Greetings, and welcome to the Bell Chem Corporation 4th Quarter 2015 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr.
Bill Vakas, Chief Financial Officer for Broadcom Corporation. Thank you. You may begin.
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 Bachus, 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 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 Alkem's Form 10 ks.
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 Q1'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.
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 $108,000,000 and record free cash flow of $85,000,000 In addition, we are pleased to declare a $0.38 per share dividend or $12,100,000 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 4th quarter consolidated net sales of $140,800,000 which resulted in 4th quarter net income of $15,900,000 or $0.50 per share on a GAAP basis. This result includes significant non cash amortization expenses of $7,500,000 for acquisition related intangible assets, which were recorded in these 4th quarter GAAP financial statements. The amortization expense is a direct result of acquisition valuation and business combination accounting rules. Consequently, our 4th quarter non GAAP net earnings of $21,400,000 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 $21,400,000 or $0.67 per share were up compared to the comparable prior year quarter of $21,000,000 or $0.66 per share.
Adjusted EBITDA of $37,700,000 for the quarter was $4,000,000 or 11.8 percent better than the $33,700,000 posted in the prior year quarter. Our adjusted EBITDA margin expanded to 26.8 percent, up 140 basis points compared to 25.4% from the Q4 2015. We delivered 4th quarter free cash flow of $23,600,000 while also paying down $17,800,000 of debt, including $9,000,000 of accelerated payments. This further reduced the outstanding balance on our revolving line of credit to $19,000,000 from the $65,000,000 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 4th quarter sales of $140,800,000 were 6% higher than the $132,700,000 result of the prior year comparable quarter. This increase is primarily the result of contributing sales from Albion and volume increases in Animal Nutrition and 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 in certain food and beverage markets. Our consolidated gross margin percentage was 33.3 percent of sales in the quarter, up 326 basis points from a 30.1 percent of sales level in Q4 of 2015. Adjusted gross margin percentage, adjusted primarily from the previously mentioned amortization expense as a direct result of acquisition valuation and business combination accounting rules of $639,000 was 33.8 percent 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 and 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 and 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 5 62 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 point 4 percentage points due to a more favorable customer mix and improved cost structure.
Consolidated operating expenses for the 3 months ended December 31, 2016 were $22,300,000 as compared to $17,700,000 for the 3 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 expense associated with amortization of intangible assets of $6,900,000 operating expenses were $15,400,000 or 11% of sales. Looking forward, continue to focus on tightly controlling our operating expenses and leveraging our existing SG and A infrastructure. U.
S. GAAP earnings from operations were $24,600,000 which increased $2,400,000 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 $32,200,000 increased $3,000,000 or 10.3% from the prior year comparable quarter. Interest expense for the 3 months ended December 31, 2016 was $1,700,000 all of which related to the debt financing of the Sensory FX and Alveon acquisitions.
Our net debt at December 31 was $243,000,000 The company's effective tax rates for the 3 months ended December 31, 20 16, 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 $15,900,000 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 $21,400,000 or $0.67 per diluted share compared with $21,000,000 or $0.66 per diluted share in the prior year quarter.
As outlined in our earnings release, our 4th quarter results generated $37,700,000 of adjusted EBITDA in the quarter, compared with $33,700,000 in the prior year, an increase of $4,000,000 or 11.7%. Adjusted EBITDA for the quarter was 26.8 percent of sales, a 140 basis point increase over the prior year quarter. As previously noted, our cash flow remains strong as we generated 4th quarter free cash flow of $23,600,000 and we closed out the quarter with $38,600,000 of cash. This reflects scheduled principal and net accelerated payments on long term debt of $17,800,000 along with $4,200,000 of capital expenditure funding in the quarter. Before I hand the call back over to Bill to go through the segment's 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 recover from the fire we had in July of last year at one of the 4 sites we acquired as part of the acquisition. While the majority of products were not impacted or were quickly produced successfully at other Balchem manufacturing sites or 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's Office of Dietary Supplements recently developed the first ever fact sheet on choline and is proactively disseminating information on this essential nutrient including through social media. While we continue to research and leverage other benefits of polling, we believe the RDI and European Foods Weekly Authority first ever intake recommendations for polling along with the continued building of consumer awareness of this essential nutrient will drive the inclusion of vita choline, Balchem's premier brand of choline in supplementation and food fortification applications. The 3rd Phase 3 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. 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 U. S. For swine and has been successfully used in poultry diets around the world.
