Q3 2021 Balchem Corp Earnings Call

Greetings and welcome to <unk> 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.

Good morning, everyone. Thank you for joining our conference call. This morning to discuss the results of <unk> Corporation for the quarter ending September 30th 'twenty 'twenty. One 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 FCC 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 about kemps expectation or belief concerning future events that involve risks and uncertainties. We can give no assurance that the expectations reflected in forward looking statements.

Prove correct and various factors could cause results to differ materially from our expectations, including risks and factors identified in <unk> 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.

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 now.

Our revenues of $197 $9 million were up 13% and our adjusted earnings from operations were $39 $6 million up nine 2% versus the prior year quarter.

Our net income of $25 million, an increase of 16% resulted in earnings per share of 77 cents on a GAAP basis on an adjusted basis, our third quarter non-GAAP net earnings were $30 million, an increase of 11 point.

3%, resulting in earnings per share of 92 cents on a non-GAAP basis.

And 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.

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 $500000 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 approach.

Preet, 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 impact of these challenges by leveraging our global supply.

Supply chain capabilities and redundancies to ensure continuity of production, while raising prices, where we can offset the extraordinary input cost inflation.

Within our human Nutrition and Health segment research conducted by Professor Murray Codell at Cornell University into the role of choline in DHA and Omega three fatty acid metabolism. During pregnancy has been completed and a manuscript has been submitted for peer review also.

So in the final stages of review is a long awaited paper from Cornell University reporting on a seven year follow on study of all spring from mothers supplemented with adequate levels of choline during their third trimester of pregnancy.

7% to seven 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 chelate minerals for functional beverage applications in a campaign introducing novel plant and dairy based extruded protein Chris to the market, We also announced.

In agreement with the best selling author of the children's book series Ninja life tax to secure a 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 that from the National Academy of Sciences. The NRC Committee reviewed all of the available research over the past 20 years and validated the beliefs.

Is that an effective source of rumen protected choline fed to dairy cows before and after Cabbing will increase milk production and efficiency and 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 products, such as reassure and it will certainly bring more focus on the 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 National Animal Science Association, the international Food Technology scientific symposium and the highly anticipated.

Get a return of the pet food industries Premier event, the pet food Forum held in Kansas City, Missouri. It was at this event that new research was presented demonstrating the important value proposition of our unique pet share portfolio.

Research was presented in collaboration with all burn 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 <unk>.

Tricia's ingredient option for treat and pet food manufacturers.

The pet food Forum was also the venue for two other research presentation surrounding Val <unk> technology. The first was new research demonstrating the value of pets sharing capsulate it acids towards controlling salmonella and raw meat based diets conducted at Kansas State University. The second invited talk folks.

<unk> focused on the benefits of supplemental pet shirt choline and controlling obesity in cats with that research being led by the Ontario Veterinarian College at the University of wealth.

Within our specialty product segment, we started up a new manufacturing line for our metallic <unk> foliar applied plant nutrition products at Val Ken's existing complex in Marano, 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 seven ERP systems into one Microsoft dynamics 365 with the recent go live of our last major manufacturing site on the system.

We have 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 too.

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 Val <unk> 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 30th 2020, we have made significant.

<unk> progress and we're particularly proud of publishing in April of this year of R 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.

<unk> 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, <unk> health animal nutrition and health.

Our specialty products.

The impact of foreign exchange to our sales was minimal in the quarter, a positive $3 million, primarily due to the stronger euro.

Third quarter gross margin of $69 million were up $4.6 million or eight 1% compared to prior year.

Our gross margin percent was 38% of sales in the quarter down 139 basis points compared to 32, 2% in the third quarter of 2020.

139 basis point decrease was primarily due to increased raw material and freight and distribution costs, partially offset by higher selling prices we've.

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.

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 cost 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.

It's usually a timing difference between increased cost in 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.

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 nine 2% compared to the prior year quarter.

Third quarter, adjusted EBITDA of $48 $3 million were $3 9 million or eight 8% above the third quarter of 2020.

The company's effective tax rates for the third quarter 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 77 cents, an increase of 11 cents or 15, 5% from last year's comparable quarter.

On an adjusted basis, our adjusted net earnings were $30 million or 92 cents 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 seven 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 and 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 noncash expense associated with amortization of intangible assets of $4 $3 million and excluding the direct expenses related to the Verona Flash flood event of <unk> 2 million.

Adjusted earnings from operations for this segment were $24 $3 million, an increase of eight 2%.

Our animal nutrition and health segment generated all time record quarterly sales of $56 $2 million an increase.

<unk> of 21, 2% compared to the prior year the.

