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Edited Transcript of BCPC earnings conference call or presentation 4-May-18 3:00pm GMT

Q1 2018 Balchem Corp Earnings Call

NEW HAMPTON May 9, 2018 (Thomson StreetEvents) -- Edited Transcript of Balchem Corp earnings conference call or presentation Friday, May 4, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mary Theresa Coelho

Balchem Corporation - CFO

* Theodore L. Harris

Balchem Corporation - Chairman and CEO

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Conference Call Participants

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* Brett Michael Hundley

The Vertical Trading Group, LLC, Research Division - Research Analyst

* Francesco Pellegrino

Sidoti & Company, LLC - Research Analyst

* Julian Harrison

* Timothy Scott Ramey

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

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Presentation

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Operator [1]

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Greetings, and welcome to Balchem Corporation's First Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to turn the conference over to your host, Terry Coelho, Chief Financial Officer for Balchem. Please go ahead.

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Mary Theresa Coelho, Balchem Corporation - CFO [2]

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Ladies and gentlemen, thank you for joining our conference call this morning to discuss the results of Balchem Corporation for the quarter ending March 31, 2018. My name is Terry Coelho, Chief Financial Officer, and hosting this call with me is Ted Harris, our Chairman, CEO and President. Following the advice of our counsel, auditors and the SEC, at this time, I would like to read our forward-looking statements. This release does contain, or likely will contain, forward-looking statements which reflect Balchem's expectation or belief concerning future events that involve risks and uncertainties. We can give no assurance that the expectations reflected in forward-looking statements will prove correct, and various factors could cause results to differ materially from our expectations, including risks and factors identified in Balchem's Form 10-K. Forward-looking statements are qualified in their entirety by this cautionary statement.

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

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

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Thanks, Terry. Good morning, ladies and gentlemen, and welcome to our conference call. This morning, we reported first quarter consolidated net sales of $161.4 million, which resulted in record first quarter net income of $19.3 million or $0.60 per share on a GAAP basis.

This result includes noncash amortization expenses of $6.4 million for acquisition-related intangible assets, which were recorded in the first quarter GAAP financial statements. The amortization expense is a direct result of acquisition, valuation and business combination accounting rules. This quarter also includes $689,000 of transaction and integration costs.

Consequently, our first quarter non-GAAP net earnings of $24.4 million or $0.76 per share, reported in our press release earlier this morning, exclude these items to facilitate comparative evaluation of this current period operating performance versus the prior-year period. These non-GAAP net earnings of $24.4 million or $0.76 per share were an all-time record, and were 29.1% or $5.5 million above the comparable prior year quarter of $18.9 million or $0.59 per share.

Adjusted EBITDA of $40.9 million, also an all-time record, was 25.3% of net sales and was $5.1 million or 14.3% above the $35.8 million posted in the first quarter of 2017, and 2.3% above quarter 4 of 2017. We delivered first quarter cash from operations of $25.5 million, while making dividend payments of $13.4 million and scheduled principal payments of $8.8 million, the latter resulting in our long-term debt balance being reduced to $210.8 million.

Our first quarter sales of $161.4 million were 17.2% higher than the $137.7 million result of the prior year comparable quarter.

Sales growth in 3 of our 4 reporting segments, Human Nutrition & Health, Animal Nutrition & Health, and Industrial Products contributed to the increase, with Human Nutrition & Health and Animal Nutrition & Health both achieving record first quarter sales.

The primary sales drivers were the increased sales from the IFP acquisition, strong human chelated mineral volumes, good growth in choline nutrients and higher powder system sales within Human Nutrition & Health.

Increased mono gastric species sales within Animal Nutrition & Health continued strong sales into the shale fracking market within Industrial Products, and slightly higher repackaged gas sales within Specialty Products. These increases were partially offset by a decline in flavor system sales within Human Nutrition & Health, lower ruminant species sales resulting from continued unfavorable dairy economics within Animal Nutrition & Health and lower plant nutrition sales within Specialty Products.