This considered the most potent organic acid for feed acidification. Amazil formic acid delivers the feed hygiene benefits needed 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 PSS signals our continued intention to provide science based innovative products to the animal nutrition and health markets. I'm now going to have Bill back to discuss the segments in more detail. Bill?
Thanks, Ted.
In the quarter, sales of our consolidated human nutrition and health segment were $75,900,000 an all time record quarter and an increase of $5,500,000 or 7.9% in 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, calling nutrients and cereal systems. This was partially offset by an unfavorable mix and continued softness in powder systems. Sequentially from the Q3 2016, without the impact of Albion, we did see volumes in H and H increase 1.4% with sequential improvement in powder systems, inclusions and choline nutrients. 4th quarter earnings from operations for this segment were $10,300,000 versus $9,900,000 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 $6,100,000 adjusted earnings from operations for this segment were $16,400,000 compared to $15,500,000 in the prior year quarter, an increase of $835,000 or 5.4 percent. Earnings from operations for the quarter were driven by the inclusion of Albion and volume growth in certain market sectors, partially offset by the previously noted softness in the Powder Systems business. The Animal Nutrition and Health segment sales of $42,500,000 increased 2.6 percent or $1,100,000 on a 4.8% increase in volumes compared to the prior year quarter. Sequentially from the Q3 2016, sales increased $1,600,000 or 3.9% on a 5% increase in volumes. Sales of product lines targeted for ruminant animal feed markets increased by $2,900,000 or 23.7 percent 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 in 2017. Feed costs remain low and this coupled with higher milk prices has resulted in improved dairy farm income over feed costs and subsequently more favorable conditions for nutritional ingredients. Global monogastric species sales including feed grade choline products decreased 1 0.4% from the prior year comparable quarter, primarily due to lower monogastric average selling prices, resulting principally from reduced formula pricing based on lower raw material costs and increased competitive activity. With a stronger production, driven by lower feed costs and strong international demand, the relatively low priced meat protein, the USDA has further increased its export forecast for 2017. Nonogastric volumes did increase 3.5% from the prior year comparable quarter and were also up 5 point 2% sequentially from the Q3 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 in both organic development strategic alliances. A and H quarterly earnings from operations were $8,100,000 an increase of $1,800,000 or 29 percent from the prior year comparative quarter. The increase compared to the prior year quarter was a result of the noted higher sales volumes, favorable product mix and cost decreases in certain key raw materials. Specialty Products segment achieved quarterly sales of $16,200,000 for the 3 months ended December 31, 2016 as compared with $13,000,000 for the 3 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 $5,300,000 versus $6,200,000 in the prior comparable quarter, a decrease of $849,000 or 13.8 percent.
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 $6,100,000 compared to $6,300,000 in the prior year quarter, a decrease of $203,000 or 3.2 percent due to unfavorable mix and higher raw material costs. In the Industrial Products segment, sales decreased $1,700,000 or 22.1 percent from the prior year comparable quarter, primarily due to significantly reduced volumes sold with choline and choline derivatives for oil and natural gas fracking in North America. Compared sequentially to the Q3 2016, sales were flat. There remains 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 Products segment were $930,000 an increase of $707,000 compared with the prior comparable quarter and primarily reflects a favorable customer mix and an 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. Thanks, Bill.
We are pleased that in the Q4 of 2016, we were able to deliver strong earnings with adjusted EBITDA of $37,700,000 and 4th quarter free cash flow of $23,600,000 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 $9,000,000 above and beyond the regularly scheduled payments of $8,800,000 reducing our net debt to $243,000,000 on December 31 or approximately 1.6 times 12 months trailing adjusted EBITDA, further strengthening our balance sheet. Accelerated debt payments of $9,000,000 reduced our outstanding revolver balance to $19,000,000 from the $65,000,000 that were borrowed in February to partially fund the Alpeon acquisition. And while top line challenges remain, we delivered year over year revenue and operating earnings growth in 3 of our 4 segments. The global macroeconomic environment continues to present challenges to our company.
Of particular note is the ongoing uncertainty in the oil and gas market, the strong U. S. Dollar impacting exports and rising raw material costs 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 opportunity. I would now like to hand the call back over to Bill, who will open up the call for questions.