The increase in sales was primarily the result of higher volumes and prices in both mono gastric and ruminant animal markets.

Our ruminant business grew volumes seven 4% and we continued to successfully drive penetration of our rumen protected encapsulated products in the market.

<unk> market remains volatile all the milk and milk protein prices.

Main at relatively healthy levels and are trending positively.

On the mono gastric side overall volumes were up 11, 3% driven by higher volumes of feed grade choline as well as strong demand for our animal chelate in minerals and our offerings for the companion animal market.

Animal nutrition, <unk> health quarterly earnings from operations of $7 $4 million were up six 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 noncash expense associated with amortization of intangible assets of <unk> $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.

Nine 4%.

Our specialty products 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 and the return of elective surgeries and Rick 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 continued 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 27% 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 noncash 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.

Thanks, Martin we are very pleased with <unk> 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.

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 starkey.

Our first question comes from the line of Bob <unk> 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 a volume a little bit and 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% topline is volume related versus price related and then.

Uh huh.

Tack on to that question is have you been constrained in reaching the demand out there because of the supply chain raw material labor, you know transportation and could volume even be higher I guess is.

As the demand higher than what you were able to supply right now.

Yeah.

Yes, Bob.

And animal did very well in the quarter from a growth perspective, and a growing almost 21% on revenue if you separate that between volumes and price, it's almost half and half.

Volumes were up around 10% and the remaining piece being higher selling prices.

So 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.

And it is you know.

The limiting factor at the moment is really raw material availability labor availability freight and distribution availability, we're 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.

So.

I guess I would ask rate us there's not a.

Really a demand issue at the moment. It is really a matter of how effectively you can procure material retain labor run if effective operations.

And get the products to the customers.

Yeah, just kind of adding to that Bob I think if you. 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.

So a little bit over half of that driven by <unk>.

Volume growth in and the rest being pricing related growth.

And a little bit of mix in there and 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, but I think when you look at it across the whole company.

It might be a 100 basis point, a couple of hundred basis points kind of growth that were.

Not able to fully supply because of some sort of constraint, whether it's raw material or capacity at this point. So demand does remain strong we're not able to fully satisfy at all.

But.

Doing everything we can to deal with all of these challenges that we're facing in the marketplace.

Got it great Thats really helpful. Thanks, and 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 and 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.

Yes.

That's very true that last statement certainly.

And 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 but.

Effectively a preview of it was shared with the industry.

Recently, and we've also talked about this this.

This finding of the.

Darcy is not maybe a grand slam for us, but it's a it's a really good.

Results that we are we're pleased with and basically.

This is the handbook that many dairies and as you point out primarily in North America used to guide them in what they feed their their cows. They also obviously use nutritionists and and so forth and there are a lot of opinions out there, but this is a basic guide book that is is very critical.

<unk> to the industry and what we have is now that guide book for the first time say.

Saying that.

Feeding a rumen protected efficacious rumen protected choline does.

Does enhance.

Milk production through the lactation cycle.

The Grand Slam would've been if it had said and you should feed this amount and unfortunately, it does not say that because.

The science isn't clear as to exactly how much you should feed.

But we're pleased with the result, we are.

Taking on a 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 are the what is.

The finding and what does it mean for our for the average dairies. So we're really taking this and running with it we think it's an important.

Important new step and.

We're really trying to leverage it and it does.

<unk> have some impact outside of the U S I think that that.

The U S is one of the most efficient.

Dairy markets in the world So I think.

Dairy markets outside the U S do look to the U S and so I think we'll be able to leverage it outside the U S is not singularly a U S thing, but clearly.

Driving increased U S penetration, we believe will be.

<unk> benefited by this new NRC finding.

That's great that's a 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 on our balance sheet continues to.

Add cash.

<unk>.

Any update on availability of M&A or.

Valuations out there or opportunities for you.

Yes, certainly.

We obviously can't talk about any 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.

And so we're taking our responsibilities very seriously seriously around one thing to augment our organic growth strategy with acquisitions, but also doing it in a smart targeted a way where we can earn a return and so.

We've been involved in several processes.

Not.

At the end of the day than the new owner of those those assets at least in part because we didn't feel like the value.

Was appropriate for the asset and we'll continue to do that we were active we think.

This hot market, if you will will present opportunities for us at the right value and and the correct strategic.

Contribution to our company so.

Yeah, Youre right to point out we have $90 million of cash our net debt leverage ratio is effectively zero.

And we have the ability.

To act on acquisitions as they come in and we're confident that those will come over time, but we're going to continue I think as we always have been to be selective.

And make sure we can get the right return on these so.

