Balchem Corp (BCPC) 2011 Q3 法說會逐字稿

Greetings and welcome to the Balchem Corporation's third quarter 2011 earnings call. At this time, all participants are in a 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. Thank you. Mr. Fitzpatrick, you may begin.

Good morning, ladies and gentlemen. Thank you for joining our conference call this morning to discuss the results of Balchem Corporation for the period ending September 30, 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 statements. This release does contain or likely will contain forward-looking statements, which reflects 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 AM Eastern Time. I'll now turn the call over to Dino A. Rossi, our Chairman, President, and CEO.

Thanks, Frank. Good morning, ladies and gentlemen, and welcome to our conference call. We're pleased to report record third quarter net earnings of $10.8 million on consolidated sales of $74.4 million for the quarter ended September 30, 2011. These third quarter sales of $74.4 million were approximately 16.5% greater than the $63.9 million result of the prior-year comparable quarter.

Disciplined management of our business has enabled us to improve operating margins on a sequential basis and deliver strong profitability and cash flow. Double-digit revenue growth was achieved this quarter with the Animal Nutrition & Health segment up approximately 21% due to growth from our basic choline and industrial products which were up 20% and strong specialty ANH sales which were up 25.5%.

The ARC Specialty Products segment generated record quarterly sales of $12.2 million, a 12.8% improvement over the prior-year quarter, principally a result of increased sales volumes of packaged ethylene oxide in the quarter. The Food, Pharma & Nutrition business posted a 2.8% growth, resulting in quarterly sales of $11 million, with particular strength in the human-grade choline markets.

As previously noted, consolidated net income closed the quarter at $10.8 million, up from approximately $8.5 million in the prior-year quarter, on increase of approximately 27%. This record quarterly net income translated into diluted earnings per share of $0.36, a 24.1% increase from the $0.29 we posted in the comparable quarter of 2010.

Looking between the top and bottom line, you will see that our consolidated gross profits of $22.6 million were equal to 30.4% of sales in the quarter. This level, although a modest decline as a percentage of sales from the prior-year quarter, does reflect improved sales volume and plant efficiencies and is an improvement of 1.2 percentage points on a sequential basis.

We did, however, realize higher cost of certain key raw materials. These raw material increases, largely petroleum derivatives, particularly affected unfavorably our ANH and ARC Specialty Products segments. As mentioned in the last conference call, certain raw material costs continue to rise at a very swift pace in the quarter, with a few leveling out; and while some increases were passed on to customers, additional price increases have been and will be implemented in the fourth quarter 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 third quarter, but they were more than offset by the raw material cost increases, hence the slight decline in gross margin noted.

At the consolidated operating expense level, you will note expenses totaled $7.4 million for the quarter, which equaled 10% of sales versus the prior-year 11.3% level. This spending level reflects some increased expenses related to an increase of employee headcount, net of all expenses, and external R&D research. On a sequential basis, operating expenses were down approximately $260,000, due principally to lower consulting fees. We continued to leverage off of our existing infrastructure and exercised tight control over all controllable operating expenses.

Overall, it was another strong quarter. We again are particularly pleased with the results of our choline product line that generated strong margins, largely due to continued strong sales volumes, product mix, production, and logistic efficiencies.

Operating margin percentages remained strong for both FP&N and ARC Specialty Products segments. Consolidated earnings from operations finished at 20.4% of sales or $15.2 million for the quarter, up $2.1 million from the prior-year quarter. Other income of $63,000 relates principally to favorable fluctuations in foreign currency exchange rates between the US dollar, the reporting currency and functional foreign currencies.

Our effective income tax rates for the third quarter of '11 and '10 were 29.2% and 34.4% respectively. This decrease in our effective rate for the quarter was principally a result of favorable adjustments related to changes in state income tax apportionment and increases in certain tax credits. Our annualized effective income tax rate for all of 2011 is currently estimated to be approximately 32.3%.

Net income of $10.8 million translated to $0.36 per diluted common share or an increase of 24.1% over the comparative prior-year quarter, generating approximately $17.6 million of EBITDA in the quarter which translates into $0.58 per diluted share and when including our non-cash stock-based compensation charge, we generated $18.5 million of EBITDA in the quarter, equaling approximately 25% of sales.

At September 30, 2011, our outstanding borrowings were approximately $3.9 million, but zero, net of our cash balance of approximately $105 million. We continued to aggressively manage all areas of working capital, driving strong cash flow, which also results 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 Specialty Products and Food, Pharma & Nutrition segments.