Bill? Thanks, Ted. This now concludes the formal portion of
the conference. At this point, we will open the conference call for questions.
Thank you. Our first question comes from the line of Brett Huntley with Vertical Group. Please proceed with your question.
Hey, good morning, Ted and Bill.
Hey, Brett.
Thank you for taking my questions. I have kind of a 2 part question on HNH and then I wanted to ask you a question about Curemark. So on HNH, there's kind of a lot going on in the sales line there, in my opinion, with just some different businesses that are performing or 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 H and H segment? And then I have a question on margins.
Okay. Yes, Brett, you're right. There is a lot going on. Certainly, in the quarter, we had the contribution of that we were pleased with in H and H. And then many of the different businesses, cereal systems, choline nutrients, inclusions all saw a 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. 1, 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 a sequential growth and we've really seen sequential growth in that business unit over the last few quarters. So we're still seeing some year over year decline in powder systems. We're seeing some sequential growth, which was nice to see. And so as we go forward, I think that the year over year comparisons in the Powder Systems business will get better and we should be able to start to see more of that mid single digit type growth rate in H and H 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 inclusions and cereal.
That's really helpful. I appreciate it. And then staying with H and H, I wanted to maybe talk about 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 EBT basis as you give the information. But the last few years, you've had H and H margins kind of just sub-twenty 2 percent.
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 was potential for more Alpeon cost synergies going forward, maybe related to a common ERP system this year. 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 2018?
I think Brett, 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 H and H and given that revenue stream, which really is largely going to be margin that will have an incredibly material impact on the margin profile of segment. So 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 products do tend to have a little bit higher margin than the average. So we should see some slow mix and margin improvement over 2017 into 2018 based on just the margin difference in those different business sectors.
Okay. And then last question for 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 3 new sites for CMAT. And I'm just curious, does this push potential FDA approval firmly into H217 or even beyond in your view?
We actually our reflection on the press release and our discussions with Curemark view the announcement of the 3 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 twenty eighteen timeframe than any earlier than that. But I'm not sure this specific announcement is a signal that things are going more slowly than anticipated. We actually view it as positive.
And I just want to make sure I heard you correctly. You just said that you think that approval would be a late second half 2018. Did you mean 2017?
I did mean 2017. Yes, since I said 2018, apologize for that. Yes.
All right. Thanks so much for taking my questions.
Thank you. Our next question comes from the line of Timothy Ramey with Pivotal Research Group. Please proceed with your question.
Thanks so much. I'm assuming you've given some thought to what a border adjustment tax would do to your operations. Can you just give us a little bit of your perspective on how that might have puts and takes on the business?
We certainly have, Tim. Thanks for the question. And we don't believe obviously I'm not sure any of us really understand all the macroeconomic implications of such a move. But we are not a large importer raw materials. And really at the end of the day, we're not a large exporter of products.
I did 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 a border tax would have a very material impact on our company as best we can assess today.
I mean, I guess the only thing I would add, Tim, is to the extent that finished products are coming in, obviously, that may be a little more competitive from a currency standpoint or the Chinese importing coal in for example if there's something that increases their cost because of the tax and that may make us a little more competitive against some of that. And so that might help us here domestically with the sales.
Yes, that was sort of what I was getting at was there is meaningful Chinese choline volume coming in. And since the it is probably very much a price driven business, it seems like that volume would be disadvantaged right away. Have you thought through more on what that would mean? Or is it just too hard to contemplate?
Yes. And I think we
see absolutely it's going to it would hurt them. The problem we've experienced in 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 dump product into the country. So I think that's
the thing we can't really get
a complete handle on because, again, we would view some of the things that you as maybe irrational.
Right. Bill, if I can follow-up on sort of Brett's question there, maybe from a 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 the pass through impact. So I understand that. Can you help us kind of understand what your thinking is from a total company perspective on can we return to growth in 2017 without the benefit of another acquisition?
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 did get. And we have seen some bright spots there, but it's still very uncertain.
I think that we're hopeful even like Ted mentioned the THO free initiative here in food, and that's starting those formulations are starting to occur as being the reformulations are occurring. We're part of that. And I think that's been probably a big part of some of the softness we've experienced in H and H more than anything. So we would expect hopefully to see something happening there that's going to maybe help the growth rates. Choline Nutrients is getting closer and closer to the labeling requirement and that should obviously help also.
