Balchem Corp (BCPC) 2012 Q2 法說會逐字稿

Greetings and welcome to the Balchem Corporation second quarter 2012 earnings conference 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, sir. 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 June 30, 2012. My name is Frank Fitzpatrick, Chief Financial Officer and hosting this call with me is Dino Rossi, our Chairman, President, and CEO.

Following the advice of our counsel, auditors, and the SEC, at this time, I would like to read our forward-looking statement. This release does contain or likely will contain forward-looking statements which reflect Balchem's expectation or beliefs concerning future events that involve risks and uncertainties. We can give no assurance that the expectations reflected in forward-looking statements will prove correct and various factors could cause results to differ materially from our expectations, including risks and factors identified in Balchem's Form 10-K. Forward-looking statements are qualified in their entirety by this cautionary statement. The financial information that is referenced in this meeting was disclosed this morning in our quarterly press release at 9.30 A.M. Eastern Time.

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 second quarter net earnings of $10 million on record consolidated sales of $79 million for the quarter ended June 30, 2012. These second quarter sales of $79 million were approximately 5.8% greater than the $74.7 million result of the prior-year comparable quarter.

In the quarter, our Specialty Products segment generated record quarterly sales of $12.5 million, a 3.6% improvement over the prior-year quarter, a combined result of increased sales volumes and modestly higher selling prices of packaged ethylene oxide and propylene oxide in the quarter.

Animal Nutrition & Health at $54.8 million set a new quarterly record, up 5.8% over the prior-year comparable quarter as we realized another very strong quarter for our ANH ruminant sales, which were up 36%. This strong performance recognizes the offset by the Company decision to suspend sales of the AminoShure-L, 52% lysine product.

As previously reported, there were no safety concerns relating to this product. However, research indicated that the lysine bioavailability of the product was lower than originally designed and projected, hence found to not meet our internal expectations. The sales and earnings from operations impact of suspending this product was approximately $1 million in the quarter. Sales of our basic choline and industrial products were up approximately 1% in the quarter.

Food, Pharma & Nutrition at $11.8 million also set a new quarterly record, up 8.1% over the prior-year comparable quarter, where strength in the human-grade choline and VitaShure products, which was up 34%, was partially offset by lower quarterly sales of the encapsulated products sold into the food markets.

As previously noted, consolidated net income closed the quarter at $10 million, up from approximately $9.6 million in the prior-year quarter or an increase of approximately 4.2%, again net of the AminoShure-L product suspension decision. This quarterly net income translated into diluted earnings per share of $0.33, a new second quarter record as compared to the $0.32 we've posted in the comparable quarter of 2011.

Looking between the top and bottom line, you will see that our consolidated gross profits of $22.6 million were equal to 28.6% of sales in the quarter. This level, although a modest decline as a percent of sales from the prior-year quarter, does reflect slight gross margin improvement in the Food, Pharma & Nutrition and our Specialty Products segments. These improvements were, however, offset by approximately $800,000 in the Animal Nutrition & Health segment due to the aforementioned product sales suspension and related inventory reserves.

Gross margins in the Animal Nutrition & Health segment were also impacted again by higher cost of certain key raw materials. These raw material increases, largely petroleum derivatives, continued to affect unfavorably our ANH choline sales. Raw material price escalation did however begin to subside, but not until very late in the quarter. We continue to work on and achieve operational efficiencies; however, they were again more than offset by the noted raw material cost increases.

At the consolidated operating expense level, you will note expenses totaling $7.8 million for the quarter, which equaled 9.8% of sales versus the same spend in the prior year, but at the 10.3% level. This spending level reflects expenses incurred due to the product suspension issue, but otherwise represents normalized levels as we continued to leverage off of our existing SG&A infrastructure and exercised tight control over all controllable operating expenses.

Overall, it was a solid bottom line quarter, especially considering the product suspension and the escalation of raw material cost. Consolidated earnings from operations percentages remained strong and finished at 8.8% of sales or $14.8 million for the quarter. Our effective income tax rate for the second quarters of 2012 and 2011 were 32.7% and 33.3% respectively. This decrease in the effective tax rate is primarily attributable to a change in apportionment relating to state income taxes. Our annualized effective income tax rate for all of 2012 is currently estimated to be approximately 32.5%.

