Balchem Corp (BCPC) 2012 Q1 法說會逐字稿

Greetings, and welcome to the Balchem Corporation first quarter 2012 earnings conference call. (Operator instructions.)

As a reminder, ladies and gentlemen, this conference is being recorded.

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

Thank you. 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, 2012. My name is Frank Fitzpatrick, CFO, 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.

30 a.m. Eastern Time. I will now turn the call over to Dino Rossi, our Chairman, President and CEO.

Thanks, Frank. Good morning, ladies and gentlemen, and welcome to our conference call. We are pleased to report first quarter net earnings of $9.3 million on record consolidated sales of $76.2 million for the quarter ended March 31, 2012. These first quarter sales of $76.2 million were approximately 4.4% greater than the $73 million result of the prior year comparable quarter and a 9.3% increase sequentially from Q4 of 2011.

In the quarter, our specialty product segment generated quarterly sales of $12.3 million, an 8.5% improvement over the prior year quarter, principally a result of increased sales volumes of packaged ethylene oxide and propylene oxide in the quarter. Animal nutrition and health, at $53.2 million, set a new quarterly record, up 5% over the prior year comparable quarter as we realized another very strong quarter for our ANH ruminant sales, which were up 30%. This strong performance was partially offset by lower sales of our basic choline and industrial products, which were down approximately 1% in the quarter but up 10% sequentially.

Food, pharma and nutrition, at $10.7 million, closed off approximately 2.7%. More strength in the human grade choline product, which was up 26.5%, was offset by low quarterly sales of encapsulated products sold into the food markets. This revenue result also reflects a $216,000 decline in the calcium product line, or 2% of the 2.7% decline which was sold late in 2010.

As previously noted, consolidated net income closed the quarter at $9.3 million, up from approximately $8.9 million in the prior year quarter, for an increase of approximately 4%. This quarterly net income translated into a dilutive EPS of $0.31, a new first quarter record, as compared to the $0.30 we posted in the comparable quarter of 2011.

Looking between the top and bottom line, you will see that our consolidated gross profit of $21.2 million were equal to 27.8% of sales in the quarter. This level, although a modest decline as a percent of sales from the prior year quarter, does reflect gross margin improvement in the food, pharma, and nutrition segment. These improvements were, however, offset by lower gross margins in our ARC specialty products and animal, nutrition and health segments, principally a result of higher costs of certain key raw materials.

These raw material increases, largely petroleum derivatives, particularly affected unfavorably our ANH choline sales. As mentioned in the last conference call, certain raw material costs continued to rise in the quarter, with a few leveling out. And while some increases were passed onto the customers, additional cost increases have been realized. And our current view is that our businesses are likely to remain affected by these higher costs in 2012.

We continue to work on operational efficiencies. However, they were more than offset by the noted raw material cost increases, hence the slight decline in gross margin noted.

At the consolidated operating expense level, you will note expenses totaling $7.5 million for the quarter, which equaled 9.8% of sales versus the same spend in the prior year, but at the 10.2% level. This spending level reflects normalized levels as we continue to leverage off of our existing SG&A infrastructure and exercise tight control over all controllable operating expenses.

Overall, it was a solid bottom-line quarter, especially considering the escalation of raw material costs. Consolidated earnings from operations percentages remain strong and finished at 17.9% of sales, or $13.7 million for the quarter. Our effective income tax rates for the first quarters of 2012 and '11 were 32.3% and 33.4% 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.

Our annualized effective income tax rate for all of 2012 is currently estimated to be approximately 32.5%. Net income of $9.3 million translated to $0.31 per diluted common share, which is 3.3% ahead of the comparative prior year quarter. These results generated approximately $16.1 million of EBITDA in the quarter, which translates into $0.53 per diluted share. And when including our non-cash stock-based compensation charge, we generated $17 million of EBITDA in the quarter, equaling approximately 22% of sales.

At March 31, 2012, our outstanding borrows were approximately $1.2 million, but zero net of our cash balance of approximately $121 million. We continue to aggressively manage all areas of working capital, driving strong cash flow, improving cash earnings, and generating quality organic 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 product and food, pharma, nutrition segments.

Thank you, Dino. The ARC specialty product segment posted sales of approximately $12.3 million, or an 8.5% 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 for nut fumigation.

ARC quarterly business earnings increased 8.1% to $4.7 million versus the prior year comparable quarter. This increase is largely a direct correlation to the improved sales result of propylene oxide, increased volumes sold of ethylene oxide product, and, as previously reported, higher average selling prices on certain products. Increased selling prices were implemented to help offset key raw material cost increases. However, our results were, again, adversely impacted by additional cost increases. We continue to monitor raw material price escalations and seek to implement price increases within contractual guidelines.

For the quarter, the food, pharma, and nutrition segment realized a 2.7% sales decline to $10.7 million from the prior year comparable quarter. Business segment earnings of $2.7 million were, however, up approximately 7.8% 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, positioning choline with nutritional and pharmaceutical companies as an essential ingredient with excellent therapeutic benefits for all ages, and are now effectively utilizing the three structured function claims awarded to Balchem by [EPSA] in Europe.

