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Edited Transcript of BCPC earnings conference call or presentation 28-Feb-17 4:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Balchem Corp Earnings Call

NEW HAMPTON Feb 28, 2017 (Thomson StreetEvents) -- Edited Transcript of Balchem Corp earnings conference call or presentation Tuesday, February 28, 2017 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bill Backus

Balchem Corporation - CFO

* Ted Harris

Balchem Corporation - CEO

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Conference Call Participants

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* Timothy Ramey

Pivotal Research Group - Analyst

* Francesca Pellegrino

Sidoti & Company - Analyst

* Mitchell Kapoor

Rodman & Renshaw - Analyst

* Brett Hundley

The Vertical Group - Analyst

* Tony Pollock

Aegis Capital - Analyst

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Presentation

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Operator [1]

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Greetings and welcome to the Balchem Corporation fourth Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. 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 home Mr. Bill Backus, Chief Financial Officer for Balchem Corporation. Thank you. You may begin.

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Bill Backus, 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 December 31, 2016. My name is Bill Backus, Chief Financial Officer and hosting this call with me is Ted Harris, our President and CEO. 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 outcomes expectation or beliefs 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. The financial information that is referenced in this meeting was disclosed this morning, in our quarterly press release. Before I hand the call over to Ted, to go through our consolidated results, I would like to remind everyone that given the first quarter's acquisition of Albion international, there are significant non-cash acquisition accounting items impacting our results in this quarter. For this reason, we will focus our discussion, primarily on adjusted results which facilitate comparability to prior year and sequential quarterly performance. I will now turn the call over to Ted Harris, our President and CEO.

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Ted Harris, Balchem Corporation - CEO [3]

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Thanks, Bill. Good morning, ladies and gentlemen, and welcome to our conference call. Before I get into the quarter, I would like to reflect for a minute, on the full-year performance and note that we are very pleased to report another full year of sales and adjusted net earnings growth, while delivering record cash generation from operations of $108 million and record free cash flow of $85 million. In addition, we are pleased to declare a $0.38 per share dividend or $12.1 million this year, that represented nearly a 12% increase per share. These 2016 results were accomplished despite the continued struggles in several of our end markets. During 2016, we also successfully completed the integration of Albion International into our company and have made significant investments in new production capacity and technology, that leaves us well positioned to continue our growth story in 2017 and beyond.

Moving on to the quarter, this morning we reported fourth quarter consolidated net sales of $140.8 million, which resulted in fourth quarter net income of $15.9 million or $0.50 per share on a GAAP basis. This result includes significant non-cash amortization expenses of $7.5 million for acquisition-related intangible assets, which were recorded in these fourth quarter GAAP financial statements. The amortization expense is a direct result of acquisition valuation and business combination accounting rules. Consequently, our fourth quarter non-GAAP net earnings of $21.4 million reported in our press release earlier this morning, exclude this item to facilitate comparative evaluation of this current period operating performance versus the prior year period.

These non-GAAP net earnings of $21.4 million or $0.67 per share, were up compared to the comparable prior-year quarter of $21 million or $0.66 per share. Adjusted EBITDA of $37.7 million for the quarter was $4 million or 11.8% better, than the $33.7 million posted in the prior year quarter. Our adjusted EBITDA margin expanded to 26.8%, up 140 basis points compared to 25.4% from the fourth quarter, 2015. We delivered fourth quarter free cash flow of $23.6 million, while also paying down $17.8 million of debt including $9 million of accelerated payments. This further reduce the outstanding balance on our revolving line of credit to $19 million, from the $65 million we borrowed to partially fund the Albion acquisition. We are proud that the team delivered these strong earnings results, especially when viewed in light of the ongoing macroeconomic pressures in certain segments of our business. Our fourth quarter sales of $140.8 million were 6% higher than the $132.7 million result of the prior year comparable quarter. This increase is primarily the result of contributing sales from Albion and volume increases in Animal Nutrition & Health. These increases were partially offset by the decline in industrial product sales, resulting from reduced oil and natural gas fracking, lower average selling prices related to reduced raw material costs, unfavorable mix and reduced volumes and certain food and beverage markets. Our consolidated gross margin percentage was 33.3% of sales in the quarter, up 326 basis points from a 30.1% of sales level in Q4 of 2015. Adjusted gross margin percentage adjusted primarily for the previously mentioned amortization expense as a direct result of acquisition valuation and business combination accounting rules of $639,000 was 33.8% of sales, up 360 basis points from a 30.2% of sales level in the prior year comparative period. The improvement was primarily due to [a favorable] product mix and lower raw material costs. Gross margin percentage for the Human Nutrition & Health segment increased by 122 basis points, primarily due to the acquired Albion product lines, generating a higher margin. Gross margin percentage increased for the Animal Nutrition & Health segment by 581 basis points, primarily due to increased volumes, a favorable product mix and cost decreases of certain key raw materials. Gross margin percentage for the Specialty Products segment decreased by 562 basis points, primarily due to the inclusion of the Albion plant nutrition sales, which carry lower margins than the legacy Specialty Products business, along with an unfavorable mix and certain higher raw material costs. Industrial products gross margin increased by 12.4 percentage points due to a more favorable customer mix and improved cost structure. Consolidated operating expenses for the three months ended December 31, 2016 were $22.3 million as compared to $17.7 million for the three months ended December 31, 2015. The increase was principally due to the inclusion of Albion operating expenses and amortization expense related to the previously mentioned acquisition, excluding non-cash operating expenses associated with amortization of intangible assets [that's] a $6.9 million, operating expenses were $15.4 million or 11% of sales. Looking forward, we will continue to focus on tightly controlling our operating expenses and leveraging our existing SG&A infrastructure. US GAAP earnings from operations were $24.6 million, which increased $2.4 million or 10.7% compared with the prior year comparable quarter. This increase was primarily due to the inclusion of Albion and strong earnings growth in our Animal Nutrition and Health segment. On an adjusted basis, as detailed in our earnings release this morning, earnings from operations of $32.2 million increased $3 million or 10.3% from the prior-year comparable quarter.