Thanks, Dino. The ARC Specialty Products segment posted a record sales of approximately $12.2 million or a 12.8% increase over the prior-year comparable quarter. This increase was principally the result of strong sales of ethylene oxide for medical device sterilization and steadily improving sales of propylene oxide in support of our prior-year acquisition of Aberco, Inc., which targets nut meat and spice fumigation.

ARC's quarterly business earnings increased 5% to $4.7 million versus the prior-year comparable quarter. This increase is largely a direct correlation to the increased volumes sold of ethylene oxide products and, as previously reported, higher average selling prices on certain products. These increased selling prices were implemented to help offset key raw material cost increases. However, our results were still adversely impacted by additional cost increases. We continue to monitor raw material price escalations and seek to implement price increases within contractual guidelines.

The Food, Pharma & Nutrition segment realized a 3% sales increase to $11 million versus the prior-year comparable quarter. Business segment earnings of $3.2 million were up approximately 28% over the prior-year quarter. As stated in this morning's press release, we realized double-digit growth in sales of our human choline products for nutritional enhancement.

We continue to focus on building consumer awareness of the benefits of choline and recently, were rewarded three claims by EFSA in Europe. We continued to division choline with nutritional and pharmaceutical companies as an essential ingredient with excellent therapeutic benefits for all ages. Food sector sales, while shy of our prior-year results, did show sequential growth, with steady sales of encapsulated ingredients for baking, prepared food, preservation, and in particular the confection markets.

Switching over to the calcium product line, as previously reported, late in the fourth quarter of 2010, we did successfully close on the sale of this business line. We exited our leased facility at the end of the second quarter in 2011. Exiting this business did have an unfavorable impact on our sales growth in this segment; however did, as expected, nicely contribute to improved operating income for the FP&N segment in the quarter.

Our pharmaceutical delivery development efforts continue. In the quarter, we did not generate any R&D milestone payment; however, a licensee of our technology concluded a Phase III clinical trial utilizing our technology. We await the unblinding of this trial and are cautiously optimistic that the trial will yield good end results. In the near term, this sector remains a net expense to the business segment.

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

Thanks, Frank. In the Animal Nutrition & Health segment, we realized sales of $51.2 million, an increase of $8.8 million or 21% 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 solid dairy economics continued to generate greater demand for our products. These increases are principally a result of improved sales volumes of AMINOSHURE-L, our rumen-protected lysine; and REASHURE, our rumen-protected choline.

We continue to be pleased with the progress we have made with the new 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 stabilized over the past several months. However, we are monitoring this very closely, as higher feed prices pressure milk producer economics.

Despite rising feed prices, milk production continues to advance, as milk output is expected to rise 1.5% for all of 2011. In 2012, the US dairy herds are expected to decline slightly, with most of the contraction coming in the second half of the year. Improved milk production and output per cow is expected to more than offset this decline in the herd count.

As noted in our press release, our global feed-grade choline product sales were up 12.7% from the prior-year quarter, a very positive result considering feed grain prices. Data from USDA's Broiler Hatchery report, which tracks the number of broiler chicks placed, continues to forecast decreases for the fourth quarter, as poultry integrators had slowed the placement of chicks in an attempt to lower inventory levels and raise the meat prices enough to cover the large increases that have occurred in both feed and energy cost. The new US production estimate for 2012, however, is for a slight increase over 2011.

As previously reported, we do continue to evaluate export sales opportunities for the poultry market. Exports of liquid and dry choline from our North American plants did improve in the quarter, as we saw greater volumes sold internationally and in the coming quarters, we may elect to be more aggressive in seeking to win additional business, depending upon the then-current cost and market conditions.

Sales of industrial products and derivatives had another very strong quarter. Methylamines and other industrial products, including the total produced methylamine derivative from our Italian operations, specifically for Europe, continued strong despite the general poor economic climate in Europe. We again saw exceptional strong sales of choline derivative products being sold for various industrial applications in North America, especially for the gas fracking opportunities.

We continue to evaluate these growing industrial opportunities with other core technologies to determine how we can drive innovative solutions into this market and derive the most positive value. This strong performance has continued into the early part of the fourth quarter and we remain fairly confident that this trend will continue throughout 2011 and into 2012, driving increases in sales and profitability.

Earnings from operations for this entire segment improved to $7.3 million as compared to $6.1 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.

These key raw materials rose at a 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 fourth quarter, as our businesses are likely to remain affected by these higher costs for the balance of 2011 and into 2012.

