Dan Coshaba – KSA Capital Partners Jonathan Victor – Segovia Capital Lawrence Goldstein – Santa Monica Partners

Ladies and gentlemen, thank you for joining our conference call this afternoon to discuss the results of Balchem Corporation for the period ending September 30 2007. My name is Frank Fitzpatrick, Chief Financial Officer; and hosting this call with me is Dino Rossi, 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 statements. This release does contain or likely will contain forward-looking statements, which reflect Balchem’s expectation or belief concerning future events that involve risks and uncertainties.

We can give no assurance that the expectations reflected in forward looking statements will prove correct and various factors could cause results to differ materially from our expectations, including risks and factors identified in Balchem’s annual report on Form 10-K for the year ended December 31, 2006. 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 at 9:30 am Eastern time. I will now turn the call over to Dino A.

Rossi, our President and CEO.

Good afternoon, ladies and gentleman, and welcome to our conference call. We are pleased to report that consolidated revenue for the 3rd quarter was again a new quarterly record for the company at $50.5 million.

This level was approximately a 101% ahead of the $25.1 million result in the prior year comparable quarter, and approximately 14% ahead sequentially of the 2nd quarter result of 2007. All three segments achieved new 3rd quarter record revenue results, with the BCP Ingredients segment extremely strong due to the performance of the previously announced Akzo and Chinook businesses.

Extremely solid organic growth out of the core BCP business, the Encapsulated/Nutritional Products, and steady growth levels out of the ARC segment. The acquisitions contributed $22 million in the 3rd, quarter, and the balance of the core business this group 13% over the prior year quarter.

These revenues led to the generation of a new record quarter in consolidated net earnings as well, closing the quarter at $4.5 million, up from approximately $3.2 million in the prior year quarter, or an increase of approximately 41.4%. These results also reflect net interest expense of $576,000, an increase of $573,000 over the prior year quarter, which is being incurred for the $39 million borrowed to complete the mentioned acquisitions.

This quarterly net income translated into diluted earnings per share of $0.24, or a 41.2% increase from the $0.17 we posted in the comparable quarter of 2006. In the quarter, we incurred approximately $734,000 of amortization expense related to the Chinook acquisition, which will continue for the ten-year life of the amortizable assets acquired.

Tax effective on a non-GAAP basis, this is equal to $0.0206 per share per quarter at today’s outstanding share level. Our consolidated gross margins of $12.6 million, with 25% of sales in the quarter, down from the 35% in the prior year quarter.

This level of profitability reflects the initial impact of the acquisition in the animal grade choline business, which we know carry lower gross margins, and which were even lower due to unfavorable variances realized in Italy due to the traditional summer holiday in Europe. We are still working on integration efficiencies, which should increase the results of this segment by a couple of percentage points.

We also realized increase raw material costs that are largely petroleum-derivative, which have not been presented as price increases to our costumers in the 3rd quarter. These raw material costs have continued to rise at a very swift pace, and are being studied for certain products affected.

Price increases will be implemented beginning in the 4rth quarter as our businesses will remain affected by the higher costs. At the consolidated operating expense level, you will note the 47% to $5.4 million for the quarter.

This $1.7 million increase was due primarily to the $734,000 of additional amortization, plus sales and technical personal expense associated with the Chinook and Akzo acquisition. We also incurred approximately $160,00 of commercial development expenses toward our pharmaceutical market initiative in the quarter.

With these increases, operating expenses were 10.7% of sales or 4 percentage points less than the operating expenses as a percentage of sales incurred in last year’s comparable quarter. This level was also 1.5% lower sequentially than the 12.2% of sales we incurred in the 2nd quarter of this year, as we continue to leverage off of our existing infrastructure going forward.

Over all it was the strong quarter, especially with the unfavorable manufacturing variances incurred at the Marano facility due to the summer holiday period in Europe, and the escalating raw material costs. We did realize approximately $9.2 million of EBITDA in the quarter, which translates into $0.49 per share, and points out that we are incurring approximately $2 million per quarter of non-cash expense.