Interest expense for the three months ended December 31, 2016 was $1.7 million, all of which related to the debt financing of the sensory affects and Albion acquisition. Our net debt at December 31 was $243 million, company's effective tax rates for the three months ended December 31, 2016 and 2015 were 30.2% and 24.1% respectively. The increase in the effective tax rate is primarily attributable to discrete items and the timing of certain tax credits. As previously noted, consolidated net income closed the quarter at $15.9 million, up $200,000 from the prior year quarter. This quarterly net income translated into diluted net earnings per share of $0.50 for the current year, an increase of $0.01 per share over last year's comparable quarter, result of $0.49.

Despite the aforementioned increase in tax rate, which impacted results by $0.04 per share. On an adjusted basis and as detailed in our earnings release, our adjusted net earnings were $21.4 million dollars or $0.67 per diluted share compared with $21 million or $0.66 per diluted share in the prior year quarter. As outlined in our earnings release, our fourth quarter results generated $37.7 million of adjusted EBITDA in the quarter, compared with $33.7 million in the prior year, an increase of $4 million or 11.7% adjusted EBITDA for the quarter was 26.8% of sales, 140 basis point increase over the prior year quarter. As previously noted, our cash flow remained strong, as we generated fourth quarter free cash flow of $23.6 million and we closed out the quarter with $38.6 million of cash. This reflects scheduled principal and net accelerated payments on long-term debt of $17.8 million, along with $4.2 million of capital expenditure funding in the quarter. Before I hand the call back over to Bill to go through the segments detailed results, I would like to update you on a few of our key growth initiatives. The Albion integration has been successfully completed. We have achieved expected cost synergies and continue to work on delivering sales synergies and results to date have met our expectations. We continue to work hard to fully recovered from the fire we had in July of last year at one of the four sites we acquired as part of the acquisition. While the majority of products were not impacted where we're quickly produced successfully another Balchem manufacturing sites for third parties, some of the products have proven to be more difficult to replicate resulting in some back orders and delayed shipments. We believe we will ultimately fulfill all of these back orders, but we are experiencing some delayed sales on these select products. Awareness around Choline and the reference dietary intake issued by the Food and Drug Administration continues to progress. The National Institute of Health Office of dietary supplements recently developed the first ever factsheet on Choline, and is proactively disseminating information on this essential nutrients, including through social media. While we continue this research and leverage other benefits of Choline, we believe the RDI and European Food Safety Authority first ever intake recommendations for Choline along with the continued building of consumer awareness of this essential nutrient will drive the inclusion of vital Choline Balchem's premier brand of Choline [in] supplementation and food fortification applications. The Third Phase III clinical trial for the Curemark drug to be utilized in the treatment of autism is progressing with continued recruiting, now at 33 clinical sites across the country, up from 30 sites from our last report. We look forward to the completion of this clinical trial and the important milestone it represents. In the meantime, the infrastructure and quality systems at the cGMP compliant production facility are nearing completion to ensure preparedness for the production of initial launch demand upon FDA approval. And related to our collaboration with BASF, we are pleased that the FDA has now approved formic acid for use in poultry diets in the United States. Formic acid was recently introduced in the US for swine and has been successfully used in poultry diets around the world. It is considered the most potent organic acid for feed --, (inaudible) formic acid delivers the feed hygiene benefits [need] to meet consumer demands for a safe food supply, while also providing a solution to those introducing or moving to [antibiotic-free lines] of business. The collaboration with BASF signals are continued intention to provide science based innovative products to the Animal Nutrition & Health markets and now we're going to have Bill Backus discuss the segments in more detail. Bill?

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Bill Backus, Balchem Corporation - CFO [4]

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Thanks, Ted. For the quarter, sales of our consolidated Human Nutrition and Health segment are $75.9 million and all-time record quarter, and increase of $5.5 million or 7.9% from the comparable prior-year quarter. The sales increase was a result of the contribution of the Human Nutrition portion of Albion and volume increases in flavor systems, inclusions, choline nutrients and cereal systems. This was partially offset by an unfavorable mix and continued softness in powder systems, sequentially from the third quarter 2016, without the impact of Albion. We did see volumes in HNH increase 1.4% with sequential improvement in powder systems, inclusions and choline nutrients. Fourth quarter earnings from operations for this segment were $10.3 million versus $9.9 million in the prior-year comparable quarter, an increase of $400,000 or 4%.

Excluding the effect of non-cash expense associated with amortization of acquired intangible assets of $6.1 million, adjusted earnings from operations for this segment were $16.4 million compared to $15.5 million in the prior year quarter, an increase of $835,000 or 5.4%. Earnings from operations for the quarter were driven by the inclusion of Albion in volume growth in certain market sectors, partially offset by the previously noted softness in the Powder Systems business. Animal Nutrition & Health segment sales of $42.5 million increased 2.6% or $1.1 million on a 4.8% increase in volumes, compared to the prior year quarter. Sequentially from the third quarter 2016, sales increased $1.6 million or 3.9%, on a 5% increase in volumes.