Net income of $10 million equated to $0.33 per diluted common share, which is 3.1% ahead of the comparative prior-year quarter. These results generated approximately $17.2 million of EBITDA in the quarter, which translates to $0.57 per diluted share. And when including our non-cash stock-based compensation charge, we generated $18.2 million of EBITDA in the quarter, equaling approximately 23% of sales.

At June 30, 2012, our outstanding borrowings were approximately $696,000, but zero, net of our cash balance of approximately $138 million. We continued 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, we're now going to have Frank Fitzpatrick discuss the ARC Specialty Products and Food, Pharma & Nutrition segments.

Thank you, Dino. The ARC Specialty Products segment posted record sales of approximately $12.5 million or a 3.6% 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 6.8% to $4.8 million versus the prior-year comparable quarter. This increase is largely a direct correlation to the improved sales results of propylene oxide, 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 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 & Nutrition segment realized record sales of $11.8 million, an 8.1% increase from the prior-year comparable quarter. Business segment earnings of $3.4 million were up approximately 19.7% over the prior-year quarter.

As stated in this morning's press release, we've 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 EFSA in Europe.

Food sector sales did have a slower quarter as compared to a very strong 2011 second 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 a 12.7% improvement on a sequential quarterly basis. Overall, we expect continued revenue and earnings growth year-over-year in 2012.

Our pharmaceutical delivery development efforts continued. 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 back over to Dino for him to discuss the Animal Nutrition & Health segment.

In the Animal Nutrition & Health segment, we realized record quarterly sales of $54.8 million, an increase of $3 million or 5.8% as compared to the prior-year comparable quarter. Within this segment, ANH ruminant product sales realized 36% growth from the prior-year comparable quarter, an excellent -- as excellent product performance and dairy economics continued to support greater demand for our products. These increases were principally a result of improved volumes of AminoShure and ReaShure, our rumen-protected amino acids and rumen-protected choline products.

As stated in this morning's press release, during the quarter, the Company announced the decision to suspend sales of its AminoShure-L, 52% lysine product. Again, there were no safety concerns relating to this product; however, research indicated that the lysine bioavailability of the product was lower than originally designed and projected, hence found to not meet our internal expectations.

We are working to make the required product improvements and we'll look to reintroduce this product into the dairy industry once the improvements are completed and confirmed with industry experts. At this time, we are unable to give a precise estimate as to when this work will be completed.

Sales and earnings from operations impact of suspending this product was approximately $1 million in the quarter. Dairy economics in the US and certain export markets continue to support strong demand for our rumen-stable product despite increasing production, animal feed prices.

Forecasted higher feed prices in the second half of 2012 are expected to result in lower milk production due to ration changes, but should support continued utilization of our products as herd managers will still look to maximize results of production animals. As mentioned in this morning's press release and to support this expected growth, a new manufacturing facility in Virginia is being constructed, which will more than double output capacity for our rumen-stable products and is scheduled to be commissioned later this fall.

Our global feed grade choline product sales were up 3.4% from the prior-year comparable quarter, although as projected, volumes sold in North America were down. Volumes sold in these markets are strongly influenced by their various dynamics of our customer base, predominantly the poultry production industry.

The current 2012 USDA forecast for broiler meat production continues to forecast lower broiler production in the second half of 2012. We constantly evaluate export choline sales opportunities for the poultry market, but found Q2 to be a continuously challenging export market when combining raw material cost increases and foreign competitor activities.

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-grade products for fracking continue to be steady, as sales were flat with the prior-year quarter, but on a sequential basis, they did improve 14%, particularly due to volume.

Sales of methylamines, derivatives and choline for industrial applications in Europe were soft in the quarter, but did increase 8% sequentially from Q1. We continue to see solid sales of choline and choline derivative products for various industrial applications in North America, especially for the gas fracking opportunities and we remain confident that these products will continue to show strength in 2012, driving steady to increasing levels of sales and profitability at current rig deployment levels. We continue to evaluate industrial opportunities with other core technology to determine how we can drive innovative solutions into this and other markets to derive the most positive value.