Interest expense of $672 thousand was a full $656 thousand higher than the previous year’s quarter. This was in direct relationship to the long term debt incurred to achieve the noted acquisitions and is equal to $0.204 per share on a tax-effective basis.

Noting our strong EBITDA, the long term debt and the impact of the interest expense on our quarterly results, we plan to accelerate our debt reduction. In the quarter, we paid $5.2 million of which $2.5 million was accelerated, and we will reduce our debt load more aggressively in the coming months and quarter, driving off of our strong cash flow, our desire to reduce interest expense and improve earnings and generate even more creative results from the recent acquisitions.

In an effort to detail our consolidated results better for our shareholders, I will now call on Frank Fitzpatrick to discuss the ARC Specialty Products and BCP Ingredients segments.

The ARC Specialty Products segment posted a new 3rd quarter sales record of approximately $8.2 million, or 3.5% over the prior year comparable quarter. This increase in sales was primarily derived from the improvement volume of 100% package deal and the canister product line.

With this product mix and volume increases, our quarterly business earnings increased 2.5% to $2.9 million versus the prior year comparable quarter. Sequentially, this result is 3.8% lower than the record quarter we posted for this segment at June 30, 2007.

This reflects the early impact of the quickly escalating raw material increases in the quarter. We have begun to increase prices to offset this impact already in the fourth quarter, and expect to have passed this increases through to the market as contracts allow by the 1st quarter of 2008.

We continue working on a number of initiatives to broaden and build on the ARC’s business model. Next, I want to report on the BCP Ingredients segment, which is a segment that manufactures and market an encapsulated choline supplement to the animal feed industry as well other choline-derivative products.

As Mr. Rossi noted, this segment has been significantly impacted by acquisitions.

For the quarter, we set another new quarterly sales record of $29.4 million, up 331% over the prior year quarter, and realized record segment earnings of approximately $2.1 million or 91% over the prior year comparable quarter. These increases were driven particularly by sales volumes of the acquisitions, which contributed approximately 94% of the sales revenue increase, with an additional 18.6% organic growth in the base.

The Chinook acquisition contributed most significantly to this growth at $10.7 million, as we integrated their base of business into ours in San Gabriel and Verona, to a lesser degree our Verona plant. The volume increases helped us to achieve plant operating efficiencies in Saint Gabriel and Verona.

The Balchem Italia BV operations generated the balance of $10.7 million all through the Marano, Ticino site. In this 3rd quarter, the 2006-acquired choline chloride plants in Saint Gabriel, Louisiana produced approximately 25 million pounds of product.

This is approximately 80% of the plant’s nameplate capacity. The additional capacity of this operation gives us the opportunity to continue our growth plans for this business segment, both domestically and on the international front.

The integration of the Chinook and Akzo businesses highlight significant opportunities to synergize our operating plants, to drive costs out of of logistic issues and efficiencies into plant operation which we expect to utilize to strengthen this commodity or add to markets for our customers and shareholders. This is especially critical as we deal with the escalating raw material costs previously mentioned.

Numerous choline or choline- derivative product opportunities for markets outside of animal nutrition are currently being worked on, and look quite promising as well. We are very pleased with the immediate accretive impact on our financial results from both of these recent acquisitions.

I will now turn over the call to Mr. Rossi for him to discuss the encapsulated segment.

Thanks Frank. For the quarter, the Encapsulated/Nutritional Products segment realized a 25% sales improvement to $12.9 million, over the prior year comparable quarter.

This quarterly result does reflect the first full quarter of the previously noted human choline business of the Akzo acquisition, which contributed an increase of $700,000 in revenues into this segment for the quarter. Business segment earnings of $2.2 million is an improvement of 113% over the same period of the last year, improving to approximately 17% of sales.

