Greetings, and welcome to Balchem Corporation's third quarter 2021 financial results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Martin Bengtsson, Chief Financial Officer. Thank you. You may begin.
Morning, everyone. Thank you for joining our conference call this morning to discuss the results of Balchem Corporation for the quarter ending September 30, 2021. My name is Martin Bengtsson, Chief Financial Officer, and hosting this call with me is Ted Harris, our Chairman, CEO, and President. Following the advice of our counsel, auditors, and the SEC, at this time, I would like to read our forward-looking statement. This release does contain or likely will contain forward-looking statements which reflect Balchem's expectation or belief concerning future events that involve risks and uncertainties. We can give no assurance that the expectations reflected in forward-looking statements will prove correct, and various factors could cause results to differ materially from our expectations, including risks and factors identified in Balchem's Form 10-K. Forward-looking statements are qualified in their entirety by this cautionary statement.
I will now turn the call over to Ted Harris, our Chairman, CEO, and President.
Thanks, Martin. Good morning, and welcome to our conference call. This morning, we reported strong third quarter results, with record third quarter sales in all three of our reporting segments, as well as record third quarter net earnings and adjusted EBITDA and strong free cash flow. Our revenues of $197.9 million were up 13%, and our adjusted earnings from operations were $39.6 million, up 9.2% versus the prior year quarter. Our net income of $25 million, an increase of 16%, resulted in earnings per share of $0.77 on a GAAP basis. On an adjusted basis, our third quarter non-GAAP net earnings were $30 million, an increase of 11.3%, resulting in earnings per share of $0.92 on a non-GAAP basis. We continued to deliver strong cash flows.
Cash flows from operations were $39.6 million for the third quarter, an increase of $4.3 million from the prior year, with quarterly free cash flow of $31.1 million. Before passing the call back to Martin to cover the detailed financial results, I would like to update you on a few items. Last quarter, we informed you that we experienced a flash flood event at our Verona, Missouri manufacturing facility in May. The plant was shut down for several weeks in the second quarter while we repaired affected equipment, cleaned the site, and safely restarted activities. Since that time, the plant has been fully functional, and while this event was categorized as a once-in-500-year event, our focus has turned to implementing actions that will help to mitigate the impact of another such event.
We recognized an additional $500,000 of expense in the third quarter, primarily due to additional expenses associated with the write-off of damaged inventory and the costs associated with external service providers used for the cleanup efforts. We do not expect any further expense associated with this event to impact subsequent quarters and should start to receive insurance reimbursements in the coming quarters. While we remain focused on maneuvering the company through the pandemic and our priorities remain the same, employee safety first, keeping our manufacturing sites operational, satisfying customer needs, preserving cash, and ensuring strong liquidity, and responding to changes in this dynamic market environment as appropriate. We are increasingly having to focus on managing the extraordinary supply chain disruptions that are challenging the markets we operate within. We are experiencing severe input cost inflation, raw material shortages, logistics disruptions, and labor availability issues.
These challenges have been with us to some extent since the beginning of the year, but have accelerated as the year has progressed and certainly through the third quarter. We expect this trend to continue to accelerate in the fourth quarter of 2021 and be with us at least through the first half of 2022. We will continue to focus on dampening the impacts of these challenges by leveraging our global supply chain capabilities and redundancies to ensure continuity of production while raising prices where we can to offset the extraordinary input cost inflation. Within our human nutrition and health segment, research conducted by Professor Marie Caudill at Cornell University into the role of choline in DHA and omega-3 fatty acid metabolism during pregnancy has been completed, and a manuscript has been submitted for peer review.
In the final stages of review is a long-awaited paper from Cornell University reporting on the 7-year follow-on study of offspring from mothers supplemented with adequate levels of choline during their third trimester of pregnancy. The 7- to 7-and-a-half-year-old children were subjected to a variety of validated cognitive tests, and the first results are expected to be published soon. We expect the results of both of these studies to further support the need for choline supplementation. Additionally, we continue to accelerate our marketing efforts in the quarter, launching a functional beverage campaign promoting our choline and chelated minerals for functional beverage applications and a campaign introducing novel plant and dairy-based extruded protein crisps to the market.