The profitability of the ANH segment was achieved with a constant re-evaluation 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 models.

Last quarter, we announced our plans to expand production capabilities with the new encapsulation technology targeted to the ruminant animal market, which is focused on supporting our targeted markets with new and novel products to enhance our ability to better serve these markets. I am pleased to report that we have successfully completed this new process technology expansion and are now producing commercial saleable products.

This new manufacturing technology is expected to lower our overall cost for certain products, facilitate higher throughput in our encapsulation process, and reduce the production animal dosage cost to herd managers. With the bulk of the feed-grade choline predominantly going to the poultry and swine markets, we're very sensitive to continued economic pressures on the large production animal integrators. Feed ration costs have modestly corrected near term, but retail poultry prices remained low, keeping significant downward pressure on profitability for this global end market.

As noted previously, we continue to closely monitor raw material cost for all segments of our business. Where absolutely necessary, we implement cost pass-throughs as appropriate. As noted in previous calls, we continue to see a revenue roller coaster effect quarter to quarter in various products' own market sectors but 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 portfolio of products that we offer to markets we serve. Our business continues to create a 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 yielding improved financial results. Near term, we remain focused on implementing operational and logistic improvement, 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.

This now concludes the formal portion of the conference. At this point, I will open the conference call for all questions.

Thank you. We'll now be conducting a question-and-answer session. (Operator Instructions). One moment please while we poll for questions. Thank you. Daniel Rizzo, Sidoti & Company.

Hi, guys.

Hi, Dan.

Hi. In our last quarter, and I think in the past, raw material sourcing, particularly the AN&H segment have been somewhat of an issue. Is that still a concern, the pressure has alleviated somewhat, I mean not so much pricing, it's just getting enough raw material?

Yes, I think that, there is -- on and off, there's been a little bit of interruption, we've been able to manage around it. I think we're in a pretty good state right now and have been probably for the last couple of months. But there is still some tightness there and I'm going to say operating issues at some of the other, I must say, key drivers of those raw materials, but we've been able to manage around that pretty effectively.

Are you still looking at potentially doing a JV or an acquisition to kind of vertically integrate?

It's very difficult.

I'm not sure, Dan.

Well, I mean, I thought, maybe I'm wrong, that you were looking towards potentially forming a joint venture to get more raw material sourcing as that's still an option.

Yes, I'm sorry, yes, yes, yes. Definitely, yes, we're still exploring that option and I don't know that we're any further along at the moment, but certainly have had additional discussions to try and deal with that, and I must say, ease some of that on and off pressure.

Okay. And then, final question. In terms of potentially, I think the deal with those providing encapsulation products to Caremark. Is there any update on that?

Yes, not really. I think as we just said, they have concluded the clinical trials at this point and they -- Caremark are waiting for information or unblinding, if you will, of the results and the latest news is maybe to now expect that here in November.

Okay. I'm sorry, I didn't hear that part. Thank you, guys.

Sure.

Thank you. Greg Garner, Singular Research.

Thank you for taking my question. First of all, a very nice quarter.

Thank you.

A couple items. On the fracking product, are you finding -- I just want to get a sense for how you're seeing the industry maybe evolving as your revenues grow there, I mean -- or how your interaction with the industry is? Are you finding that you need to work more with customers to design formulations for the fracking process more and -- versus just selling it to someone who then works through that process?

Yes, I would say it's kind of the same for us. I mean we're supplying an ingredient into the space. I definitely believe that the industry themselves are constantly evaluating the frack fluid to, I mean would say, strive for more environmentally-friendly, but certainly still looking for that performance characteristic that they need. We have done some work to kind of try to come up with a new and improved product, and we'll continue to do that because I think the industry will always look for that. So we have the characteristics in the product that the industry is looking for. Will we come up with a better one, maybe, and so we'll continue to work along that path, but as it relates to actually formulating a frack fluid that -- we really are not there.

Okay. I'm just seeing that revenues there seem to be in that $13 million to $14 million range per quarter throughout the year. And yet, there was a commentary about how you expect that to grow from this level. Is that -- that's why I thought there might be more involvement with the end use there.

No. Yes, I think your numbers are spot on, but our -- with our participation in the actual frack fluid part of that in terms of formulating is still done by the larger operators of the well sites.

But you're still seeing there is an increasing demand in that to even increase from the current revenue run rate?

Of choline?

Yes.

Yes.

Yes.

Yes.

Okay. And on the new encapsulation product, would this essentially also be replacing AMINOSHURE or is it a new version of AMINOSHURE and REASHURE that would be -- ?

