Balchem Corp (BCPC) 2008 Q1 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the Balchem Corporation first quarter 2008 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer section will follow the formal presentation. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

It is my pleasure to introduce your host Mr. Frank Fitzpatrick, CFO for Balchem. Thank you, Mr. Fitzpatrick, you may begin.

Thank you for joining our conference call this afternoon to discuss the results of Balchem Corporation for the period ending March 31, 2008. My name is Frank Fitzpatrick, Chief Financial Officer, and hosting this call with me is Dino Rossi, our Chairman, 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 Balchem's Form 10-K. Forward-looking statements are qualified in their entirety by this cautionary statement. The financial information that is referenced in this meeting was disclosed this morning in our quarterly press release at 9:30 a.m. Eastern Time.

As reported in our press release, and effective with the quarter ending March 31, 2008, we have realigned the business segment reporting structure to more appropriately reflect the internal management of the businesses, largely due to the impact of the recent acquisitions of 2007. We will continue to report three segments, and they are ARC Specialty Products, Food, Pharma and Nutrition, and Animal Nutrition and Health. The specific changes are, one, a chelated minerals and specialty nutritional products for the animal health industry, previously recorded as part of the encapsulated nutritional products segment, now combined with the choline business, formerly BCP ingredients, into a consolidated animal, nutrition and health segment. And two, the encapsulated nutritional products segment has been renamed Food, Pharma and Nutrition, and it is focused strictly on human health. The ARC Specialty Products segment remains unchanged. I will now turn the call over to Dino A. Rossi, our Chairman, President and CEO.

Thanks, Frank. Good afternoon, ladies and gentlemen, and welcome to our conference call. We are pleased to report that the consolidated revenue of the first quarter was again, a new quarterly record for the Company at $56.9 million. This level was approximately 106% ahead of the $27.6 million result in the prior year comparable quarter, and approximately 6% ahead sequentially of the fourth quarter result for 2007. All three segments achieved new first-quarter record revenue results with the Animal Nutrition and Health segment extremely strong, due to the performance previously announced Akzo and Chinook businesses, and strong organic growth out of the core basic choline and specialty animal nutrition and health products. The Food, Pharma and Nutrition business posted near 30% organic growth with particular strength in international food and pharma calcium. And we realized typical growth level out of the ARC Specialty Products segment.

The acquisitions contributed $25 million in the first quarter and the balance of the core businesses grew 15% over the prior year quarter. Consolidated net income closed the quarter at $4.6 million, up from approximately $3.4 million in the prior year quarter for an increase of approximately 35%. This result also reflects net interest expense of $298,000, an increase of $259,000 over the prior year quarter, which was being incurred for the initial $39 million borrowed to complete dimensioned acquisitions. This quarterly income translated into diluted earnings per share of $0.25 or a 32% increase from the $0.19 we posted in the comparable quarter of 2007. 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 affected on a non-GAAP basis, this noncash item alone is equal to $0.025 per share, per quarter, at today's outstanding share levels.

Our consolidated gross margins of $13.5 million were 38% ahead of the prior year quarter in dollars and equal to 24% of sales in the quarter. This level of profitability continues to reflect the impact of the acquisitions in the animal-grade choline business which carried lower gross margins, but did improve sequentially over the fourth quarter 2007 results. We also realized increased raw material costs in this first quarter that are largely petroleum derivative. These raw materials costs continue to rise at very swift pace in the quarter, and while some were passed on to customers, additional price increases were implemented beginning in the second quarter, as our businesses are likely to remain affected by these higher costs. But petrochemically-oriented, but not directly aligned, are the higher cost of key coating materials such as cotton, soy and palm oil which are being unfavorably impacted by the higher consumption of acreage into corn production versus other crops for ethanol. We continue to work on integration efficiencies, which should increase the results of this segment by a couple of percentage points when completed.

At the consolidated operating expense level, you will note a 38% increase to $6.1 million for the quarter. This $1.7 million increase was due primarily to $732,000 of additional amortization, plus sales and technical personnel expense associated with the Chinook and Akzo acquisitions. We also incurred approximately $164,000 of commercial development expense toward our pharmaceutical initiatives in the quarter, and higher G&A expenses due to increased audit, tax accounting, and noncash stock-based compensation recognition. With these increases, operating expenses were 10.7% of sales or 5.2 percentage points less than the operating expenses incurred as a percent of sales in last year's comparable quarter. This level also favorably compares to the 10.8% of sales we incurred in the fourth quarter of 2007, as we continue to leverage off of our existing infrastructure going forward.