Earnings from operations for this entire segment were $6.6 million as compared to $6.7 million in the prior-year comparable quarter. Earnings were unfavorably impacted by the product suspension discussed above, increases in key raw materials during the quarter and choline demand levels of North American poultry producers. Key raw materials rose again 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.

The profitability of the ANH segment continues to be achieved with a constant reevaluation of global raw material costs, product reformulation, currency review, and ultimately -- ultimate ability to economically 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 cost out of our business model.

With the bulk of the feed grade choline predominantly going to the poultry and swine markets, we are very sensitive to continued economic pressures on the large production animal integrators. Feed ration costs are projected to increase due to the US drought situation, hence expected low crop yields. And while retail poultry prices have stabilized, pressure on profitability for this global end market continues.

As noted in previous calls, we at times see a revenue roller coaster effect quarter-to-quarter and within 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 can 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 through 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 human asset base.

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

Ladies and gentlemen, at this time, we'll be conducting question-and-answer session. (Operator Instructions) Tim Ramey, D. A. Davidson & Company.

Good morning. The AminoShure-L product discontinuation had less of a negative impact and I thought it might, given -- I think you had said that it had something like an $8 million sales run rate if I'm not mistaken. Did you not receive product back from the pipeline in terms of product returns or presumably there was something like a $2 million impact on just a ratable quarter-by-quarter basis? What -- how did I misunderstand what happened?

Well, yes, I think we had said that there was about a $2 million quarterly run rate on the product is what we had announced, so that gets to your $8 million annualized number. But in the quarter, when we took the decision, we did have some return material and that's what the million dollars was about, that was the products sold that had not been consumed in the market and did reflect certainly some returns, but also other expenses that we incurred in dealing with that matter, I think in a very professional manner.

So that's where perhaps maybe there was a little bit of a disconnect there, but it really did focus on what had not been consumed in the industry. And I will just reiterate once again that there were no complaints from the marketplace about the product, we really took the high road in terms of suspending the production and gave the opportunity to those customers that still had product to return it, if they wanted to do. Some did, some didn't because they were convinced that the product worked and they continued to use it. So it was a little bit of kind of a mixed response, if you will, in terms of those returning and those continuing to use the product.

And it doesn't look like there was any kind of franchise damage across your ruminant business, given that, yes, I mean, you had pretty strong results in ruminant?

Yes, I think that that's very true and we've continued to see strong results in the ruminants even as -- even after that now. Our other products have continued to move very strongly in the space. So I would agree I don't think there was any real franchise damage, I mean, you never really know. I think that people are asking us when we're going to bring the new lysine product back to the market. I think generally, there was a lot of people that thought the product worked and worked well. So I think we've positioned ourselves to come back neatly in the space, when we do have the replacement product.

Terrific. Thanks.

Thank you.

Daniel Rizzo, Sidoti & Company.

Do you have a timeline on when you will be back in the market with the lysine product?

Yes. We really don't, Dan. We're working on it and I don't want to promise too much too soon and I'm sure my R&D guys don't want me to do that either. But I can tell you that they are aggressively working on it. We've taken the decision to continue building out the new Virginia plants largely in response to the ruminant products. And so our expectation fully is that we'll be back and -- but it will be fully vetted products and with all the outside testing done. So that alone takes additional time as well. So -- but I really can't sit here today and tell you exactly when we'll have that product back on the market.

Okay. And then, with [the call] on feed sales, what were volumes down in the quarter?

Why?

No, what was -- it was -- I don't know if you gave a number for volumes.

Yes, I don't think that we said that -- if we said they were down, it was maybe 1% and that was largely because of the North American poultry market, just the grower production being off. So that's -- as it relates to the poultry side. And then, on the industrial side, we saw a general flatness there.

And then, I mean, because I think the 3% price increases that -- was the 3% volume growth in the segment AN&H, or did I miscalculate that?

Hold on just one second.

For total AN&H?

Total AN&H.

Total AN&H was up 5.8% in the quarter.