Yes, it's not a new version of REASHURE, but it is a new version of AMINOSHURE-L, which is the lysine product. So, yes, we had been derived -- we had been selling that product probably for -- I'm going to say, the better part of maybe not two years, 18 months, at least. And we've known that the price point was a bit high and that probably led to, I think, a desire on our part to come up with a better product, a cheaper product and that's what kind of led to the new and improved version that we've now pushed out there. And like I said, I think we've come into the sweet spot of where the product needs to be priced to see uptake in the market and that's what we're commenting on there.

So it's a good way to look at it that this could be a lower price point, making it more attractive and maintain the same margins.

Yes, and hopefully have broader market acceptability.

Yes.

Yes, okay.

Yes.

Yes, probably a good plan.

Yes.

In the raw material cost, I know they've been problematic here over the last few months, but with petroleum products or at least the price of oil relatively flat although it jumps around a bit, but relatively flat for a couple of quarters, is it appropriate to look at going forward that the petroleum derivative products that you work with, that the raw material pricing is probably not as much of an issue in the next couple of quarters versus what it has been given -- I guess, assuming also that oil prices stay in a range here that doesn't vary -- doesn't go up to $100 per barrel, but doesn't go down to $60 either?

Yes, I think that's a good observation. I think that what's over the last month, for sure -- and you could point to the fact that oil prices fell earlier in the quarter, and certainly they are bouncing back now, but it's become more an issue of, I'm going to say, tightness in the market, in terms of producing those oil-based derivatives, if you will.

Okay.

And so there definitely has been a snugness in the market and that's where, I would say, that industry has leveraged that to move prices up. And so we're subject to a bit of that right now. And so I think that that's probably -- that's just a general tightness, if you will; I'm not saying it's not available, but certainly it's gotten tighter; operating rates are much higher in those commodity-based industries and that's leading, I'm going to say, to some of the -- I'm going to say, tightness and price points that are staying either up, flat, not much of a decline, but certainly maybe stabilizing a little bit right now, but I don't see them backing off either.

Okay. Okay. In the Food, Pharma & Nutrition, the higher margins, is this -- I understand the calcium product being dropped, but also the encapsulated choline, is this a higher-margin product than it is contributing to the margins there?

Well, let me just say, there is some encapsulated choline sold in there, not a high volume. It's really just the core human-grade choline products that we're selling that generally are not encapsulated. But as a percentage, definitely growing higher-margin, leveraging the asset that we have on the ground to drive our cost position down with improved volumes and just seeing good uptake of -- I'm going to say, better uptake of that product into the human space. So that definitely is contributing as well as, I'm going to say, the elimination of the calcium loss.

Yes, okay. All right, thank you very much. Again, very nice quarter.

Thank you.

Thank you. Tim Ramey, D. A. Davidson.

Hi. Good morning, thanks. You mentioned feed-grade choline up 12.7% and it sounds like there was both volume and price growth. Would you care to kind of give us a breakdown of kind of what was price, what was volume there?

Frank, do you have that at this point?

You have to give me a couple of minutes to dig it out.

Yes. Frank will work on that. I think that definitely, what I would say though is that price was up a little bit following our model that we've explained a number of times in terms of passing through those raw material costs. And the other part is that we did see a good movement into the export space this past quarter as well. So -- but I'll let Frank dig those splits up, Tim, if you don't mind.

Indeed, on the exports, congratulations on being globally competitive. There is that -- is there anything really changing on that or was there any disruption from other suppliers or was it related at all to the strength of the dollar or I guess the strength of the dollar would probably hurt that.

Okay.

Not surprising, yes.

Yes. No, there was no disruption, at least not that we're aware of, I'm going to say on a global choline production scenario. We go in quoting our numbers and we pretty much kind of stick to the margins that we expect to get on the business. Sometimes, we win it; sometimes, we don't. But I would say that there were no extraordinary global issues there that kind of drove that to a higher level than not.

So I think if anything, maybe some raw material costs had gone up in other parts of the world and they could not be as competitive as they had maybe been in other quarters. But that's a little speculation on my part, but clearly our bid was accepted and we won the business. So that's probably as much insight as I could give on that.

Okay. And for both choline and the ARC Specialty business, I mean the growth rates do seem like they're in excess of the growth of kind of the end-market takeaway. I'm wondering if you suspect that there was any buying-ahead-of-price increases that benefited the 3Q?