Overall, it was a strong quarter, especially with the unfavorable escalating raw material costs incurred by all business segments. We did realize approximately $9.3 million of EBITDA in the quarter, which translates into $0.49 per share. Including our noncash stock-based compensation charge, we incurred approximately $2.5 million of noncash expense in the quarter. Net interest expense of $298,000 was a full $259,000 higher than the previous year quarter. This was in direct relationship to the long-term debt incurred to achieve the noted acquisitions and is equal too $0.01 per share on a tax-affected basis. Noting our strong EBITDA, the long-term debt and impact of interest expense on our quarterly results, we plan to continue to accelerate our debt reduction. During the past year, which nearly aligns with the acquisition debt borrowing, we have aggressively reduced our acquisition-related borrowings of $39 million to $25.8 million at March 31, 2008, reflecting accelerated payments of $11 million.

We will continue to reduce our debt load more aggressively in the coming months and quarters, driving off of our strong cash flow, reducing interest expense, and improving earnings to generate even more accretive results from the recent acquisitions. In an effort to detail our consolidated results better for our shareholders, I am now going to have Frank Fitzpatrick to discuss the ARC Specialty Products, and the Animal Nutrition and Health segments.

The ARC Specialty Products segment posted a new quarterly sales record of approximately $8.5 million or 4.8% over the prior year comparable quarter. This increase in sales was equally derived from improvement in volumes sold and price increases of 100%-packaged ethylene oxide. Our quarterly business earnings however, decreased 10.5% to $2.6 million versus the prior year comparable quarter. This result reflects the impact of continued and quickly escalating petrochemical raw material increases in the first quarter, especially ethylene oxide. In this segment, we did increase prices as noted to help offset the significant portion of the cost increases, but we did not keep up with the rapid raw material increases -- from zero price increases. We continue to monitor the raw material escalation, and if appropriate, we'll seek additional price increases. We also continue working on a number of initiatives to broaden and build on the ARC business model.

Next I want to report on the Animal Nutrition and Health segment, which now is the segment that manufactures and markets specialty nutritional products, unencapsulated choline supplements, and chelated minerals to the animal feed industry, as well as 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 $39.1 million, up 217% over the prior year quarter and realized segment earnings of approximately $3.3 million or 55% over the prior year comparable quarter. These increases were driven particularly by sales volume of the acquisitions, which contributed approximately 93% of the sales revenue increase, with an additional 15% organic growth in the base.

The Chinook acquisition contributed most significantly to this growth at $14.4 million, as we integrated their base of business into our St. Gabriel, Louisiana and Verona, Missouri operations, helping to achieve plant operating efficiencies in both. The Balchem Italia BZ operation generated an additional $11 million in revenue, as we continued our global growth strategy. In this first quarter, the 2006 acquired choline chloride plant in St. Gabriel, Louisiana produced approximately 31 millions pounds of product. This is approximately 88% 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, domestically, but especially 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 logistic issues, and efficiencies into plant operations, which we expect to utilize and strengthen in this commodity-oriented market for our customers and shareholders. This is especially critical as we deal with the escalating key raw material costs previously mentioned. To be sure these material costs increases referenced, were very significant and not predictable by near history trends. We have taken what we believe are appropriate price increases to the market to help defray the unfavorable effect on our results, remaining mindful of our end market customers. 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 pleased with the immediate accretive impact on our financial results from both of the recent acquisitions, but do expect to post even better bottom line results going forward.

In the Specialty Animal Nutrition and Health sector, the core business recognized $5.6 million of revenue, up approximately 32% when compared to the previous year quarter. The key product lines in this sector are Reashure, Nitroshure, and our chelated minerals. Reashure has continued the uptrend seen in 2007, with the first-quarter '08 up 16% over the previous year comparable quarter. With the integration of the chelated minerals product line, combined sales efforts, and favorable field trial results, we expect to achieve better penetration in various species for all animal nutrition and health products, both domestic and abroad. I will now turn the call over to Mr. Rossi for him to discuss the Food, Pharma and Nutrition segment.

Thanks, Frank. For the quarter, the Food, Pharma and Nutrition segment realized a 29% sales improvement to $9.3 million over the prior year comparable quarter. Business segment earnings of $1.5 million is an improvement of 369% over the same period of last year, improving to approximately 16.5% of sales, up significantly from the 4.5% level in the prior year comparable quarter. This first-quarter result saw improvement in most sectors of the core FP & N business over the previous comparable quarter, and sequentially in most sectors from the fourth quarter.

