Balchem Corp (BCPC) 2011 Q1 法說會逐字稿

Greetings and welcome to the Balchem Corporation first-quarter 2011 earnings conference call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

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

Ladies and gentlemen, thank you for joining our conference call this morning to discuss the results of Balchem Corporation for the period ending March 31, 2011. 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-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.

I will now turn the call over to Dino A. Rossi, our Chairman, President, and CEO. Dino?

Thanks, Frank. Good morning, ladies and gentlemen, and welcome to our conference call. We are pleased to report record first-quarter net earnings of $8.9 million on record consolidated sales of $73 million for the quarter ended March 31.

First-quarter sales of $73 million were approximately 22% greater than the $60 million results of the prior-year comparable quarter. Disciplined management of our businesses enabled us to report solid, sustainable operating margins, and deliver strong profitability and cash flow. All three segments achieved double-digit revenue growth this quarter, with the Animal Nutrition and Health segment up almost 26%, due to the growth from our basic Choline and Industrial Products, which were up 25.8%, and strong Specialty Animal Nutrition and Health sales, which were up 26.3%.

The Food, Pharma and Nutrition business posted 10.7% growth, resulting in a record quarterly sales of $11 million, with particular strength again in the domestic food markets. The ARC Specialty Products segment generated quarterly sales of $11.3 million, a 16.8% improvement over the prior-year, principally a result of increases in sales volume of packaged ethylene oxide and propylene oxide in the quarter.

As previously noted, consolidated net income closed the quarter at $8.9 million, up from approximately $7 million in the prior-year quarter, or an increase of approximately 27%. This quarterly net income translated into diluted earnings per share of $0.30, [to] 25% increase from the $0.24 we posted in the comparable quarter of 2010.

You will also note that our consolidated gross profits of $20.8 million were equal to 28.5% of sales in the quarter. This level, although a slight decline as a percent of sales from the prior-year quarter, does reflect a $3.4 million improvement, driven by sales volumes, product mix, and plant efficiencies. We did, however, realize higher cost levels of certain key raw materials. These raw material increases, largely controlling derivatives, particularly affected unfavorably our ANH and ARC Specialty Products segments.

As mentioned in the last conference call, these raw material costs continue to rise at a very swift pace in the quarter. And while some were passed on to customers, additional price increases have been and will be implemented in the second quarter, where we are contractually able to do so, as our businesses are likely to remain affected by these higher costs for the balance of 2011. We continue to work on operational efficiencies, and did achieve improvements in the first quarter, but they were more than offset by the raw material cost increases, hence the slight decline noted.

At the consolidated operating expense level, you will note a $562,000 increase to $7.5 million for the quarter, which equaled 10.2% of sales versus the prior year, which was approximately 11.6% of sales. As noted in our press release, this spending level reflects some increased expenses related to an increase of employee headcount, other payroll-related expenses, consultancy fees, and new amortization expense related to the Aberco acquisition. We do, however, continue to leverage off of our existing infrastructure, and exercise tight control over all controllable operating expenses.

Overall, it was another strong quarter. We are particularly pleased with the results of our human food and choline product lines that again generated strong margins, largely due to continued strong sales volumes, product mix, production, and logistic efficiencies. Operating margin percentages also remains strong for both ANH and our Specialty Products segments. Consolidated earnings from operations finished at 18.2% of sales or $13.3 million for the quarter, as compared to 17.5% in the prior-year quarter.

Other income of $78,000 is principally related to favorable fluctuations in foreign currency exchange rates and interest income in the quarter. Net income of $8.9 million translated to $0.30 per diluted common share, or an increase of 25% over the comparative prior-year quarter, generating approximately $15.6 million of EBITDA in the quarter, which translates into $0.52 per share. And when including our non-cash stock-based compensation charge, we generated $16.6 million of EBITDA in the quarter, equaling approximately 23% of sales.

At December 31, our outstanding borrowings were approximately $5 million but $0 net of our cash balance of approximately $82 million. We continue to aggressively manage all areas of working capital, driving strong cash flow, which also resulted in improved earnings to generate even more accretive results from our core businesses.

