Balchem Corp (BCPC) 2016 Q1 法說會逐字稿

Greetings, and welcome to the Balchem Corp. first quarter 2016 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 Mr. Bill Backus, CFO for Balchem Corporation. Thank you. You may begin.

Ladies and gentlemen, thank you for joining our conference call this morning to discuss the results of Balchem Corporation for the quarter earning March 31st, 2016. My name is Bill Backus, Chief Financial Officer, and hosting this call with me is Ted Harris, our 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 to 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. Before I hand the call over to Ted to go through our consolidated results, I would like to remind everyone that given this quarter's acquisition of Albion International, there are significant noncash acquisition accounting items, as well as cash transaction costs impacting our results this quarter.

For this reason we will focus our discussion primarily on adjusted results, which facilitate comparability to prior year, and sequential quarterly performance. Additionally we have renamed our SensoryEffects segment, Human Nutrition and Health, as this segment now includes encapsulates, choline, mineral amino acid chelates, specialized mineral salts, mineral complexes, and customized food and beverage solutions. The three mineral product lines are contributions from the recent Albion acquisition. We believe that this segment name change provides more clarity as to the segment's core businesses and strategies. We will continue to use the brand SensoryEffects for certain customer market activities. I will now turn the call over to Ted Harris, our President and CEO.

Thanks Bill. Good morning ladies and gentlemen. And welcome to our conference call. This morning we reported first quarter consolidated net sales of $135.1 million, which resulted in first quarter net income of $11.9 million, or $0.37 per share on a GAAP basis. This result includes significant noncash amortization expenses of $7.4 million for acquisition-related intangible assets, and inventory fair valuation adjustment of $2.4 million related to the Albion acquisition, and net costs of $0.5 million for transaction and integration costs in a favorable legal settlement, all of which were recorded in these first quarter GAAP financial statements. The amortization expense and inventory fair valuation adjustment, are a direct result of acquisition valuation and business combination accounting rules. While the transaction and integration costs are related to the Albion acquisition.

Consequently our non-GAAP net earnings of $18.4 million, or $0.58 per share, reported in our press release earlier this morning, excludes these items to facilitate comparative evaluation of this current period operating performance versus the prior-year period. These non-GAAP net earnings for the first quarter 2016 compared to $19.6 million, or $0.62 per share in the comparable prior-year quarter. Adjusted EBITDA of $35.5 million was $600,000 below the $36.1 million posted in the prior-year quarter, and was up $1.8 million sequentially. Our adjusted EBITDA margin was strong at 26.2%, compared to 24.9% and 25.4% respectively from the first quarter 2015, and sequentially from the fourth quarter 2015.

We delivered record first quarter cash generated from operations of $29.3 million. Our first quarter sales of $135.1 million, or 6.7% lower than the $144.9 million result of the prior year comparable quarter, with the most significant driver of this decline being a $13.6 million reduction in sales in industrial products. Related to the significant downturn in oil and natural gas fracking, partially offset by the addition of $10.6 million of added sales from the Albion International acquisition.

Human nutrition and health achieved record first quarter earnings of $8.4 million, on net sales of $71.6 million, up $3.8 million from the prior-year quarter. The human nutrition portion of Albion that was consolidated into Balchem's human nutrition and health segment contributed $7.1 million of sales to the quarter, which were modestly better than expectations. Partially offsetting these added sales were lower sales in Powder Systems, due to the mild winter weather and its impact on hot specialty beverage systems, as well as year-over-year and sequential weakness of several key customers in their end user sales.