That's where we are.

Its somewhat disappointing that we haven't been able to add an acquisition.

To our portfolio over the last couple of years, but we're working hard to.

Get something done in the foreseeable future.

Okay, great. Thanks, so much.

Thanks, Bob.

Our next question comes from the line of Ram <unk> 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 continues to be a relatively challenging times. So.

So I wanted to drill down on the pricing situation and what its long term implications may be.

I think 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. So what implications does that have for the pricing paradigm that you might be able to sustainably and forced labor.

Work going forward.

Yeah, maybe I'll take a stab at that and Martin can chime in with any specifics.

Obviously, it's a complicated.

Environment that that maybe has more extreme than any of us have really seen.

Seen before.

We are seeing in many cases, you know freight lanes up.

You know.

<unk> percent, we're seeing certain raw materials up 500%, 200%.

Obviously, some with more modest increases so it's a very.

Unusual unprecedented maybe it's overused word today, but very unusual environment.

So I think we're going to have to see how much of that sustains over time and how much.

False falls back.

There's no question that our margins a lag.

As we see it as we're in an inflationary environment.

And to the negative and there is no question to maybe your specific point that error.

Our margins to the positive will lag as.

Costs come down over time, and you know, it's very hard to predict the speed that they'll they'll come down, but we will see a beneficial lag effect.

When costs start to normalize and start to come down just because of the nature of their formulas and and so forth.

Some of our customers are getting the benefit of those as costs go up and we will get the benefit of those as as our costs.

Costs come down.

So that's I think the primary answer your question, but it does raise the question around the value pricing of our products in certain areas and and.

The opportunity that they bring and I think we'll have to.

Evaluate that and challenge aircraft pricing practices going forward based on kind of this new information in these new situations that we find ourselves in so we'll just have to see as we go.

Okay, and then with respect to the pet food segment.

To some extent in your prepared remarks, I was just wondering relative to particularly speaking do you see the segment, increasing meaningfully and importance.

A driver of revenue growth over the course of the coming quarters.

Okay.

Yes, so I'll take that one as well.

The answer to that is is yes.

The pet food business for us is already quite a sizeable business.

About a third of our mono gastric business in total is pet foods selling essentially.

Essentially choline into the pet food industry, that's going to have more modest growth.

But but still healthy what's growing rapidly.

Are the pet show our products that we have launched over the last few years that are really more specialty and.

Capsulate it.

And the other products.

For example, those grew at 45% year every year and in Q3.

And when you continue to grow at those kinds of rates.

Can have a meaningful.

Impact to the business and when you add that to the kind of the base companion animal business that we have the the choline that we sell now this is an important segment to us and we feel like Theres a lot of innovation a lot of opportunity for us to introduce novel products to the market.

And drive meaningful growth and so we're pretty excited about the.

Companion animal market and the products that we have to offer to them.

Okay, and then just very quickly a couple last few ones.

Firstly.

Furthering the M&A discussion I was wondering to what extent you expect to potentially employee equity issuances as specifically in M&A tool, particularly given where the stock currently trades and then I think these are just for Martin I was wondering if you could offer some commentary.

Gary on where you see the effective tax rate going I think last quarter, you were guiding towards that being around 23% effective tax rate currently looks like it's around 22. So how should we be thinking about that going forward and then when do you expect to receive whatever insurance payouts our view in the wake up a flashlight incident.

So maybe I'll take the first one and Martin can take the last two.

Relative to using equity for acquisitions, we definitely believe that that is a tool in our toolbox and and we have that ability.

To use equity, having said that its highly likely we will.

Maximize.

The borrowing component of our.

Debt.

First and then move on to equity so I think that you would tip.

Typically see us use equity on a very sizeable more transformative type of acquisition as opposed to the <unk>.

Types of M&A deals that we have done in the in the recent past, but its 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.

With regards to the tax rate has not really changed from the last quarter discussion that 2021, GAAP tax rate estimate of around 23% is.

It's still a good number.

With the adjusted rates being quoted a percentage point higher than that more like a 24%.

Based on where we sit today.

You also asked around their flash flood.

We had about $3 8 million of expenses impacting in the second quarter, we had another half a million impacting the third quarter here so call. It four three.

<unk> million dollars of impact to the P&L we.

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 out with the insurance company, we do expect full recovery less the deductible.

Thank you very much.

Thanks, Rob.

Yeah.

Our next question comes from the line of Lawrence Goldstein, a private Investor. Please proceed with your question.

Hi.

On inflation.

My own perspective.

It's going to be runaway.

If you want to make that assumption.

With me for the moment.

Historically, the company has been able to raise prices, but with a time lag.