We also announced an agreement with the best-selling author of the children's book series, Ninja Life Hacks, to secure strategic partners for branded food products to enable food innovations that deliver on consumer demand for children's nutrition. In the third quarter, our animal nutrition and health segment continued to progress several key strategic advances around the technical support for our products and portfolio. Our team was present to preview the early results from the updated and long-awaited nutrient requirements of dairy cattle, or NRC, from the National Academies of Sciences. The NRC committee reviewed all of the available research over the past 20 years and validated the beliefs that an effective source of rumen-protected choline fed to dairy cows before and after calving will increase milk production and efficiency in the subsequent lactation cycle, while also reducing the incidence of several metabolic health disorders.
This exciting new NRC release emphasizes the importance of an efficacious encapsulated product such as ReaShure, and it will certainly bring more focus onto rumen-protected choline as a fundamental supplemented nutrient during the dairy transition period. Additionally, in our companion animal business, there were numerous accepted publications and technical presentations made during the return of several important industry meetings. These included the American Society of Animal Science, the Institute of Food Technologists Annual Meeting, and the highly anticipated return of the pet food industry's premier event, the Petfood Forum, held in Kansas City, Missouri. It was at this event that new research was presented demonstrating the important value proposition of our unique PetShure portfolio. Research was presented in collaboration with Auburn University that demonstrated the value of restructuring proteins derived from animal co-products for the manufacture of highly nutritious treats.
This novel application uses our proprietary encapsulated ingredients and allows for a sustainable and nutritious ingredient option for treat and pet food manufacturers. The Petfood Forum was also the venue for two other research presentations surrounding Balchem's technology. The first was new research demonstrating the value of PetShure encapsulated acids towards controlling Salmonella in raw meat-based diets conducted at Kansas State University. The second invited talk focused on the benefits of supplemental PetShure choline in controlling obesity in cats, with that research being led by the Ontario Veterinary College at the University of Guelph. Within the specialty product segment, we started up a new manufacturing line for our Metalosate foliar applied plant nutrition products at Balchem's existing complex in Merano, Italy.
This new production capability in Europe will augment our existing North American production and will enhance our ability to serve the growing needs of our international customer base and strengthen the robustness of our supply chain capabilities. We have also substantially completed our project to consolidate 7 ERP systems into one, Microsoft Dynamics 365, with the recent go live of our last major manufacturing site on the system. We now have near 100% of our revenues on the new system. We are extremely pleased with the completion of this project that was delivered on budget and on time relative to the pandemic adjusted timeline. This initiative is critical for the continued growth and operational efficiency of the company, and we are very pleased to move from focusing on implementation to realization of the many benefits of being on one integrated system across the entire company.
Additionally, in our continuing effort to advance our environmental, social, and governance, or ESG efforts, Balchem celebrated the one-year anniversary of signing our commitment to the UN Global Compact principles. Since becoming a member of the UN Global Compact on September 30, 2020, we have made significant progress, and we are particularly proud of publishing in April of this year our 2030 goals to reduce both greenhouse gas emissions and water usage by 25%, and all of the work that is going on across our company to realize these important goals. As we look back on the last year, joining the UN Global Compact was an important step in our continuous improvement journey relative to our corporate social responsibilities and the achievement of our higher purpose of making the world a healthier place.
I'm now going to turn the call back over to Martin to go through the detailed consolidated financial results for the company and the results for each of our business segments.
Thank you, Ted. As Ted mentioned, overall, we delivered strong financial results in a challenging environment. Our third quarter net sales of $197.9 million were up 13% compared to prior year, and we delivered strong sales growth in all three segments: human nutrition and health, animal nutrition and health, and specialty products. The impact of foreign exchange to our sales was minimal in the quarter, a positive $0.3 million, primarily due to the stronger euro. Third quarter gross margin of $60.9 million were up $4.6 million or 8.1% compared to prior year. Our gross margin percent was 30.8% of sales in the quarter, down 139 basis points compared to 32.2% in the third quarter of 2020.
The 139 basis point decrease was primarily due to increased raw material and freight and distribution costs, partially offset by higher selling prices. We've been managing inflationary pressures all year, although input cost increases further accelerated in the third quarter. In the third quarter, we experienced approximately $13 million of raw material inflation compared to the prior year quarter, and approximately $4 million sequentially compared to the second quarter. In addition, freight and distribution costs have increased dramatically, driving approximately $2 million of increased costs in the quarter compared to the prior year. As mentioned by Ted earlier, we expect this trend of increased inflationary pressures on our input costs to continue into the fourth quarter and into 2022. As such, we have and will continue to work hard to recover these cost increases by passing them through to our customers.