Food sector sales did have a slower quarter as compared to a very strong 2010 first quarter. As in the past, results for this segment continue to reflect the roller coaster effect of pipeline fills, inventory level management, and delayed marketing initiatives. Our growth drivers do, however, remain intact for this sector, and food did show modest growth on a sequential basis. Overall, we expect continued revenue and earnings growth year-over-year in 2012.

Switching briefly 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 line had an unfavorable impact on our sales level in this segment for the quarter. However, it did, as expected, nicely contribute to improved operating income for the FPN segment in the quarter.

Our pharmaceutical delivery development efforts continue. In the quarter, we did not generate any R&D milestone payments. However, with the licensee of our technology concluding a phase III clinical trial, we await the unblinding of this trial and are working with them in support of their NDA filing. In the near-term, this sector remains a net expense to the business segment.

I'll now turn the call over to Dino for him to discuss the animal nutrition and health segment.

Thanks, Frank. In the ANH segment, we realized sales of $53.2 million, an increase of $2.5 million, or 5% as compared to the prior year comparable quarter. Within this segment, ANH ruminant product sales realized 30% growth from the prior year comparable quarter as excellent product performance and dairy economics continued to support greater demand for our products. These increases are principally a result of improved volumes of AminoShure-L and -M, our protected -- our rumin-protected amino acid, and ReaSure, our rumin-protected choline.

We continue to be pleased with the progress we have made on the new AminoShure launches, as more prospective customers trialing the product are also experiencing positive results. These overall increases clearly coincide with a dairy economy that has remained stable. However, we continue monitoring this very closely as potentially higher feed prices could pressure milk producer economics. Despite rising feed prices, milk production continues to advance as milk output is expected to rise again in 2012, now also in support of milk powder exports to China.

US dairy herds are also expected to decline slightly, with most of the contraction coming in the second half of the year, but improved milk production and output per cow are expected to more than offset this decline in the herd count. To support this growth, plans for a new manufacturing facility in Allegheny County, Virginia, were recently announced. The planned expansion will more than double output capacity for the AminoShure product, leveraging off of our new, innovative encapsulation technology. The Virginia plant expansion is scheduled to be commissioned later this fall.

As noted in our press release, our global feed grade choline product sales were down 4.9% from the prior year comparable quarter. Volumes sold in these markets are strongly influenced by the dynamics of our customer base, predominantly the poultry production industry. As previously reported, data from USDA broiler statistics projected that broiler chick placements and egg sets would be lower for the first quarter due to continued higher grain prices, along with only minor improvements in the domestic economy. And we did anticipate lower volumes as a result of this.

The current 2012 USDA forecast for broiler meat production is 1.7% lower than in 2011, representing a slight improvement from the prior forecast. We continue to evaluate export sales opportunity for the poultry market, but found Q1 to present a very challenging export market, combining raw material cost increases and foreign competitor activities.

Exports of liquid and dry choline from all of our plants declined slightly due to the high (inaudible) level of global competition. In the coming quarters, we may elect to be more aggressive in seeking to win additional business depending on the then-current cost and market conditions. Sales of industrial products and derivatives rebounded this quarter, improving 7.5% over the prior year comparable quarter, and, on a sequential basis, improved 38%.

The sequential improvement came from sales of methylamines, derivatives, and choline for industrial applications, including gas fracking, where slightly lower average selling prices in this first quarter were more than offset by improved volumes sold. We continue to see solid sales of choline derivative products for various industrial applications in North America, especially for the gas fracking opportunities here in the early part of the second quarter, and we remain fairly confident that these products will continue to show strength in 2012, driving increases in sales and profitability.

We will continue to evaluate these industrial opportunities with other core technology to determine how we can drive innovative solutions into this market and derive the most positive value.

Earnings from operations for this entire segment were $6.2 million as compared to $6.4 million in the prior year comparable quarter. These earnings were unfavorably impacted by increases in petrochemical commodities used to manufacture choline. These key raw materials rose 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, and our businesses are likely to remain affected by the higher costs for the balance of 2012.

The profitability of the ANH segment continues to be achieved with a constant re-evaluation of global raw material cost, product reformulations, currency review, and the ultimate ability to meet market needs from our various global facilities and trans-load sites. The opportunity to capitalize in this fashion is a direct result of our effective integration of acquisitions, growth strategy, and the ability to drive cost out of our business model.

In July last year, we announced the beginning of commercial production of a new encapsulation technology targeted to growth opportunities in the ruminant animal market. I'm extremely pleased with the rate of uptake these products have had in the marketplace and am confident they will continue to drive incremental sales growth for us. Our investment in a new plant facility announced earlier this week will provide Balchem with world-class manufacturing capabilities that will allow us to match the rapidly growing demand for these products and the technology in the animal nutrition and health industry.