So we do certainly see certain market sectors that we believe should grow organically. I think there's 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.
And Tim, we certainly see the oil and gas market has stabilized and in fact in the last few sequential quarters has improved a bit. So in 2016, we saw a $30,000,000 revenue negative impact associated with the decline in oil and gas. And of course, we firmly believe that that is behind us and really sees us up to show some healthier organic growth numbers across the company in 2017.
Perfect. Okay. Thank you.
Thanks.
Thank you. Our next question comes from the line of Francesco Pellegrino with Sidoti and Company. Please proceed with your question.
Good afternoon, guys. Hi, Francesco. Hi.
So, I guess, again, I'm not sure if maybe Bill gave this in the prepared remarks. Is there a way to quantify what Alvheim contributed to, the company in 2016 top line?
Yes, I mean, we if you look at the press release that we put out for Albion, we talked about Albion being about $50,000,000 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, a combination of significant growth from the human nutrition part of Albion and some decline in the plant nutrition business. But if you look at the whole business, it grew about 3%.
Jay, 3%. I know when you did the acquisition early in 2016, you had spoken about Algon doing about $54,000,000 in sales in 2015. You had just mentioned that I think you used a $50,000,000 base. Is there a nice, neat number that we can talk about for 20 16? And I know that all of Albion wasn't really in the Q1 of 2016 as well.
Yes. I mean, I'll be honest, you kind of take that I would take that 54% and add 3% and subtract the money from it and you're probably pretty good.
Okay. Just to follow-up on some of the Curemark commentary and some of the questions that Brett had asked. So if enrollment is still happening for the 2nd Phase 3 trial, I was viewing it more as a second half twenty eighteen event, but you're saying that the FDA could come out with this decision in the second half of 2017 even though we haven't closed enrollment yet in the first half of twenty seventeen. Am I hearing things right?
Yes. I think that and obviously this is a very hard item to forecast. You are talking about the FDA. You are talking about a clinical trial that'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 300 patient is recruited. And we believe that that should be winding down by mid year. And then if you think about the conclusion of that study and the submission of the results and so forth that late in the second half of this year, 2017, we can reasonably expect some some move by the FDA.
So by the time the trials come to an end, you would expect a rather quick turnaround in town, so you'd be setting it being more of a one half twenty eighteen decision. So I would think that the data would be compiled towards the latter end of 2017.
This is kind of in 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 and 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 late second half approval.
Okay.
I guess just to shift back to some legacy business, it looks like you've made some pretty good progress when it comes to volume within the rumen and monogastric business. In fact, volumes, I think, in the press release you had mentioned were up for both the rumen and monogastric end markets. I think Bill had said monogasic volumes were up 3.5%. I think monocastric 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 a product mix shift maybe to more profitable ReAssure as compared to like the amino acids business?
How should I really be viewing that pricing for the ruminant end market that you're selling into right now? And what's changing?
Yes, 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 and in our ruminants space we do have a very wide array of product pricing anywhere from products that are priced at $4 to $5 a pound to products that are priced at less than $1 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.
I know in past when you talked about the ruminant market, we think about Alchems' high market share, whether it's for choline or whether it's for amino acids. And when we look at like the 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 the crucial $2 per pound level, run up to $2.70 in December. Then they come in a bit in January $2.20 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 U.
S. Is rather low, but it's still strong at 25%, I think in past calls. You even gone 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 ruminant or dairy producers to start incorporating choline, ReAssure, amino acids into the diet, but it just seems as if there's more flexibility for ruminant producers, dairy producers, what really just an outsized growth in the segment end? I know it's just you think we're constantly keeping the team down the road about when that's going to occur.
Just really was wondering if you had any commentary or some color
into that maybe? Yes. I think the best indication, Francesco, that I can give is that our ReAssure volume for example in the quarter grew about 20%. Right. So that's I think a very strong indication that we are doing a nice job of increasing penetration and that really is largely coming from new cows and not so much existing cows consuming more.
It's really coming from new cows. So I think we are doing a good job of further penetrating the market, increasing the number of cows that are on ReAssure. And so I think that's the kind of the best indication that we can give. I think we've got a really good sales team, technical team calling on the right nutritionist in the dairy market, developing the right data in our clinical studies to support the use of choline in particular in dairy cows. And that growth, 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 pick back up and milk 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.