In the third quarter, we passed through approximately $10 million of price increases. There's usually a timing difference between increased costs and our ability to raise prices, and we will continue to work hard to fully recover the higher costs over a period of time. Operating expenses for the third quarter of 2021 were $28.4 million, as compared to $27.3 million in the prior year. The increase was primarily due to higher selling expenses, driven by an increase in compensation-related costs and an increase in research and development, partially offset by the timing of an insurance recovery. GAAP earnings from operations for the third quarter were $32.5 million, an increase of $3.5 million or 12% compared to the prior year quarter.
On an adjusted basis, non-GAAP earnings from operations of $39.6 million were up $3.3 million or 9.2% compared to the prior year quarter. Third quarter adjusted EBITDA of $48.3 million was up $3.9 million or 8.8% above the third quarter of 2020. The company's effective tax rates for the third quarters of 2021 and 2020 were 22.0% and 22.7%, respectively. The decrease in the effective tax rate was primarily due to higher tax benefits from stock-based compensation and the prior year being negatively impacted by clarifying regulations related to tax reform. Net income closed the quarter at $25 million, up 16% from the prior year.
This translated into diluted net earnings per share of $0.77, an increase of $0.11 or 15.5% from last year's comparable quarter. On an adjusted basis, our adjusted net earnings were $30 million or $0.92 per diluted share, up $3.1 million or 11.3% compared with the prior year quarter. We generated quarterly free cash flow of $31.1 million, and we closed out the quarter with $90 million of cash on the balance sheet. As we look at it from a segment perspective, our Human Nutrition and Health segment generated record third quarter sales of $111.2 million, an increase of 7.3% from the prior year.
The sales increase was driven primarily by strong sales growth within our minerals and choline nutrients business that continues to see strong demand. We delivered double-digit sales growth in both the choline and mineral product lines, while our food business grew modestly with notable growth in encapsulated products. Our human nutrition and health segment delivered quarterly earnings from operations of $19.8 million, an increase of 13.2% compared to the prior year quarter, primarily due to the aforementioned higher sales, favorable mix, and the timing of an insurance recovery, partially offset by higher manufacturing input costs and distribution costs.
Excluding the effect of non-cash expense associated with amortization of intangible assets of $4.3 million and excluding the direct expenses related to the Verona flash flood event of $0.2 million, adjusted earnings from operations for this segment were $24.3 million, an increase of 8.2%. Our animal nutrition and health segment generated all-time record quarterly sales of $56.2 million, an increase of 21.2% compared to the prior year. The increase in sales was primarily the result of higher volumes and prices in both monogastric and ruminant animal markets. Our ruminant business grew volumes 7.4%, and we continued to successfully drive penetration of our rumen-protected encapsulated products in the market. The dairy market remains volatile, although milk and milk protein prices remain at relatively healthy levels and are trending positively.
On the monogastric side, overall volumes were up 11.3%. Driven by higher volumes of feed-grade choline, as well as strong demand for our animal chelated minerals and our offerings for the companion animal market. Animal Nutrition Health quarterly earnings from operations of $7.4 million were up 6.1% from the prior year quarter due to the aforementioned higher sales, partially offset by an increase in manufacturing input costs and distribution costs. Excluding the effect of non-cash expense associated with amortization of intangible assets of $0.2 million and excluding the direct expenses related to the Verona flash flood event of $0.3 million, third quarter adjusted earnings from operations for this segment were $7.8 million, an increase of 9.4%.
Our Specialty Product segment delivered record third quarter sales of $27.6 million, an increase of 20% compared to the prior year quarter due to higher sales of products in both the plant nutrition business and medical device sterilization market. Sales of our performance gases products, which largely go into the medical device sterilization market, grew nicely year-over-year, but were down sequentially, showing the volatility in the return of elective surgeries and the recovery of this market. While our plant nutrition business is seasonal, with a majority of business being in the first half of the year, we continue to see good growth year-over-year in this business, with strong growth in the third quarter contributing to an approximate 30% growth year-to-date in that business.
Specialty Products segment had third quarter earnings from operations of $6.5 million, an increase of 20.7% versus the prior year. The increase was primarily due to the aforementioned higher sales, partially offset by increases in manufacturing input costs and distribution costs. Excluding the effect of non-cash expense associated with amortization of intangible assets of $1.2 million, third quarter adjusted earnings from operations for this segment were $7.7 million, an increase of 11.5%. I'm now going to turn the call back over to Ted for some closing remarks.