With the bulk of feed-grade choline predominantly going [through] the poultry and swine markets, we are very sensitive to continued economic pressures on the large production animal integrators. Feed ration costs have modestly corrected, near-term, and retail poultry prices have stabilized, keeping pressure on profitability for this global end market. As noted in previous calls, we at times see a revenue roller coaster effect quarter to quarter in the various products or market sectors. We remain committed to growth as we look to continually expand our product offerings and move into new geographies. We will 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 good balance, yielding profitable growth opportunities for the various market challenges of any single segment or product line. We remain focused on helping our customers generate reinvestment-level returns, making money in this tough economy while maintaining our own operating discipline. Overall, we continue to build the financial strength of the Company, managing the working capital base aggressively and yielding improved financial results. Near-term, we remain focused on implementing operational and logistic improvements, new product development, and new product introductions. We also continue to explore alliances, acquisitions, and-or joint ventures to continue building and leveraging our technology and strong union asset base.

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

Thank you, gentlemen. (Operator instructions.)

Daniel Rizzo of Sidoti & Company.

Hi, guys.

Hi, Dan.

I think you said -- and forgive me if I missed it, but I think what you said last quarter was there was an increase in foreign competition in the choline industry. Has that gone away?

It has not gone away. I think I did reference that in the last quarter. I think, if you'll recall correctly, too, we talked about reducing some pricing, and we did do that. And with that, we've clearly seen some return of the volume that had been displaced to some of that foreign competition.

Do you think -- I'm sorry.

That's all.

No, do you think, with the reduction in pricing, that -- I mean, is it going to be -- will it be exiting the industry soon, I mean do you think, or do you not know?

Hey, Dan, could you repeat that one?

Well, you've reduced prices, and that's increased your volumes. But now, with the lower prices, does it make it that less profitable for the foreign competitors to the extent where they'll leave?

Well, I don't know about leave, but I think it makes it certainly a lot more tighter. I talked before about pricing philosophies and business models and at moments I said not sustainable, and I think I was right. And I don't know that they'll ever go away, to be honest with you, but I do think that, all things being equal, if we're very competitive with, I think you're going to find a North American market that would just as soon do business with us.

Okay. And then, just switching gears a little bit, with everything that's going well with the dairy end market, is there any effect at all by reports of mad cow disease in California having like weakened demand, or just having a negative effect on demand for your products?

No. I mean, we saw that report. I think it was really quite a narrow incident, if you will, but certainly no impact at all.

But if it were to spread, would it be -- have an impact, or is it just -- I mean, is that a concern, mad cow disease?

I think it's -- mad cow disease has been out there for a number of years, quite honestly. And I won't say that it's rampant out there at all. Don't let me mislead. But clearly, if it were to take off in a large way, would it have an impact? Absolutely. But I don't think that that's going to happen, either.,

Okay. All right. Thanks, guys.

Thank you.

Greg Garner of Singular Research.

Hello, gentlemen.

Hi, Greg.

Hi. Couple questions. On the industrial choline, how it's bounced back so strongly, can you give us any flavor as to why? Is there new regions, new applications, new formulations, or is it just new customers? Is there any insight into what's driving that? Well, sequentially, as I recall, the fourth quarter had some issues with it. But separate from that, it just seems like it's a very strong rebound.

Yes. I think that in fact, as is -- just in the question in here before, the price reduction I think has played through, and we've alluded to the fact that the volume's really rebounded very nicely, playing right back into kind of what we saw happening in Q4, and perhaps even levels that were pretty consistent throughout the balance of last year.

So I think the price correction was a right move. I think it's kind of -- we've managed to leverage that and re-establish our position in this North American market. And I think that's what you're seeing playing through here in Q1. I think in no uncertain terms, if you're follow-on gas fracking, you know that there's certainly been some curtailing on the gas side of things, natural gas side of things, because -- for a lot of reasons out there, including cheap natural gas, which, interestingly enough, is not rippling through the petrochemical industry yet. But that clearly is causing shift in where they're drilling from gas to oil because of the barrel price.

But -- so clearly, we've worked our way back into that space pretty quickly and feel good about that. What I'd like to sit here and think is that we're going to see some reduction in some of these key raw materials, leveraging off of that cheap gas that's out there. Hopefully that's going to trickle into the -- I'm going to say upstream products in the industry.

Okay. Yes, because with the decline in the dry natural gas drilling and fracking, I mean, it just -- that's why it came as a bit of a surprise. It seems as if there might be some other dynamics might be occurring in the industry, another geography or perhaps different -- maybe it's more useful in some of the oil fracking. Are you seeing anything along--?

--Well, yes. I can't point to any new shale play, if you will, that is accounting for that. Clearly, I think the same issues are out there in certain of these shale plays and the actual play that's there that's being dealt with that has an impact on whether or not choline is used, and-or at what rate it's used. All of those things can vary. But we can't really point to any one shale play that's being developed, I should say, more aggressively than what we've seen over the past year.