Right. And half of that was price increases or --

I think less than that, less than half of it was price increases. The price increases really revolved around the choline business, not the ruminant animal part of the business. Remember the ruminant part was up 36%. Again, it's a smaller piece of the total pie. But -- and I think of the -- when you go to the choline business in and of itself, certainly it was up a very modest percentage, and of that, there was just a little bit. Again, I don't even think it was half that was price increase.

Okay. And then, you indicated that towards the end of the quarter, you finally saw some relief just with the petroleum-based feedstocks.

Yes.

I assume since the end of the quarter, that's continued like things are getting better as we continue into this third quarter here?

It's a little bit of a -- well, I'm going to say into July, the answer to that is yes. As we look forward here, there is rumors that numbers are going to start to move back up again, and those are forecasts, not actual. Yet, we haven't seen that. But -- so, certainly, as we sit here at the end of July now, I can say, yes, we saw that continue, but there's some buzz in the market that some of these are going to start to move up again a little bit here in Q3, not back to where it was, for sure, but there are things that there is definitely a bit of a push to move some of these numbers and at least back up a bit.

Okay. I think in the past -- my last question, I think in the past that the international acquisitions were kind of part of the plan. Are you still in talks, or is that still on the table, or is that kind of not working anymore?

We're still in talks, I would say. Well, I would say that a couple of things are actually off the table as it related to international, but there's actually another two that are on the table. So I think, we're continuing to explore these opportunities. And if we can make them make sense, then these are ones that we're clearly interested in. And so, we'll continue to pursue those. Others that have fallen off likely because of price and economics that have clearly gotten in the way of what I would say are good investment decisions.

Okay. Thank you, guys.

Thank you.

Greg Garner, Singular Research.

Hi, yes, thanks for taking my question. On the industrial choline for fracking, I just seen the trend how it was weak a few quarters ago, good sequential rebound in the first quarter and some more sequential improvement here in the second quarter. Does this mean that you're expanding the market presence there, because the rig count has not really been -- actually been declining for the natural gas areas? So are you finding that it's working better in oil deposits now too or is it really just gaining share in the gas deposits?

Well, I think first, you're absolutely right in terms of the rig counts shift away from gas and going over to oil and that's largely because of the price we're getting from natural gas and lack of infrastructure, if you will, to deal with the inventory builds that happened just also the price on the oil. So clearly, I would say that we've made additional inroads on the gas side of things, but in fact we do know that there is also some product being used on the oil side as well. A little bit difficult to know end market-wise how much is coming from which part of that, but we are absolutely certain that there is some being used on the oil side now as well.

Okay. Because you're selling to intermediaries that don't necessarily give you a good visibility into that, is that why (multiple speakers)?

Yes. I think, that's a significant part of the answer here, it's because of that -- the distribution channel that we have and so we don't get absolute transparency into that end-use.

Okay. So the intermediaries are the ones that are actually creating the formulations?

No, actually, they are more distributors. I mean, the formulations are still being driven by people like, say, Halliburton, BJ; they're guys that are handling our products typically are, they are specifically distributors that are selling probably 20 different products for different well applications and so they really act as that very spontaneous, if you will, provider of those products that these other guys are going to be specking in.

Okay. Okay. And on the Food, Pharma & Nutrition, it's a nice sequential increase in the encapsulated ingredients and it was mentioned there is a pipeline or a growth driver is intact relative to the pipeline. Can you tell us a little more color on that as to the type of products or (multiple speakers)?

Yes, I think that far and away, the largest product moving [through it] in that space is our human-grade choline, which continued to get real good uptake into a number of different applications, actually on a global note. So part of it is geography, [let alone], just new products or new product applications. So that's all very positive. I think the EFSA claims that we secured last year definitely helped to promote reasons why companies want to include those choline products in their end products, so that's paid really nice dividends early on here for us.

On the food side, as I mentioned, it was down a little bit from last year, up sequentially as we're getting more of existing products into new applications, either with existing customers and/or some new customers as well. Is there a kind of a breakout end product that we're in that's overly exciting? I would not say that's a case. I think we're working on platforms here that we've talked about, whether it's baked goods or tortillas or confectionery markets, processed meats, prepared meal, all of those are contributing neatly, I would say, in a more consistent fashion and as I say getting conversions from products that are in the pipeline to commercial business.