The animal nutrition and health segment sales of $39.2 million, decreased 8.1%, or $3.5 million, on a 7.1% increase in volume compared to the prior year comparable quarter. The reduced sales were primarily due to lower average selling prices for products in the monogastric markets, as well as an unfavorable product mix particularly for ruminant products. The lower monogastric average selling prices were primarily a function of reduced formula pricing, resulting from lower raw material costs, along with the impact of foreign currency. Volumes in the monogastric market were quite strong, as were volumes for ReaShure, our ruminant protected choline, while sales volumes of other nutritional products were still being challenged by lower milk and milk protein prices, as well as the strength of the dollar. Earnings for animal nutrition and health were down $2 million to $6.5 million. In the first quarter, Specialty Products achieved earnings of $5.3 million, on record first quarter sales of $17.1 million. The legacy sterilization and pasteurization business performed well, delivering record first quarter earnings, while the $3.5 million of added sales from the plant nutrition portion of Albion that was consolidated into Balchem's specialty products segment, were somewhat below expectations. Industrial product sales decreased $13.6 million, or 65% from the prior year comparable quarter, primarily due to significantly reduced volumes sold of choline and choline derivatives for oil and natural gas fracking in North America. Additionally, average selling prices were lower as a result of pressures related to the industry activity downturn. Rig count has further declined and is now down approximately 80% from the peak, and our volumes have followed a similar trend. Earnings for Industrial Products were down $2.9 million to $0.2 million. Our consolidated gross margin percentage was 31.7% of sales in the quarter, up 190 basis points from a 29.8% of sales level in Q1 of 2015. Adjusted gross margin percentage adjusted primarily for the previously mentioned $2.4 million inventory fair valuation impact was 33.8% of sales, up 390 basis points from a 29.9% of sales level in the prior year comparative period. The improvement was primarily due to a favorable product mix and lower raw material costs, which were partially offset by the impact of previously noted lower volumes.

Gross margin and percentage for the human nutrition and health segment increased by 250 basis points, primarily due to improved product mix and lower raw material costs. Gross margin percentage decreased for the animal nutrition and health segment by 170 basis points, primarily due to an unfavorable product mix, partially offset by cost decreases of certain key raw materials. Gross margin percentage for the Specialty Products segment decreased by 340 basis points, due to an Albion acquisition-related inventory fair valuation adjustment of $0.9 million. Industrial Products gross margin declined by 800 basis points, reflecting the reduced volumes and lower average selling prices.

Consolidated operating expenses for the three months ended March 31st, 2016 were $22.9 million, or 16.9% of net sales as compared to $18.1 million, or 12.5% of net sales for the three months ended March 31st, 2015. The increase was principally due to the inclusion of Albion operating expenses, transaction and integration costs, and amortization expense related to the aforementioned acquisition. Excluding net costs of $0.5 million for transaction integrations and a favorable legal settlement, and noncash operating expense associated with amortization of intangible assets of $6.8 million, operating expenses were $15.6 million, or 11.6% of sales. Looking forward we will continue to focus on tightly controlling our operating expenses and leveraging our existing SG&A infrastructure. US GAAP earnings from operations were $20.0 million, a decrease of $5.1 million, or 20.2%, compared with the prior year comparable quarter. On an adjusted basis as detailed in our earnings release this morning, earnings from operations of $30.1 million decreased $1.6 million, or 5% from the prior year comparable quarter.

Interest expense for the three months ended March 31st, 2016 was $1.8 million. All of which related to the debt financing of the SensoryEffects and Albion acquisitions. Our net debt at March 31 was $313 million. The Company's effective tax rates for the three months ended March 31, 2016 and 2015 were 33.9% and 34.3% respectively. As previously noted, consolidated net income closed the quarter at $11.9 million, down from $15.2 million in the prior-year quarter.

This quarterly net income translated into diluted net earnings-per-share of $0.37, as compared to the $0.48 we posted in a comparable quarter of 2015. On an adjusted basis as detailed in our earnings release, our adjusted net earnings for the quarter were $18.4 million, or $0.58 per diluted share, compared with $19.6 million, or $0.62 per diluted share in the prior-year quarter. As outlined in our earnings release, our first quarter results generated $35.5 million of adjusted EBITDA in the quarter, compared with $36.1 million in the prior-year quarter, and $33.7 million in the fourth quarter of 2015.

Adjusted EBITDA as a percent of sales for the quarter was 26.2% of sales, a 130 basis point increase over the prior-year quarter, and equals $1.11 per diluted share. As previously noted, our cash flow remains strong, as we generated record first quarter cash from operations of $29 million, and closed out the quarter with approximately $39 million of cash. And this reflects scheduled principal payments on long-term debt of $8.8 million, dividends paid of $10.7 million, and $10.7 million of capital expenditure funding in the quarter.