Thanks, Martin. We are very pleased with Balchem's financial results reported earlier this morning. We delivered record third quarter revenues in all three of our business segments, record third quarter net earnings and adjusted EBITDA, and strong cash flows from operations. All of this while facing continued higher raw material costs and global logistics and distribution challenges. We also continue to progress our strategic growth initiatives and remain encouraged about the long-term growth opportunities ahead of us. These strong results continue to show that we are well-positioned in attractive markets, where we have the leadership and capabilities to be successful not only today but also into the future. I would now like to hand the call back over to Martin, who will open up the call for questions. Martin?
Thank you, Ted. This now concludes the formal portion of the conference. At this point, we will open up the conference call for questions.
Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Robert Labick with CJS Securities. Please proceed with your question.
Good morning. Congratulations on a nice quarter. Great execution.
Thanks, Bob.
Thanks, Bob.
I wanted to start, you touched on volume a little bit in on the animal side. Maybe talk about the overall demand environment. I know you have lots of little niches, so it might be hard, but is there a way to think about how much of the growth of the maybe 13% you know top line is volume related versus price related? T hen kind of a tack onto that question is, have you been constrained in reaching the demand out there because of the you know supply chain, raw material, labor transportation? And could volume even be higher, I s the demand higher than what you're able to supply right now?
Yeah. Yeah, Bob, the in Animal did very well in the quarter from a growth perspective, you know, growing almost 21% on revenue. If you separate that between volumes and price, it's almost half and half, where volumes were up around 10% and the remaining piece being higher selling prices, s o it splits about half and half between those two. In terms of whether we could sell more, given the demand, the demand is very strong at the moment across the board, not only in these businesses, but almost across the board.
It is the limiting factors at the moment is really raw material availability, labor availability, freight and distribution availability, where not in all cases and in all areas of our businesses, but in many areas, that is a little bit of a limiting factor versus where the demand sits. I would answer it as there's not really a demand issue at the moment. It is really a matter of how effectively you can procure material, retain labor, run effective operations, and get the products to the customers.
Yeah, just kind of adding to that, Bob, if you look at the company as a whole, we delivered about 13% revenue. I think that you could just in round numbers think of 7% of that driven by volume growth. A little bit over half of that driven by volume growth and the rest being pricing related growth. A little bit of mix in there. Certainly, we've been constrained in some areas, not in all areas. Some areas it's quite significant, and we're leaving maybe 10% volume growth on the table.
W hen you look at it across the whole company it might be 100 basis point, a couple hundred basis points kind of growth that we're not able to fully supply because of some sort of constraint, whether it's raw material or capacity at this point. Demand does remain strong. We're not able to fully satisfy it all, but we're doing everything we can to deal with all of these challenges that we're facing in the marketplace.
Got it. Great. That's really helpful. Thanks. Then as it relates to the nutrient requirements for dairy cattle, the NRC information you put in the release and mentioned the validation for ReAssure, et cetera, how does that affect the market going forward? How do you get the word out there? How do you think that will play out ultimately for ReAssure? Is this a kind of a U.S.-centric organization, or does this potentially help boost the penetration in Europe, which I think is lagging the U.S.?
Yeah. That's very true, that last statement, certainly. If you remember, we've been talking about the NRC for some years. It's been delayed. It still has not officially been released. We expect it to officially be released in December, but effectively, a preview of it was shared with the industry recently. We've also talked about this finding of the NRC is not maybe a grand slam for us, but it's a really good result that we're pleased with. Basically, this is the handbook that many dairies, and as you point out, primarily in North America, use to guide them in what they feed their cows.
They also obviously use nutritionists and so forth, and there are a lot of opinions out there. This is a basic guidebook that is very critical to the industry. What we have is now that guidebook for the first time saying that feeding a rumen-protected, efficacious choline does enhance milk production through the lactation cycle. The grand slam would have been if it had said, "And you should feed this amount." Unfortunately, it does not say that because the science isn't clear as to exactly how much you should feed. We're pleased with the result.
We are taking on ourselves prior to the full release of this to communicate in a series of webinars and podcasts, the fact that this is out, what is the finding and what does it mean for the average dairy. We're really taking this and running with it. We think it's an important new step and you know, we're really trying to leverage it. It does have some impact outside of the U.S. I think that the U.S. is one of the most efficient dairy markets in the world. I think dairy markets outside the U.S. do look to the U.S. I think we'll be able to leverage it outside the U.S.