Our Q1 consolidated gross margin dollars of $51.5 million were up $7 million or 15.8% compared with the same period in the prior year. The increase was primarily driven by the higher sales, partially offset by unfavorable segment, product and customer mix and higher raw material costs within the current quarter across all of our segments. Our consolidated gross margin percent was 31.9% of sales in the quarter, down 40 basis points from 32.3% in Q1 of 2017, primarily due to the previously mentioned mix and higher raw material costs.

Gross margin percentage for the Human Nutrition & Health segment increased by 20 basis points to 32%, primarily due to mix. Gross margin percentage increased for the Animal Nutrition & Health segment by 90 basis points to 26.2%, primarily due to improved monogastric gross margins as a result of higher volumes, driving improved throughput, combined with increased average selling prices.

Gross margin percentage for the Specialty Products segment decreased by 100 basis points as compared to the prior year comparable quarter, primarily due to lower plant nutrition volumes, mix and certain higher raw material costs.

Industrial Products gross margin increased by 700 basis points, primarily due to the higher sales volumes, partially offset by certain higher raw material costs. Consolidated operating expenses for the 3 months ended March 31, 2018, were $24 million as compared to $21.7 million for the 3 months ended March 31, 2017.

The increase was principally due to the inclusion of IFP operating expenses, additional R&D spend, certain compensation-related expenses and increased transaction and integration costs, offset partially by insurance proceeds associated with the Clearfield fire and lower amortization. Excluding transaction and integration costs of $689,000 and noncash operating expense associated with amortization of intangible assets of $5.4 million, operating expenses were $17.9 million or 11.1% of sales.

Looking forward, we will continue to focus on tightly controlling our operating expenses and leveraging our existing SG&A infrastructure.

U.S. GAAP earnings from operations were $27.4 million, which increased $4.7 million or 20.7% compared with the prior year comparable quarter. This increase was primarily due to earnings growth in our Human Nutrition & Health, Animal Nutrition & Health and Industrial Products segments.

On an adjusted basis, as detailed in our earnings release this morning, earnings from operations of $34.4 million increased $4.5 million or 15.2% from the prior year comparable quarter, again, due to higher earnings in our Human Nutrition & Health, Animal Nutrition & Health and Industrial Products segments.

Interest expense for the 3 months ended March 31, 2018 was $1.9 million, and our net debt on March 31 was $168.1 million. The company's effective tax rates for the 3 months ended March 31, 2018 and 2017 were 23.2% and 25.1%, respectively. The decrease in the effective tax rate is primarily attributable to the recently passed tax reform, partially offset by lower excess tax benefits from stock-based compensation related to the adoption of ASU 2016-09 in the first quarter of 2017. The tax benefits associated with the adoption of ASU 2016-09 have been adjusted out of adjusted net earnings to aid in comparability of results to prior periods.

As previously noted, consolidated net income closed the quarter at $19.3 million, up $3.8 million from the prior year quarter. This quarterly net income translated into diluted net earnings per share of $0.60 for the current year. An increase of $0.12 per share over last year's comparable quarter result of $0.48. On an adjusted basis, and as detailed in our earnings release, our adjusted net earnings were $24.4 million or $0.76 per diluted share, up $5.5 million or 29.1% compared with $18.9 million or $0.59 per diluted share in the prior year quarter.

Our first quarter results generated $40.9 million of adjusted EBITDA or 25.3% of sales in the quarter compared with $35.8 million or 26% of sales in the prior year, an increase of $5.1 million or 14.3%. As previously noted, our cash flow remains strong, as we generated first quarter cash flows from operations of $25.5 million and closed out the quarter with $42.7 million of cash on the balance sheet. This reflects dividend payments of $13.4 million, scheduled principal payments on long-term debt of $8.8 million, along with $3.7 million of capital expenditure funding in the quarter.

Free cash flow for the first quarter was $21.7 million, an increase of $1.9 million compared to the same quarter in the prior year.

Before passing the call back to Terry to cover the detailed results by segment, I would like to update you on a few of our key growth initiatives. We continue to work hard to progress awareness around choline after the issuance of the Reference Dietary Intake by the Food and Drug Administration and the European Food Safety Authority's first ever intake recommendations for this essential nutrient. As we continue our VitaCholine market development activities through both consumer awareness initiatives and the strategic expansion of our sales channels, we're extremely pleased to share the choline signals -- singles using Balchem's VitaCholine branded product are now available for sale across 4,000 Walmart stores in the United States, effective last month. Choline is now also available across many Target stores across the United States. Increased availability of choline in large retail outlets is a key development to accompany the increase in consumer awareness.