And so, it's safe to assume that it's still primarily for shale plays, for -- the choline chloride for fracking, not so much for other plays or oil?

I would say that's correct.

Okay. And for the animal choline, I mean, that being such a huge volume part of the revenues for the whole company, and with the pricing changing there -- and I know in the last couple years there's been, as I recall, some shifting in the manufacturing to improve the cost structure. Is there anything on those sides? I know that you've made some big strides there, but is there anything else you can see as a possibility there, or are we really at the lowest production price we could be, based--?

--Well, if you knew me, you'd say we're never as low as we can be. But I think we continue to try and take cost out everywhere we can. And with that said, I'll say there's always opportunity.

But I think the key issue here is really the demand in the marketplace, which our focus is clearly North America on this. Not to say there's not export opportunity, but the North American market in and of itself I think is one where [they're] still soft with poultry production. And we mentioned that egg sets are projected now to be off for the year 1.7% year-over-year by the USDA. That for me is really the key driver here.

And quite honestly, if they could nudge that up a little bit, then, personally, I think that's probably going to have to come through exports more than anything. Then, all of a sudden, I think the demand would go up, more volumes through the facility, drive cost down and leverage all those other positions that we have. I think that's going to have to be the key requirement there to see significant upside from there.

Okay. In the ruminant that's doing so well, is there -- there really is no competition there, so, I mean, it's sort of hard to talk market share. But -- so it seems like you're really dominating in that area, but -- in the US. But I'm wondering, are these products also sold in Europe?

Well, let's be clear. There is some competition, for sure for these products, and probably I think, with each passing quarter, we see one or two new players looking to get into this space. Whether the product is as good as is always a question mark. But we're seeing some competition there.

I think, if you look at the percentage of market penetration, even just North American alone, we're still under 10% market penetration, so it's a developing market, if you will. So we feel good about the upside opportunity from that standpoint. We are starting to move some product [into] Europe, some over into Asia, and other areas of the Far East. So, definitely there are markets over there, and I think that those are going to continue to be burgeoning markets, as well, because I would say that, nine times out of 10, you're going to find that they're not as sophisticated as the US dairy industry is with technology and-or a number of the other factors that play through in the decision to adopt a product [like these].

Okay. Just two more items. On the food, pharma, nutrition, there's been softness in the food, encapsulated products into the food line. Is there anything driving that, or -- I mean, it just certainly seems like that would be more stable, and perhaps increasing as new food products are introduced. Has there been a dearth of new food products?

Well, yes. I think that I mentioned the last time that the lifecycle on new foods that are out there I think get shorter and shorter. There's a lot of new products coming onto the market. And what that usually means, there's products going off the market.

And so, the key for us is to keep a very rich pipeline. We've talked about this before and trying to get some of those conversions. The good news is, on the food side, sequentially we did see some growth, a little over 2% from Q4 to Q1. So we're seeing some new products moving into this space.

But clearly, on the comparative with the prior year quarter, we're still lagging there because of some products that have been discontinued in the space. But we still feel pretty good. I can tell you, I mean, we study this pipeline of opportunities that we have here regularly, and feel pretty comfortable that there's still a definitely really good upside opportunity here.

We're doing very well in Europe now. We've put on a few new distributors over there, hired another person on the ground over there, and really feel that that's going to be a good move for us, as well, where we probably have less than 10% of what we have in North America in Europe, and it's a much larger market. So look to develop that more -- I'm going to say quickly as we move forward, as well.

And even choline there, what kind of reception are you getting from the food companies and beverage companies? Are they still wanting to test whether or not choline is a beneficial ingredient, or are they just trying to decide which products to put it in? Can you give us any flavor for where those discussions are?

Yes. Sure, yes. There's a lot of things going on on that front, and clearly the numbers are up quarter over quarter, both on a comparative as well as sequential. So we're seeing the product be adopted, but in [quarter two], it's being trialed in a lot of different applications, as well.

I think that there's -- it's being looked at in beverages, different foods, supplements. And the good news is I think that the structured function claims that were awarded are good news, so it tells you there's value there. A lot of the challenges revolve around getting the product included in that finished product, if you will. I think any time you're going to change a formula, whether it's in a functional beverage and-or a functional food or straight-up food, the product is being used even as a sodium replacement-type product today. So there's a lot of new opportunities bubbling up here, and clearly more and more information's coming out about the benefit of it.

So it's more a question of getting the product worked into that final food form, if you will, and that, quite honestly, just takes time. And sometimes we not only are selling choline as is, but an encapsulated version of choline, too, so that you don't get preliminary interactions, if you will, in some of these foodstuffs.

Okay. So it's safe to say that we should probably see, or expect to see, some products with choline as an additive, or as an ingredient?

Well, hopefully -- you mean on the package itself?

Yes, on the package itself, yes.

Yes, hopefully. I mean, we always try to position to get them to -- if you will, in some fashion, declare that. We'd like it to be on the front label rather than the back, but certainly, yes, we certainly expect and are trying to continue to position for that.