So the human choline is going into a lot of prepared foods then, is that --?

It's going into some prepared foods, it's still predominantly into, I'm going to say nutritional-type products and we could argue about is it a prepared food or not, because some of these products are kind of mill replacement type products.

Yes.

And so I want to be clear, I wouldn't say we're out there in a number of frozen prepared meals with choline, at least not yet, although I think it would be a good end market for us. But -- so it's moving clearly into the nutritional supplements, nutritional drinks, bars, all kinds of products like that.

So the European claims are coming to benefit even it's working well with US-based manufacturers?

Oh, yes, absolutely.

Okay.

Yes, I mean, they are kind of a ruling body on a global note, but everybody sits up and pays attention to it.

Okay.

Yes.

All right. And on the ARC, is there any expansion possibilities from the propylene oxide with the nut fumigation, any -- or is there really just some volume growth with the almonds or is there other nuts that you could -- I remember before you mentioned how there's potential growth opportunities in the export side of the market?

Yes. So, I mean, there are other nuts that are treated today including pistachios. Certainly almonds are [far in] the largest nuts, and the almond market is the one we've talked about growth opportunities. California is the largest growing almonds area in the world, and only about 30% of those almonds actually today are treated with propylene oxide and that's kind of government regulatory issues and those are products that is being sold either in the United States and/or Canada.

The California Almond Board is continuing to lobby in favor of PO more broadly where we continue to work with them and support that. Clearly, we have a vested interest to see that happen. So that's still going on in the background. So I do -- we do think that there is good chance that we're going to see upside opportunity from that. But how quickly we're going to get -- we or the Almond Board is going get those governments to move, very difficult to predict.

Okay. And one follow-up question from your commentary on the acquisition that's -- or the discussions that you are in. Would these -- if they were to come to fruition, would it be as large of an acquisition as it was a few years back when you entered the choline business, or are they more tuck-in acquisitions?

I would say that a couple of investments there are -- I could argue that individually, the choline acquisitions were kind of tuck-in, given the size and how we went about that. So I would say that a number of them are of comparable size to that.

Okay.

And then, there is one other certainly that's I would say larger.

Okay. All right, thank you.

Thank you.

Thank you.

[Andrew O'Connor, Harris Investments].

Good morning, Dino, Frank. I'm relatively new to the Company and I wanted to know if you guys could expand on the construction progress at your Virginia manufacturing facility, what exactly is complete and how are construction costs trending to this point. Thanks.

Yes. Well, I think that it's moving forward, for sure. I mean, we've let a lot of the engineering out. It's being actively worked on, equipment has been ordered, some has been received. But understand that the facility we bought was basically a building empty, so it's now been designed and so construction is underway. But it's on its pace. We're looking to try and get it done honestly as quickly as we can. But in all probability, we're looking at November-December, hopefully no slippage from that in terms of a deliverable.

I think the spend that we're talking about is still consistent with what we talked about before in that $10 million to $12 million range. And so I would say it's tracking based on the engineering guidelines that had been outlined, and to be honest with you, we're starting to hire people down there and move the program forward.

Thanks, Dino. And then, is the capacity from the new facility, the new Virginia facility, is that spoken for or contracted or what percent of the total is already spoken for?

Yes, that's a great question. I think if you ask the business guys, they're going to tell you that a piece of it certainly is already spoken for as depending on the product line, we're bumping our head a little bit and getting into some pinch points here. So I think that very early on, we'll be moving commercial product in there and out of there pretty quickly. Today, if I had to venture a guess, maybe as much as 15% to 20% of that is already committed and I think assuming economics continue in the fashion that they are, I think we'll see that move pretty quickly.

Okay. And then, I had a couple of other questions if that's all right. Is there an economic return that you'd expect to realize on the $12 million spent in Virginia, Dino?

Well, we've run the analysis and quite honestly gone through, what I'll say is Board approval, and we're looking for a return certainly, I would say in a no more than two to three-year range on the project itself, maybe less depending on how quick the uptake goes.

Okay. So a two to three-year payback period?

Yes.