Yes, no, that's a great question. I think, I mean clearly, the industry gets a pretty good advance notice here in terms of what's going on with our prices. If you were to study the volumes in particular on the poultry side, it's generally been what it's been domestically anyway. I don't think that the export guys respond to a price increase in advance like that, unless they've got an advance notice from some other competitor that -- and they thought ours was better. But I tend to not think that was probably the case.

But I think we did see just pretty consumption of the product. And even though, I think Frank earlier commented about too that bird placements were down a little bit in the quarter, but weights were up on birds and which still just says they're going to consume product maybe even a little bit more. But -- so it's up a little bit, that's nice domestically, certainly the export did pick up. But I would say that I don't really believe there was much up-tick, if you will, because of advanced buying on the price increase.

Okay, thanks.

And I can say that looking at October business right now as well.

Great. Thank you.

Yes. Okay.

Thank you. Lenny Dunn, Freedom Investors Corp.

Good morning, and another great quarter. I can't think of another investment that we have where we could almost do all the sleep because you guys do such a good job of managing the Company and both financially and reinventing your private clientage need to go along. So I wanted to congratulate you on that.

Thanks, Len.

I don't have any criticisms [using] constructive ones of the way you run the Company. I did mention on previous calls that -- and I've been criticized from this -- from other callers that if you want a quarterly dividend, you'd probably smooth out the stock performance a little more and I would still encourage you to do that. I think that it would work well for the stock performance. But the performance of your sales and earnings speaks for itself. So thank you, again, for the good work you're doing on that.

Okay. Thanks, Lenny.

Thank you. (Operator Instructions) [Daniel Williams, GIC Group].

Yes, I have a couple of questions for Mr. Rossi. First, there was a lot of positive feedback on the international market performance and so based on the strong area you folks are having, which new international markets are proving to be most growth attractive for the animal health and nutrition products, and the division as a whole? And what products do you think are best aligned to serve those markets that you're targeting internationally?

Well, I think that our product line in general should be attractive to any economy, quite honestly, based on our results. So I mean, clearly, we've had good experiences in South America; certainly Europe, Eastern Europe and parts of Asia in particular, I wouldn't say China, but parts of Asia; and so we're seeing uptake of the product, kind of I'm going to say across the board, not equally.

But I do think that the product line, in and of itself of the portfolio, it can be, should be attractive to every one of these countries. I can point to the fact that I think more and more poultry production is happening in South America, in particular Brazil, certainly Russia, let alone China. So those certainly are maybe a bit more attractive, if you will, just because we see production volume kicking up there.

On the dairy side, I think the more and more signs we get behind a good, quality product is opening more of those doors globally as well. There is dairy markets, if you will, in particular Europe or I would say, we still think there's a lot of headspace there where we probably haven't been as successful as we'd like to be. And actually, there's more dairy cows in Europe than there are in the United States. So that will continue to be a target for us.

So I don't know that I would rule out any of those good production animal markets, if you will. I think they're all logical markets for us to grow in. And if you look at our market penetration rate, still very low on the ANH specialties in particular for the ruminant animals. And again, with good signs behind our products, I think still yes. We talked the last quarter about 20% plus growth; this quarter, about 20% plus growth; we think that those are kind of numbers that we can continue to see going forward.

Thanks a lot for that question -- that answer. I appreciate that. Regarding [poultry] in Brazil --

Yes.

You noted earlier that the pace of acceptance, is that showing with European because some poultry from Brazil was kind of banned for the hormones? Is this change in its acceptance helping you in that market space?

I'm not real sure about the issue that you're pointing to in Brazil. I mean, I did hear a one moment that they were -- there were some challenges to taking birds out of Brazil. I'm not sure how big a deal that ended up being, but -- and I'm not even sure it was real to be sure in terms of the hormone issue. But, I mean, there is a lot of those challenges that come out from time to time that maybe have legs, maybe don't. But I would say that -- so yes, we're seeing -- and the stats are out there, good bird production in Brazil, good -- excellent exports out of Brazil. So maybe certain end countries are having issues there, but I think in general, they're still running very, very strong.

Okay. All right. Well, it's just some research that we've done that we noted they came up with some other products. What about the Asian market? You said China has not been that helpful for you. What Asian markets or -- and products are being -- are most successful to you? And what -- you're talking about very strong growth rates, what do you see going on in that sector of the world?

Yes, I mean, there is still very strong poultry production in Thailand, Vietnam, areas like that. China really, it's not -- there is a fair bit of choline produced in China today. I don't see us ever exporting into China for that, although that is definitely a growth market for poultry, projected to be around 10% a year. And so I think that the focus outside of China, if you will, for Asia is still very legitimate for us and so we're seeing good uptake there.