Sales of product lines targeted for ruminant animal feed markets increased by $2.9 million or 23.7% compared to the prior-year comparable quarter, largely due to strong growth of our flagship reassure product line. Milk and milk protein prices have improved and the USDA has recently increased its milk price forecast for 2017. Feed cost remain low and this coupled with higher milk prices has resulted and improved dairy farm income over feed cost and subsequently more favorable conditions for nutritional ingredients. Global monogastric species sales, including feed grade choline products decreased $1.8 million or 6.4% from the prior comparable quarter primarily due to lower amount of gastric average selling prices resulting principally from reduced formula pricing based on lower raw material costs and increased competitive activity. Due to stronger production driven by lower feed costs and strong international demand for relatively low price to meet protein the USDA has further increased its export forecast for 2017. (Inaudible) volumes did increase 3.5% from the prior comparable quarter and were also up 5.2% sequentially from the third quarter of 2016. We remain confident long term in Animal Nutrition and Health as we continue to prove the value of our existing product portfolio while introducing new and novel products to satisfy attractive end market demands to both organic developments and strategic alliances. [In each] quarterly earnings from operations were $8.1 million, an increase of $1.8 million or 29% from the prior comparative quarter. The increase compared to the prior quarter was a result of the noted higher sales volumes, favorable product mix, and cost decreases of certain key raw materials. Specialty Products segment achieved quarterly sales of $16.2 million for the three months ended December 31, 2016 as compared with $13.0 million for the three months ended December 31, 2015, an increase of 24.3% due to the contribution from the plant nutrition portion of Albion. Specialty Products achieved quarterly earnings from operations of $5.3 million versus $6.2 million in the prior comparable quarter, a decrease of $849,000 or 13.8%, excluding the effect of non-cash expense associated with amortization of acquired intangible assets of $800,000, adjusted earnings from operations for this segment were $6.1 million compared to $6.3 million in the prior year quarter, a decrease of [$203,000] or 3.2% due to unfavorable mix and higher raw material costs. In the Industrial Product segment sales decreased $1.7 million or 22.1% from the prior year comparable quarter, primarily due to significantly reduced volumes sold of Choline and Choline derivatives for oil and natural gas fracking in North America. Compared sequentially to the third quarter 2016, sales were flat. They remain significant uncertainty in the oil and gas industry and while the rig count in the United States continues to trend up, we still expect headwinds to continue, although year-over-year comparatives should start to improve here in 2017. Our earnings from operations for the Industrial Product segment were $930,000 an increase of $707,000 compared with the [prior year] comparable quarter and primarily reflects a favorable customer mix and improved cost structure. Sequentially, earnings from operations increased by $403,000. I'm now going to turn the call back over to Ted for some closing remarks.

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Ted Harris, Balchem Corporation - CEO [5]

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Thanks, Bill. We are pleased that in the fourth quarter of 2016, we were able to deliver strong earnings with adjusted EBITDA of $37.7 million and fourth quarter free cash flow of $23.6 million even while facing a challenging business environment, particularly in the oil and gas business within Industrial Products but also across other market sectors. Our continued strong cash generation enabled accelerated debt payments of $9 million above and beyond the regularly scheduled payments of $8.8 million reducing our net debt to $243 million on December 31 or approximately 1.6 times 12 months trailing adjusted EBITDA, further strengthening our balance sheet. The accelerated debt payments of $9 million reduced our outstanding revolver balance to $19 million from the $65 million that were borrowed in February to partially fund the Albion acquisition and while topline challenges remain, we delivered year-over-year revenue and operating earnings growth in three of our four segments. The global macroeconomic environment continues to present challenges to our company. A particular note is the ongoing uncertainty in the oil and gas markets, the strong US dollar impacting exports, and rising raw material cost among others. We are however pleased with the progress made on our key strategic growth initiatives, and we will continue to strengthen our company by focusing on these initiatives exercising disciplined cost management and seeking value creating acquisition opportunities. I would now like to hand the call back over to Bill who will open up the call for questions, Bill.

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Bill Backus, 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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Unidentified Participant [7]

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some different businesses that are performing are going in different directions, I should say. And then you also have Albion and revenue synergies that you're chasing there. You have choline potentially starting to get better this year and into 2018, so I was wondering if maybe with all that as a backdrop, if you can maybe guide us a little bit on what we should expect from a top-line growth standpoint for the HNH segment? And then I have a question on margins.

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Ted Harris, Balchem Corporation - CEO [8]

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Okay. Yes (inaudible), you're right, there is a lot going on, certainly in the quarter we had the contribution of Albion, that we were pleased with in HNH and then many of the different businesses, cereal systems, flavor systems, choline nutrients, inclusions also nice volume growth quarter-over-quarter, we did see certainly some price deflation in there, so while we saw volume growth, we saw some sales decline across that group of businesses and then those positive results were offset by continued year-over-year decline in the Powder Systems business, which again are driven by things that we've talked about in the past. One, the loss of one of our customers to a competitor, the warm weather and we're also seeing the transition to PHO-free solutions in that business, creating opportunity for us, but also causing some stagnation in that market a little bit, year-over-year, as all of our customers plan for anticipate for the transition to PHO-free.

On a positive note in the Powder Systems business, it was nice to see sequential growth that we've really seen sequential growth in that business unit, over the last few quarters. So, while we're still seeing some year-over-year decline in powder systems, we're seeing sequential growth which was nice to see. And so, as we go forward, I think that the year-over-year comparisons in the Power Systems business will get better and we should be able to start to see more of that mid single-digit type growth rate in HNH that we're looking for, which is a combination of growth in Albion, growth in choline nutrients

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Questions and Answers

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Operator [1]

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(Operator Instructions) Unidentified Participant.

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Unidentified Participant [2]

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Hi, good morning Ted and Bill. Thank you for taking my questions. I have kind of a two-part question HNH, and then I wanted to ask you a question about Curemark. So on the HNH, there is kind of a lot going on in the sales line there, in my opinion, with just some different businesses that are performing are going in different directions, I should say. And then you also have Albion and revenue synergies that you're chasing there. You have choline potentially starting to get better this year and into 2018, so I was wondering if maybe with all that as a backdrop, if you can maybe guide us a little bit on what we should expect from a top-line growth standpoint for the HNH segment? And then I have a question on margins.