The human food, nutrition and pharma sector of the in encap segment experienced both weakness and strength. The calcium, pharma and international food sectors combined were approximately $439,000 below prior year.

The calcium line continued to be soft versus the prior year quarter, but did improve by 61% over the second quarter revenue result. More importantly, it moved to a near break-even level in this quarter, after posting a $600,000 loss for the first six months.

The international food sector continues to improve but is still soft through September, lagging the prior year-to-date levels by 42%. The domestic food business is comparable to the prior year-to-date revenue results.

Particularly positive is the continued growth of the human grade choline sector. We continue to see increased consumer recognition of the benefits of choline, hence choline inclusion in more supplements and fortified drink.

This sector was 53% ahead of the prior year quarter and is now 52% ahead of prior September year-to-date result. We have utilized the excess capacity recently acquired in the Marano, Ticino facility capitalizing on logistics and currency to improve profitability of this sector in Europe and Asia.

We continued to position choline as an essential ingredient with excellent therapeutic benefits for all ages, not just newborn infants. Our pharmaceutical delivery systems’ commercial development effort continues, but as previously noted, is a long process.

We are confident that these efforts will yield good end results, but in the near term is a net expense to the business segment. We incurred $160,000 expense in the quarter and we now expect to sign a number of small research and development agreements in the 4th quarter, hoping to offset these expenses near term.

In the Animal Nutrition and Health sector, the core business recognized $5 million of revenue, up approximately 62% when compared to the previous year quarter. The two key product lines in this sector are REASHURE, our encapsulated choline product, and our chelated minerals product line.

The REASHURE product line has continued the uptrend seen in 2006 with the 3rd quarter of 07’ up 36% versus the previous year comparable quarter. With the integration of the chelated mineral product line, combined sales effort, and favorable field trial results, we expect to get better penetration in all markets for all AN & H products.

Although we still have some rollercoaster effect quarter to quarter in the various market sectors, we are very pleased with the over all volume and revenue growth in the encap segment. Adding the acquired Akzo products, European customer based and technology have strengthened our growth platform, and we are confident that more business will be generated based on the unique platform of products that we offer or soon will offer to the market.

We continue to build the financial strength of the company. While we have about $29 million in quarter one and another $10 million in quarter two, we continue to manage our asset base aggressively.

We have improved results while building our technology base. Near term, we are focused on completing the integration of our recent strategic acquisition.

However, we do continue to explore alliances, acquisitions and/or joint ventures to leverage our technology and strong human asset base. This now concludes the formal portion of the conference.

At this point, I will open the conference call for questions.

What were the margins on the acquired businesses in the BCP section of the company’s results?

When you say the margins, what level are you talking?

The operating margins for the, I believe it was two acquired businesses in BCP?

Yes. Certainly, I think they both have different levels, to be clear.

They were probably both in the neighbourhood of, I will say, 6% to probably 11%. The 6% is there predominantly on the Chinook acquisition, because of the amortization expense which is actually pretty heavy.

We have talked about that before. And certainly better results on the Italian business

Okay. But on the average, if you combine the two businesses, were they below the existing business?

I suspect they were, pretty significantly.

They certainly were below.

Related to that now, you have plans obviously to do some integration and to take some costs out. Where do you think you can get margins in those two businesses?

Is there 100 basis points of margin to get, or is it two or three, over a period of time?

I think there is certainly more than 100 to get. We have looked at the core business that we had, and we expect to certainly be able to get back there in fairly short order, and actually up two or three percentage or basis points over that.

So the timeline on it is sort of coming into this quarter with what is going to go on with raw materials. I would say that our plan was to try and get there certainly towards the end of next year.

The raw material increase is probably dampening that a little bit, right now.

Yes.

That will probably be a little bit further out.

But we should see a sequential margin, if resin holds steady, and I know you are trying to push some pricing through.

Yes.

Taking resin out of the equation, will we see some margin improvement sequentially as you go through the process of taking costs out of those two businesses?