Okay, and just one last question on general margin. With the way raw material price increases, in prior times you've been able to pass that on. Is this still the situation, but there's just a lag factor occurring?

Yes, absolutely. And I think -- so there's definitely that. And I think that we're also looking at the end markets that we're playing into and perhaps some of the challenges that might be there because, I mean, if we just simply try to push it through in its entirety, I know -- I mean, we hear the cries of the industry, if you will, about cost increases continuing, including grains and whatnot. So we're certainly sensitive to that, but still have, I think, a pricing model in place that's very valid, where we're simply trying to preserve our position, but I think, along with that, being sensitive to the end market, as well.

Good. All right. Thank you very much.

Thank you.

[Lauren] Goldstein of Santa Monica Partners.

Hi, Larry.

Hi. I'm a little confused. At the opening, you mentioned that reduced prices increased volume. And then, also at the opening, you said you have been raising prices as you did -- as you said the last call, and you're constantly playing catch-up. Those two things seem to be at odds. And notwithstanding any of that, is it not correct that there will come a time when prices -- when expenses, costs are not rising, and you have instituted these increases such that your margins will then rise dramatically?

Well -- so I think your observations are correct. And depending on the certain end markets where we talk about price decreases as well as price increases, it was all valid in the period. So while it may be a little confusing, I think, based on the product mixes and whatnot, is exactly what happened.

And when you talk about the impact on margins, certainly volume [places] very, very keenly, especially when you start talking about more of the commodity polling and the leverage points that you get off of that, so we've taken all of that into consideration as we've made those adjustments.

I think to your other point, Larry, about rising costs, yes, we're always playing catch-up, typically. At a certain moment that will flip, and we would look to see some margin improvement happen in that window. But typically, our margin model, I would say, also at probably the following quarter or the following quarter after that, too, some of that will start to trickle back into the marketplace.

But you're right. At a certain moment there, margins should increase. And I'm kind of chuckling because we've seen raw material costs pull up every quarter now for I think eight quarters, which is quite unusual, but it's real. And so that's been -- I'm going to say difficult to expect, especially when it's petrochemicals, and most of those are natural gas derived. And while we talk about $2 to $3 natural gas, we're not seeing it trickle into the market very much.

But hopefully that will happen. That should happen, and -- but your observation's right. Margins should improve. However, at a certain moment, I think they'll stabilize, but again, that stabilization will be based on the raw material costs coming down, and at that moment then, too, passing that on to the market.

So implied there is, when you raise prices, they stick regardless of costs declining.

Well, I think within reason they do, but there's also a bit of a give-back on -- given the model.

Shift gears, Curemark now has a whole array of products in the works and diseases they're focusing on. For example, the CM-AT has led to their line CM-PK. It's just -- I think it's the same stuff. It's just aimed at Parkinson's disease. Are you making the -- doing encapsulation of all their sprinkles for all their separate so-called pharmaceuticals, or are you just on the autism?

Yes. I mean, right now, our focus is on the autism. It depends on the substrate that they're looking to use on these other -- I'm going to say disease work that they're doing. I'm not going to sit here and pretend that I know all of the products that they're working with, but our focus is clearly to work with them on the product that's out there for autism. And clearly, we have a good relationship with them, and from time to time we are quizzed about other products, if you will, from a encapsulation standpoint.

So we continue to work with them, and we will continue to work with them likely even outside of the autism product that's been developed to date. So I'd like to think that, if there is a requirement for some of these products -- and I can't even sit here and say that there is -- for microencapsulation, that we would get a favorable, given, I think, the experience to date.

By the way, I think Frank said that it's costing you something at the moment. Why would that be, since they reimburse you for cost per the contract?

Well, I think there's different moments of timing on the reimbursement, but we continue to do work as they do their NDA filing right now, and so a lot of that is just timing issues.

Have they filed their NDA?

I think they're working on the file.

I don't think they have.

And I think it's going to be an evolving NDA, as well.

So what does that mean in practical terms? When do you foresee a product?

You know, Larry, I wish I could answer. I don't. As I've said before, we're not the marketing arm here.

No, I understand.

Yes, so, I mean, I honestly can't tell you. And I'm not sure they could tell you necessarily for sure right now, given everything else that's going on. But hopefully it won't be too far off.

Okay. One other point. The sales that you're making outside the US in choline, are they being shipped from Italy, and-or are you shipping from the US? Because the question in my mind is, is currency exchange becoming -- foreign exchange becoming a material factor?

We're shipping export from both countries, for sure. And certainly, currency is examined regularly in terms of bidding on the business and who's going to have the better cost position, given currency fluctuations, for sure.

What about currency's effect on our financial statements?

It was very minimal.

Right. It's been that to date. So that's what I'm asking, is it going to become material?

Well, I think that would likely -- it'll be a function, Larry, ultimately of our ability to just compete in the export space from a raw material perspective here in the United States.