You're raising prices with the time lag now.

He has done.

You can see that.

So if and when the inflation starts.

What about the stickiness of the.

The price increases that you are making if indeed you are.

Secondly.

Can you tell us about the size of the pet market.

The.

Companies that have gone public.

Service.

United States pet market, which has grown enormously during the pandemic are showing big increases similar to yours, what they've got.

Hundreds of millions of sales.

Give us some idea of yours.

And thirdly I'm wondering.

Our many or any of that.

Companies you have your eye on as acquisitions being acquired by others.

Finally in reverse.

Buffett said at.

The phone rang, you'll know what to me does your phone rang.

[laughter].

Thanks, Larry for the questions.

The last one or phone ever ring.

Yes.

I have not received a call I guess.

<unk> point blank.

No.

The phone has not rung yet.

Going back to your first question I think it's a really important question because it's a.

And Rob asked a similar question it really is.

I almost want to say all hands on deck type of situation relative to the inflation that we're dealing with today and needing to raise prices and yes.

We are absolutely raising prices.

But with a lag.

And when costs are going up.

That lag is negative to our margins and so when you will see our gross margins.

<unk> impacted fairly significantly and you you heard.

Martin give you the numbers on the gross margin. So we are raising prices. We we approximately had about $15 million of inflation hitting our P&L in Q3, and we raised prices about to the tune of $10 million.

And so that 5 million sort of reflects to some extent the lag.

And we're raising prices. Additionally, in Q4 and 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 so 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, but we're doing that we'll continue to do that and when costs.

Start to flatten and even decline will catch up and then at some point will be on the on the favorable side of that lag as as things come down and I think rahm was really kind of getting at how much of this is sticky and.

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 will have to.

See that as.

The situation evolves, but.

It's a significant focus effort for the for the team right now to get prices up.

Okay.

And the pet market size wise. It is a very very sizable market youre absolutely right. All in all we have a relatively small position, but our business in total is probably about a 50 million dollar 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 have been.

Introducing to the market.

But even the base part of the pet food market is growing faster than the mono gastric market as a whole. So we're again pretty bullish on on the pet food market.

Yeah $50 million piece of our company is the sizable.

Business for us and we have very relevant important positions with the big pet food companies that gives us a voice in.

In access and contacts that we can leverage with these new and novel ingredients. So I think that's partly why we're.

Pretty bullish.

Bullish about the companion animal market for Balco.

Thank you.

Yes, Thanks, Larry appreciate it.

Our next question comes from the line of Mitra <unk> with Sidoti. Please proceed. Please proceed with your question.

Yes, hi, good morning, and thanks for taking the questions.

I was just curious.

Given the inflationary environment and labor shortages, youre seeing et cetera are you.

More in client.

Be less aggressive in terms of head count expansion et cetera, and sort of.

Manage costs, a little more aggressively.

Good morning Mitra I.

I would say, we we always evaluate all head count expansion based on really.

Or do we get in return for it. So 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 in there. It's just very competitive at the moment.

You see a scarcity of labor and also wage inflation is as a result, when we look at our call it overhead costs, our 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.

We are generating the returns on it. So I don't think anything has fundamentally changed or that we will go after aggressive cost cuts or anything similar.

Less something unexpected happens here.

Always evaluate that based on the performance you are delivering but I think we've proven that so far during the last two years and going through this pandemic wave.

We have kept it altogether delivered strong results.

And expect to continue to.

Manage the situation well and should that change then obviously, we will reassess that but for now we.

We continue in the strategy that we've deployed so far that Mitra. The other thing I would add to Martin's comments is we really do not feel like we have been.

Differentially impacted relative to our competitors and really the market as a whole.

Things that we are experiencing everybody is experiencing that are buying the same raw materials and the same.

Geographic regions that we are in so.

Sure.

Theres nothing differential here, but but that doesn't mean that.

We don't have to deal with it and we're working really really hard to deal with it.

Okay, No that's great. Thanks.

And then on the.

The product segment.

Typically in the medical device sterilization.

Have a nice growth year over year down a little sequentially.

Wondering what youre seeing into the fourth quarter and your expectations for this.

Business the box back.

2022.

Yes, again, we are very pleased with the performance of our specialty products in <unk>.

Q3, both our sterilization business and the plant nutrition business grew nicely.

The sterilization business as he said accurately was it 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 that elective surgeries were indeed.

Year over year, but down sequentially.

And I think that that.

Partly that was the pent up demand that that came back in the second quarter.

That was somewhat fulfilled and then I think it's also partly the rise in the Delta variant cases in the 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 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.

And then.