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Bill Backus, Balchem Corporation - CFO [3]

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Okay. Yes (inaudible), you're right, there is a lot going on, certainly in the quarter we had the contribution of Albion, that we were pleased with in HNH and then many of the different businesses, cereal systems, flavor systems, choline nutrients, inclusions also nice volume growth quarter-over-quarter, we did see certainly some price deflation in there, so while we saw volume growth, we saw some sales decline across that group of businesses and then those positive results were offset by continued year-over-year decline in the Powder Systems business, which again are driven by things that we've talked about in the past. One, the loss of one of our customers to a competitor, the warm weather and we're also seeing the transition to PHO-free solutions in that business, creating opportunity for us, but also causing some stagnation in that market a little bit, year-over-year, as all of our customers plan for anticipate for the transition to PHO-free.

On a positive note in the Powder Systems business, it was nice to see sequential growth that we've really seen sequential growth in that business unit, over the last few quarters. So, while we're still seeing some year-over-year decline in powder systems, we're seeing sequential growth which was nice to see. And so, as we go forward, I think that the year-over-year comparisons in the Power Systems business will get better and we should be able to start to see more of that [mid-single-digit] type growth rate in HNH that we're looking for, which is a combination of growth in Albion, growth in choline nutrients some improvement in the Powder Systems business and continued performance in flavors and end caps and inclusion.

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Bill Backus, Balchem Corporation - CFO [4]

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That's really helpful, I appreciate it. And then staying with HNH, I wanted to maybe talk about the mix a little bit and really the margin structure of that business, as I think about the last few years and we view segments of course on an EBITDA basis as you give the information, but the last few years, you've had HNH margins kind of just [sub] 22% and our expectation is that you would really start to see that segment step up a little bit in coming years from a margin standpoint and a lot of that's just related to some of the culling that you've done in recent years, maybe a greater mix of Choline products relative to maybe some more commoditized sensory effect products and maybe potentially some additional synergies, I could be wrong on that, I thought that there is potential for more Albion cost synergies going forward maybe related to a [common ERP] system this year, but again I could be wrong. So anyway, I just wanted to revisit mix and margin structure with you in HNH and make sure I was on the right track with potentially expecting margin improvements for that segment in 2017 and 2018.

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Ted Harris, Balchem Corporation - CEO [5]

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Yes, I think [Brad] you're generally I think headed in the right direction there. If you think about the growth that we talk about obviously Curemark will ultimately be reported in HNH and given that revenue stream which really is largely going to be margin that will have a incredibly material impact on the margin profile of that segment, but putting that aside for a second, the businesses that should be growing a little bit faster than others in that segment choline nutrients, the Albion do tend to have a little bit higher margin than the average. So we should see some slow mix and margin improvement over 2017 and 2018 based on just the margin difference in those different business sectors.

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Unidentified Participant [6]

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Okay and then last question from me you kind of walked me into my Curemark question, as you alluded to in your prepared remarks, last week Curemark announced enrollment procedures, at three new sites for [TMA] and I'm just curious, does this push potential FDA approval firmly in the H2 2017 or even beyond, in your view?

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Ted Harris, Balchem Corporation - CEO [7]

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We actually are reflection on the press release and our discussions with Curemark view the announcement of the three additional sites actually is a positive step. I think the more sites that are recruiting the quicker we'll get to the 300 participants in the study and the quicker the study will be concluded. But I do think that the ultimate approval by the FDA is more of a second half--late second half 2018 timeframe than any earlier than that, but I'm not sure that specific announcement is a signal that things are going more slowly than anticipated. We actually view it as positive.

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Unidentified Participant [8]

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And I just want to make sure I heard you correctly, you just said you think the approval, would be a late second half 2018 did you mean 2017?

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Ted Harris, Balchem Corporation - CEO [9]

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I did mean 2017. Yes, if I said 2018 apologize for that.

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Unidentified Participant [10]

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Alright, thanks so much for taking my questions.

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Operator [11]

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Timothy Ramey, Pivotal Research Group.

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Timothy Ramey, Pivotal Research Group - Analyst [12]

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I'm assuming you've given some thought to what reported adjustment tax would do to your operations. Can you just give us a little bit your perspective on how that might have puts and takes on the business?

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Ted Harris, Balchem Corporation - CEO [13]

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We certainly have Tim. Thanks for the question. And we don't believe, obviously, I'm not sure any of us clearly understand all the macroeconomic implications of such a move. But we are not a large importer of raw materials and really at the end of the day, we're not a large exporter of products that do note that higher the strength of the dollar impacts our ability to export. But in the grand scheme of things, it's a fairly small part of our Company. So we don't think that border tax would have a very material impact on our Company as best we can assess todayI mean I guess, you don't think I would add Tim as to the extent that finished products are coming in obviously, that maybe a little more competitive from a currency standpoint or the Chinese importing choline for example if there's something that increases their costs because of the tax then, that may make us a little more competitive against some of that. And so that might help us [here] domestically with the sales.

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Timothy Ramey, Pivotal Research Group - Analyst [14]

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Yes, that was sort of what I was getting at was, there is meaningful Chinese choline coming in and since the -- that is probably very much a price driven business. It seems like that volume would be disadvantage right away, if you thought through more on what that would mean or is it just too hard to kind of play?

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Bill Backus, Balchem Corporation - CFO [15]

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Yes, I think we see -- absolutely it's going to -- it would hurt them, the problem we've experienced the times with the Chinese is trying to really understand what they're trying to accomplish with their pricing, I mean they do things that we clearly wouldn't do and so trying to understand rational pricing strategies can be difficult. So, I think we're hopeful that if this occurs, from that perspective, it would be beneficial. We can't sit here and say that, we wouldn't expect them to just continue to take even less margin and continue to sort of done product into the countries. So, I think that's the thing, we can't really get a complete handle on, because again we review some of the things they do is maybe [irrational].