It's not singularly a U.S. thing, but clearly, you know, driving increased U.S. penetration, we believe, will be this new NRC finding.
That's great. That's very exciting. Super. Okay, one last one for me, and I'll get back in queue. I know you've been busy looking at M&A for quite some time, and the balance sheet continues to add cash. Any update on, you know, availability of M&A or, you know, valuations out there or, you know, opportunities for you?
Yes, certainly. W e obviously can't talk about any specific opportunities that we're working on, but we all probably know that this is one of the hottest M&A markets that there's ever been. It's very active. There are a lot of properties for sale, but that also comes with probably some of the highest valuations that we've ever seen. W e're taking our responsibilities very seriously around wanting to augment our organic growth strategy with acquisitions, but also doing it in a smart, targeted way where we can earn a return.
We've been involved in several processes, have not, at the end of the day, been the new owner of those assets, at least in part because we didn't feel like the value was appropriate for the asset. We'll continue to do that. We're active. We think this hot market, if you will present opportunities for us at the right value and the correct strategic contribution to our company. Yo u're right to point out we have $90 million of cash. Our net debt leverage ratio is effectively zero.
W e have the ability to act on acquisitions as they come and we're confident that those will come over time, but we're gonna continue as we always have been to be selective and make sure we can get the right return on these. That's where we are. I t's somewhat disappointing that we haven't been able to add an acquisition to our portfolio over the last couple years, but we're working hard to get something done in the foreseeable future.
Okay, great. Thanks so much.
Thanks. Thanks, Todd.
Our next question comes from the line of Raghuram Selvaraju with H.C. Wainwright. Please proceed with your question.
Hi. Thanks very much for taking my question. Certainly, congratulations are in order for the performance in what continue to be relatively challenging times. I wanted to drill down on the pricing situation and what its long-term implications may be b ecause, one of the things that we're curious to learn more about here is whether if you take price increases in the context of the current supply chain environment, how likely are these to remain sustainable even after the supply chain issues have gone away? In other words you're talking about seeing healthy volume demand even at increased prices. What implications does that have for the pricing paradigm that you might be able to sustainably enforce, as it were, going forward?
Yeah, maybe I'll take a stab at that, and Martin can chime in with any specifics. O bviously it's a complicated environment that maybe is more extreme than any of us have really seen before. We are seeing, in many cases freight lanes up 1,000%. We're seeing certain raw materials up 500%, 200%, obviously, some with more modest increases. It's a very unusual, unprecedented, maybe it's an overused word today, but very unusual environment. W e're gonna have to see how much of that sustains over time and how much falls back.
T here's no question that our margins lag as we see as we're in an inflationary environment to the negative. There's no question to maybe your specific point that our margins to the positive will lag as costs come down over time. I t's very hard to predict the speed that they'll come down. We will see a beneficial lag effect when costs start to normalize and start to come down just because of the nature of our formulas and so forth. Some of our customers are getting the benefit of those as costs go up, and we'll get the benefit of those as costs come down.
That's t he primary answer to your question. I t does raise the question around the value pricing of our products in certain areas and the opportunity that they bring. I think we'll have to evaluate that and challenge our pricing practices going forward based on kind of this new information and these new situations that we find ourselves in. We'll just have to see as we go.
Okay. With respect to the pet food segment, you featured this to some extent in your prepared remarks. I was just wondering, relativistically speaking, do you see this segment increasing meaningfully in importance as a driver of revenue growth over the course of the coming quarters?
I'll take that one as well. T he answer to that is yes. The pet food business for us is already quite a sizable business. About a third of our monogastric business in total is pet food, selling essentially choline into the pet food industry. That's going to have more modest growth, but still healthy. What's growing rapidly are the PetShure products that we have launched over the last few years that are really more specialty encapsulated and other products. F or example, those grew at 45% year-over-year in Q3.
W hen you continue to grow at those kinds of rates, you know, it can have a meaningful impact to the business. When you add that to the kind of the base companion animal business that we have, the choline that we sell. T his is an important segment to us, and we feel like there's a lot of innovation, a lot of opportunity for us to introduce novel products to the market and drive meaningful growth. So we're pretty excited about the companion animal market and the products that we have to offer to them.