Could you comment a little on the international markets in terms of what Youre seeing on both the demand.

Side, and maybe on the cost, especially in areas like Italy, Belgium, et cetera, where you are.

Have a physical presence.

Yes.

So.

I think I'll start on that on the cost side of things and you're probably all aware of the extreme.

Inflation, that's going on in Europe, particularly around natural gas and and.

The issues that they're well unfortunately, many of our raw materials for choline for example, as well as our sterilization business.

Stem from natural gas to one extent or another and so that's really.

A significant press.

Pressure that we're experiencing and part of the.

Whats behind.

Our perspective that things are accelerating.

The natura.

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 we will continue in.

In Q4, but things that products that come from natural gas like urea like ammonia like methanol are all important raw materials for us and those costs are.

Going up dramatically. So Europe is one area that that are I would say the inflation is is the most extreme but.

Managing through it. It's also not just manifesting itself in higher costs. There's also curtailments some of our suppliers are.

Giving us the only 75% allocation for example on certain raw materials, because theyre cutting back production because costs are up so again, it's just a.

Complement complicated supply chain.

Right now and I think that what's behind your question is the recognition that.

That is even more extreme in Europe right now than it is.

In the U S.

But we're managing it we do have pricing power and flexibility in Europe, we have fewer.

Uh huh.

Kind of locked in contracts with with with our customers in Europe. So we are able to raise prices a little bit faster. So our lag is a little shorter in Europe than it is in the U S and so we're leveraging that that position from a demand side I would say our demand still remains quite strong.

So.

Uh huh.

<unk> have been healthy.

In Europe really across the board in all of our businesses similar return to elective surgeries and Europe similar demands from the amount of gastric market that we're seeing in the U S. So demand remains strong and we see that.

Continuing again for for certainly the next few quarters.

Okay. Thanks again for taking the questions. Congrats thanks. Thanks, Thanks, Gerry appreciate it.

Our next question comes from the line of Tony Pollock.

Private Investor. Please proceed with your question.

Good morning, 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 youre working on.

In the past for.

Very successful.

Okay.

Could you talk a little bit about the Chinese choline situation.

And what's happening.

Okay.

This morning, Toni This is Martin just quickly on the R&D, we spent in the third quarter about $3 $2 million versus $2 nine in the prior quarter and a $2 seven in the first quarter.

So call it approximately 300000 more.

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 it is.

Fairly volatile as again, you all know.

Chinese are significant producers of animal grade and industrial grade choline.

Their participation in western markets has been.

Up and down in and out over the years for various reasons, whether it was the shipment of contaminated product or.

The blue skies initiatives in China that that restricted production.

And so on and so forth and 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 there.

We're also having to deal with these incredibly high freight costs all of their production has to be put in containers.

Shift in.

Just as an example, we ship containers from Malaysia to.

And <unk> been used to be about 15000 euros container and now its 20000 euros. So that that adds an awful lot to a container of choline. So.

We're seeing less supply coming out of China today.

The supply that is coming out of China is at higher prices.

And the.

The Blue Skies initiative is somewhat back there's discussion around the Olympics coming up in China, and so there's curtailment of certain.

Production so.

That is also have any impact on on there.

Their production capabilities. So 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 end and be able to.

Produce.

That capacity or above so that's kind of the latest on on a Chinese choline and I would say just another notch in the volatile history of product coming out of China.

New products, we continue to.

Develop new products, our R&D teams have been continuing to innovate and come into the labs throughout the pandemic.

The product that we've talk most about is <unk> product that we launched a couple of years ago.

That rahm used the word meaningful earlier that is having a meaningful impact on our.

Revenue within our A&H and is a product that is.

Is relatively new to the market that we have a lot of excitement about.

I talked a little bit earlier about the texture line of products, which are largely encapsulated products, but also some flavor inclusion systems that are.

We again.

Have a very high hopes for.

And feel.

Feel like there's a very significant market that we can.

Trade with those products were also talked a little bit about the Z crisps and.

Plant and dairy protein crisps that we're bringing to the market that.

Our ideal for inclusion in bars, nutritional bars and trying to up the protein content, but also have the protein content being a plant bay baked.

Based we're making hemp and pea protein based Chris and so.

We're excited about that.

Those products as well so.

Definitely new product development continues to be an important part of what we view as our growth where 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, and we're really pleased with that and we're going to continue to strive to.

Pushed that metric upwards with additional new product launches.

Okay.

Yes, Thanks, Tony I appreciate the questions.

Got it.

Thanks.

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 a it's already coming in on the end of the year, but we will talk to you again in February of 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 So hopefully will.

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.