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Timothy Ramey, Pivotal Research Group - Analyst [16]

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And Bill, if I could follow up on sort of (inaudible) question there, but maybe from a total company perspective. With the benefit of an acquisition, you basically had flat sales this year and a lot of that was down pricing due to pass through impacts, I understand that. Can you help us kind of understand what you're thinking is, from a total company perspective on -- we'll -- can we return to growth in 2017, without the benefit of another acquisition?

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Bill Backus, Balchem Corporation - CFO [17]

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Yes, I think we absolutely can, I mean there is certainly -- certain product lines, organically we expect to grow. I'm going to exclude Oil and Gas, obviously from the equation because I still don't know where that's going to wind up. But as I indicated, the comparative should get better because of how low it could get. Then we have seen some bright spots there, but it's still very uncertain. I think that you will hopefully even like Ted mentioned the PHO-free initiative here in food and that's starting, -- those formulations are starting to occur. There's being - the reformulations are acquiring we're part of that and I think that's been probably a big part of some of the softness we've experienced in HNH more than anything. So, we would expect hopefully to see something happening there, that's going to maybe helpGrowth rates Choline nutrients is getting closer and closer to the labeling requirement and that should obviously [helpful] also. So we do certainly see certain market sectors that we believe should grow organically. I think there is always going to be some of the stuff that's uncertain as I mentioned, Oil and Gas, but we are hopeful and see some bright spots on the horizon.

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Ted Harris, Balchem Corporation - CEO [18]

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And Tim, we certainly see the oil and gas market has stabilized and in fact in the last few sequential quarters has improved [debts] so in 2016, we saw a $30 million revenue negative impact associated with the decline in oil and gas and of course we firmly believe that is behind us and really frees us up to show some healthier organic growth numbers across the company in 2017.

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Operator [19]

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Francesca Pellegrino, Sidoti & Company.

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Francesca Pellegrino, Sidoti & Company - Analyst [20]

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Good afternoon, guys. So, I guess, and I'm not sort maybe Bill gave this in the prepared remarks, is there a way to quantify what Albion contributed to the company in 2016 topline?

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Ted Harris, Balchem Corporation - CEO [21]

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Yes, I mean we if you look at the press release that we put out for Albion, we talked about Albion being about $50 million in revenue, we saw about 3% growth on the Albion business year-over-year and that was, as we've talked about in the past, the combination of significant growth from the human nutrition part of Albion and some decline in the plant nutrition business, but if you, if you look at the whole business, it grew about 3%.

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Francesca Pellegrino, Sidoti & Company - Analyst [22]

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Okay. 3%. I know when you did the acquisition early in 2016. We had spoken about Albion doing about $54 million in sales in 2015. You had just mentioned that I think [you use a] $50 million base. Is there a nice number that we can talk about for 2016 and I know that all of [Albion was early] in the first quarter of 2016 as well?

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Ted Harris, Balchem Corporation - CEO [23]

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Yes, Albion, if you kind of take that, I would take that [54%] and add 3% and subtract the month and we are probably pretty good.

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Francesca Pellegrino, Sidoti & Company - Analyst [24]

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Just a follow-up on some of the Curemark commentary and some of the questions that So -- [roaming] is still happening for the second Phase III trial, I was viewing it more as a second-half 2018 event, but you're saying that the FDA could come out with the decision in the second half of 2017 even though we haven't closed enrollment in the first half of 2017. Am I hearing things right?

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Ted Harris, Balchem Corporation - CEO [25]

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Yes, I think that, and obviously this is a very hard item to forecast. You're talking about the FDA. You're talking about a clinical trial, it's trying to recruit 300 childhood patients and so it certainly takes time and we don't have given the sort of arms length approach to these sorts of trials, we don't have access to specifics as far as where they are in the recruitment, but we continue to believe that it's really a 14-week trial, once the [300th] patient is recruited and we believe that should be winding down by mid-year and then if you think about the conclusion of that study [in] the submission of the results and so forth that late in the second half of this year, 2017, we can reasonably expect some moved by the FDA.

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Francesca Pellegrino, Sidoti & Company - Analyst [26]

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So by the time the trials come to an end, you would accept a rather quick turnaround it sounds, like instead of it being more of a one half 2018 --, but I would think that the data would be compiled towards the latter end of 2017?

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Ted Harris, Balchem Corporation - CEO [27]

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This is kind of a fast track process and that's what we have come to understand we've actually spent some time with outside consultants trying to really more deeply understand these kinds of trials and so forth and believe that with the fast track status in -- this trial as it stands today that is a reasonable assumption to make and that's the one that we're making and going with and that's leading our work relative to manufacturing and quality controls and so forth and making sure that we have our manufacturing processes up and running in time for a [later] second half approval.

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Francesca Pellegrino, Sidoti & Company - Analyst [28]

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Okay. I guess just a shift back to some of your legacy business, it looks as if you made some pretty good progress when it comes to volume within the (inaudible) business, in fact volumes I think in the press release, you had mentioned were up for both. The ruminant monogastric end markets I think Bill had said, monogastric volumes were up 3.5% I think, was it monogastric pricing was down so that would mean that ruminant pricing was up but is that more of a factor of you raising prices or just the product mix shift, maybe to more profitable reassure as compared to like amino acid business, how (inaudible) we are viewing that item that pricing for the ruminant end market that you're selling into right now and how it's changing?

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Ted Harris, Balchem Corporation - CEO [29]

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You're right, we had a very good quarter in our animal nutrition business. We did see volume growth of about 3.5% in the monogastric business and about 14% in the ruminant business. Revenue was down in monogastric as you talked about based on really a combination of increased competition as well as lower raw material costs that we passed on. Ruminant sales were up 24%. So again, you're right in saying that price was up. We did have a price increase on one of our products in the quarter that had some impact. And but the majority of it really is mix related. Within our ruminant space we do have a very wide array of product pricing anywhere from products that are priced $45 a pound to products that are priced less than a dollar a pound. So you can see quite a big mix impact there. And so the majority of that price inflation that you see there is really mix driven.