Most notably, the consolidated human choline nutrient products were up 27% over the prior year quarter. We continue to see increased consumer recognition of the benefits of choline, hence choline inclusion in more supplements and fortified drinks. A number of new independent research studies on the benefits of choline have been completed and recently published. We continue to position choline with nutritional and pharmaceutical companies as an essential ingredient with excellent therapeutic benefits for all ages, leveraging off the baby/infant formula requirement. The international food market was very strong in the first quarter, up 170% over the prior year quarter. We also saw continued improvement in our calcium line, which improved 183% over the previous comparable quarter, and improved 30% on a quarterly sequential basis. More importantly, however, it generated profits of approximately $400,000 after posting a $600,000 loss in 2007.

A number of new product developments have been introduced into the nutritional supplement marketplace, using our calcium platform, and we expect to see new product launches beginning the second quarter of 2008. Our pharmaceutical delivery systems commercial development effort continues, but as previously noted, is a long process. We did generate $50,000 of R&D milestone revenue in the quarter. We are confident that these efforts will yield good end results, but in the near term, this sector is still a net expense to the business segment. We incurred $225,000 of net expense in the quarter for these pharma efforts. Sequentially from the fourth quarter, this entire segment was up approximately $300,000 or 3% in sales. We continue to see some fluctuating results in this growth segment, due to product mix and customer order patterns, but overall steady growth.

Although we still have some roller coaster effect, quarter to quarter in the various market sectors, we are very pleased with the overall volume and revenue growth in all segments. Adding ate inquired Akzo products, European customer base, and technology, we have strengthened our global growth platform and our confident that more business will be generated, based on the unique platform of products that we offer or soon will offer the market. Our business portfolio continues to create nice balance, yielding continued growth through the various challenges of any single product line. Overall, we continue to build the financial strength of the Company as noted earlier. We will continue to manage the asset base aggressively, which will also assist in yielding improved financial results.

Near term, we remain focused on completing the integration of our recent strategic acquisitions, however, we continue to explore alliances, acquisitions and/or joint ventures to continue building and leveraging 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.

Thank you. (OPERATOR INSTRUCTIONS) Our first question is from Jonathan Lichter with Sidoti and Company. Please state your question.

Hi. Do you see any large milestone payments later in the year? Or will they remain in the same range here?

No, I think certainly, we expect to see order magnitude more like what he we saw in the fourth quarter, which was about a quarter of a million dollars per quarter. We've got a number of -- as I mentioned before, there's a number of deals signed up. We are getting close to the point where either a certain amount of work is done, or moving into phase two of some of these will trigger the next payment on a number of these.

Okay. Overall, on the price increases, where are you in terms of price increases in each of the segments?

Well, I think -- certainly each one of them is slightly different. I would tell you in the choline -- the basic choline business, our average price increases were probably anywhere between 8% and 12% on average. Maybe that's a 10% on average, if you want to take average of averages. On the ARC Specialty Products business, the increase was probably about 6%. On the specialty business, in the animal part of the business, it was probably closer to about 6%. On the Food, Pharma and Nutrition -- and again, remember you are looking at different product mixes here for sure, it was probably closer to about 11%.

Okay. Thank you.

And again, those -- when -- Jonathan, just so you understand too, when I talk about those increases, it doesn't mean every product was increased that much, but where we found it appropriate to increase prices, that is where they were ranging.

Could you see any additional increases later this year?

I think if raw materials continue to move up, then we will continue to pursue price increases, absolutely.

Thank you.

(OPERATOR INSTRUCTIONS) The next question is from Jerry Hefferdin with Lord Abbott and Company.

Good afternoon, gentlemen, and thank you so much for all the information that you provided here.

Sure.

In regards to the new business segments, and understanding that with the $120 oil, normal is a pretty tough word to grasp these days.

Yes.

Where would you foresee a longer-term normalized margin in these segments? I am trying to get a feel for -- when you are sitting back and trying to set strategy for the Company in the long term, where are you targeting as being -- when running properly in a more normal raw cost situation, we have normalized earnings of what level here?

Yes. You mean by segment?

Yes, by the three segments, particularly since the segments may be a little bit new to some people.

