRIS. And the ACC has presented scientific evidence to support their correction. And also very positively, and maybe more so than even the ACC, the Texas Commission on Environmental Quality, really the Texas EPA, has determined that the IRIS value was not adequately supported by scientific data. So the Texas EPA has, therefore, published their own assessment value, which is significantly different to the IRIS.

And so I think the EPA now has multiple assessments to evaluate as they decide what to do. We do think ultimately this will all lead to -- because even the Texas and ACC assessments would suggest tightening emissions controls and exposure limits, but we believe now the EPA has multiple assessments that they can use to decide what levels to set for emission controls and exposure limits. And we believe that what they ultimately decide will be something that the industry and the market can work toward and live within.

So we'll continue to work closely with all the appropriate stakeholders as this situation evolves to ensure that good science is being used by the regulatory authorities to make exposure limit decisions, and also, of course, to ensure that Balchem is prepared to meet any new regulations that may come from all of this, but we do see it as positive that Sterigenics is planning on reopening and that the ACC and Texas EPA have come out with new assessments that will provide, we think certainly, good scientific data to challenge the IRIS assessment and use as they set new exposure limits.

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Edward D. Marks, H.C. Wainwright & Co, LLC, Research Division - Research Analyst [20]

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Perfect. I appreciate you going into all that detail. So moving on to the Industrial Products, you mentioned choline and the Permian Basin a little bit. I was just wondering if any of the oil price volatility and prospects for maybe some prolonged geopolitical conflicts over in the Middle East might have impacted any of the shale deposit production timelines and how that might affect demand for choline maybe in the past quarter and as you're looking into the second half and into 2020.

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Theodore L. Harris, Balchem Corporation - Chairman CEO & President [21]

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Obviously, this was a significant disappointment for us in the quarter. The overall volumes associated with oil and gas. We really don't think that oil prices played a significant role, at least in the last quarter. Oil price, of course, does matter, and if there was a significant geopolitical issue where oil prices ramped up rapidly that would benefit choline. Right now, we really see 2 primary drivers of the poor performance. One, clearly in the Permian Basin there is slowing fracking activity, at least in part related to the anticipation of the pipelines being completed and transportation costs coming down once those are completed. And so there's less activity in anticipation of that. And we still expect, once those are completed, that there will be a pick-up in production. But secondly the operators' new capital discipline and focus on kind of staying within their free cash flow is impacting us both, I think, from an activity perspective but just as reduced levels of choline being included in fracking fluids. There's clearly a move toward cost cutting and that's playing a role. I mean they really are looking at every avenue to lower costs and one way to do that is to, I'll use word skimp but, skimp on fracking fluid components even if they do make things more efficient and make sense to include. And so those are right now we see as the two biggest drivers in the quarter and really over the last few quarters, less so oil price but that's clearly a long-term driver.

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Edward D. Marks, H.C. Wainwright & Co, LLC, Research Division - Research Analyst [22]

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Got it. Those were good points. And then just finally really quick, I may have missed this in the prepared remarks but in terms of the AminoShure XM, rumen-protected, the methionine product, I'm just wondering how that rollout is currently going.

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Theodore L. Harris, Balchem Corporation - Chairman CEO & President [23]

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So that's going well. This is really the next generation methionine product. On a positive note, milk protein prices are picking up. We just got the new milk prices and milk protein prices this morning, and balancing with amino acids, specifically methionine, really do make sense of these kind of protein levels. So we're encouraged that we're launching a new product in a more favorable environment for milk protein, so that's positive. Right now, we have leading dairy nutritionists around the country trialing the product, incorporating the product in their clients' feed formulations. I think we've received good levels of interest in the product and the new technology. So we're encouraged by the initial response. We have kind of pushed some product into the supply chain and really waiting to see that the dairy farmers realize the benefits that we've seen in all of our studies. So sort of more to come on that, but we're at least encouraged by the initial receptivity to the technology.

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Edward D. Marks, H.C. Wainwright & Co, LLC, Research Division - Research Analyst [24]

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Excellent. Well, glad to end on a high note. That's all from me, so thanks for taking the questions.

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Operator [25]

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(Operator Instructions) Our next question comes from Lawrence Goldstein of Santa Monica Partners.

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Lawrence J. Goldstein, SMP Asset Management, LLC - President [26]

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A question and a request. Would you be able to send me or anyone who wants it a copy of that May study in Montreal, CM-AT, and secondly what's happened since then? June, July, here we are in August, haven't heard a word. And I wonder if you'd comment why it is that -- I know you can't speak for her but why it is all they do is put out a press release with a few brief paragraphs of her interpretation of what the study said and really say nothing. You summarized it and she said nothing about any detailed study. The study was lengthy, I presume, and you just had a couple of sentences, which is all she had in her press release.