Working Capital Management is always an ongoing initiative, and Albion presents new opportunities, as they have historically had relatively high networking capital as a percentage of sales. In particular as it relates to carrying high inventories. We are working hard toured the business value of this higher level of investment and working capital, but believe at this point that Balchem's supply chain processes and working capital discipline, will provide opportunity for working capital improvements over time.

Before I hand the call back over to Bill to go through the segments detailed results, I would like to provide a brief update on our Albion International acquisition, as well as our other key strategic initiatives. The integration of Albion is progressing very well. Organizational integration is complete, expected cost synergies are being realized per our plan, and operating results in aggregate have been consistent with our expectations. At the same time the customer and market response has been very positive, and we are working hard to deliver expected sales synergies, as a result of the expanded array of solutions that we now have. As expected Albion is enhancing the value of our business model, through both top-line sales and expanded margins. I am also pleased with the recently announced strategic partnership with BASF, to leverage the combined technical and commercial capabilities of both companies to bring next-generation feed efficiency and health products to the swine industry as a start.

Our focus will be on providing products and solutions to meet the accelerating trend toward antibiotic-free feeding systems. The BASF and Balchem team together will be a leader in helping our customers meet the changing needs of the market. On our other key growth initiatives, we are pleased with the initial production validation trials that have taken place for several products ,using our state-of-the-art continuous agglomeration unit. We expect full production campaigns to begin here in Q2, and have already secured contractual volume for this unit. The market response to our new technology offering has been quite positive. We have experienced good interest from the single serve hot beverage area, as well as from customers interested in instatizing single component ingredients.

There are no new significant developments to report regarding CureMark although the process of performing the third Phase III clinical for their drug to be utilized in the treatment of autism is progressing, with the ongoing fulfillment of populating the clinical study sites with patients. As previously discussed, in anticipation of their new drug application being approved by the US Food and Drug Administration, we are in the latter stages of validating air quality systems, supply chain and manufacturing capabilities, to ensure preparedness for the production of final validation batches by mid-year, and the initial launch demand upon FDA approval.

Relative to the recommended daily intake for choline, we were disappointed that the FDA missed the previously noted date of March for issuing the final rule on the RDI for choline. That said, they are making progress and we are pleased to have recently learned that the FDA has prepared the final rule, and it has been sent for review to the Office of Management and Budget, which is evidently the last step before publication. Activity in the marketplace is encouraging, and the RDI and recent tests and recommendations should spur further interest in choline enrichment, for both supplements and food fortification. I am now going to have Bill Backus discuss the segments in more detail.

Thanks Ted. As previously noted for the quarter, sales of our consolidated human nutrition and health segment were $71.6 million, an increase of $3.8 million, or 5.6% from the comparable prior-year quarter, with Albion contributing $7.1 million. Powder system sales were lower, impacted negatively by the mild winter weather and its impact on hot specialty beverage systems, as well as year-over-year and sequential weakness at key customers in their end user sales. Sales of inclusions and encapsulated products increased 5.7% over the comparable prior-year quarter, even with the negative impact of the strong dollar affecting international markets.

Record first quarter earnings from operations for this segment were $8.4 million versus $7.7 million in the prior year comparable quarter, an increase of $0.7 million, or 8.6%. Excluding the effect of noncash cash expense associated with amortization of acquired intangible assets of $5.8 million, and an inventory fair valuation adjustment of $1.5 million relating to acquisition accounting, adjusted earnings from operations for this segment were $15.7 million, compared to $13.3 million in the prior-year quarter, an increase of $2.4 million, or 17.7%. Earnings from operations from this segment increased due to an improved product mix including from the Albion acquisition and lower raw material costs.