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Francesca Pellegrino, Sidoti & Company - Analyst [30]

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I know in the past, when we talk about the ruminant market we think about Balchem high market share, whether it's for choline or whether it's for amino acid and when we look at back in like this summer of 2016 we saw really low milk protein prices then towards the tail end of 2017 we started to see them run go above that crucial $2 per pound level run to $2.70 in December and then they come in a bit in January to $02.20 and we're going back to that crucial mark of $2 per pound where a lot of decisions are being made by I guess dairy producers. When I think about the fact that your market penetration here in the US is rather low, but it's still strong at 25% I think in past calls you even got on and just said, this could be an incredible runway for us for incremental business down the road, how is the Company approaching or maybe how are you guys doing with new account wins and maybe convincing some of these ruminants or dairy producers to start incorporating choline reassure amino acids into the (inaudible), it just seems is it when there's more profitability for [ruminant] producers, dairy producers that's going to be what really can contribute to some outsized growth in the segment. And, I know it just seems like we're constantly taking [can] down the road, about when that's going to occur. This really was wondering, if you had any commentary or some color into (inaudible) maybe?

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Bill Backus, Balchem Corporation - CFO [31]

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Yes, I think the best indication, Francesco that I can give is that our reassure volume for example, in the quarter grew about 20%. That's, I think a very strong indication that we're doing a nice job of increasing penetration and that really is largely coming from new [calves] and not so much existing [calves] consuming more, it's really coming from new [calves]. So, I think we are doing a good job -- further penetrating the market, increasing the number of [cals] that are on reassure and so, I think that's the kind of the best indication that we can give. And I think that we've got a really good sales team, technical team calling on the right nutritionists in the dairy market; developing the right data in our clinical studies to support the use of choline in particular, in dairy [cals] and that growth what we saw that through 2016 really in fairly poor dairy economics and as you appropriately point out those conditions are improving and we've seen milk prices picked back up and no protein prices also pick up nicely as well. And we think that there could be some ups and downs here in 2017, but the majority of experts are forecasting significantly improved dairy market conditions in 2017 over 2016.

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Francesca Pellegrino, Sidoti & Company - Analyst [32]

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So, I just want to confirm and I think just looking at the 20% increase in volume sales of the [ruminant] end markets, is a good data point to look at. And is it wins with new customers or are you just feeling shared, because I know when we start talking about international producers and international producers of choline, we start talking quality issues that you sort of have a differentiated product for. So, I just want to mention that you are growing the category as maybe -- as compared to maybe just stealing share?

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Bill Backus, Balchem Corporation - CFO [33]

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I think, when we talk about reassure particularly,

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Francesca Pellegrino, Sidoti & Company - Analyst [34]

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[Previous] right.

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Bill Backus, Balchem Corporation - CFO [35]

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You can count on that being us growing the market and it's not a share shift or anything like that, it's us adding reassure in new (inaudible) and really creating demand.

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Bill Backus, Balchem Corporation - CFO [36]

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Okay, perfect that's it for me. Thanks again, guys. Mitchell Kapoor, Rodman & Renshaw.

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Mitchell Kapoor, Rodman & Renshaw - Analyst [37]

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Hi, thanks for taking my question. I just wanted to know how do you expect your dividend to evolve in 2017 versus 2016 and if you had considered doing a share buyback in place for that dividend?

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Ted Harris, Balchem Corporation - CEO [38]

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For the past, I think it was five years, we've increased our dividend, I think our intention would be to continue to pay out a dividend and hopefully be able to continue increasing it at the same rate as far as a share buyback, it's really sort of not who we believe we are from a capital allocation standpoint we've historically done the dividend, but I think we and I think most of our investors would prefer that we take our cash and find ways to grow the business, whether it's organically or inorganically, and it's less likely we're going to do a treasury buyback or do something beyond the dividend that we do -- that normal increase, like I said, we've made. So I won't say never because you just don't know what could happen, but it's really not in our plans as far as capital allocation.

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Operator [39]

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(Operator Instructions) Unidentified Participant.

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Unidentified Participant [40]

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First of all, regarding the Curemark opportunity, it's obviously a challenge to invest on the production side in preparation for what's inherently an uncertain outcome on the approval upfronts and maybe this was something you were discussing with the consultants you mentioned but if (inaudible) were to be approved, could you estimate the total incremental cost commitment that would ultimately be required and then, what percentage of those costs have already been spent before the approval process plays out or maybe from a different angle, what percentage of total costs related to the opportunity are you waiting to spend until the approval process is completed?

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Ted Harris, Balchem Corporation - CEO [41]

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So Andrew, the costs for manufacturing this product are fairly minimal, they're in the low couple of million dollar [type] range, so given our annual CapEx, say $25 million, it's really not a significant portion of that and we have to date, spent the majority of that already in anticipation of our approval. So there's very little else to spend. It's more kind of validation protocols and validation batches that we need to go through, which are time-consuming and resource consuming, but it's really not a whole lot more capital. I do think if the ultimate sale of [CMAT] is very successful as we certainly hope it is we may look to have a secondary manufacturing site as a backup and so we might be looking to spend again that kind of money once again as a duplicative site but that's kind of the order magnitude that we're looking at.

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Unidentified Participant [42]

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Okay, great thanks. And then regarding the FDA's reference dietary intake and the EFSA's dietary reference values for choline it's tough to know with the magnitude of this opportunity would ultimately be for the H&H segments over the long run. Would you be able to provide some commentary to help frame our expectations for how impactful these developments could ultimately be on segment results if the product mix, does indeed shift significantly more towards choline based products?

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Ted Harris, Balchem Corporation - CEO [43]

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Yes it is hard one way that we look at it is we look at other essential nutrients, vitamins, minerals that maybe have been in a similar position and you can make a three vitamin D or other sort of benchmark type products vitamin D, of course it was wildly successful and when the FDA came out and said that Americans were deficient in vitamin D and should supplement and they, it was kind of one notch up from choline they said it was a nutrient of concern they have not quite said that for choline. But we can look at those sorts of growth rates.