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Theodore L. Harris, Balchem Corporation - Chairman CEO & President [27]

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Sure, Larry. Thanks for the questions. The study that was presented in Montreal, we don't have access to that but really all we have access to is what she decides to put in a press release. And it is what it is, and you accurately stated we really don't have any control over that. We did have someone attend the presentation in Montreal and again there was more detail there, but I think at the end of the day it certainly supported her primary conclusion, which is what we included in our (inaudible) and what's included in the press release. And that is that CM-AT did in fact statistically improve those core and noncore areas. And that was really the ultimate finding and the ultimate result of the study. So we're pleased with that. I think that's a significant milestone and very positive results. And again I really can't get into, don't have access to --

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Lawrence J. Goldstein, SMP Asset Management, LLC - President [28]

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Can the person who attended tell you what statistically the number was? What percentage? What anything? I mean, the word statistically is a word.

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Theodore L. Harris, Balchem Corporation - Chairman CEO & President [29]

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Right.

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Lawrence J. Goldstein, SMP Asset Management, LLC - President [30]

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X or Y percent.

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Theodore L. Harris, Balchem Corporation - Chairman CEO & President [31]

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Yes, absolutely. And so that was presented and I believe that there was an abstract submitted in Montreal. And I also think there is a way for the general public to get access to that abstract. So we'll look into see how people can get access into that more detailed abstract and let you and others know how to possibly do that.

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Lawrence J. Goldstein, SMP Asset Management, LLC - President [32]

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Thank you.

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Operator [33]

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Our next question comes from Mitra Ramgopal of Sidoti.

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Lalishwar Mitra Ramgopal, Sidoti & Company, LLC - Healthcare Sell Side Analyst [34]

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First, just a couple questions on Chemogas. I was wondering how much it contributed in the quarter. And in terms of the revenue and cost synergies is that more 2020 expectation or should we look for that as early as second half?

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Carl Martin Bengtsson, Balchem Corporation - CFO [35]

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This is Martin. The Chemogas contributed in line with our expectations for the first month. We closed on them at the end of May, so we had one month of their revenue and earnings here in the second quarter. And they essentially came in just in line with our model the way we had modeled it, so we were quite pleased with sort of the consistency and delivery from them. And from an integration and synergies, et cetera, it is more of a 2020. I think we disclosed earlier that we would expect run-rate synergies in the $1.5 million range. We see a clear path to that. Here in the beginning we also have some obviously integration costs associated with it. So you're not really going to start seeing these benefits until 2020.

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Lalishwar Mitra Ramgopal, Sidoti & Company, LLC - Healthcare Sell Side Analyst [36]

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Okay. No, that’s great. I know FX is a headwind for you this quarter in terms of trying to get the margins up even more. I was wondering in terms of raw materials or commodity costs are you seeing any headwinds there?

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Carl Martin Bengtsson, Balchem Corporation - CFO [37]

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Yes, Mitra. Raw materials for us in the second quarter were actually somewhat favorable, about $1 million of favorability in the quarter from raws. If you remember in the Q1 release, it was not a driving factor in the first quarter for us and we had about $1 million of benefit in the second quarter. And this is almost exclusively showing up in our Human Nutrition and Health segment, which is also why you see strong margin growth in our Human Nutrition and Health segment. For the other 3 businesses, raw materials was not a key driver. It was actually slightly unfavorable in the other 3 segments.

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Lalishwar Mitra Ramgopal, Sidoti & Company, LLC - Healthcare Sell Side Analyst [38]

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Okay. That's perfect. And Ted I know you had said the ERP initiative is on track. I just wanted to get a sense also in terms of the $12 million that's being allocated to that. How far along are we on that?

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Carl Martin Bengtsson, Balchem Corporation - CFO [39]

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Yes, we're progressing well on D-365. As we've communicated before, we would view this as approximately a $12 million project. We've incurred between CapEx and expense for that one close to $7 million out of the $12 million as we sit here project to date. And as we look into the future here and completing this, we are very confident that we will come in under budget or at least not exceed budget. So we feel quite comfortable with how this is progressing.

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Lalishwar Mitra Ramgopal, Sidoti & Company, LLC - Healthcare Sell Side Analyst [40]

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Okay now, thanks. And Martin, also on the tax rate, I know it obviously has moved over the last couple quarters and this quarter some discrete items. Is 25% still a fair number to use going forward?