Okay. And then, also wanted to ask if you guys could expand on the drought in the United States that's impacting the demand for feed-grade choline chloride from the poultry and swine end markets. This drought is a multi-decade event. And is there some perspective that can be shared regarding how you see your end markets shaping up in the wake of this very unusual weather event from years past? Thanks, again.

Yes. It's a great question. Certainly, there is pressure being brought from the ag side here, because of what's going on. I think corn is up now futures over $8 a bushel. And so it depends on, to some degree, how low these guys bought futures that either impacts in the near-term or not, but certainly it's very real.

I think the other thing that is starting to happen is some of the rations are changing to substitute wheats, corns, and things like that, where generally, it's just a cheaper ration. Quite honestly, that kind of opens the doors to be supplemented with other products that we think will probably favor us, given what our products do and the performance that comes with it, not to say that we're a cheap product, but I think there is good value proposition there with those that quite honestly give us a comfort level.

I think the key issue still comes down to production levels. And in the poultry market, we can talk about the feed cost and whatnot, but at the end of the day, I think that our comments about that that market in and of itself kind of shrinking and maybe flat right now is likely where it's going to continue to be on a go-forward basis.

I think on the dairy side, they're going to look at that, those ration costs real hard, they'll look to maximize milk production still yet likely from a smaller [herd]. Some of the cows can be culled and sold for beef. So I think they're looking to reshuffle the deck there, if you will, to figure out how they too can be profitable. But certainly, in no uncertain terms, those grain prices are driving these guys to look at all of this real hard right now and decide how they're going to feed these animals and get some type of decent performance out of them.

And so it's a very real challenge. I'm not hearing about anybody looking to go out of business or necessarily even losing money yet. But I also wouldn't necessarily say perhaps they felt the brunt of this yet either. I think that's still yet going to be coming in the third and fourth quarters.

So a very difficult period, no question, and I think a little bit difficult to predict. But generally, if you follow the poultry industry and -- or people who are playing in that space, they're still announcing some pretty decent numbers but certainly hedging as to what's going to happen in the balance of the year.

Thanks for your candor. Good luck, guys.

Thank you.

Lenny Dunn, Freedom Investors Corporation.

A good quarter taking into consideration the recall and the -- in looking at the amount of cash that you're generating and your balance sheet, it seems to me that it would make sense to start a quarterly with dividend policy, I don't see how that would harm your abilities to make acquisitions or anything else. And returning some more cash to shareholders would be nice for shareholders, but the buying back stock, I don't think makes sense at four times book or decreasing the float, because we like to have as much floats possible. So I do -- but I do think it makes sense to start a quarter with dividend policy. We're in the big leagues and it would be a nice thing.

Lenny, we've looked at it in the past, for sure. We've heard it from other people as well. Are -- is there any chance that's going to happen? I think that if you just look at the numbers straight up, could it be done? The answer is yes. To date, I would say that we're still focused on trying to grow that topline via acquisition or joint ventures. And if some of these things come through, it's likely to consume a lot of that cash build that's going on, not to say that we couldn't leverage and borrow money, because clearly as you noted, the balance sheet is under-leveraged. So we're looking at that.

I think it's all fair questions, going to be studied. I think as a little bit more time goes on, if some of these opportunities don't get converted, then we'll probably look at that a little bit harder. So I'd say we hear you, understand your position. I would tell too that, yes, I think your comment about a stock buyback, while the program is in place, not -- probably we're looking to do anything on that at least in the near term, so -- but we hear you. So thanks.

Again, I think it's a fine line that you work, but I think -- I just can't see how it would deter you from making an acquisition to start a quarterly dividend policy?

Well, like I said, I hear you and yes, we'll look at it real hard. [In all technical side], I think as cash continues to grow, we hear you and maybe it's something we will adopt. So we'll see.

Okay, thank you.

Thank you.

Lawrence Goldstein, Santa Monica Partners.

Good morning. In light of the lysine product recall, just wondering if you would comment on how it came to pass in light of -- now, we have other products and some people -- some companies might simply say, we have a new improved product and wait till you had that and come out with it, how does it all work?