Normally, I would say yes. I think to some degree it really just depends on what happens with the raw material.

Uh-huh. If I could just add one more, the pricing that you have put through in the marketplace right now, how much of the increased cost of resin does that make up for?

Certainly, I mean, what you have to understand is what is going on in the raw material market today is we are seeing significant increases every month. While we have put together plans to cut on to the raw material costs the best we can, the challenge right now is to predict at what moment we are going to meet the top of that raw material increase.

Yes.

Every month, the industry keeps saying, “Oh, we have reached the ceiling, we have reached the ceiling, we cannot go any higher.” I suppose, I do not think we are alone in this for sure, but it has continued to move up every month.

So while I agree, I think it is going to get, it cannot, it has been to where it has got to be without causing serious economic ramifications much broader than us. So I am optimistic that we will be pretty close to the ceiling now, and that hopefully will be the number that we can pass on to the market.

What I will tell you is it is certainly our belief too that the raw material cost is going to come down. I do no think that they are going to stay up here for an extended period of time.

I do not have a crystal ball for sure, but just studying, I am gonna say, the recent history of these certain raw materials, certainly it has been an absolute roller coaster up and down. I think that the question is how long are the peaks and how long are the valleys now.

Yes, okay, great. Thank you.

Good quarter.

Now for the slowdown in Italy over the summer, how much revenue would be BCP Ingredients see from that, roughly?

I think the revenue number is a pretty decent number. I mean, it might have a little bit of a haircut.

We have built inventory levels to some degree to bridge over. But the more important factor was the unfavorable manufacturing variances incurred in the month of August.

That probably knocked off maybe $200,000 to $300,000 in pre-tax income.

But just in August?

Yes.

Okay. Was it 18% growth in BCP Ingredients, the organic growth there?

That is correct.

Where did that come from?

Actually, I would say, it mostly came from our export business. We had a pretty strong hold on the domestic business, and at a certain moment it starts to blur with the acquisitions now, because the domestic business that we did not have did accrue to us through the acquisitions.

But I think straight up looking, studying the growth, it is more export; South America, to some degree; some into Mexico; and certainly, probably the other market is Russia.

Does not Chinook serve the Russian market?

Well, the Chinook business did serve the Russian market. But we have actually managed to pick up more business as well.

Did you have any specific calls for that reduction?

I would say that what we plan to be as aggressive as we can. We are going to operate the business as efficient as possible standpoint from cash flow, because money in the bank is costing us reduction of debt.

We are going to be aggressive as we can to taking it down and maybe in the quarter you might see another $7 million or so come out.

In the course of time, in the fullness of time, from what you have said, you are going to get back to the type of high margin that you had prior to acquisitions. Is that fair?

For example, you are 19% almost 20% pre tax a year ago in the quarter, and now you are 13 or so. So when everything plays out and is “normalized” are you talking about getting to that level or higher?

I think the question earlier, Larry, was directed to the BCP business. At least, that was what I responded to question-wise.

I think the acquisitions that came that were, when you look at them, they cannot really align themselves with the BCP Ingredients business and they actually run a lower level than what the core BCP business did. Our immediate challenge is to certainly get those businesses back to the core BCP level, and then certainly we will be able to get that up a couple of basis points.

But as you look at the consolidated number, with the weight of the BCP type business now, the ability to get back to that old average number is not in the cards.

Okay. Now, are you headed en route to having the Encap be the largest profit segment of the business?

Well, I think, [chuckles] largest profit segment. I want them all to be large, but I think certainly there is a shift going on right now in the business anyway.

we definitely have a much larger position in the animal health business, especially when you combine the specialty animal health business with the commodity animal health. We are starting to leverage that on a combined basis out in the market, both with ourselves, with our manufacturing platform, certainly logistics where we can now, even from the marketing standpoint, where we can go to a number of the same customers with a variety of products.