In an effort to detail our consolidated results better for our shareholders, I'm now going to have Frank Fitzpatrick discuss the ARC and Food, Pharma and Nutrition segments.

The ARC Specialty Products segment posted sales of approximately $11.3 million, or a 17% increase over the prior-year comparable quarter. This increase was principally the result of strong sales of ethylene oxide for medical device sterilization, and increased volumes of propylene oxide in support of the recent acquisition of Aberco, Inc., which targets nut meat and spice fumigation. Excluding approximately $1.2 million of sales associated with the Aberco transaction, ARC quarterly sales would have been up 4.7% compared to the prior year.

ARC quarterly business earnings increased 32% to $4.4 million versus the prior year comparable quarter. This increase is largely a result of the aforementioned increase sales volume of propylene oxide and, as previously reported, higher average selling prices on certain propylene and ethylene oxide products to help offset key raw material cost increases. Our results were modestly adversely impacted by continued raw material cost increases. We continue to monitor raw material price escalation and will implement timely price increases within contractual guidelines.

We continue working on initiatives to broaden and build on the ARC business model, with particular application development work on the ERC fruit-ripening technology. As we have reported to you in previous quarters, we continue to be disappointed at the slow pace with which fruit producers and wholesalers are moving to this new technology. Trials with large fruit producers and wholesalers have continued to take place with positive results. We are working closely with the produce industry on this project, developing marketing and product launch strategies that should get result in notable commercial sales in 2011.

The Food, Pharma & Nutrition segment realized a 10.7% sales increase to a record $11 million versus the prior-year comparable quarter. Business segment earnings of $2.5 million were 26.8% greater than the prior-year quarter. As stated in this morning's press release, domestic and international food sector sales were up approximately 9% this quarter, as we again saw growth of encapsulated ingredients for baking, prepared food, preservation, and confection markets. We also realized double-digit growth in sales of our human choline and VITASHURE products for nutritional enhancement.

We continue to focus on building consumer awareness of the benefits of choline, hence choline inclusion in more foods such as Gerber baby food and fortified beverages. Subsequent to the quarter ending, we received three positive choline claims from the EU EFSA organization, focusing on structured function claims for maintenance of healthy liver function, lipid metabolism, and reduction in homocysteine levels. We continue to position choline with nutritional and pharmaceutical companies as an essential ingredient, with excellent therapeutic benefits for all ages.

Switching over to our calcium product line, late in the fourth quarter of 2010, we did successfully close on the sale of this business line, and we plan to exit our leased facility by the end of the second quarter in 2011. Exiting this business line and facility will result in improved operating income for the FP&N segment in 2011.

Our pharmaceutical drug delivery development efforts continue. In the quarter, we did not generate any R&D milestone payments. However, as previously reported, a licensee of our technology continues to conduct a Phase 3 clinical trial utilizing our technology. We are cautiously optimistic that these efforts will yield good end results, but in the near-term, this sector remains a net expense to the business segment.

I will now turn over the call to Mr. Rossi for him to discuss the Animal Nutrition & Health segment.

Thanks, Frank. In the Animal Nutrition & Health segment, we realized sales of $50.7 million, an increase of $10.4 million, or 26% as compared to the prior-year comparable quarter. Within this segment, Specialty ANH product sales realized 26% growth from the prior year comparable quarter, as sustainable dairy economics continue to create greater demand for our products.

These increases were principally a result of improved sales volumes of Aminoshure-L, our rumen-protected lysine. These improved sales were, however, partially offset by softness in sales of our chelated mineral products, principally into the international market. We continue to be pleased with the progress we have made with the Aminoshure-L launch, as more prospective customers trialing the product are realizing positive experiences. These overall increases clearly coincide with the dairy economy that has continued to do well over the past several months. However, we are monitoring this very closely as higher feed prices will surely pressure milk producer economics.

In addition, improving output for cows expected to maintain or boost milk production in 2011. The increased output per cow is expected to more than offset the targeted reduction of herd size this year, resulting in more milk, which may actually keep prices from rising much more in 2011.