Within our Animal Nutrition & Health segment, we are very encouraged to see the published results of a new research trial using ReaShure. The trial was documented in the prestigious Journal of Dairy Science, the leading scientific journal for the industry. It was the first research ever to clearly demonstrate the full lactation benefits of feeding ReaShure, Balchem's rumen-protected choline during the transition period.

In addition, we've also seen exciting new research results supporting the efficacy of choline in transition cals at higher feeding rates as well as potential benefits for the health of the newborn baby calf. This new research will certainly help in our efforts to expand the penetration of ReaShure into dairy herds across the globe, and also helps to direct our future efforts toward exploring the expansion of ReaShure feeding and the value proposition across the full dairy animal life cycle.

The third Phase III clinical trial for the CureMark drug to be utilized in the treatment of autism continues to progress. We informed you last quarter that the last patient -- last visit occurred within the month of December, effectively completing the trial and starting a results analysis phase of the project. While the CureMark team analyzes the data in preparation for a possible NDA submission, Balchem remains focused on our manufacturing and supply chain preparedness for the launch of the product, while continuing to manufacture additional trial quantities of the encapsulated enzyme for rollover participants from previous trials. We look forward to communicating more on this important initiative as the project progresses further.

We continue to make very good progress on the integration of the Innovative Food Processors or IFP acquisition, and we are already beginning to realize the plan synergies. The IFP acquisition has been a good addition to Balchem, bringing capabilities and assets that are helping to better service our powders and encapsulated ingredients customers. As part of the integration process, and after close examination, we recently announced the decision to close one of the acquired manufacturing sites and transfer the production capabilities to our [Fairbough, Minnesota] and [Slight Hill, New York] manufacturing locations. This transaction will improve the efficiency of our network, lower overall costs and further improve the profitability of the IFP business. And once finalized, we believe the integration activities associated with the IFP acquisition will largely be complete.

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

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Mary Theresa Coelho, Balchem Corporation - CFO [4]

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Thanks, Ted. For the quarter, sales of our consolidated Human Nutrition & Health segment were $83.1 million, a record first quarter, and an increase of $9.9 million or 13.6% from the comparable prior year quarter. The sales increase was primarily driven by added sales from the IFP acquisition, strong chelated mineral volumes, good sales growth in choline nutrients and higher powder systems product sales, partially offset by lower flavor systems sales.

First quarter earnings from operations for this segment were an all-time record of $13 million, an increase of $2.8 million or 27.5% compared with the $10.2 million in the prior year comparable quarter. Excluding the effect of noncash expense associated with amortization of acquired intangible assets of $5.5 million, first quarter adjusted earnings from operations for this segment were $18.5 million compared to $15.8 million in the prior year quarter.

Earnings from operations for the quarter were driven by the strong sales growth, partially offset by the impact of product mix, certain higher raw material costs and increased Research and Development spending.

Supply chain optimization and recovery of higher raw material costs through pricing actions continue to be important focus areas of this business. The Animal Nutrition & Health segment sales of $46.1 million, a record first quarter, increased 21.2% or $8.1 million compared to the prior year comparable quarter and continued the sequential quarterly improvement we have been delivering since mid-2017.

Sales of product lines targeted for ruminant animal feed markets decreased by $0.6 million or 5.1% compared to the prior year, primarily due to lower ruminant product volumes resulting from challenging dairy economics, particularly in North America, where milk and milk protein prices remain low in the first quarter.

Sales into the global monogastric species market increased $8.7 million or 33.1% from the prior year comparable quarter, driven by healthy demand in North America and Europe, higher average selling prices and additional sales realized as a result of the continuing supply disruptions of Chinese imports. Recent investments in both the acquisition of coal mix and the expansion at our manufacturing facility in Italy have proven critical to meet the increasing demand from the European market.