I just want to confirm and I think just looking at the 20% increase in volume sales to the ruminant end market is a good data point to look at. And is it wins with new customers? Or are you just dealing share? 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 make sure that you're growing the category as maybe compared to maybe just stealing share.
I think when we talk about ReaShure particularly, 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 cows and really creating the band. Okay, perfect. That's it from me.
Thanks again, guys.
All right. Thank you.
Thank you. Our next question comes from the line of Mitra Kapoor with Rodman and Renshaw. Please proceed with your question.
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 of that dividend? Thanks.
Yes. I mean, for the past, I think it was 5 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 the 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 driven and that we do other than that normal increase like I said we've made. You know 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.
Sure. Thank you. Thank you. I really appreciate
that. Thanks.
Thank you. Our next question comes from the line of Andrew Lane with Morningstar. Please proceed with your question.
Hey, good morning, Ted. How are you?
Good. How are you doing, Andrew?
Great, great. First of all, regarding the Q Mark opportunity, it's obviously a challenge to invest on the production side in preparation for what's inherently an uncertain outcome. On the approval front. And maybe this was something you were discussing with the consultants you mentioned. But if CMAT 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?
So Andrew, the costs for manufacturing this product are fairly minimal. They're in the low couple of $1,000,000 type of range. So given our annual CapEx of say $25,000,000 it's really not a significant portion of that and we have to date spent the majority of that already in anticipation of approval. So there is very little else to spend. It's more kind of validation protocols and validation batches that we need to go through which are time and resource consuming but
there is
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 of magnitude that we're looking at.
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 what the magnitude of this opportunity will ultimately be
for the
HNH segment 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 cooling based products?
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 you know omega-three, vitamin D or other sort of benchmark type product vitamin D of course was wildly successful when the FDA came out and said that Americans were deficient in vitamin D and should supplement and they it was kind of 1 notch up from choline, they said it was a nutrient of concern. I 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 $20,000,000 including the key fit formula portion of that business. And I think we should expect as a management team that we should be able to double that business in the course of 3 to 5 years if we're successful in building awareness and leveraging the RDI in the marketplace.
So those are the internal goals that we have set for ourselves.
And with regard to that kind of general growth rate you are gaining for, does that include the inclusion of choline in prenatal vitamins? It seems like that could be a huge growth driver going forward.
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's 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 forth to have much more significant dialogues with the prenatal vitamins guys that we've ever had in the past.
So I see that as maybe one of the earlier wins and potentially one of the wins that we can 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 multivitamin.
Very helpful. Thanks. Congratulations on a
solid quarter.
Thank you, Andrew.
Thank you. Our next question comes from the line of Dan Aclarad with Times Herald Record. Please proceed with your question.
Hey, gentlemen. How is it going?
Good. Hey,
you talked about investments in new manufacturing capabilities, new product development and possibly strategic acquisitions. Which of those is the priority?
I think the priority for us really is the internal organic growth. That's where we spend the majority over time. We see the higher ROIs, particularly given the value of the technical systems today. So I would say we spend most of our time there, both from investing capital and new assets like we did in 2016 as well as building our R and D capabilities, which I see us making more progress in 2017 2018. But it doesn't mean to say we're not spending a fair amount of time on acquisitions.
We do see strategic acquisitions as a way to strengthen our position and grow our company as well. But certainly, primarily, we are looking at organic investments. And as we stated in our prepared remarks, we feel good about some of the capital investments in particular that we made in 2016.
So, Chano, can you talk to me a bit more about those investments?
Yes. It's kind of a long list of investments. The one we've talked about quite a bit is our continuous agglomeration unit, our clients, 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. It's a very sort of nuts and bolts things like we invested in a 2 generation plant in our Italian operation that allowed us to move off of fuel oil to natural gas that is contributing nicely to health nutrition quality systems upgrades in Reading, Pennsylvania site and other investments like that. We added new excruiter capability at our serial systems plants in Lake and Nebraska that's allowed us to expand that somewhat.
So those kinds of investments, some as small as $1,000,000 and some as big for example in agglomeration of 15,000,000
dollars or so. Talk to me about fracking in the gas market and how it's affected earnings and what you're expecting in the future?
Sure.