Yes. I think the ARC business obviously, is off a little bit this quarter. And I think it is fair to say that on a more normalized basis, you are probably looking at an extra 3% ballpark. That becomes a more quote, unquote, normalized rate if you will. On the food, pharma look, you are seeing about a 16% margin there currently. That is probably the best that it has been, last quarter, this quarter, for a long time.

We continue to expect to see some increase there. Certainly if we achieve milestone payments, that is a significant increase over that. I think it is fair to say that 16, 16.5% that you are seeing now on a more normalized basis would be closer to 20%. And then on the Animal Nutrition and Health, this one will be a little bit more interesting, because I think that the bulk of the growth will come -- in pure dollars, will come out the specialty part of the business which obviously, carries a higher margin for sure.

Today we are a little over -- about 8.4% in the look that you have there. We have been certainly lower than that these last couple of quarters. On a normalized basis, if you went back to when it was BCP, prior to the acquisitions, we were run being about 15, 16 points there. I won't sit here and pretend that we will get back there, but I think you could be looking at another four points if we got to a normalized state for sure.

I am sorry, on the Animal Nutrition and Health, another four points from where we are now?

Yes.

Okay. Okay. That's a great help. In regards to interest expense, and the fact that you are aggressively paying down the outstanding balance, if you could help save me the time of going through the filed reports, where is your interest rate going given Fed rate cuts and the paydown. I don't know if your interest rate goes down based on an outstanding balance, and/or what the spread is and things like that.

A LIBOR based rate, so we are at LIBOR plus one.

Okay. The only change in interest expense is then going to be based upon the outstanding balance?

It would be on the balance and any change in LIBOR.

Right.

Right.

Okay. Were there any foreign currency effects in the net sales line? Could you give us any feel for FX effects on the total net sales?

It impacted us to the positive about $80,000 this quarter.

Oh, just $80,000, a rather immaterial amount.

Yes.

Okay. That's it for me right now. I will go back in queue. Thank you.

Thanks, Jerry

The next question is from Greg Garner with Singular Research. Please go ahead with your question.

Thank you. Good quarter, you guys. A question about the choline business. You mentioned the choline that your gross margin was up sequentially. Does this mean for the Animal Nutrition and Health, that it was at 8.4%, that growth margin? I am trying to tie in what the answer to the last question was.

Yes. The operating income level was 8.4%. Right. For that entire sector.

What was it then for -- as the segment is positioned today, what would that have been for the fourth quarter, when you mentioned it was a sequential increase? I wanted to get a sense for how much that improved.

It was about 4.9%.

That is quite a bit.

Yes. I think certainly in the fourth quarter, I don't know if you will remember or not, but we were stung pretty hard based on methanol cost increases in particular in Italy. That is one key raw material that has begun to decline late in the first quarter. We really had the opportunity to claw back a little bit and pick up some of those points. In the fourth quarter, that methanol spike, if you will, cost us about $1.4 million pretax.

Okay. It was mentioned in the prepared comments about a couple of percentage points increase in this operating margin in the -- I am trying to get the new name. Not the DCP but the animal --

Animal Nutrition and Health?

Animal Nutrition and Health.

Yes.

Is that above this 8.4% to the 12 -- 12.4%. Is that what you are --

Yes, yes.

Just another comment that was mentioned about leveraging the business model in the Specialty Products. Could you comment more about that? Broaden and build on that model?

You you mean on our Specialty Products?

Yes.

We have got a couple of projects that we are working on right now, that certainly I think are products that logically fit into this space, i.e., buying in bulk and repackaging or distribution. There is one product in particular that -- I am not going to tell you exactly what it is yet, because we are in the throws of negotiating a contract, a license agreement on the technology where in all probability, we'll be the exclusive distributor and seller of the product here, assuming we can get this done, and likely to be announced in the second quarter. Up-side opportunity, and I don't know that I'll blue sky a number here right now. But it is a known product, into in the industry, we're basically changing the repackaging to make it more effective as a product used in the industry today. It is a product that is sold into -- actually into the food industry. That's one that we are probably most excited about right now, and working pretty aggressively to try to get this launched certainly this year.

There could be some news in the course of next quarter then about that?

I certainly hope so, yes.

Just one final clarification. I don't think I quite heard this. In the Food and Pharma segment, it was the human component that was up 27%? Is that right?

It is the human piece that is up, yes. Almost 30%.

That is obviously all organic growth?

Yes, correct.

Very good. I will get back in the queue. Thank you.

Okay. Thanks.

At this time, I am showing no further questions in queue. Actually, we do have a question from Kevin Sonich with R.K. Capital Partners. Please go ahead with your question.