I think, still yet in the dairy side, we're not really doing much in that Asian market and I think it will improve. I think the Chinese dairy market will improve over time and that too ultimately will represent a good end market for us. Not there yet. We are only in China with one of our product lines today, happens to be our Chelated Minerals and -- which is actually predominantly for the dairy industry, but -- so the way for us to kind of sense what's going on in that space as we really kind of formulate, I'm going to say, our harder strategy for that market.

Would there be any possible JV opportunity on the raw materials side? Do they offer competitiveness in some of these international markets, do you think about?

On the raw materials side?

Yes. I think, at the beginning of the call, there was another question regarding a potential JV or acquisition to improve raw material sourcing and --?

Yes, well, whether it's to improve raw material sourcing or just general sourcing, if you will, I think that's a legitimate area to explore. I'd prefer probably not to say much more than that right now, but definitely, it's a possibility.

Well, thanks for all the questions and giving us time, I appreciate it.

You bet.

Thank you. [Tony Pollock], Maxim Group.

Good morning.

Good morning.

On the fracking -- choline for fracking, can you tell us what you did in the quarter and what's your capacity?

Tony, I'd rather not report the specifics of the volume that we move.

Okay.

From a capacity standpoint, we're in pretty good [straight] situation. I think you know, we did the expansion -- expansions, I should say, earlier this year. So we definitely have headspace there and so I'm pretty confident with our ability to continue to grow as it relates to the market activity there.

Okay. Could you -- you said the R&D was a net expense, could you quantify that?

Yes, one second, Tony. R&D expense in the quarter will be about $650,000.

Okay. Are they far along in terms of giving you actual revenue or is this early-stage R&D?

That's our entire quarterly number for our R&D programs [looking forward]. Now, that does not just pertain to any pharma efforts.

Okay.

I think, Frank's earlier comment was that it was a net expense as it related to that pharma effort.

Right. What was that number for the pharma effort?

It was probably $150,000 and we did not get any milestone payment.

Right. Now, is that for the Phase III drug or is that for other products?

Other products.

Okay. And could you, like I said, quantify that a little in terms of is that very early-stage R&D, or is it something that we could possibly see revenues in the next year from?

Yes, I think I would say definitely, it's early stage. I don't know that we're really close enough to getting to the point of a commercial product there that we're confident to predict yet. There is definitely some interest in some of these products being expressed by the market, which is leading to those efforts, but I think it's still yet early.

Okay. Could you go into the product for ripening of fruits, where that stands?

Yes, it continues to be a bit of a disappointment for us, Tony. We've continued to run the trials. There is still yet a challenge, if you will, of getting the product introduced into the space, and so it's a slow go at best right now. So I wish I had more exciting news to report there, but it just continues to be slow.

Okay. Could you give us the depreciation number, depreciation and amortization for the quarter?

Yes, one second, Tony. Depreciation was about $1.4 million; and amortization, about $1 million.

Okay. Great. Great quarter. Thank you.

Thank you.

[Brian Huffield], Santa Monica Partners.

Hi.

Hello.

Hi, there.

Hi. I just wonder several years ago when I was in your offices, I walked down the hall and into the room of, forget me for not remembering his name, your marketing fell with choline to the consumer products, the food industry and he had shelves filled with all kinds of bottles and jars and whatnot. And I just wonder why that room isn't -- what's the obstacle to getting choline into more food products?

Yes. Well, I think part of it is still yet having a lot of the structured function claims line down the ability to have good health data to reference, scientific data to reference and the -- really people thought we don't have full appreciation, but these three claims that we got from ASFA are things that we worked on that probably for two-plus years. And while we actually -- we applied for five, we only got three. So it's a very difficult process and clearly, it's a slow process.

So it's not for lack of trying, it's not for lack of believing. We think we're doing the right things in trying to get a good scientific data behind it, to get end companies wanting to use and claim that it's in there, but I think we're continuing to move down that path of trying to get more and more of that data, number one, treated and available, let alone approved; and that really is what -- why I think it's moving a little bit slower than we'd like to see. But definitely going in the right direction.

Thank you.

Yes. Thank you.

Thank you. There are no further questions at this time. I would now like to turn the floor back to management for closing comments.

Okay. I'd just like to say thanks, everybody, for attending the conference call. I do really believe it was a very good, strong quarter for us again and we look forward to talking to you at the end of next quarter. Thanks. Bye.

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