What happened to those essential nutrients and vitamins and so forth when approved, again we don't think that choline will necessarily follow the vitamin D path largely because awareness is low and as we've talked about in the past, we're spending a lot of time and money and resources on increasing the awareness of choline and building the awareness out there with all the right folks but it's still quite low, but we think that business today is about $20 million including the infant formula portion of that business and I think that we should expect as a management team that we should be able to double that business in the course of three years to five years, if we're successful in building awareness and leveraging the RDI in the market place so those are the internal goals that we have set for ourselves.

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Mitchell Kapoor, Rodman & Renshaw - Analyst [44]

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And [which] regard to that kind of general growth rate you would be aiming for -- will that include the inclusion of Choline and prenatal vitamins, it seems like that could be a huge growth driver going forward?

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Ted Harris, Balchem Corporation - CEO [45]

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Yes, absolutely. It's an area that it's surprising that Choline has not been traditionally included in prenatal vitamins and that's probably one of the areas with the strongest clinical data supporting Choline there has been a recent study at Cornell University, that's getting wide publication and discussion that speaks to just that and actually one of the real benefits of the Albion acquisition is, Albion minerals have been in prenatal vitamins and again we have not been successful over the years of getting Choline there, but we're really leveraging those relationships from the Albion business as well as the new data and results from Cornell University and so for us to have much more significant dialogs with the prenatal vitamin [guys] that we've ever had in the past. So, I see that has maybe one of the earlier wins and potentially one of the wins that we could talk about here in 2017 and I think those kinds of wins will help fuel the awareness and hopefully ultimate acceptance of Choline and things like multivitamins and so forth just general multivitamins.

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Operator [46]

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Unidentified Participant.

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Unidentified Participant [47]

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Hi, gentlemen, how it's going.

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Ted Harris, Balchem Corporation - CEO [48]

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Yes.

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Unidentified Participant [49]

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You talk about investments in new manufacturing capabilities, new product development and possibly strategic acquisitions. Which of those is the priority?

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Ted Harris, Balchem Corporation - CEO [50]

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I think the priority for us really is the internal organic growth. That's where we and the majority of our time, we see the higher ROIs particularly given the value of acquisitions today so I would say we spend most of our time there both from a investing capital in new assets like we did in 2016, as well as building our R&D capabilities which I see us making more progress in 2017 and 2018. but that doesn't mean to say, we're not spending a fair amount of time on acquisitions, we do see strategic acquisitions as the way to strengthen our position and grow our company as well. But certainly, primarily we're looking at organic investments and as we've stated in our prepared remarks, we feel good about some of the capital investments in particular that we made in 2016.

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Unidentified Participant [51]

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So, (inaudible) can you talk to me a bit more about those organic investments?

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Ted Harris, Balchem Corporation - CEO [52]

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Yes, it's kind of a long list of investments, but one we've talked about quite a bit is [there] continuous agglomerations, our [defiance] Ohio [plant] that really provides us with kind of increased particle size manipulation capabilities, than we've had in the past and we're quite encouraged by that new technology to very sort of nuts and bolts things like we invested in a [co-generation] plant in our Italian operation that allowed us to move off of fuel oil to natural gas that is contributing nicely to child-nutrition quality systems upgrades and [reading] Pennsylvania site and other investments like that. We added new [Screwfix extruder] capability at our cereal systems plants in Lincoln, Nebraska that's allowed us to expand that business somewhat. So, those kinds of investments some is as small as a million dollars and some as big for example in a collaboration it's $15 million or so.

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Unidentified Participant [53]

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Talk to me about the fracking and the gas market and how it's affected earnings and what you're expecting in the future?

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Ted Harris, Balchem Corporation - CEO [54]

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Sure. Obviously, it's had a significant impact, I think as we said, when Tim asked his question just in 2016, revenue was impacted by $30 million alone with the reduction in oil and gas and that industrial segment. At its peak, but $100 million in revenue in 2014 and this year Q4 results were about $25 million. So, and it's really been a commensurate reduction in earnings as well, so that's been the significant impact on the company over the last couple years. As far as going forward, we've had three quarters, where we have been flattish, we've seen some modest uptick here in the last quarter or so. And we see that continuing in 2017 we're certainly not bullish on this business in 2017 if oil prices were to spike we would see some further improvements, but we kind of see some modest growth continuing in 2017 from where we've been in the last couple of quarters. And from a profit perspective in the last quarters we've actually started to see some albeit from a pretty small base, some pretty nice margin and bottom line profit improvement in our industrial segment in Q4 we highlighted that as well. And I think we'll hold on to that, I would expect going into 2017 and be able to leverage that higher margin position that we've had in the last couple of quarters as revenue continues to pick up a bit.

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Unidentified Participant [55]

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The fire and the back orders, can you talk a bit about that and just give a touch of background about when was the fire again and when do you anticipate fully recovering from that cause you said you're still dealing with some of the fallout?

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Ted Harris, Balchem Corporation - CEO [56]

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Yes we had the July--the fire in July of last year and essentially destroyed a complete site that we had. And again overall we were quite pleased by the recovery but some of the products have proven more difficult to replicate than we expected. We saw in Q4, we thought about $1 million of revenue was pushed out into 2017 and likely we'll see a similar impact here in Q1. We are in the midst of finalizing plans for rebuild not at that existing site but at another Balchem site and so should fully recover. We expect by the third quarter of 2017. But I think every week that goes by we are getting a little bit better and hope to see that sort of [million dollar] push, if you will for the quarter to start to decline over the coming months.

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Unidentified Participant [57]

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Which time was that and where are you rebuilding?

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Ted Harris, Balchem Corporation - CEO [58]

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It was the Clearfield site and we're not quite ready to announce exactly where we're rebuilding. But it will be likely another a Balchem site.