Just snuck in there. My question is about margins. Just looking at the blended operating margin of the whole business. We saw partly, certainly because of the acquisitions early last year, but we've seen declines for a few quarters in the row. This is the first quarter where I think we saw an uptick. It sounds like we have got two opposing forces right now. We have raw material costs still that rose throughout the first quarter overall, but some price increases that are going to go into effect. As we sit here today where the raw materials are currently priced, do you think we have troughed from a margin perspective?

I wish I had a crystal ball. I think certainly at the last quarterly conference call, I felt pretty confident for instance, that ethylene and ethylene oxide had hit its peak, and would at least level off, if not begin to decline. In fact that has not happened in the first quarter. But on the flipside of the coin, we have seen -- as I mentioned earlier, the methanol number begin to decline late in the first quarter, so we're picking up some benefits there. Net-net, I would tell that you it is hard for me to point right now and say that we've seen much, if any significant decline in our raw material cost base. We have pushed through the price increases that we felt appropriate at the beginning of this quarter, only to see the numbers continue to move up.

We did pick up some benefit there from those price increases coming through. I would like to think that the margins are at the trough. We are going to be as aggressive as we can with price increases, assuming raw materials do continue to increase. But I don't have a crystal ball for you on that, Kevin. I think we are going to continue to try and push the numbers up, is what I will say. And whether that volumes and efficiencies through operations and/or passing on price increases, based on raw materials, and/or continuing to leverage off of our SG&A, we are going to do all of those things.

How about the trends during the quarter, if you could just touch on the the impacts of those moving pieces. The commodity cost increases and price increases being implemented a little later in the quarter. How did the business trend from a margin perspective over the first few months of the year?

Well, I think in the quarter, I would tell you our Specialty Products business obviously trended down, I mean down in terms of margin percentage. Even though we had pushed through price increases early on, EO moved up every month on us, anywhere from $0.03 a month, and the latest nomination I will tell you is $0.05 to $0.06 here for May. Whether or not that will stick, I'm not real sure, but we have seen it move up $0.02 to $0.03 a month, every month. I can tell you, we did not raise our prices $0.02 and $0.03 a month.

$0.02 to $0.03 each month, meant in May? Or in May, we're looking for $0.05 increase?

$0.05 to $0.06 is what they're nominating on ethylene and then we pay -- it gets factoring down in the process of manufacturing ethylene oxide. Net-net -- if the $0.05 to $0.06 holds, we might be looking at $0.03 to $0.04 again.

I see. Okay.

That is a challenge for me to try and exactly predict. It is very difficult to go to the market every month with a price increase for sure, even though the commodity guys are doing that today. It is still very difficult for us to do that in this space. As it relates to the other parts of the businesses, I mentioned methanol has come down as it relates to choline. Ethylene oxide is going up, as I just alluded to. Those dynamics on EO are the same, whether it's choline and/or the ARC Specialty Products business. We are getting a little bit of an offset there by virtue of the fact that the methanol number has came down.

If I had to hedge a little bit, natural gas prices are going up, might give the methanol guys an avenue to raise their number back. I don't see order of magnitude anywhere near where it was, but it may give them some strength before it hits the low levels that it was at perhaps in the third quarter of last year. When we come over to the human side, we give -- I would just say the real key issue here is the coating material. Soy numbers have gone up, and that's really happened because more corn is being planted, less soy. Even though -- if you read the newspaper, you'll hear a little bit more shift over to soy, but at the end of the day, order of magnitude not enough to really make a difference in total soy supply. That continues to remain quite firm.

We have passed on price increases to handle that. And I think, again, you are seeing part of that margin in those numbers. But your product mix in that sector any given quarter, could move it a little bit that's not necessarily indicative of just the raw material aspect.

Okay. Just one more if I could. Could you just touch on -- given that we reclassified the segments, as well as the fact that the commodity choline business is very large now. Can you just touch on the seasonal trends in the different segments as they are classified today? In particular times of year where you would expect to see from an industry perspective, a little more strength or a little bit more weakness?

What I will tell you is, just from a pure seasonality standpoint, we really have never felt that seasonality played much of a role in our business. I mean maybe a little bit on any given quarter, but not enough to sit here and say, yes, this quarter will be 5% better than the last one because of seasonality. I don't know, Frank, do you want to tell them about --

Kevin, I am going to have a schedule put up on our website that recaps the segments as we are now recording them for 2007. There will be a link right up on front page of our website, hopefully sometime yet this afternoon that will give the historical look.