Yes, that's a fair question. I think that -- and you're right, other companies have done that. And I think, as I said before, we've kind of taken the highroad here. We conducted our own additional research and there was a little bit of research that came from the outside as well that suggested, it wasn't delivering from an efficacy standpoint to the point that we had -- actually thought we had designed and it was there. And so I think as we go out in a very scientific fashion [standard], our product is going to do X and along with the value proposition, we stand behind those declarations, if you will.

And when it became clear that, that was not the case, we've looked at the entire franchise and said, you know what, we don't want to damage it. If we have a product there that's not what we say it's going to be, then we're going to take it off the market. And so that's what we elected to do and I was very sincere when I tell you that from the field experiences, there were no complaints about the product. And like I said, I think to some degree, the industry was a little surprised with our decision. I've even had some people tell us they would not have taken that decision, but we did.

And like I said, I think with a high level of confidence that we can get it corrected and bring it back, it's a product that the industry still needs that the market wants. And so I think we've -- I'd like to say, on a go-forward basis, I think, in general, we've positioned ourselves well to come back with a product that is desired by the market. So --

A comment about dividends. I can't help but mention, as a 30-year-holder of Balchem, I never bought it to get dividends and I don't see that anybody would buy it today to get a 1% yield out of the dividend and I hope a lot less even if the dividend amount is more. And we would do far better as long as you see acquisition opportunities and historic 20% return on equity is the way it's worked. So I don't see any point in a dividend and I don't think you should do it at all.

Okay. Well, I appreciate the view, Larry. Like I said, we hear about it from time to time and we look at it real hard. And again, I think, as I mentioned, I mean, depending on what happens with the acquisition opportunities or joint ventures, may dictate a decision there. But certainly, as you know, historically, we haven't gone in that direction. We would [pump up the annual] from time to time, but I think, it's a fair comment for consideration and I think we'll always study it. So thanks.

Tony Polak, Maxim Group.

Good morning. In terms of the Curemark NDA filing, you say, you're doing everything to support their NDA filing. I guess with that statement comes to when you would expect that filing to happen? I was wondering if you could give us time frame, the fall, the winter.

Yes. Again, we're not the filer. I think you know that, Tony. And so I think a little bit of this is really depending on how quickly Curemark moves through that process. If I had to guess, I think it's going to be -- I think the filing will yet be this year and it seems to have slipped a little bit, I don't think dramatically for sure, but it has slipped a little bit, but I know it's aggressively being looked on, not only our part of it, but the balance of that filing as well. But my sense is, and in my conversations that it's still yet going to be this year. Could be late Q3, it could be into Q4, but I think for sure that filing will be done this year.

Okay. Got it. In terms of the increased raw material costs for last quarter, have you implemented enough cost increases this quarter to offset that or are you seeing some decreases from the increased costs?

I mean, it really kind of depends on which product and a number of products get touched by some of these petroleum derivative cost increases. So the answer is, yes, we've passed through what I think are pretty good numbers to cover what was happening in Q2, again saw little softness there at the end of Q2. And so with that said, I think we're in a pretty good state there. It would be nice to see those raw materials continue to stay down or go down here in Q3, but -- so overall, I think we've positioned it pretty well to hopefully call back a little bit on some of that margin.

Okay. Can I assume that you hope to earn something like $3 million next year on the new plant, is that an accurate number?

Well, if you're tying that to my comment of three year or two to three-year return, that would be a fair comment. As I said, I think a lot of it just really depends on how quickly it ramps up. I mean, if the general economic situations stay the same, the earlier comment about the drought situation, what's going to happen with feed cost could change that view, but it probably wouldn't be a bad assumption with all else being equal.

Thanks. Is there a number of capacity on the choline, both the industrial and human choline on where you're at right now?

Yes, I think on an overall blended average basis, we're probably around -- I'm going to say in the low-to-mid 70% kind of range and that's between the three-plus operating facilities.

Right. Okay. Thank you.

Thank you.

It appears we have no further questions at this time. I would now like to turn the floor back to management for closing comments.

Okay. So I'll thank everybody for attending the meeting. I again thought it was a pretty solid/strong quarter, especially given the ups and downs going on out there, but we feel pretty strong about that. So again, thanks, and I look forward to talking to you next quarter.

This concludes today's teleconference. You may now disconnect your lines at this time and have a wonderful day.