Okay. Just very quickly, a couple last few ones. Firstly furthering the M&A discussion I was wondering to what extent you expect to potentially employ equity issuances as specifically an M&A tool, particularly given, you know, where the stock currently trades. I think these are just for Martin. I was wondering if you could offer some commentary on where you see the effective tax rate going. I think last quarter you were guiding towards it being around 23%. The effective tax rate currently looks like it's around 22%. How should we be thinking about that going forward? When do you expect to receive, you know, whatever insurance payouts are due, in the wake of the flash flood incident? Thank you.
Maybe I'll take the first one and Martin can take the last two. Relative to using equity for acquisitions, we definitely believe that is a tool in our toolbox and we have that ability to use equity. Having said that, it's highly likely we will maximize the borrowing component of our debt first and then move on to equity. I think that you would typically see us use equity on a very sizable, more transformative type of acquisition as opposed to the types of M&A deals that we have done in the recent past.
It's definitely a tool that we have in the toolbox that we would use, if needed, but, probably only on something more transformative than where our focus has primarily been. Martin?
Yeah. With regards to the tax rate, it has not really changed from the last quarter discussion that 2021 GAAP tax rate estimate of around 23% is still a good number. With the adjusted rate being call it a percentage point higher than that, more like 24%, based on where we sit today. You also asked about the flash floods, and we had about $3.8 million of expenses impacting the second quarter. We had another $0.5 million impacting the third quarter here. Call it $4.3 million of impact to the P&L. We do expect to get fully reimbursed for that, less the deductible, based on what we're seeing today.
We expect to receive some payments here in the fourth quarter, and then the remaining payments early next year as you go through all the work of tying everything up with the insurance company. We do expect full recovery, less the deductible.
Thank you very much.
Thanks, Ram.
Our next question comes from the line of Lawrence Goldstein, a private investor. Please proceed with your question.
Hi. On inflation, my own perspective is it's gonna be runaway. If you wanna make that assumption with me for the moment, historically, the company's been able to raise prices, but with a time lag. Are you raising prices with a time lag now? The margins don't. Y ou can't see that. If and when the inflation stops, what about the stickiness of the price increases that you're making, if indeed you are? Secondly, can you tell us about the size of the pet market? T he companies that have gone public that service the United States pet market, which has grown enormously during the pandemic, are showing big increases similar to yours, but they've got $hundreds of millions in sales. Give us some idea of yours.
Thirdly, I'm wondering, are many or any of the companies you have your eye on as acquisitions being acquired by others? Finally, in reverse, like Buffett said, if the phone don't ring, you'll know it's me. Does your phone ever ring?
Thanks, Larry, for the questions. On the last one, does our phone ever ring? I have not received a call point blank. So the phone has not rung yet. Going back to your first question, I think it's a really important question because it's an, and Ram asked a similar question. It really is, I almost wanna say all hands on deck type of situation relative to the inflation that we're dealing with today and needing to raise prices. Yes, we are absolutely raising prices, but with a lag. When costs are going up, that lag is negative to our margins. When you see our gross margins, they are impacted fairly significantly.
You heard Martin give you the numbers on the gross margins. We are raising prices. We approximately had about $15 million of inflation hitting our PNL in Q3, and we raised prices about to the tune of $10 million. That $5 million sort of reflects to some extent the lag. We're raising prices additionally in Q4. Unfortunately, as we also said, raw materials continue to escalate, so we expect in Q4 to continue to be on the negative or unfavorable side of that lag. We are absolutely raising prices aggressively and benefiting our margins significantly because of that. If we hadn't done that, our margins would really be depressed. We're doing that.
We'll continue to do that. When costs start to flatten and even decline, we'll catch up. At some point we'll be on the favorable side of that lag as things come down. I think Ram was really kind of getting at, you know, how much of this is sticky. You know, I guess my answer there is it's a little bit hard to tell at this point in time. There's just so much inflation and so much volatility in the marketplace. We'll have to see that as the situation evolves. It's a significant focus effort for the team right now to get prices up.
Pet market.
The pet market, size-wise, it is a very, very sizable market. You're absolutely right. All in all, we have a relatively small position. Our business in total is probably about a $50 million business, with the bulk of that being that kind of base choline that we supply into the market, and a smaller portion of that being these new novel ingredients that we've been introducing to the market. Even the base part of the pet food market is growing faster than the monogastric market as a whole. We're, again, pretty bullish on the pet food market. We.