Okay. If I think about the year-to-year growth rates that we are seeing in the segments, understanding that they may or may not be sustainable, one can deduce that the quarterly growth rates should just be some fraction, a fourth of those year-to-year growth rates. In other words, there is not necessarily more strength as we get toward the back half of the year, as compared to the period as we move through the first half?

Well, I think -- I am going to say generally that is probably very fair. Certainly within the ARC Specialty Products business, and on the Animal Nutrition and Health sector, because the choline business is so significant a piece of that segment that those percentage growth numbers are probably pretty good. Because our expected growth, in terms of real high percentage growth, is going to come out of this Specialty, Animal Nutrition Health products, which still yet is, probably yet a small piece of that total number. Maybe -- maybe about -- somewhere between 15% and 18% is the specialty piece, which we expect to continue to run out at somewhere between 20% to 30% growth.

On the human side, certainly I think we expect it to continue to grow at the rates that you have seen. I mentioned some new calcium products being introduced into the market here, some launches here in the second quarter. That business has turned around very nicely for us. We expect that to continue. New product launches in there should certainly help. Then obviously too, if we get the milestone payments that we expect on the pure pharmaceutical work, again, we will see nice uptick in those percentages as well.

If I could going back to the seasonality. I think I remember last year, maybe late in the summer in August or September, you hadn't had the international choline business for all that long -- but I recall. I recall we were a little bit surprised that the business fell off at some point overseas, and I know it bounced back pretty quickly. Is that something we should expect again this year?

Yes. I think that the growth -- or the decline that you saw there in the third quarter typically last year. There is a little bit of seasonality on the choline business here domestically because it's hotter months. There tends to be a little less choline consumed, just because of the heat stress issue. In Europe in particular, it was because there was a period there where all of a sudden the Chinese got pretty aggressive with their pricing into the European market space. I wouldn't necessarily call that a seasonal thing, as much as just them getting very aggressive. I will tell you they then backed off in the fourth quarter, because the methanol numbers spiked and in fact, they walked away from pieces of business just because of the raw material cost increases. I wouldn't necessarily call that seasonality.

Okay. Thank you very much.

Sure.

Next question is from Lawrence Goldstein with Santa Monica Partners. Please go ahead with your question.

Hi. I just counted up in the interim, 32 times in the last ten years when you made similar comments about raw material prices, and you're raising them and then there's a time lag. I don't think -- is there anything new and different this time?

Certainly, the severity of the increase is significant. The continued ability to pass it on into the market and the fact that our business model certainly ha changed. There is a little bit more flavor to the -- I will call it the commodity side with the pure choline business, that makes it a little bit more difficult to recapture those increases. But I think from a philosophical standpoint, we will continue to try and maintain or grow the margins that we have in this business, as a specialty business. I don't know if I answered your question.

Tell me, under what circumstances could you see the bottom line declining?

I think there is a lot of unknowns that could happen. If raw materials escalated even more rapidly than they have, and as I said earlier, I wouldn't have expected them to be where they are today.

Nobody in the world has predicted it. But the assumption should be, they will continue to escalate.

Yes. With that said, I think again, we have to be very cognizant -- I don't want to say something that will insult people, but we do have a very good business. We have good more margins. I think trying to preserve that percentage numbers at times could certainly be challenged in this environment. I think we -- our business model, because it has changed from where we are and quote, unquote, number one position, I think we just have to be cognizant of how aggressive we get there.

Are you suggesting that you have some Wal-Mart-like client who is going to tell you what you have to charge and is not going to be understanding that your costs are going up like everybody else's?

I wouldn't tell you that we have a client, but I think in a certain moment we had an industry. I think -- you have probably read a lot about what is going on with people like Tyson's and Pilgrim's Pride, taking profit hits. It's not necessarily because of our product, but it is because of the en entire feed cost structure that's happening today that is putting tremendous pressure. It is more an industry issue, then it is a particular customer with us.

Look, let's take Reashure as a specific. Isn't the idea of Reashure to get more milk out of a cow?

Absolutely.

And the price of milk has escalated beyond the price of gasoline in these parts.

Well, but in fact milk prices have begun to decline. And in fact, a lot of herd producers are actually dumping milk out in California today. Milk -- pricing has come under pressure for reasons I can't explain to be honest with you, especially in the face of feed ration costs rising. It is going in colliding directions here and in fact, I will tell you nutritionists on the West Coast are asking guys, how can you give them a diet that keeps the cow healthy, but doesn't produce as much milk. How is that for a crazy. There is those dynamics taking place today.