As noted in our press release, our global feed-grade choline product sales were up 12.5% from the prior-year quarter. Exports of liquid and dry choline from all plants declined slightly due to global competition, which resulted in our declining to pursue certain international business in the quarter. We continue to evaluate these export sales opportunities, and in the coming quarters, may elect to be more aggressive in seeking to win this business, depending upon the then-current costs end market conditions.

Data from the USDA's broiler hatchery report, which tracks the number of broiler chicks placed and eggs set in North America, continues to point toward gains in 2011. The most recent forecasted improvements were decreased slightly, as poultry integrators have slowed the placement of chicks in an attempt to lower inventory levels and raise prices enough to cover the large increases that have occurred in both feed and energy costs.

We're also closely monitoring the unfortunate weather events that have occurred in the South. Government officials in Alabama, the number three chicken-producing state behind Arkansas and Georgia, said last Thursday that preliminary reports indicate about 200 poultry houses were destroyed and another 180 were damaged by the fierce storms. That alone is not enough to disrupt chicken supplies nationally; however, the disruption could have some minor impact on our sales volumes in the second quarter.

Sales of industrial derivatives had another very strong quarter. Sales of methylamines and other industrial products, including [a toll]-produced methylamine derivative from our Italian operation specifically for Europe, continued strong despite the poor economic climate in Europe. We again saw exceptionally strong sales of choline derivative products being sold for various industrial applications in North America.

We continue to evaluate these growing industrial opportunities to determine how we will derive the most positive value. This strong performance has continued into the early part of the second quarter, and we remain fairly confident that this upward trend will continue throughout 2011, driving increases in sales and profitability.

Earnings from operations for this entire segment improved to $6.4 million as compared to $5.2 million in the prior-year comparable quarter, largely due to improved volumes sold, product mix, and certain favorable production and logistic efficiencies. These earnings were, however, unfavorably impacted by increases in petrochemical commodities, used to manufacture choline, and some operating inefficiencies at one of our plants.

Key raw materials rose at a very swift pace in the quarter. And while some were passed on to customers, our pricing initiatives in the quarter were not enough to offset all of the cost increases. Additional price increases have been and will be implemented in the second quarter, where we are contractually able to do so, as our businesses are likely to remain affected by these higher costs for the balance of 2011.

The profitability of the ANH segment was achieved with a constant reevaluation of global raw material costs, product reformulation, currency review, and our ultimate ability to meet market needs from our various global facilities and transload sites. The opportunity to capitalize in this fashion is a direct result of our effective integration of acquisitions, growth strategies, and the ability to drive costs out of our business model.

Last quarter, we announced our plans to expand production capabilities of feed-grade choline and a new encapsulation technology targeted to the ruminant animal market. These investments are focused on supporting our targeted markets with new and novel products to enhance our ability to better serve these markets. I'm pleased to report that we have successfully completed the expansion of our feed-grade choline production facility in St. Gabriel, Louisiana, and are currently producing at the expected increased levels.

We are also pleased with the progress we have made with our new encapsulation technology, and expect to have this new asset online toward the end of the second quarter.

With the bulk of the feed-grade choline predominately going to the poultry and swine markets, we are very sensitive to the continued economic pressures on the large production animal integrators. Feed ration costs have corrected near-term, but retail poultry and swine prices remain low, keeping significant downward pressure of profitability for this global end market.

On the industrial growth, we closely track the rig count of the oil and gas industry, which continues strong, especially in support of the natural gas fraccing applications. We continue to closely monitor raw material costs for all segments of our business and implement cost pass-throughs as appropriate.

As noted in previous calls, we continue to see revenue growth, with some roller coaster effect quarter-to-quarter in the various products or markets sectors, but we are very pleased with this overall quarterly consolidated earnings result. We continue to strengthen our global growth platform, and are confident that more business will be generated based on the unique platform of products that we offer or soon will offer the markets we serve.

Our business portfolio continues to create good balance, yielding profitable growth opportunities through the various challenges of any single segment or product line. We continue to deliver solid revenue and operating income growth by staying focused on helping our customers save and make money in this tough economy, while maintaining our own operating discipline.