Yeah, a $50 million piece of our company is a sizable a business for us, and we have very relevant, important positions with the big pet food companies that gives us a voice and access and contacts that we can leverage with these new novel ingredients. T hat's partly why we're pretty bullish about the companion animal market for Balchem.
Thank you.
Yeah. Thanks, Larry. Appreciate it.
Our next question comes from the line of Mitra Ramgopal with Sidoti. Please proceed with your question.
Yes. Hi, good morning, and thanks for taking the questions. First, I was just curious, given the inflationary environment and labor shortages you're seeing, et cetera, are you more inclined to sort of be less aggressive in terms of headcount expansion, et cetera, and sort of manage costs a little more aggressively?
Good morning, Mitra. I would say we always evaluate all headcount expansions based on really, you know, what do we get in return for it. I think fundamentally that has not changed in terms of how we evaluate our cost structure versus the opportunities. I think the current environment is unique in the sense that when you look at your manufacturing footprint and the ability to staff properly the plants with hourly workers, et cetera, that's a very challenging environment. You know, it's just very competitive at the moment, and you see a scarcity of labor and also wage inflation as a result.
When we look at our, call it, overhead costs or selling and marketing and R&D, et cetera, we have actually done a number of investments over the last two years based on opportunities we're seeing, where we're generating the returns on it. I don't think anything has fundamentally changed or that we will go after aggressive cost cuts or anything similar unless something unexpected happens here. Y ou always evaluate that based on the performance you're delivering. I think we've proven that so far during the last two years in going through this pandemic, we've kept it all together, delivered strong results, and expect to continue to you know, manage the situation well. Should that change, then obviously we'll reassess that. For now, we continue in the strategy that we've deployed so far.
Mitra, the other thing I would add to Martin's comments is that we really do not feel like we have been differentially impacted relative to our competitors and really the market as a whole, that the things that we are experiencing, everybody's experiencing that are buying the same raw materials and the same geographic regions that we are in. T here's nothing differential here, but that doesn't mean that we don't have to deal with it. W e're working really hard to deal with it.
Okay. No, that's great. Thanks. And then on the specialty product segment, more specifically on the medical device sterilization, you had nice growth year-over-year, down a little sequentially. I was just wondering in terms of what you're seeing into the fourth quarter and your expectations for this business to bounce back as we look out to 2022.
Yeah. Again we are very pleased with the performances of Specialty Products in Q3, both the sterilization business and the plant nutrition business grew nicely. The sterilization business, as you said accurately, was up year-over-year, but down sequentially. We did just this morning get some data from the industry in the U.S. around elective surgeries, and they validated basically our results that elective surgeries were indeed up year-over-year, but down sequentially. I think that, you know, partly that was the pent-up demand that came back in the second quarter that was somewhat fulfilled. I think it's also partly the rise in the Delta variant cases in the third quarter.
Our expectation is that we'll continue to see year-over-year growth in Q4 as this industry recovers. But I think, you know, it will be relatively modest year-over-year growth similar to what we saw in Q3 and not to the extent that we saw in Q2.
Okay, thanks. Could you comment a little on the international markets in terms of what you're seeing on both demand side and maybe on the cost, especially in areas like Italy, Belgium, et cetera, where you have a physical presence?
Yeah. I'll start on the cost side of things. You're probably all aware of the extreme inflation that's going on in Europe, particularly around natural gas and the issues there. Well, unfortunately, many of our raw materials for choline, for example, as well as our sterilization business, you know, stem from natural gas to one extent or another. That's really a significant pressure that we're experiencing and part of what's behind our perspective that things are accelerating. T he natural gas crisis, I would say, in Europe really built in Q3 and continues to build and really started impacting us severely in September and will continue in Q4.
Things that products that come from natural gas like urea, like ammonia, like methanol are all important raw materials for us. Those costs are going up dramatically. Europe is one area that I would say the inflation is the most extreme. You know, we're managing through it. It's also not just, you know, manifesting itself in higher costs. There's also curtailment. Some of our suppliers are giving us only 75% allocation, for example, on certain raw materials because they're cutting back production because costs are up. Again, it's just a complicated supply chain right now. I think what's behind your question is recognition that that is even more extreme in Europe right now than it is in the U.S. We're managing it.