I see. I see, I think. Okay. Okay. Thank you.

Okay.

The next question is from Ted Gorance with Salem Investment Counselors. Please go ahead with your question.

Good afternoon. Great work. I apologize to everybody, I just want to get my arms around a couple of things. The sales increase in the Animal Nutrition was $25 million year-over-year from the acquisitions.

Correct.

Roughly $1.8 million internal growth and I'll say -- and I am presuming that the Reashure, Nitroshure and so forth, is a part of Animal Nutrition, and that's up 31%. It looks like that would be around $6 million last year, $7.8 million or thereabouts this year, to get the 31% growth.

The range of your numbers is about right. I think they are slightly different than that, but you are close.

Ballpark. Major league, not little league.

Yes.

What I am wonder is --this is just fantastic growth. Is that coming from volume or price?

Yes and yes. Definitely the volume numbers have continued to move up. Volume even the basic choline piece -- the basic choline business grew. Again not huge, but it did grow, probably up by about $0.5 million dollars. The balance came out the Specialties, which definitely was volume derived.

You are really -- obviously, you are clearly getting acceptance among the farm community. Could you give us an estimate on how many dairy cows you think are on the program and how big is the dairy cow business?

Well, we are selling Reashure now into Europe, and actually a little bit into Asia today. I think where we used to talk about 9 million dairy cows in the U.S., that doesn't hold up. I will tell new the U.S., our market penetration is probably around 5% or 6%. It still has a lot of opportunity upsidewize, and obviously a very, very small percentage in these other markets. What we are starting to do with the sales force that we picked up through the Akzo acquisition, and this is basically, right now three employees headquartered in Amsterdam. They are now starting to sell the specialties, as well as the base choline business. We're starting to get some good uptick there. We've got them trained. They're out there making quality calls and getting real good receptivity to those products.

Another product that is doing extremely well right now, beyond Reashure, is actually Nitroshure which is the encapsulated urea product. With soy prices up -- this is kind of the dilemma. I talk about soy prices going up and the effect of soy coating materials, but on the flip side, encapsulated urea sells very, very nicely into this space in lieu of soy. But it's a product that is going very well, and that's one that was -- that's a product that was introduced a little over a year ago. Real good uptake.

If you use the Food, Pharma and Nutrition category as a proxy, and look at increase in operating profits of $1.2 million, and a sales increase of $2 million which is a great contribution margin.

Yes.

And I have a similar -- organic growth in the specialty component, inside the animal piece.

Right.

Wouldn't I also have a fairly large contribution margin in that as well?

In the animal piece?

Yes.

Yes.

When you look back at the acquisitions of Chinook and Akzo, and have that $700,000 amortization against you.

Yes.

That's really where the raw materials are beating you down, because I am guessing that -- you are really not showing a great deal of operating profitability from that acquisition yet. That is where the four in-point contribution would come from as you sync up with your selling prices and raw material costs.

I think for sure, the key material increases -- we've talking about ethylene oxide and methanol are two very key raw materials, in terms of the percentage of the finished product as it relates to raw choline. Your observation is right on. That's where we are getting stung the most, if you will, from the raw material costs. The specialty we've definitely maintaining our margin look, maybe even increasing it a bit, and obviously continuing to grow volume pretty nicely there.

And I apologize. I have one last question. Can you talk about the contractual relationships that you have in the EO business with -- for sterilization purposes?

Yes. I think -- well, basically our -- the majority of our customers in that segment are under contract with us, anywhere from three to seven years' contract. Most of the contracts are written with some type of ability to raise prices in direct correlation, if you will, to what is going on with raw materials. They're not all the same. And the windows are not all the same either, in terms of when you can do that. But that is why maybe there is some timing differences that may come through because of those contracts.

Thank you very much for your time.

You bet, thanks.

The next question is from Brandt Armentraut with Comstock Evaluation Advisors. Please go ahead with your question.

Congratulations, guys.

Thanks.

I think ed and I must be in sync today. I wanted to ask you guys about the uptake of Niashure and Nitroshure, compared to the uptake in Reashure, and whether that's enabled you to push market share quickly in Nitroshure? And also whether there's any developments on the beef cattle side for Reashure?