Overall, we continue to build the financial strength of the Company, managing the asset base aggressively, reducing debt and interest expense, which also assists in yielding improved financial results. Near-term, we remain focused on implementing operational and logistic improvements, new product development, and new product marketing. We also continue to explore alliances, acquisitions, and/or joint ventures to continue building and leveraging our technology and strong human asset base globally.

This now concludes the formal portion of the conference. At this point, I will open the conference call for questions. Kathleen, if you would.

(Operator Instructions). Greg Garner, Singular Research.

Very nice quarter, first of all. Just a few questions. In the ARC business, I know you've been disappointed with how the ERC fruit-ripening product has progress, but it was mentioned -- I think, Frank, you mentioned that you expect some sales in this year. So apparently there's some testing going on? Can you just give us some more color on that?

Yes, we do. And testing certainly has continued. I mean, that's all, again, part of the frustration because the testing has all been very positive -- just getting, I'm going to say, commercial adoption of the technology has just been slow. So we continue to support the effort here with that testing and continue to get good results.

Early this year, there was a banana shortage that took a little wind out of the sail in terms of guys even looking to convert it all; but even through that, we did some trials and that was all positive. So I still think that the banana shortage has not been totally resolved yet, but we expect that to happen here in Q2. And with that should mean, again, more bananas flowing and I think the need for additional treatment facilities, which is where our technology comes into play. So we're still optimistic that we will see some growth out of that yet this year.

As I remember that there was some kind of capital expenditure that the wholesalers or the fruit producers need to do to -- or change the way in which they're delivering it?

(multiple speakers) Yes. With our technology, in fact, it's capital expenditure avoidance. Yes, so instead of having to build new conditioning rooms, they effectively can use that ocean-going container as a temporary conditioning room, so they get to completely avoid that CapEx.

Okay. And the sales of the calcium line, it was mentioned that it would most likely have a positive impact on margins or Food, Pharma & Nutrition. Is there any quantification of that? Is it a couple of percentage points? Or is it just incremental amounts?

Well, I would say it's incremental -- well, it's probably a little bit more than incremental actually, because late last year -- or last year, we were bleeding with the business, which we had conveyed. And [ending] first quarter still yet as we transition out, probably a couple of hundred thousand dollars of [migot] we lost, which hopefully, by this time, the end of mid-next quarter, that's going to be behind us. So it will stop the bleeding, if you will, which will be more than incremental or a slight pickup so that we look forward to getting that squared away.

Okay. And the improvement in the animal choline side of things, is this partly due to the new facility -- the facility expansion that you're able to meet the demand? Or is it also in comments -- I mean, there was a lot of comments about how the poultry and the dairy markets are improving, but I'm just wondering on the supply side -- was that a factor here, too?

Well, from the supply side standpoint, Q1 was very tight for us. I just mentioned that we got the new capacity online, but that really just happened here starting in Q2. So we really didn't realize any of that availability, if you will, in Q1. We kind of worked our way through Q1 as aggressively as we could, managing our inventory.

And in fact, we did enhance even our Varona facility yield rates through this. So we picked up some additional tonnage from there as well. So it was just more a function of managing through a tight window. And in fact, yes, we did see some improved volumes in the poultry space in particular, probably more so than swine, including some decent export tonnage -- not all of the export that we could have chased, because some of those price scenarios were not so attractive. And so we didn't go after those, but certainly those that were, we did.

So with the tight supply, did that push prices up a little bit? I don't recall if you mentioned anything about pricing.

Yes, we really didn't. I mean, there was a modest price increase following our pricing model that was implemented a couple of years ago. That was more really directed towards passing on some of the raw material cost increases.

Okay. So there's no one-time events here that were unrepeatable. It sounds like its demand factors are improving there on the choline --?

Yes, they are. And I would say, I think that there's -- we've kind of moved into a little phase here of global snugness in that market, which is always beneficial, too.

What did you call it? Global what?

Snugness.

Snugness?

Nugness?

Oh, snug, okay.

Yes. And part of that has to do with some issues just coming out of China on a global note, the availability of product, the availability of raw materials that appear to us to slow their rates. So again, is that a one-off or not? I'm not so sure that it is. But certainly that played through as well.