We're pleased with the first quarter human nutrition and health results, especially when considering previously mentioned top line challenges resulting from the mild winter weather and its impact on hot specialty beverage systems, and certain customers softness in their market space. This segment has continued to see margin expansion, as we realized improved efficiencies, managed supply chain costs, and improved the value proposition of our product portfolio. Albion has contributed to this margin expansion, and adjusted gross margins adjusted for the previously noted inventory fair valuation adjustment of $1.5 million, increased to 32.9% of sales in the first quarter 2016. An improvement of 450 basis points from the 28.4% of sales in the comparable prior-year quarter. The opportunities presented by our pipeline in the aforementioned agglomeration CureMark, RDI and its first ever intake recommendations along with the Albion acquisition, will help fuel future growth for this segment. As noted, the animal nutrition and health segment sales of $39.2 million decreased 8.1%, or $3.5 million compared to the prior year comparable quarter. Global monogastric species sales including feed-grade choline products decreased $1.9 million, or 6.5%. Primarily due to lower monogastric average selling prices, resulting principally from reduced formula pricing based on lower raw material costs, along with the impact of foreign currency.

Lower feed prices and favorable economic conditions provide initiative for broiler integrators to expand production, and the USDA has maintained its higher 2016 broiler production forecast, as eggs sets and chicks placed for grow out have increased from 2015 levels. Monogastric volumes did increase 8.5% from the prior year comparable quarter. Sales of product lines targeted for ruminant animal feed markets decreased by $1.6 million, or 11.4% on flat volumes, compared to the prior-year quarter. The decline from the prior year comparable quarter was most notably from decreased sales of AminoShure and NitroShure, primarily due to the noted challenging global diary market dynamics, and the strength of the dollar which subsequently impacts our export volumes.

While low milk prices have persisted for some time, milk protein prices recently fell to historic lows, further challenging the inclusion nutritional ingredients in feed rations. These dynamics have been particularly challenging for us, when coupled with the strength of the US dollar. While these global market dynamics have been increasingly impactful, we were pleased that we were able to deliver strong growth of our flagship ReaShure product line through these tough conditions. Our recent expansion of our Verona, Missouri facility, brought online additional feed encapsulation capacity for ReaShure.

This new 40% expansion is running extremely well, and has positioned us strongly to satisfy the increased demand for ReaShure created by the Balchem team successfully driving increased penetration for the foreseeable future. We also believe that milk and milk protein prices will show signs of improvement in the second half of the year. We remain confident long-term, as we deliver value with our innovative and efficacious product portfolio further penetrate the market and gain market share.

We also remain positive of our capabilities to introduce new and novel products, to satisfy attractive end market demands through both organic development and strategic alliances, such as the previously noted partnership with BASF. ANH quarterly earnings from operations were $6.5 million, a decrease of $2 million, or 23.2% from the prior year comparative quarter, and an increase of $0.3 million, or 4.6% sequentially from the fourth quarter 2015. The decrease compared to the prior-year quarter was a result of the noted lower sales and unfavorable product mix, partially offset by cost decreases of certain key raw materials. As previously noted, both human and animal encapsulated products have been impacted by foreign currency. We are working to address this impact of the strength of the dollar, as we are scoping out adding encapsulation capabilities to our existing footprint in Europe for both human and animal products. This will provide us with both logistic and foreign currency flexibility in the European markets, as well as additional global capacity. The specialty products segment posted record first quarter sales of $17.1 million for the three months ended March 31st, 2016, as compared with $13.6 million for the three months ended March 31st, 2015. An increase of 26.1% with Albion being the significant contributor to the sales increase.

Excluding the contribution from Albion, the legacy sterilization and pasteurization business also achieved record first quarter sales. Specialty Products quarterly earnings from operations were $5.3 million versus $5.7 million in the prior year comparable quarter, a decrease of $0.4 million, or 7.2%. With the legacy sterilization and pasteurization business achieving record first quarter earnings. Excluding the effect of noncash expense associated with amortization of acquired intangible assets of $0.6 million, and inventory valuation adjustments of $0.9 million relating to acquisition accounting, adjusted earnings from operations for this segment were $6.8 million, compared to $5.8 million in the prior-year quarter. An increase of $1 million, or 16.4%.