I'll answer the last question. Reashure opportunities on the beef side, while we continue to work a little bit on the beef side, it is not huge. Actually probably more attractiveness on the beef side is chelate and we've got some projects going on under way there. Beef prices are obviously -- the window of time between feeding it and harvesting it, and drawing a direct correlation continues to be a challenge for the Reashure product. I would tell that you we are not really focusing a whole lot -- not to say -- not 0, but not a whole lot on the beef side as much as we are on the dairy side. I do think that our position in the Reashure -- position of Reashure in the dairy market today, certainly has opened the door a whole lot easier to introduces products like Niashure and Nitroshure for sure.

Nitroshure is relatively new product, all of year and a half with us, that has ramped up very quickly, has good science behind it. The Niashure product, same way. Niacin is part of the the ration out there today, through some of the research, as conducted and actually has -- was recently reported at the Southwest nutrition conference in Phoenix a couple of months ago, that it has proven to be a great fighter of heat stress. Especially as we go into these hotter months, and from an export standpoint, from some of these countries where it is very hot a lot of times, we are seeing very good uptake of that product as well.

Good science behind all of them, absolutely. I think what I would tell you, is credibility in the market place. Even with the acquisitions, we now have a very solid position. You are looking at a $120 million to $140 million Animal Nutrition and Health business today. We do have credibility in the market.

Back to an earlier comment you made about normalized profit margin, 3% incremental in ARC, 4% incremental Food Pharma, and 3.5% give or take in Animal. I'm coming up with -- that's $2 Million EBITDA on a quarterly basis increase in a normalized basis. Is that --

I think that is good. Maybe that is even a little conservative. Again, remember normalized, and I am not sure when we will get back to normalized, but certainly based on history, you can easily point to those kinds of numbers.

I appreciate it. Thanks, guys.

Thank you.

The next question is from Lawrence Goldstein with Santa Monica Partners. Please go ahead your question.

Question and a and a half. In the next 12 months, do you think it's likely or not likely to make another material acquisition?

We are probably going to try for sure. I think that there is a couple of things that we are looking at right now that we are very, very interested in, and in the throws of some discussions. Based on -- I would say my understanding of now doing acquisitions, and how quickly you can get them done, there is a chance -- seriously a chance for one and any others would be off further than that. And quite honestly, I think it might be deemed to be a little bit early for a number of different reasons. It also could happen this year. That's about as vague I could be without giving --

Okay. You have authorized repurchase of shares some time ago, and you never repurchased any, correct?

We have repurchased. We haven't done any repurchasing lately though for sure. We did do some repurchases early in that program.

You haven't done any in the past couple of years.

That's fair.

And I presume you haven't done any this year?

That's correct.

If you don't buy anything, that would be a good reason to do them, don't you think? As a matter of fact, I think it is a good idea if you did them both, but if you didn't use monies to acquire anything, what do you say about repurchasing shares?

I think we will see what the price does for sure.

Let's assume that the price trends up like it has.

I think we will look at what is the best decision to do, either to pay down the debt, increase the earnings, and looking at -- versus reducing the number of shares with the idea of increasing earnings as well.

How about a program just to offset the option exercise at the least? How about giving that real consideration?

We will take a hard look at it. I hear your concern. We will take a hard look at it.

Okay. Thank you.

The next question is from Jerry Hefferdin with Lord Abbott. Please go ahead with your question.

Hey, guys. My question is in regards to the $700,000 charge that you referred to. It's a noncash charge in relation to the acquisition. Forgive me for being short on my accounting acumen. Is that a number that will continue each quarter? Or is this something that will wind down over the course of the next year or two?

No. It's an amortization charge having to do with the customer lists that has another life of just all of more than nine years now.

Okay. Thank you. I had another question and it just plain left me. Thank you very much for your time, guys.

Okay, thank you.

There are no further questions in queue at this time. I would like to turn the call back to management for closing remarks.

Okay. I want to thank everybody for joining the call today. A lot of good questions. I think a lot of fair questions. And I know for everybody's model, it is a little bit confusing right now. As Frank said, he will have numbers up there by quarter for 2007, so everybody can rethink their model if you will.

I do think this is a much better look of how we are running the business. While, again, I appreciate the fact that it is a little bit confusing right now, it's certainly the way we are looking at the business and perhaps where you all should be looking at it as well. With that said, I do think it was a pretty good quarter, even in light of the raw material increases that we had. I think we are focused on continuing to drive value. I appreciate you all listening in and all the questions. Thanks and we will talk to you next quarter. Bye.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.