Italy basically is in a near volume capacity state right now. Their business is, for the most part, euro-denominated business, which we translate over on a quarterly basis. So I think that the dynamics of currency are kind of what they are right now. I don't anticipate that, out of North America, we would be looking to push a lot of product into euro-denominated countries. So if anything, we'll sell down -- opportunities exist in South America, which are typically US dollar-denominated sales.

And what's the thinking, or if you're at the point of a plan, production in the Far East?

Well, we continue to explore that opportunity, is what I'll say. I think it's -- we definitely view it as a developing and growing market, would like to be there, and we'll continue to try and get something done there.

Okay. Thank you.

Thank you.

Tim Ramey of D.A. Davidson & Company.

Hi, there, thanks. Dino, I guess I was a little confused by some of the answers to some of the questions, so maybe I'll just take another cut at it. It sounded, from your prepared remarks, that you had been a little bit sharper on price. And by that, I guess I'm probably interpreting that to mean you're taking prices up less, right? Prices, I assume, are still going up, but maybe going up less.

To answer that, Tim, they're going up less than the raw material costs are going up, so if that adds any clarity to it. But yes, it's not gone up as much. I think on the flip side, though, too, we had taken prices down in Q3 and Q4 where we had -- especially on the industrial side, where we had implemented a pretty significant price increase. And so you're seeing the benefit of that coming through here in Q1.

Got you. So what I'm trying to understand, and I think I understand the question, based on what you just said, but let me just ask it anyway. Sometimes it takes a while for you to get to the economics that you want to get to. In a rising price environment, those price increases don't come through as fast as the cost increases. Is the P&L that we saw for the first quarter pretty close to a steady-state P&L, or is it a P&L on its way to a different place?

Well, I mean, certainly if you run percentages, you'll see that it's off maybe from where we were in Q2 or even Q3 of last year, and I think part of that clearly has to do with the level of raw material cost increases that you just mentioned. I still sit here and believe that, at a certain moment, the benefit that everybody talks about, and we believe in, of cheaper natural gas is going to start to trickle through this economy. I would say, at this moment, it certainly has not, and at least in petrochemical, petrochemical derivatives. So hopefully that will start to happen here, at which moment we'll see some improvement in those margins.

But I think that's going to be -- that needs to be the major contributing factor. And with that said, I think it's positioned North America to be one of the lowest cost producers of chemicals on a go-forward basis. So hopefully, that's going to happen. The other part is improved volumes, certainly deliver higher levels of efficiencies through our plant operations. So that should help a bit, as well.

But I would say at this moment I'm a bit yet optimistic that there's more margin in there, and we're going to do everything from a production efficiency standpoint to drive that, and then I think the balance is really going to have to come out of some raw material cost reduction.

But at the same time, I think you did say earlier in your prepared remarks that you expect these impacts to be with us through most of 2012, i.e. slight margin pressure.

Yes. I think that that's very real. I mentioned, I think, too that there's been some leveling off, maybe even some that are backing off a little bit, but order of magnitude nowhere near what they've ramped up. And perhaps that's me being pessimistic because I would have expected to have already seen some of these costs decline, and haven't seen that. So at this moment, I'm not sure I can point to any drivers in those supply chain positions that are going to really push decreases through in any significant way. So that's me hedging a little bit rather than trying to predict significant declines, even though I could probably argue that it should start to happen. But maybe given where we are today, I'm reluctant to promote that too aggressively.

Great. Thanks for your help.

Thank you.

Lenny Dunn of Freedom Investors Corp.

Yes. Good morning, and a good quarter. And again, I always follow the cash flows, and I think they're very good. And we have a better cash balance than we've had previous quarter despite giving out the annual dividend. Okay, a couple of things. [One, a comment, the] natural gas prices of course will come down. It's not a question of if. It's just when, and the when will be this year. It's just a question of when.

The question I have is about the new plant. What would you anticipate, when this is up and running, which you have apparently scheduled for the fall? What is that going to do for the margins?

Well, I think that, with any new plant like that, you kind of got to get up to certain volume levels to really achieve kind of your efficient operating rate.

What I would say right now is that we need the new capacity. It's not as if we're going to displace capacity and move it there. Our expectation is that this is going to be net additive capacity, and volume produced is sold into the marketplace. So clearly, the ruminant animal products carry a higher margin level than the basic choline does, so, overall, that too should help improve overall margins of the business.

And we think we have a good value proposition out there with the price points that we have in the space today, and with a higher end of technology associated with those products, our expectation is that we should be able to maintain those kind of price points. So I think, overall, it should lead to improved margins. Whether that will happen in a particular quarter or not, again, I think you're going to get into ramp-up issues before you meet those true efficient levels. But definitely with the idea that that's how it should ramp up and develop.

Great. We're long-term investors, and I guess you may misinterpreted my question. I wasn't asking you can we expect a large increase in the fall quarter. I was asking you what you answered, which is that, after things are up and running and you get all the kinks out of it, should improve margins.