Okay. And just about the choline used for fraccing, is there any particular lead-time for orders in that business? Or is it just pretty much a -- we need it next week, and you deliver?

I wish we could get a week.

Oh, really?

It's usually the call today, we need it tomorrow. Yes.

And are you getting any feedback as to that they like the way it works in certain formations relative to competitive potential products?

Yes -- well, clearly, I mean, the volumes of the product continues to grow and all the intelligence is that it works well from a straight-up replacement standpoint. Clearly, our price point remains very competitive. And we think that the market will continue to grow. And so that's all very positive news coming out of that space.

Yes. I remember you mentioned before that you really didn't have any sales people there. Is this something that could grow even more with salespeople? Or have you perhaps put a salesperson on that or --?

Yes, we have put a sales -- I'm going to say, business development person on that now, working out of Houston. And certainly, most of the key customers, if you will, are headquartered in Texas for sure. And whether it's the customer or, I'm going to say, maybe a larger group of people that work in this space that influence what products are used in the fraccing application, we're kind of working both ends of that now.

Okay. All right, thank you. Again, very nice quarter.

Tim Ramey, D.A. Davidson.

You made the comment on two of the segments regarding input costs and the ability to pass on pricing within contractual agreements and guidelines. Can you give us some sense as to what extent you will be able to pass on pricing of petrochemicals? What portion of those sales would be more spot-based and what would be more contractually priced?

Yes, well, most of our customers are under contract with us, whether it's in the Animal Health space and/or in the ARC Specialty Products business. And while they have different models, if you will, we do have the ability to pass on raw material costs. It's probably the limiting factor is the timeliness of that. Some are as little as a month, where they get their protection, and then on the extreme, then it's probably a quarter.

So we have a model/methodology there that will give us protection. And the key is as raw materials move up, we tend to lag a quarter before we're able to catch up. I talked about the quick escalation, if you will, in the petrochemicals that's taken place here and continues to take place. So we're kind of on that upward trend. So we're trailing a little bit, always on the catch-up. So that's just kind of the dynamic that we're in right now with that.

But in general, we have the ability to pass that on with, I'd like to say, up to a quarter lag, if you will, but the definite ability to pass that on into the market.

Do any of the contracts have, like, a force majeure clause so that if you had a serious run-up, you could take more immediate action? Or it just goes up in the leg?

Well, when you say force majeure, I guess, are you drifting to economic force majeure or --?

Yes. Sort of like, let's say, natural gas prices went up dramatically or petrochemical prices went up --

You know, my -- probably my gut would say unless we're actually bleeding and losing money, which has happened to some of our customers over time, I think we'd be probably in a difficult state to declare economic force majeure. And I'm not sure it would be appreciated by the customer base.

So I think we would look at it -- I mean, as all of our clauses -- all of our contracts have force majeure clauses in there. So I think the clauses there -- whether or not we would execute on an economic force majeure, probably a different question. And I would say my gut check is we would be very reluctant to do that.

Okay. The ethylene oxide based business, ex-acquisition, it's really grown very nicely. And maybe more than I thought it would, just given the end market growth. Do you have any sense of why the growth has been more like mid-single digits rather than low-single digits?

Yes. I -- well, certainly, I think that we have seen additional consumption of ethylene oxide into the space. Our sense is that the number of operations actually are ticking up. The other part is the small canister part of the business seems to be growing very, very nicely. And that's because a couple of customers that we serve there are really growing their international sales, which is kind of a new thing for us, because our core EO business typically has been North American-based.

But with the small canisters, it's a product that can be shipped globally and has continued to grow very nicely. And I would say probably outside of the zone of what we had expected and maybe even what our customers expected. But that's been a real nice uptick here too, early this year. And conversations with those customers are they expect that to continue. So just a nice uptick year-over-year for sure and certainly in excess of what we thought.

Okay. And just a final one on uses of cash. Your cash balance continues to grow, and I know you've talked about acquisition strategies in the past and have a history of doing acquisitions. How does the field look right now? Target rich? Target neutral? Is it likely we'll get another deal done in 2011?