This increase is due to the addition of the Albion plant nutrition business and cost decreases of certain key petrochemical raw materials. In the Industrial Products segment sales declined 65% from the prior year comparable quarter, as volumes sold to various choline and choline derivatives for industrial applications, notably for shale fracking, decreased to the well publicized significant downturn in the fracking market. Additionally, the average selling prices were lower as a result of pressures related to this industry activity downturn, and operators desire to curb hydrocarbon production costs.

There is significant uncertainty in the oil and gas industry, and our expectations are that the headwinds are likely to continue through most if not all of 2016. We continue to leverage the competitiveness and efficacy of our products, along with our distribution and lead time efficiencies, capitalizing on opportunities to gain additional market share, while also aggressively managing supply chain costs. However, as indicated we remain cautious about this industry. Our earnings from operations for the Industrial Products segment was $0.2 million , a reduction of $2.9 million compared with the prior year comparable quarter, and primarily a reflection of the reduced volume and lower average selling prices. I am now going to turn the call back over to Ted for some closing remarks.

Thanks Bill. We are very pleased with the long-term strategic contribution of Albion International to our Company, as well as its immediate financial contribution to our first quarter earnings. We continue to face top line challenges, especially from the oil and gas markets in our Industrial Products segment, and the low milk and milk protein prices which are currently impacting our Animal Nutrition & Health segment. While sales have certainly been impacted by these macroeconomic headwinds, the combined strength of our core portfolio of businesses was evidenced by these first quarter earnings results. Record earnings in both the legacy human nutrition and health segment and the Specialty Product segment, coupled with strong volume growth in Animal Nutrition & Health, and the contribution of Albion International for two months of the quarter, helped to substantially offset the headwinds. At the same time, cash flow generation remains strong, as we delivered record first quarter cash flows from operations of $29 million. Looking ahead we expect the oil and gas related headwinds to continue through 2016 although with reducing year-over-year comparability impact as the year progressed since we first experienced significant declines in this market in Q2 of 2015. Lower milk and milk protein prices will likely persist for several more months. However, we believe that strong mid to long-term fundamentals in this market, will show signs of improving prices in the second half of the year. We will continue to strengthen our Company by, focusing on our strategic growth initiatives, while at the same time driving supply chain efficiencies, and exercising disciplined cost management.

Our significant capital investments such as the ReaShure expansion and the state-of-the-art continuous agglomeration unit, will increasingly show benefits in the form of new business, cost reduction, and unencumbered growth as the year progresses. Our investments in new product application and market development, such as with our recently launched AminoShure-M, ruminant protected Methionine, our clean label system solutions, our uniquely positioned vital choline human grade choline, and our proprietary pharma grade encapsulation technologies, are poised to contribute more significantly going forward. The long awaited impending RDI for cholines will help fuel interest in choline and its inclusion in supplement and food fortification applications.

While the process continues toward FDA approval of CureMark's autism drug, albeit at a slower pace than we would like, our investment in the technology that's included is this drug's delivery system, will undoubtedly payoff nicely once approved. And our investments and acquisitions and partnerships such as Albion and the recently announced alliance with BASF, will help fuel additional growth and opportunity. These investments and manufacturing capabilities, new product application and market developments, as well as value-adding acquisitions and partnerships, will allow us to continue to strengthen our Company, and will position us well for the future. I would now like to hand the call back over to Bill, who will open the call-up for questions.

Thanks Ted. This now concludes the formal portion of the conference. At this point we will open the conference call for questions.

Thank you. (Operator Instructions). Our first question comes from the line of Francesco Pellegrino from Sidoti & Company. Please go ahead.

Good morning guys.

Good morning.

I was going through the press release and one of the things that actually caught me a little bit off guard, and I wasn't really aware of it, and I know Ted you had actually given a little bit of detail about the products, was Albion sales into the Specialty Products segment. Could you go over those items again?

Yes. Sure, Francesco. Albion really had two primary businesses. One was a human nutrition business, and one was a plant nutrition business, and we have decided to consolidate the human nutrition part of Albion into our newly named human nutrition and health segment, and the plant nutrition business into our specialty product segment. Multiple reasons for that. One we really didn't want to have a plant nutrition business within our primarily human focused nutrition and health segment, and we do see some synergies with our plant nutrition business and our other businesses within Specialty Products, particularly around the pasteurization, fumigation for seeds and nuts. So that was the logic around that split.