Nobody else can come to them in full purchasing effort. So we expect to capitalize on that in a bigger way.

I think we just wanted to drive as much profitability out of that as we can. Certainly, that separates from the human encap part of the business.

We do expect that we continue to grow as well. With our efforts in the pharmaceutical space, which is still yet in a big way, probably a year, 18 months, two years away.

That, once we get there, honestly could yield some much better profitability as well.

Now, with the price of milk, over the last decades milk was always in oversupply. I used to hear prior to your even coming aboard early on, that the farmers did not want to pay for a product like REASHURE.

But now the price of milk has gone sky-high, and I guess they are actually shortages. So has REASHURE got a bigger market today than it did yesterday?

Oh yes, absolutely, and I think we referenced in the call here today, maybe early on, that it grew year over year about 56%. So we continue to see it growing pretty nicely.

We expect that to continue and what is going to happen with milk price is going forward. Again, I think it is one of those numbers that is much stronger than it has ever been in my time here.

Certainly it is a scenario that does not meet our expensive product with as much challenge.

So is this worldwide or North America or US or what?

Well, we are selling the product on a global note for sure. Even historically, Japan has been a very good market for us.

Milk places in Japan, actually they are under stretched right now. So we have continued to do our business there as we have.

We have not seen any growth out of that market right now and I think part of that is because of the pressure on milk prices. So I think it is a little bit of a mixed bag on what is going on with milk prices around the world.

Well in the US, our dairy farmers believing that if they use REASHURE, they are going to get more pounds per animal or whatever the measurement is?

Well, that is certainly what we promote and I think obviously the product continues to move well. So I think that we are coming better understood in the market.

Can you say anything about penetration? I would imagine that the kind of volume you are doing is like a thimble’s worth.

It is, I think we are definitely under 10% of the North American market for sure.

So what would it take to get to 20%, 30%, 40%, 50% whatever?

I think just more time in front of the right people, convincing them and I think there is still yet a lot of show me on my herd attitude out there, which is pretty typical of the industry, that they want to see it to believe it themselves. But we are building, we have added some more sales people.

We have added some more tech service people in this space. We are conducting a number of seminars for the industry and we are just going to continue to try and get more in front of the right people and get the message out there.

So you so say you think you have 10% of the market. What does 10% amount to?

What value? What is the market?

Well, we have lent the map and I shared this with a number of people in the path. In North America alone, if you would get 100% of the dairy cows would be about $110 million market.

Obviously we are well assured of that today, and that is just North America.

So that does not change a whole lot. Is it conceivable to you that it takes a few more veterinarians of herds to say, “Hey, it works!”

or what? What is the obstacle you have to overcome?

I think it is just getting their confidence level up and …

How many more years would that take?

Larry, I think it is a product that always has to be sold. I think that is typical in the animal health industry.

You can point to some of the best products out there, especially the more expensive ones and it is easy for them to not want to spend the money if you will, because times are good and they are making good money on the milk, so why spend any more than they have to? But I think it is a product that constantly has to be sold and we are out there advertising more, and getting in front of the right people, and you are right, you need to be in front of the vet, the nutritionist and what not who influence those buying decisions even more than the herd managers, for sure.

Say something about return on capital, return on equity. How you look at it and what kind of levels you think will be normalized levels?

Well, what is normalized? Let me just say the objective certainly is to be in a high teens on returns if you will, and I would say closer to 19 or 20.

So our objective is, as we look at running our business, certainly is to continue to derive that kind of return. In the interim, there might be some soft spots there, as we even do an acquisition and achieving some of the integration results and what not.

But I think when you look at the blend of our business. That will probably be a challenge, especially when we take on the kind of acquisition that we did, that for instance will not carry a return like the ARC Specialty Products does.

But I think we are going to continue to push that ahead and continue to certainly be in the mid to high double-digit teens, if you will, which hopefully will drive a good return for all the shareholders.