Well, I think it's -- I still think it's target-rich. (laughter) If you go to the M&A industry in general, it's very target rich and also very target expensive. It's growing a lot as a lot of the, I think, cash that's on the sidelines is looking for a home right now.

But our view right now is that we have a couple of projects that we have continued to work on, that we think for sure we will come to a conclusion on at least one this year. And we're working on that pretty aggressively right now; early due diligence and with the expectation of getting that transaction completed this year.

But I also learned a long time ago it's never done until it's done. So -- but we are -- we view that it's a kind of transaction that fits with us very neatly strategically and one that we want. So unless we really find something that says this is not right for a number of wrong reasons, I think we'll get one, at least one done this year.

Thank you and congrats.

Lawrence Goldstein, Santa Monica Partners.

On fraccing -- how much of the $50 million was due to fraccing choline sales?

Frank is rooting for that number right now.

Okay. And you did say it was growing. And if I recall right, you were going at a $40 million annual rate -- or did $40 million last year?

That was an annual run rate.

Annual run rate. Okay. (multiple speakers)

Right, yes. So (multiple speakers) --

You said it's growing, so --?

Yes. And certainly, I think it has continued to grow. And Frank is close to having the number here.

Okay. But let me turn to a subject not touched. I'd like -- the royalty arrangement you have with Curemark, does that extend to any product they -- all products they make, they will make?

Well, not necessarily. I think we have a relationship certainly that's there that's based on the technology, could definitely lead to working with them on additional products that I know they have in their pipeline.

So I would say that the technology in and of itself is likely going to continue to play in products that they're looking to develop. At least, what we know today. But we have no agreement that says they're exclusive to us on future products. But certainly, I think it's been a good relationship so far and I'd like to think that the opportunity will be there going forward.

Is the royalty arrangement one that increases in percentage as the volume goes up?

To be honest, there's like a tier scenario here, Larry, and actually, as the volume gets significantly larger, that percentage goes down. So the higher percentages are still yet at the lower level but the tranches are pretty consistent.

So do they begin at good double digits and they go down to single-digit royalties? (multiple speakers) That would be the reverse of what's normal in the drug industry.

Well, we're not in the double-digit scenario. We're in the singles. But certainly, I think it's more heavily weighted to, I'm going to say, the early levels of sales. And I think there's still a question on how large it could be. So we structured it by design to be -- I'm going to say, heavier on the front.

And are you able to if they -- supposing they develop sales of $50 million, $100 million, $500 million, $1 billion over one, two, three-year kind of thing. Are you able to make a manufacturing profit on the order of 100% of what you sell them?

On manufacturing processes?

Yes, if there's some -- if they sell $1 billion worth, or $500 million worth or whatever, and the pharm product that you're making cost 10% of that to them, does that mean it cost you half? Do you make 100% profit?

Not on the manufacturing side. At least that we have out there today. I mean, we do make a profit, but not 100%. So (multiple speakers) --

Is your understanding the same as mine, that a normal pharmaceutical product is priced to the market at about 10 times the cost, and so the division between manufacturing profit and profit because of the uniqueness of the deal being the two-part makeup of the manufacturing profit is going to be smaller.

Well, certainly, the manufacturing profit will be smaller. I can't confirm (multiple speakers) --

Can you comment on -- my understanding is the normal markup would be ten-fold.

Yes. I don't know if that's true or not, Larry. What I do know is they have had a number of conversations about what it cost to deal and treat with autism today, and that likely will be -- will have some influence on what the price is versus the standard 10-to-1 scenario that you just suggested.

Okay. Going back to choline, so what percentage of the domestic market do you have now? And you commented abroad, Chinese competition, that you weren't willing to meet. What percentage of the international market, I mean?

So are you asking on a global note?

Yes, domestically and global, what are the two market shares that you believe you have today?

Okay. On the Animal Health side, I think that we're solidly in North America in the 90-plus percent range. On a global note, we're probably closer to a maybe 25% or 26% range. So obviously, a lot less, if you will, outside of North America.

No -- so has that changed? It sounds like the same numbers you've been saying (multiple speakers) --?