Obviously, it's had a significant impact. I think as we said when Tim asked his question just in 2016 our revenue was impacted by $30,000,000 alone with the reduction in oil and gas. And that industrial segment at its peak was $100,000,000 in revenue in 2014 and this year with Q4 results were about $25,000,000 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 of years. As far as going forward, we've had 3 quarters where we've 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 improvement, but we have seen 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 quarter or so 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 leverage that higher margin position that we've had in the last couple of quarters as revenue continues to pick up a bit.
The fire on the back orders,
can you talk a bit about that and just a touch of background about when was the fire again and when do you anticipate fully recovering from that because you said you're still dealing with some of the fallout?
Yes. We had the fire in July of last year and essentially destroyed the complete site that we had. And again, overall we are 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 $1,000,000 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 a rebuild not at that existing site, but at another Balchem site.
And so should fully recover, we expect by the Q3 of 2017. But I think every week that goes by we're getting a little bit better and hope to see that sort of $1,000,000 push if you will for the quarter to start to decline over the coming months.
Which site was it and where are you rebuilding?
It was a clear field site and we're not quite ready to announce exactly where we're rebuilding, but it will be likely at another Pelchem site.
And it was in what segment it was affecting?
It's exclusively affecting our Human Nutrition and Health segment. The fire had no impact on the animal I'm sorry, the Plant Nutrition business.
And what was that plant making?
It was a Clearfield, Utah plant. It was actually doing 2 things. 1, it was packaging most of the human nutrition mineral business and we very quickly replaced that at our other sites and at Solar's. It was also granulating some of our powdered products and we were taking we sell some of our products as powders and we granulate some of those powders that sell them as granulated products and so they performed the granulation and like I said, we've been able to replicate that elsewhere in many cases, but not at all.
Thanks very much, gentlemen.
Thank you.
Thank you. Our next question comes from the line of Garo Norian with Palisade Capital Management. Please proceed with your question.
Hey, guys. You touched on raw material costs a couple of times. I was wondering what your outlook is across the board, so to speak, for 'seventeen,
impact of the business?
Yes. It is a little bit of a confusing story because we're still seeing some year over year declines from raw material costs. So we 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 a pickup based on higher natural gas prices. Obviously, it's positive to see natural gas coming down over the last few days or so, 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, casing, higher dairy prices are driving casing prices up, kind of a supply demand and balance is driving corn syrup prices up.
Typhoons in Indonesia and the 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 have been in 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 the business as best as possible.
But raw material increases are real and felt we needed to talk about.
Okay. So just I don't know if there's a way of kind of netting it all, but would one expect overall impacts or the margins of the business to be kind of more positive, negative or neutral assuming you get the majority of the prices increases that you're working on?
I think we'd 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's proving to be more difficult.
So I think your kind of term sort of on average when you net it all out, we're hopeful that we will see neutral impact, but we will see some variance from one business, one segment to another.
Sure. And in the response to a prior question, you had referenced kind of about a $25,000,000 CapEx. I didn'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?
Sure. Yes, that was kind of an average number. I think we ended up the year in 2016 at around $24,000,000 and previously we talked about $28,000,000 in 2017.
Okay, great. And then just the last question for me. It looks like, maybe I'm missing it, but that your receivables ticked up a bit at least into the Q4. Is there anything going on there? Is it just a little bit of timing or
Yes. Some of it's timing for sure. And I think typically at year end, in particular, and we kind of do the same thing. You're expecting customers to hold on to cash. They're 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, 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 pricing, just what we wind up doing from a selling standpoint.
Got it. Thanks so much.
Thank you.
Thank you. Our next question comes from the line of Tony Pulik with Aegis Capital. Please proceed with your question.
Good afternoon.
Could you comment a little more
on the merger acquisition landscape out there? Gino used to spend a few minutes every conference call discussing that?
Sure. As I said, our primary focus is on organic investments. We spend a fair amount of time looking at acquisitions. Common knowledge, acquisition prices are very high today. I think that does 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 and 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 are looking at acquisitions.
We apply typical hurdle rate to acquisitions and obviously these high multiples makes it hard hit a 12% return. But we're committed to that We're committed to finding opportunities that allow us to meet those financial hurdles while we can addressing those strategic opportunities I talked about.
Great. Thanks.
Thanks, Tony.
Thank you. Mr. Harris, there are no further questions at this time. I will turn the floor back to you for final remarks.
Great. I would just like to say thank you all for participating. I apologize that 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.