Is this current quarter, how is it going to compare in volume with this quarter?

Current quarter meaning the 4th?

Yes.

Volume in revenue, you mean?

Yeah.

I think our expectation right now is it is going to be comfortable. I would say October started up very, very strong for us into the quarter.

So things continue to move well, we alluded to the European holiday there, it took a little edge of the top line, but that is back online.

So you are going to be about 175 million this year, and you are going at a $200 million rate going forward, so you will be in excess of that next year?

That certainly would be a pretty good projection.

Well, you should be doing better than that to for the next annual rate at the moment, for the next year. No?

Yes?

I cannot argue with that.

What are your biggest worries? What are you worried about the most?

What could go wrong?

Well, there is always stuff. I think right now--

Particularly?

Yeah, the most interesting thing, and this is, as I said, alluded to before, just what is going on with the raw material prices, whether it be a barrel of oil or natural gas that is driving a lot of this. A lot of speculation, I think, is causing the market to get overheated, and we have just have to deal with it in the interim here.

There are some challenges that, I would not say necessarily keep me awake. But it is something that is right there in front of us everyday.

Well, a couple of question about that. Are the other raw material prices having to do with oil-based items?

Absolutely, yes. In terms of significant impact.

There is some other things, a little bit going on, but certainly the most significant is oil derivatives.

What kind of resistance, if any, is there to price increase? Why for example cannot you, if you pay for a batch of whatever the material is and the price is higher, why cannot you pass that on immediately?

I think there is just market dynamic there, Larry, that just do not let that happen too easily. There are alternative product in some scenarios that can be used.

I think we have to be positive enough of some of those which are not oil derived driven. So those are the things that just we will pay close attention to as we look at the price increases.

So your comment about you think prices will all go down in time because they always have. If they do not, and let us say the price of oil a year from now is considerably higher?

Okay, what is going to happen?

Yes.

I think obviously, we will go to the market and try to position the price increase and pass it on.

Always with lagging effect.

Well, in some of our businesses we can be match more timely than others. I think we paid really close attention to this, and we tried to pass it on where we can.

Sometimes there is contract limitations that might stop for a quarter or something like that. But we try to be as timely as we can and getting it through.

I will tell you, am back from a brief visit to the oil fields of Russia, and I do not get the impression that anybody there does not think the price of oil will be a lot higher in the years to come.

I will not, I cannot argue one way or another there.

Neither do I, we cannot predict it. But I think that sounds like a more likely scenario.

Well I think the entire dynamic of the world economy is going to change then too. So it will not affect just us.

So you will be in proportion and everybody just have to accept it.

There you go.

Okay, is there anything else you would like us all of us to know that we were not smart enough to ask about?

No, I think you have done a pretty good job of open ended questions there and hopefully it helped everybody else that was listening in.

A chance of yet another acquisition in the next 12 months? High, low, or medium likelihood?

I would say medium. There are some things that we are looking at.

I would not say that they are right on the front burner and actively chased. But certainly we have a desire to move in that direction, yes.

Are you about to outgrow any facility or any manufacturing facility with big capacity restraint in anything?

There are a couple of areas where we are getting a little bit tight, a little of tightnes. We are in fact de-bottle necking certain areas out of our Verona, Missouri site, both on the human grade and on the sea grade choline product line.

I think that on the Encap line, we are in pretty good shape. Probably the one area that we are a little stretched on is corporate headquarters and the people here.

This was laboratory space and what not. But over all I think we are in pretty good shape.

Is there anything to be said at the probiotics?

Other than we are continuing to work on them but I do not think in a big way right now.

Okay, thank you.

Thank you.

Sure, I just like to thank everybody that listened into the conference call today and I certainly hope that people are clear on the state of the business. I think it was a very, very good quarter.

I think there are normal challenges out there like every other business today and we are doing everything to tackle those. So with that, thanks and we will talk again at the end of the next quarter.

Bye.