We do have pricing power and flexibility in Europe. We have fewer kinda locked in contracts with our customers in Europe, so we are able to raise prices a little bit faster. Our lag is a little shorter in Europe than it is in the U.S. We're leveraging that position. From a demand side, I would say our demand still remains quite strong. Our sales have been healthy in Europe, really across the board in all of our businesses. Similar return to elective surgeries in Europe, similar demands from the monogastric market that we're seeing in the U.S. Demand remains strong and we see that continuing again for certainly the next few quarters.
Okay. Thanks again for taking the questions. Congrats.
Thanks. Thanks, Mitra. I appreciate it.
Our next question comes from the line of Tony Polak, a private investor. Please proceed with your question.
Hey, Tony.
A few questions, if you could, I didn't see what the amount of money in R&D was this quarter versus last quarter.
Second, if you can talk a little bit about any new products that you're working on. I know in the past some have been very successful, some you've abandoned. Could you talk a little bit about the Chinese choline situation and what's happening in the autumn?
Okay. Why don't you take that one?
Yeah. Morning, Tony. This is Martin. Just quickly on the R&D. We spent in the third quarter about $3.2 million versus $2.9 million in the prior quarter and $2.7 million in the first quarter. So call it approximately $300,000 more than the prior quarter from an R&D perspective.
Okay. Maybe I'll answer your third question next. The Chinese choline situation, again, maybe an overused word right now, but is fairly volatile as, again, you all know, the Chinese are significant producers of animal grade and industrial grade choline. Their participation in Western markets has been, you know, up and down, in and out over the years for various reasons, whether it was the shipment of contaminated product or the Blue Sky initiatives in China that restricted production, and so on and so forth. Right now we're in a situation where costs in China are dramatically up.
Raw material costs, some of the increases we're seeing, they are seeing in China, and I would say it's even more extreme there than maybe what we're seeing. They're also having to deal with these incredibly high freight costs. All of their production has to be put in containers and shipped. You know, just as an example, you know, we ship containers from Malaysia to Antwerp, and it used to be about EUR 15,000 a container, and now it's EUR 20,000. You know, that adds an awful lot to a container of choline. We're seeing less supply coming out of China today and the supply that is coming out of China is at higher prices. The Blue Sky initiative is somewhat back.
You know, there's discussion around the Olympics coming up in China and so there's curtailment of certain production. That is also having an impact on their production capability. Supply is restrained, restricted from China, and the costs are higher, providing some opportunity for us in the short term, again, dependent on our ability to get raw materials and be able to produce at capacity or above. That's kind of the latest on Chinese choline. I would say just another notch in the volatile history of product coming out of China. New products. You know, we continue to develop new products. Our R&D teams have been continuing to innovate and come into the lab throughout the pandemic.
You know, the product that we've talked most about is our AminoShure-XM product that we launched a couple years ago. You know, Ram used the word meaningful earlier. That is having a meaningful impact on our revenue within ANH and is a product that is relatively new to the market that we have a lot of excitement about. I talked a little bit earlier about the PetShure line of products, which are largely encapsulated products, but also some flavor inclusion systems that we again have very high hopes for and feel like there's a very significant market that we can penetrate with those products. You know, we're also.
I talked a little bit about the Z- Crisps and plant and dairy protein crisps that we're bringing to the market that, you know, are ideal for inclusion in bars, nutritional bars, and trying to up the protein content, but also have the protein content being a plant-based. We're making hemp and pea protein based crisps, and so we're excited about those products as well. Definitely new product development continues to be an important part of what we view as our growth. We're still achieving about a 25% of our revenues based on products that we've introduced to the market in the last five years.
We're really pleased with that, and we're going to continue to strive to push that metric upwards with additional new product launches.
Yes, sir.
Thanks, Tony. Appreciate the questions.
Hey, hang on one second. Next one, please.
There are no further questions in the queue. I'd like to hand the call back over to Ted Harris for closing remarks.
Okay. Once again, thank you very much for joining our call today. We really are very pleased with the third quarter 2021 results that we released today and the ongoing progress we're making on our key strategic growth initiatives. We really appreciate your time. We look forward to reporting out Q4 2021 results in February. It's hard to believe it's already coming in on the end of the year. We'll talk to you again in February 2022. In the meantime, we will be presenting at a few conferences, the Baird Industrial Conference in November and the Stephens Annual Investment Conference in December. Hopefully we'll see you or talk to you at one of those upcoming meetings. Other than that, thank you again for joining today. Appreciate it.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.