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Unidentified Participant [59]

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And it was in what segment it was affecting?

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Ted Harris, Balchem Corporation - CEO [60]

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It's exclusively affecting our human nutrition and Health segment, the fire had no impact on the plant nutrition business.

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Brett Hundley, The Vertical Group - Analyst [61]

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And what was that plant making?

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Ted Harris, Balchem Corporation - CEO [62]

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It was the Clearfield (inaudible) and it was actually doing two things, one, it was packaging most of the Human Nutrition mineral business and we've very quickly replaced that at our other sites and -- but it was also granulating some of our powdered products and so we are taking, we sell some of our products as powders and then we granulate some of those powders to sell them as granulated products and -- this [perform] the granulation and like I said, we've been able to replicate that elsewhere in many cases, but not in all.

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Operator [63]

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Unidentified Participant.

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Unidentified Participant [64]

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Hey, guys. You touched on raw material costs couple of times, I was wondering what your outlook is for across the board (inaudible)?

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Ted Harris, Balchem Corporation - CEO [65]

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Yes it's a little bit of a confusing story because we're still seeing some year-over-year declines from raw material costs so we've talked about that in Animal Nutrition for example, but I think sequentially, we're starting to see some raw material increases raw materials that are driven by natural gas for example, we're starting to see pick up based on higher natural gas prices, obviously it's positive to see natural gas coming down over the last few days or so, but, but higher natural gas prices are driving some of our petrochemical feedstock prices up as well as just supply demand across some of our food systems products for example, (inaudible) prices are driving -- prices up kind of a supply demand in blood balancer drive is driving corn syrup prices up [Typhoons] in Indonesia and Philippines are driving coconut oil prices up. So, those kinds of impacts we're seeing in our business and we're expecting to see them through 2017 so we've been a several year period of raw material declines and we see ourselves now in a period of raw material increases, so we're actively working on raising prices where contracts permit and we have a lot of price increase activity going on so, we can mitigate the impact on their businesses as best as possible, but the raw material increases are real and felt -- we needed to talk about.

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Unidentified Participant [66]

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Okay. So just, enough is a way of, kind of netting it all, but I mean would one expect overall impact for the margin of the business to be kind of more positive, negative or neutral. As you assuming you get the majority of the prices increases that you're working on?

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Ted Harris, Balchem Corporation - CEO [67]

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I think we would like to say, overall, it should be neutral and as we talked with I think [Brett] earlier, we should see some mix improvement over the course of the year and into 2018, it should help margins. We are raising prices aggressively where we can, so that we don't see margin reductions, but there are some segments that that's proving to be more difficult. So, I think you're kind of term sort of on average, when you net it all out, we're hopeful that we'll see sort of neutral impact, but we will see some variance from one business, one segment to another.

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Unidentified Participant [68]

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Sure. And in the response to prior question you would reference kind of about at $25 million CapEx, I don't know if that was talking about where you guys were for 2016 or is that also a good look for where 2017 might be?

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Ted Harris, Balchem Corporation - CEO [69]

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Sure. Yeah, that was kind of an average number. I think we ended up the year in 2016, at around $24 million and I think previously we've talked about $28 million in 2017.

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Unidentified Participant [70]

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Okay, great. And then just the last question from me, it looks like maybe missing if that your receivables ticked up a bit at least into the fourth quarter, is there anything going on there, is it just a little bit of timing or?

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Ted Harris, Balchem Corporation - CEO [71]

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Yes, some of it's timing for sure. And I think, it typically at year-end, in particular, we kind of do the same thing, you're expecting customers to hold on to cash there they are using a once-a-year type opportunity at the end of the year to not pay so, our average days go up, on the [AR] side and we kind of offset that on the [AP] side. But look it's in the world today for sure, customers are trying to get better and better terms for themselves too and that's just part of the whole negotiation around price and just what we wind up doing from a selling standpoint.

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Unidentified Participant [72]

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Got it. Thanks so much.

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Operator [73]

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Tony Pollock, Aegis Capital.

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Tony Pollock, Aegis Capital - Analyst [74]

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Good afternoon could you comment a little more on the merger acquisition in landscape out there, [Dino] used to spend a few minutes conference call discussing that.

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Ted Harris, Balchem Corporation - CEO [75]

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Sure. As I said, our primary focus is on organic investments. But we do spend a fair amount of time looking at acquisitions, common knowledge acquisition pricings are very high today. But I think that is not from my perspective, eliminate opportunities. I think we just kind of have to dig deeper and find opportunities that make sense for us and I would say we have a very, very robust acquisition pipeline. We spend a lot of time on it, it's almost exclusively focused on human nutrition, health and animal nutrition and health and we are assessing a number of opportunities and we kind of we have kind of a strategic filter approach if you will and we've talked in the past, we're really looking at strengthening the position of our businesses.

Geographic expansion is important to us. Technology enhancement is important to us, kind of growth in skills and capabilities is important to us and we are finding despite high prices generally speaking opportunities out there to do all of those things. And that's how we're looking at acquisitions, we apply our typical sort of hurdle rate to acquisitions and obviously these high multiples makes it hard to hit a 12% return, but we're committed to that and we're committed to finding opportunities that allow us to meet those financial hurdles while again addressing those strategic opportunities I talked about.

Great. Thanks.

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Ted Harris, Balchem Corporation - CEO [76]

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Thanks.

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Operator [77]

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Mr. Harris there are no further questions at this time, I will turn the floor back to you for final remark.

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Ted Harris, Balchem Corporation - CEO [78]

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Great. I would just like to say thank you all for participating. I apologize, but we went over a little bit, but we had a lot of good questions and it's good that we had a chance to go through all those. We certainly appreciate your interest in our Company and look forward to reporting out to you through the course of 2017 on our strategic and financial progress. So thank you again.

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Operator [79]

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