Yes, it should, absolutely.

Okay. And we're -- still have quite a lot of cash, which is good, on the balance sheet. Are you looking to either make bolt-on acquisitions or perhaps continue to expand capacity in other ways other than the Virginia plant?

Yes. I think -- well, clearly, we're always looking at acquisition opportunities, or joint venture opportunities. And as I've said, some appear up close for the moment and then drift away, but then they tend to come back. So we're still optimistic that some of those that we've targeted in particular that would be maybe even more than bolt-ons -- bolt-ons, all the time we look at with the idea of incorporating those. Some may be a little bit more strategic either because of additional products, products into the portfolio, geography of where those products are being produced, and-or sales organizations all play through.

But with that said, too, we talk about the Virginia plant, but last year we de-bottlenecked choline, and we de-bottlenecked human grade choline, both in the United States and Italy, as well. So we continue to put money into those existing operations that we have and leverage off of those positions. So it's a little bit of all of those things, to be honest.

Okay. Okay, well, you answered my questions, and thank you again. Another good quarter, and glad we just had that one aberration in the last quarter and it doesn't seem to be continuing.

Thank you.

[Patrick Kirksey] of [Perimeter Capital].

Good morning, gentlemen. Couple of my questions have been answered, but just a few more. On the dairy product, obviously you guys fairly optimistic there with the doubling of capacity. I'm just curious on two things. Number one, kind of where is that product as a percentage of your revenue? Seems to me like it might be getting close to that 10% of total revenues currently. And so if you could maybe elaborate on that, that'd be great.

And then also, in terms of -- how penetrated do you think you are in the total addressable market there? It seems to me also that you're still very, very low in the penetration standpoint there.

Yes. I think with the new products that we're talking about, as it relates to the plant, where we're not really at 10% with those new products, for sure. Obviously our expectation is to move up to the 10% to 15% here within some window of time, but our market penetration is still, we believe -- and again, it's a little bit difficult to answer. I think some products maybe are close to 10%, and then others maybe are closer to 5%. So, on a blended average basis, I think we're still definitely under double-digit penetration levels, which gives you really a reason to believe that there is a lot of upside opportunity there, and again, part of the reason to make that investment.

So Frank just ran some numbers here, and I think on the new products, we're talking about maybe 6% market penetration today. And that's only in the North American market. So again, I think there's a lot of real good upside opportunity there, and clearly part of our confidence to make that investment decision.

Sure, okay. My next question -- go ahead.

I'm sorry. No, that was it.

My next question is do you guys see any seasonality in your operating margins? Because when I look at your operating margins, in 2009, 2010, and 2011, the first quarter that you just reported, at least in those last three years did represent kind of a low margin for the full year. So I don't know if that is seasonality, and if you have seen that and if maybe you expect at least maybe a little bit of upward biased on margins for the rest of the year, or do you think the raw material inflation just kind of eats into that?

Well, I think the raw material inflation certainly is eating into that. I would honestly tell you that I haven't viewed it as kind of a seasonal issue for us in terms of how the margins would run. At any given moment, you could have product mix given one -- the strength of one segment versus another, or even a certain product line in there that may cause a bit of a distortion. But net-net, we don't really see our business as being seasonal, so I would not suggest even remotely that that's how we view this business.

Okay. I mean, that's fair. I just noticed that, in each of the last three years, the March quarter was the low point in margins. I just didn't know if that was spurious or not.

Well, it's a great observation. I'll go back and take a look at it a little bit harder, but certainly it's a great observation. Thanks.

All right. And then, just last thing, this is just a comment, not a question. I would maybe be a little cautious on trying to get choline put on the front part of a consumer package just because the general consumer might be a little bit uncertain as to what choline is. And it sounds a little bit like chlorine, and it might spook some of the -- the general consumer. So maybe not get it on the front of package.

Yes. We appreciate that. I think the dilemma is to build consumer awareness for sure, wanting them to buy products that have choline in it. Your comment about chlorine being confused with choline is one we've heard before.

Right. All right. Hey, thanks a lot, guys, good quarter. Keep up the good work.

Thank you.

Tony Polak of Maxim Group.

Good morning.

Hi, Tony.

I saw your net cash provided by operations was up about $3 million, and the major number that changed was the other category of $2.4 million. I was wondering if you could comment on that.

I'm going to default to Frank.

Yes, hang on a second, Tony. I'm going to have to look that up for you.

Any other questions, Tony, while he's looking that up?

Just wanted to know if you could give us a little more detail on what you hope to get on return on investment on your $10 million Virginia plant.

Well, I think we're always looking to drive ROIs solidly into, I'm going to say, the 20%-plus kind of numbers. To some degree, it depends on how quickly it ramps up, but certainly it could exceed that very quickly. If you look at a $10 million investment there, given the possible revenue generation and the margins, it would be quite significant and could lead to a pretty quick payback. But again, it's going to -- I'll hedge here and say, depending on how quickly it ramps up, but we think it certainly could be much better than the norm, if you will.