As we have discussed before, Europe remains an important growth focus for our Animal Nutrition & Health segment. We have started to see some return to the market of Chinese choline suppliers, in line with our view that the disruption is likely to be short term.

Animal Nutrition & Health quarterly earnings from operations of $7.5 million were $2.1 million or 39.2% higher than the prior year comparable quarter of $5.4 million. The higher sales driven by increased monogastric volumes and higher average selling prices, coupled with improved throughput from the higher volumes, drove the strong margin expansion in the quarter compared to prior year.

The Specialty Products segment achieved first quarter sales of $17.7 million for the 3 months ended March 31, 2018, as compared with $18.8 million for the 3 months ended March 31, 2017. The decrease of 5.6% was driven primarily by softer plant nutrition sales in 2018, partially offset by increased sales of ethylene oxide for the medical device sterilization market.

Specialty Products quarterly earnings from operations were $5.1 million versus $6.5 million in the prior year comparable quarter, a decrease of $1.3 million. Excluding the effect of noncash expense associated with amortization of acquired intangible assets of $732,000, first quarter adjusted earnings from operations for this segment were $5.9 million compared to $7.2 million in the prior year quarter, a decrease of 18.7%. The decrease was driven by the lower volumes in plant nutrition and product mix, partially offset by the pricing actions taken to help mitigate increased raw material costs as well as other rising costs, where contract terms permit.

In the Industrial Products segment, sales of $14.5 million increased $6.7 million or 87.1% from the prior year comparable quarter, primarily due to significantly higher sales of choline and choline derivatives used in shale fracking applications. Compared sequentially to the fourth quarter 2017, sales were, however, $0.4 million lower, which marks the first sequential decrease in oil and gas demand that we have seen in over 1.5 years.

As we have discussed in the past, we are pleased with the year-over-year growth but remain cautious about this historically cyclical market.

Our earnings from operations for the Industrial Products segment were $2.5 million, an increase of $1.8 million compared with the prior year quarter and primarily reflects the increased sales.

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 and CEO [5]

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Thanks, Terry. We delivered year-over-year revenue and operating earnings growth in 3 of our 4 segments, with overall first quarter revenues of $161.4 million, up 17.2% year-over-year. Record adjusted net earnings of $24.4 million and operating cash flow of $25.5 million, despite significant challenges, including raw material and other cost inflation across all segments, an unfavorable dairy economics impacting Animal Nutrition & Health.

We continue to generate strong cash flows. Our revolver remains fully available, and our net debt has been reduced to $168.1 million as of March 31 or 1.1x trailing 12 months adjusted EBITDA, further strengthening our balance sheet.

Our strong first quarter results once again highlight the strength and resilience of our business model. While we continue to face some challenges within the ruminant side of the Animal Nutrition & Health segment, along with higher raw material costs across all of our businesses, there is good momentum in each of the 4 segments.

Additionally, we are pleased with the progress made on our key strategic growth initiatives, in particular, the growing awareness of choline as an essential nutrient and the integration of IFP and Chol-Mix.

We will continue to strengthen our company by focusing on these initiatives, exercising disciplined cost management and seeking value-creating acquisition opportunities.

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

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Mary Theresa Coelho, 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 the conference call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Tim Ramey with Pivotal Research.

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Timothy Scott Ramey, Pivotal Research Group LLC - Co-Head of Consumer Research and Senior Analyst of Food, Beverage, and Nutrition [2]

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The results in the plant-based chelates business, I wonder if you would elaborate a little bit on this. I'm guessing this is your key selling season on that, so there's probably not much recovery in that if possible for this year. Was there anything that was outside, just either -- or sales or execution or was it weather or how should we think about that?

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

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Yes, this is your favorite segment, Tim. I know you know these products well. It certainly is partly weather-related. Obviously, this has been part of our company since the Albion acquisition. We did see, through the quarter, sales into this segment increase and that has continued here into the second quarter. So there is a window of opportunity to catch up. But you're right, we need to catch up now, and we are pleased with the increase through Q1 and into Q2. I'm not sure we'll catch it all up, but we're definitely eating into the gap that we created in Q1. Our international sales continue to be strong. We continue to be bullish on the business long term, but it does seem like late frosts and excessive rains at times of kind of key spreading have somewhat impacted the business early. But we are hopeful we're going to eat away at that gap created in Q1.