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Carl Martin Bengtsson, Balchem Corporation - CFO [41]

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I think for 2019, this year, I would revise the 25% to a 24% because we had a discrete item here in the second quarter that will impact the full year outlook, and we'll have a little bit more of a discrete item in Q3. So as we look on a full year basis I would model based on 24% instead of 25%. Then, as you return to future years, I don't predict any discrete items that we're aware of, so then I would use 25% again going forward in 2020.

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Lalishwar Mitra Ramgopal, Sidoti & Company, LLC - Healthcare Sell Side Analyst [42]

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Okay, thanks. That's great. Ted, just coming back to the Animal Nutrition segment, I know one of the things you were looking at is the companion animal market. I was wondering if you were getting any traction there.

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Theodore L. Harris, Balchem Corporation - Chairman CEO & President [43]

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You know, we are. I mean we've launched this line of PetShure products that I've talked about, and we've always been in the pet food business. So this really is kind of trying to build off of that existing positive position that we have, but actually this small new line of products grew by about 36% in Q2. So we really did have a nice quarter. It's a small base, so it's not so material to talk about, but since you asked we are getting traction. It's certainly an attractive part of the monogastric market. It’s growing faster than the broiler part of the market and we feel like we have some unique differentiated products that are penetrating the market well. So we were pleased with the quarter. I think it's going to be a little bit of an up and down story going forward, but we feel, again, positive about the receptivity to the products and the trends in the market. And Q2 was a great indication of things to come.

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Lalishwar Mitra Ramgopal, Sidoti & Company, LLC - Healthcare Sell Side Analyst [44]

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Okay, thanks. And then just finally again, I know there's only so much you can say on this but obviously Chemogas is a nice fit and I was just wondering about the acquisition pipeline, if this recent transaction kind of precludes anything near term until you get this integrated.

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Theodore L. Harris, Balchem Corporation - Chairman CEO & President [45]

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It really doesn't preclude anything. Our balance sheet is strong. Our net debt to EBITDA is around 1.2, sub 1.2. We've had a really good track record with our strong cash generation of kind of paying down debt after making an acquisition. We'll continue to do that. So it doesn't preclude us. This is really now being almost fully managed by the business unit as part of that business unit, and our corporate development team is free to focus on other things. And the pipeline is reasonably healthy. There are opportunities out there. We've, I think, done a good job in the past of identifying ones like Chemogas or IFP that are a little bit off of the radar screen. And we continue to see opportunities like that out there.

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Operator [46]

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Our final question comes from Tony Polak of Aegis Capital

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Anthony Polak, Aegis Capital Corporation - MD of Wealth Management [47]

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Do you have any idea when the BLA will actually be filed?

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Theodore L. Harris, Balchem Corporation - Chairman CEO & President [48]

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Tony, that's one of the tougher question to answer partly because we've been wrong about what we have thought in the past. I do think that the BLA versus the NDA does delay things somewhat and if it were an NDA I think we would be saying this is a 2020 project that should start to show some positive results in 2020 with a filing. I think now it's more of a 2021/2022 type timeframe for us to start realizing material benefits from this. So there's no question the BLA delayed things somewhat, but obviously there are benefits with the BLA as well, like the 12 years exclusivity and so forth. But again, that's a little bit of speculation on our part. It's informed speculation based on people we talk to in the industry and expectations, but it certainly could vary from that as well.

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Anthony Polak, Aegis Capital Corporation - MD of Wealth Management [49]

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Right. Do you know when the -- I mean, she seems to have already statistically shown that the product works, so why is that held up so much not knowing the process?

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Theodore L. Harris, Balchem Corporation - Chairman CEO & President [50]

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I really think it is now largely around putting the BLA together, doing the right manufacturing work, quality work, shelf life stability work that will all go into the BLA. So I think that's really the work at hand here and the work that really will be the limiting timeframe work as opposed to anything else. That's at least our understanding of the situation.

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Operator [51]

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Ladies and gentleman, we have reached the end of the question and answer section. I would like to turn the call back to Ted Harris, CEO, for closing remarks.

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Theodore L. Harris, Balchem Corporation - Chairman CEO & President [52]

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I'd just like to thank everybody for joining the call today. I'm sure we will be talking with many of you in the coming weeks at various forums, but thank you for your continued interest and support and we look forward to reporting out our Q3 progress in November. So thanks a lot and goodbye for now.

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Operator [53]

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