What is the capacity in terms of dollars at the Virginia plant?

It's going to be built kind of in tranches, if you will, or actually cellular if you follow manufacturing buzzwords, so that we will build our first tranche of manufacturing capacity that effectively will double what we have today but could very quickly be followed up with at least two, if not three more cellular expansions within the existing site.

So I think, to a large degree, it really depends on the investment decision. Too, it really depends on how quickly it ramps up, and probably in a window of six to nine months we could easily add that next cell. And that's a vague answer, but I think our view of the investment here is going to be based on how quickly it ramps up. I mean, I would say, at this moment, we're having this discussion, and it's ramped quicker than we thought it would when we made the investment in Varona last year. So our expectation is that it's going to continue to go pretty quickly, but I'll hedge saying how quickly.

Could you give me some idea of the plant capacity on the first tranche? In other words, let's say nine months from now, you're complete on the first tranche. What would be an annual volume rate capacity?

Probably in the neighborhood of 18 million pounds, or ballpark $35 million, $40 million.

Great.

Hey, Tony? Yes, nearly all of the change in that other category is a result of working capital changes, just the timing of the inventory, the value of the inventory at the end of the quarter compared to the other, and the amount of receivable change.

Okay, so that's not a --okay, that's fine. Okay, thank you very much.

Thank you.

Appreciate it.

Lawrence Goldstein.

I'd like to address the balance sheet. I think the balance sheet is a little misleading in the brief summary you give, because most of long-term obligations are clearly deferred taxes. And I don't call that debt. I don't know whether you want to call it that. I guess you do. I don't.

So your real debt, you must be darned close -- you must be out of debt by now, aren't you, in terms of long-term debt and in terms of the bigger item that made up long-term debt that year-end was other long-term obligations? I don't remember what the heck that was. That was $2.8 million. So would you address that?

Secondly, can you say something -- are you willing to say something about the substantial cash position, which now I'm suggesting is probably all net cash? Are we going to see it used? Would you like to see it -- would you hope to -- would you expect to see it used in a major amount this year, or not? Doesn't really matter, but as long as it keeps building.

Yes. So to answer the first question, I think our net long-term, true long-term debt position is about $1.5 million today.

Yes, not even. It's about $1.1 million, Larry, and then that's all sitting in the current portion of the balance sheet. So it'll be gone this year.

Yes. And so I think your view is correct. There's really not much debt on the books. I think the other long-term obligation--.

--It's mostly having to do with post-retirement benefits, the $2.8 million, Larry.

And then, coming back to the cash position, certainly our expectation is we're going to use it this year. To some degree, I would -- I will gladly say I thought we would have used a fair chunk of it already on some other things that we were working on in terms of true acquisition and-or joint venture, but that clearly hasn't happened. But we're still working towards that end, for sure, because I think that we've identified places where we'd like to be stronger, if you will, with growth opportunities, and it's going to take cash. Maybe cash is debt, but certainly we'll look to deploy that here with the right transaction.

Could you see positioning the Company at some point where it has some, as it did when you -- where you have material net debt?

Depending on--.

--Where you become -- where you really leverage the balance sheet.

Yes. The answer is yes. I think, for a right transaction, the answer is yes. I mean, we're very comfortable in a basically debt-free position, that's for sure. But we also understand that there's kind of assets sitting on the sideline here that could be leveraged, and would like to do that. But I think it's finding that right one, or two or three, maybe. But certainly would not be averse to leveraging up for the right transactions.

Very good. Thank you.

Thank you.

Jonathan Riechek of Friedberg Investments.

Hi. Can you guys remind me what your key raw materials are?

Yes. Key raw -- far and away, the raw materials that we have are ethylene oxide, trimethylamine, and probably hydrochloric acid.

Okay. And then, just one other question. You guys mentioned that the export market for feed [pooling] was tough due to more global competition. Can you elaborate on that a little bit?

Yes. I think that a lot of the export business is bid business, if you will, which means every quarter it comes up for bid, and those integrated producers in those parts of the country, or [pre-mix guys] who look to secure a position minimally for a quarter. And so, what we have found is very aggressive pricing in many cases by the Chinese into some of those markets, and maybe even some European producers in some of those markets. So it's really mostly a question of what price point they're going to take there and whether or not we're comfortable competing at that price point. I can probably sit here and say we could, but I'm not sure we'd really make any money, so why bother? And so that's really what we mean there.

Okay, thank you very much.

Thank you.

Thank you. Ladies and gentlemen, at this time, I'd like to turn the conference back to Mr. Dino Rossi. Sir?

Okay. Well, I'll say thanks again to everybody for participating on the call. Thanks for your support along the way. We feel pretty good about how we're starting out the New Year here. And while it's been -- it's got its challenges, but we feel pretty good where we're positioned, and I think the upside opportunities on certainly certain parts of the business.

So thanks again for the support. Look forward to talking to you next quarter. Thanks. Bye.

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