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Timothy Scott Ramey, Pivotal Research Group LLC - Co-Head of Consumer Research and Senior Analyst of Food, Beverage, and Nutrition [4]

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Okay. And just one quick one on the Animal Nutrition business. In your remarks, and I think in the release too, you talked about healthy monogastric sales of choline chloride. The -- I'm kind of surprised that there isn't some retrenchment given the trade issues out there. You're just not seeing any of that is, I guess, what you're telling us.

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

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Yes, we're really not. We're somewhat concerned about that. And obviously, watching those trade discussions, swine was on the potential list. And that's a part of our monogastric business, but honestly, it's the smaller part. Something on poultry would be more significant, and we're not expecting that at this point. So we're seeing healthy demand, both in Europe and North America. We are benefiting revenue wise by higher prices. And we are also, as we talked about last quarter, benefiting from the supply disruptions coming out of China on Chinese-made choline that is exported into Europe and North America. And that probably benefited our monogastric business by about $4 million in Q2. It was about $3 million in Q4 of last year, and we had indicated that we thought it would be about the same in Q1 and it was a little bit more. So we're seeing healthy growth -- volume growth, just from the business and some benefit from pricing, but we also are seeing that benefit from the Chinese supply disruptions.

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Timothy Scott Ramey, Pivotal Research Group LLC - Co-Head of Consumer Research and Senior Analyst of Food, Beverage, and Nutrition [6]

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And that benefit, I think you indicated you saw it to be somewhat transient. Is it -- does it persist into the 2Q and 3Q but maybe goes away by 4Q? Or how would we think about that?

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

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Yes, I think that -- we think that it peaked in Q2 -- I mean, in Q1, sorry, and that it will start to decline, but we will see some lingering benefit in Q2 as well and maybe -- not all the way to Q4. We might see minimal benefit in Q3. We're starting to see increased activity from the Chinese suppliers, albeit at a higher cost position. We do think that the environmental regulations that are being imparted on these plants are changing the cost position. So while supply is coming back, we're seeing the product coming in at higher prices. And that maybe more of a permanent impact, which I think would be positive because they have been previously selling at very low prices.

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Operator [8]

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Our next question is from Brett Hundley with The Vertical Group.

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Brett Michael Hundley, The Vertical Trading Group, LLC, Research Division - Research Analyst [9]

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I wanted to ask you, or start with, the HNH choline business and see if you could give us a growth number for that business in Q1?

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Theodore L. Harris, Balchem Corporation - Chairman and CEO [10]

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Sure, Brett. As we talked about last call, the choline business has been growing pretty nicely. This quarter, our revenue was up about 10%. Last year, for the full year 2017, we were up about 13%. So the double-digit growth has continued. We are going to see growth in that business a little bit lumpy, but we're very encouraged by not only the 10% in Q1, but just the increased awareness that we're seeing across the board. The -- while the inclusion of choline singles in Walmart and Target alone is not necessarily a huge increase in demand for us, it's really encouraging to see just increased availability of choline. We've talked about that in the past. Previous to this, you could buy choline in GNCs and vitamin shops and online, but now to see it in your sort of mass retail outlets is very encouraging. So we're encouraged about choline, generally speaking. But 10% is the short answer to your question.

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Brett Michael Hundley, The Vertical Trading Group, LLC, Research Division - Research Analyst [11]

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Okay. And I can't remember -- I'll have to go back and look through my notes, but I can't remember the comparisons that are in place for your choline business on the HNH side. I mean, as you moved from 2016 into 2017, were you experiencing more difficult comparisons in the early part of 2017? So in other words, this Q1 '18, were you up against a particularly tough comparison? And then comparisons eased as you got across '17, do you recall how that business trended for you?

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

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You know, it actually -- I -- my recollection is that our business did trend up through the course of the year. So I think that this was not a particularly easy comparison nor was it a real tough comparison. But I do believe our volume trended up throughout 2017. So it might be a little bit more on the easy comparative than the hard, but it doesn't stand out as really either one to me.