Yes, I think it's ballpark the same numbers. I think we, in the quarter, did we pick up a little bit more in that zone? The answer's yes. Is it enough to move the grand scheme of things by a percentage point? Maybe, but that would be it, max.

I didn't ask the right question. You commented that the Chinese competition you didn't choose to meet.

Yes.

So what's impacting you, the market, because of that? What's the impact -- what does that mean? You (multiple speakers) --

Well, yes. I mean, we've passed on aggressively going after some business because the prices were low and we just didn't find it attractive, so we steered away from it. And a lot of that business ends up being bid business rather than contract business. So it will come up again next quarter for bid. And if the pricing scenario changes and it's attractive, then we'll be interested in it.

All right. And what about the human choline markets? What's your shares?

Well, again, remember it's a lot smaller market today on a global note. And globally, we probably have about 50% market share. They are not anywhere near the number of producers in this space today.

We feel like we continue to make good progress. Certainly, Frank talked in his earlier presentation here about the double-digit growth that took place in choline year-over-year. We continue to see good uptake of the product. And certainly, he mentioned the EFSA ruling that came out in favor of three claims that choline -- that's a bit of a breakthrough for sure; because I think a total of perhaps close to 80 claims that were submitted -- these are not just for choline -- but of 80 that were submitted to EFSA, which is an EU ruling agency, our understanding is that maybe 10 made it through. And we had three of those, so.

You mean 80 claims of all kinds, 10 claims of all kinds made it through. And three related to choline?

Correct.

And what about North America?

On choline?

Yes, you said (multiple speakers) --

Yes. I mean, we continue to have good uptake of the product whether it's supplements and/or into the -- we're trying to get more aggressive moving it into the food and mainline food industry.

So what share of North American sales do you account for?

Yes, North American sales would probably have a solid 90%. We are the only domestic producer of human grade choline. So we've carved out a pretty nice space there. And there's a little bit of import material coming in, certainly not very much.

And that's all Chinese?

Not all. There's a little bit that comes out of Europe as well. And actually, I would say there's very little, if any, human-grade choline coming into the United States. I would venture to say there's none.

I see. And going back to the pricing. So you had some lag in the last three months, now you've implemented price increases, so it will have some above lag -- more than make up in this quarter?

Well, it depends what happens in the quarter, from (multiple speakers) --

At this point. At this point, how does it look?

Well, at this point here, we are -- and through the end of April now, we have seen additional increases, which is just what's going on in the petroleum industry right now. So we have, in fact, as you so note, we pushed through price increases beginning Q2. But right now, we've seen them look to be stepping up again in April. May, at least looks to be steady if not up again, and likely into June, so.

So the outlook is prices keep advancing, you with a lag increase, and not until prices stop escalating and flatten or go down, do the lag stop. And then it becomes beneficial to widening margins for Balchem.

Correct.

Okay. Thank you.

Lenny Dunn, Freedom Investors, Incorporated.

Not just a good quarter, but a good 20 years. You guys have been about the best-managed company that I've observed. And you seem to adjust to whatever you need to adjust to; you run the Company beautifully. Unlike some of the previous callers, I don't question how you're making adjustments because you seem to know how to do it. And the proof over the last 20 years speaks for itself.

The only question I have is not how you run the business, because you guys know what you're doing; but why not go to a quarterly dividend policy? I mean, this Company has become fairly large now and certainly could sustain a quarterly dividend policy.

Well, Lenny, we've had a lot of discussion about changing our dividend policy. And as you know, I mean, we don't hide it, it's no secret, we don't pay a huge dividend, even on an annual basis. And the thought process certainly to date has been to take that cash and drive it back into the business to drive more growth. And that certainly is where we're focused right now.

Could we deviate from that? The answer is yes. Is that the thought process right now? The answer is no. So I hear what you're saying, that may be something to consider. I think it will always be on the radar screen for us. And it gets, I'd say, gets looked at every year by us. But based on some things that we have in the works, our idea is certainly to kind of keep all of our ammo available, if you will, to be able to opportunistically take advantage of those growth opportunities that are likely going to require financing of some type.