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Brett Michael Hundley, The Vertical Trading Group, LLC, Research Division - Research Analyst [13]

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Okay. I wanted to ask you about IFP. And then, I just have one other question. So on IFP, do you -- I think you were initially targeting maybe $3 million in synergies. Can we expect that to move a little bit higher over time, as you complete some other actions related to that asset? And when will the -- when will that IFP plant closure be completed?

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

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Right. So again, IFP, I think is another area that we're very pleased with. The strategic addition of IFP to the company and how the synergies are developing as we made the acquisition. We announced it was about a $20 million revenue acquisition, with about $3 million of EBITDA. And you're right, at the time, we said we thought we could transform the P&L from a $3 million EBITDA into about $6 million. And the closure of the Hayfield, Minnesota plant will add about $2 million of additional cost savings to the integration efforts. So we will, I believe, beat the $3 million. I would maybe plan on $4 million. So instead of the $3 million that we talked about, I think with the plant closure, it will be $4 million and we are expecting that to be completed by July.

So we'll see about a half-a-year benefit of that this year. There are some P&L impacts of the closure. We have about $1.5 million noncash write off that will impact Q2, and we think, all combined, the shutdown and severance costs will be less than $0.5 million. But let's say in that area for what is an annualized $2 million savings.

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Brett Michael Hundley, The Vertical Trading Group, LLC, Research Division - Research Analyst [15]

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That's great. And then, the last question I have for you is back inside HNH. Talking about sugar and sweetener reduction. So as we think about nutrition labeling standards, at least as they're currently expected to change in early 2020, our understanding is that food and beverage customers are getting more active on sugar/sweetener reduction, reformulations and things like that. And I just wanted to get a sense of how and if you guys participate in that, and to what degree?

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

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Sure, thanks. We absolutely do. It impacts us. We -- sugar is an important part of many of our products and it's a trend that we're seeing that has longevity to it and actually growing. And I think that, to some extent, it plays to our strengths. We're not really core in any of those types of ingredients. And so our formulation expertise in coming up with solutions to lower sugar products, I think, is something that can shine as this trend continues. So we are in the midst of creating new formulations for many customers that are clean label, fewer ingredients, lower sugar and different protein sources, good fats versus historically what were thought to be bad fats. And we're not concerned by it. In fact, we think it's a positive trend that we can take advantage of.

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Operator [17]

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(Operator Instructions) Our next question is from Francesco Pellegrino with Sidoti & Company.

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Francesco Pellegrino, Sidoti & Company, LLC - Research Analyst [18]

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Ted, I want to ask you about the higher monogastric sales. I think you said that $4 million was attributable to the Chinese tariff -- I'm sorry, the Chinese import issue. How much of that business was to new customers?

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

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That's a -- that's good question, Francesco. If you kind of dissect it just for a second, we were up $8.7 million in monogastric, so about $9 million, $4 million of which I already said was due to the shortage in China. I would say that most of that business was to new customers because most of our traditional customers really choose to buy European-produced product from Europe or U.S.-produced product. And so they tend not to kind of go back and forth. So I would say the entire $4 million is largely at new customers, some of whom -- we talked about this being short term, but some of whom have signed some contracts with us longer term to try to make this a little bit more sustainable for us. And then I would say, additionally, out of the $5 million, we had -- we did see a currency benefit of a couple of million dollars in revenue. And the rest really is from our existing customer base. We have expanded a little bit but maybe -- let's say $5 million out of the $9 million total was new customers.

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Francesco Pellegrino, Sidoti & Company, LLC - Research Analyst [20]

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Okay. I would think that these customers had -- a majority of them being new. I would think that their price points, they tend to buy an inferior product since they're basically buying from the Chinese producers. Maybe you were able to raise pricing a little bit more for these guys, just knowing that the desperate measures that they were -- the desperate situation that they were in, and that they were probably going to leave you once this Chinese import issue sort of resolved itself, is that fair to say?

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

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[No], I think it -- what -- how I would position it is that we've been selling -- if the customer is unwilling to sign a longer-term contract, typically we would then agree to sell on a spot basis. And our spot basis, because of its uncertainty, tends to be quite a bit higher. So we have been selling -- we certainly haven't been advantaging these short-term customers that come over due to Chinese issues. We haven't been advantaging them versus our long-term existing customers, that's for sure.