Oh, now, I'm not asking you to pay a substantial dividend or a substantial percentage of earnings out, but even if you're paying approximately what you're paying now and did it on a quarterly basis, I understand it's slightly more expensive to do so, but it tends to keep the shareholders in long-term. So it's just, I think, generally a good policy. And I can't see it having a major effect on your ability to make acquisitions.

Well, I hear what you're saying. I don't know that I can sit here and argue with you a whole lot right now. And I'll just say we'll always keep it in consideration.

Okay. That's all I'm asking you to give some serious consideration of that. But keep running the business the way you're running it. It's appreciated.

Okay, thanks.

(Operator Instructions). Tony Polak, Maxim Group.

Could you give us an idea of the expected capacity of the new choline plant and to what market that will be marketed to?

Well, the expected capacity is probably at a round-about 30 million pounds a year additional. And certainly, I think we're looking at the gas fraccing market as a key market that was supporting, I'm going to say, the investment ROI analysis that we've done. However, the poultry market still also more geared to the international space, for sure, could just as easily be a home.

So, depending on how things develop, Tony, we feel like we're in a position where we can neatly go one way or the other. So we'll basically look to maximize the return on that asset. So, depending on what end market, I almost don't care, because I think that they're both very legitimate and potentially growth markets. And I say growth on the animal side fully understanding that would be international.

Right. What is 30 million pounds in dollar volume?

Probably somewhere between $15 million and $20 million.

Has Curemark given you any timetable on what their hope is to get approval of their product?

Our understanding is that their clinical is supposed to be complete at the end of June. And they have told me that they hope to have results back from the FDA by the end of July. That's really as much as I know.

Okay. Do you have any knowledge that I wouldn't have in terms of the timetable, if the FDA get back to them by the end of July? I mean, what happens after that?

Well, they would look to file an NDA, which requires a few more things in between. I think their intent certainly would be to file that NDA, I'm going to say, in that September to December time-frame, and move through validation issues and whatnot, targeting perhaps to be commercial -- again, this is all subject to approval -- probably around June/July of next year.

Okay. And you wouldn't have any problem producing very significant quantities of it to get approved?

No.

Okay. Anything new on the choline using as a salt substitute?

We've picked up a few small accounts, continuing to work it, not only choline as a salt substitute, but also other sodium-reduction efforts based on our encap technology.

So we're keeping it out there in front of people, getting, I'm going to say, the food scientists more information and understanding about how to use it. Sometimes what you run into is taste differences between straight-up salt and choline as a salt substitute has a slightly different flavor profile. So those are issues that with each one of these efforts, you have to go through full sensory boards and whatnot to make sure that the product does taste good and similar, if you will, to what they have today that weighs in heavily on the marketing decision.

Sure. Can you give us an idea of what type of products it presently is on?

It's in some -- it might surprise you -- some bagels that are out there in grocery stores; very good brand name bagels. And you won't find it on the label, I will tell you that too, but we know it's in there. And some snack foods, as well.

Did you answer Larry's question on what the run rate is?

Yes. Frank?

Yes, we did about $14 million in the quarter.

Okay. Great quarter. Thanks.

Thank you. We have a follow-up question or comment from Lawrence Goldstein of Santa Monica Partners.

Less this turn into a referendum, I just would like to offset that gentleman who wants a dividend quarterly.

First of all, it would cost four times as much to pay it; secondly, nobody in their right mind is going to invest in this Company to make a 0.38% annual yield; third, the day you pay a significant dividend is the day the Company stops growing. The money, as you indicated, is much better used to be reinvested in the business or making acquisitions. And I would feel much better if you never raised the dividend again and you just kept growing. So please take that from a long-term shareholder of over 20 years.

And lastly, as long as we're at it, please don't split the stock. Let's keep the riff-raff out of the stock, have more sophisticated, more professional, more long-term-minded investors in, that's what happened when you have high unit-priced stock. And I hope you never forget it.

Okay. Thanks, Larry.

Thank you, gentlemen. I'm showing no further questions in queue at this time.

Okay. I'll just say thanks, everybody, for attending the call, and appreciate all the input and the support. And we look forward to the conference call in another quarter. Talk to you then. Thanks. Bye.

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