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Francesco Pellegrino, Sidoti & Company, LLC - Research Analyst [22]

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Okay. Higher raw material costs for Human Nutrition and Health and Specialty Products. I know ethylene oxide was called out for the Specialty Products. Are you going to be able to get any price increases through for the remainder of the year for these 2 raw material inputs?

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

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Yes, we will. Mostly outside of Specialty Products, I think, Specialty Products is sort of beginning of the year type of relationships with our customers, where based on current trends and natural gas prices and so forth, we don't think that ethylene oxide, ethylene prices will increase significantly more through the year. But if they were to, we would struggle in Specialty Products. In the other areas, we do have opportunities to raise prices with a reasonable, let's say, quarter lag.

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Francesco Pellegrino, Sidoti & Company, LLC - Research Analyst [24]

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Okay. Switching over to CureMark. I thought your comments about still manufacturing the CM-AT drug for rollover participants was pretty interesting, just knowing how long it took CureMark to find the right number of patients to finally close enrollment. How many patients rolled over from the trial that closed in December?

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Theodore L. Harris, Balchem Corporation - Chairman and CEO [25]

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I do not know the exact number, but it's several hundred.

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Francesco Pellegrino, Sidoti & Company, LLC - Research Analyst [26]

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Okay. If you don't know the exact number, maybe let me ask it in a different way, how much more or less are you manufacturing since the end of the trial? Because I would think that will be another way to get a read through.

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

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Right. There are rollover patients from the earlier trials. It's not just the 300. So we do have patients that have gone into the rollover study from the earlier trial. So it's not correct just to look at it as the 300. But there are hundreds of patients who have rolled over from the first trial and combined with the second trial. And other than that, I can't really -- we make these in batches, and we make sort of a similar amount every time we make a batch, and I think the positive is that we continue to have to make new batches even though the official trials are done because patients are in the rollover.

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Francesco Pellegrino, Sidoti & Company, LLC - Research Analyst [28]

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Got it. And just the last question. I think, on the fourth quarter call, when we just started talking about maybe a timeline for an eventual decision, we were dancing around like 1Q 2019. Does that still sound about right?

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

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Yes, Francesco. I don't see any reason to change that expectation. I do know that CureMark is in the midst of analyzing the results and data from the Phase III clinical trial that ended in December. I also know that they're presently in the process of requesting a requisite meeting with the FDA to review the results and discuss the filing. So I think that is a reasonable assessment of timeline at this point, based on what we know.

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Operator [30]

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Our next question comes from Ram Selvaraju with H.C. Wainwright.

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Julian Harrison, [31]

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This is Julian on for Ram Selvaraju. Regarding your autism drug candidates CM-AT, have there been any discussions about companion diagnostic test, and if so, has your company had any involvement with this?

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Theodore L. Harris, Balchem Corporation - Chairman and CEO [32]

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We have not had any involvement with it nor any discussions with them around a new and different diagnostic test. There are obviously diagnostic tests for the deficiency of this enzyme and certain patients for these trials have gone through that. But I'm not aware of a new and different test, and we're certainly not part of it.

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Operator [33]

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Ladies and gentlemen, we've reached the end of the question-and-answer session. At this time, I'd like to turn the call back to Ted Harris for final closing comments.

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Theodore L. Harris, Balchem Corporation - Chairman and CEO [34]

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Okay, thank you. And thank you all for joining the call today and your continued support and interest in the company. Q1 was a really good quarter for Balchem, both financially and relative to progress made on our strategic initiatives. We certainly look forward to talking to you again in August about our Q2 results. In the meantime, we will be presenting at several conferences. So in case you can make them, the BMO 2018 Farm-to-Market Conference and Houlihan Lokey Annual Global Industrials Conference is in May -- in mid-May in New York, and then we're going to be presenting at Credit Suisse's Global Chemicals and Agricultural Conference in Europe in early June. So hopefully, we'll get to see some of you there. Thanks again for calling in, and have a great day.

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Operator [35]

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This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.