But, Ted, if I am correct, I thought a majority of the specialty segment was BTO and PTO gas?

It is, but we use PO gas to fumigate pasteurize seed and nuts, so we have a relatively good involvement and insight into, for example the almond growing industry, and on the Almond Board, and so forth, and there is some overlap there from a plant nutrition perspective, and some of the partners that we have in that marketplace, we feel will be helpful in accelerating the growth of the plant nutrition business.

When I think about what you guys are doing with the business and moving away from I guess some of the end market customers that have a significant commodity exposure, I always thought of Albion as enhancing the human and nutrition part of the business. Now that I'm finding out that Albion has this exposure to plant nutrition that you're now incorporating into Specialty Products, are you willing to do additional acquisitions that enhance the Albion exposure to the plant nutrition that you just explained?

I think that is maybe jumping the gun a little bit. Albion had not been a company that was highly focused on acquisitions, but having said that, we very much like the plant nutrition business. It is a very high margin part of Albion, and has delivered good growth historically, and the brand name under which we sell our Albion plant nutrition products is extremely well known, and I venture to say is the premium brand in chelated minerals in the marketplace. So we have a very strong business in the plant nutrition business, and at this point in time I don't see why we would not continue to invest in it, and if there were acquisitions to further accelerate growth and strengthen their market position there, I think we would consider it. I don't want to overstate it. It's still quite a small part of Balchem. It's only about a $20 million business, and so it's not a very big part of Balchem at this point in time, but it is a high margin part, and we're interested in further growing it.

Okay. I'll probably touch base with Bill after the call just to understand a little bit more about maybe the level of commodity exposure for these customers, because you did mention some almonds, but one of the things that I did want to hit on, was you said that the Albion business and the specialty segment fell below management's internal expectations for the quarter. Could you give us a little bit of color on that?

Yes. I also said in aggregate the Albion business met our expectations, so it was essentially right on plan as we expected, which was very encouraging, and the human nutrition business was slightly ahead of those expectations, and the plant nutrition business was slightly below, and certainly weather plays a major role in the plant nutrition business and some of the wet, kind of late winter, early spring that was had in California, has impacted some of the use of our products, as well as some of the rains down in Central and South America in the banana plantations, and so forth. So weather has not been beneficial, but I would emphasize it was just slightly below expectations. We wanted to give a little bit of color more than just that Albion met our expectations, but we're not concerned about this. This is very normal, and early Q2 has come back nicely in the plant nutrition business. So hopefully that answers your questions.

Yes, it does. Referring to the industrial product side to be honest with you guys it's really hard to get blind sided by this, because you guys do such a great job on the call of letting us know how to model it out, and when I look at the correlation against rig count, it's never really that big of a surprise. My one question for you about the industrial product segment, is does new and unprofitable business in this segment over the short-term make sense to you guys?

Does new and unprofitable business.

Right. I guess sort of weathering the storm over the short-term, waiting for the fracking industry to turnaround, and when it does turnaround, you're sitting on all of the customers that you're serving with a certain amount of volume, and then the uptick, it starts becoming a profitable, more profitable in the future?

Yes I think that we have a very good position in this marketplace and I think we, again, have to remind ourselves that the products that we sell into the oil and gas market, are the exact same products that we sell into our other markets, so we really view this as a market that is somewhat plant sell, or covering fixed costs, and as long as we continue to cover fixed costs in this market, we'll continue to sell those products, and we do believe that the oil and gas market will come back, and we are uniquely positioned with our two manufacturing sites in this country to service that market. And so yes, I think your point of sort of holding on in a very smart way, obviously, not selling below cost, maintaining our market share, maintaining our relationships with customers so that when it does turnaround we'll be ready. I would l say in large part our customers are probably more optimistic, and maybe that's their role to be more optimistic about the turnaround of this market. As we have said, we don't expect it to turnaround in 2016, but some of our customers see that happening sooner than we probably do.

Okay. You had touched on the RDI for choline by the FDA, and how it's sort of been a waiting game, and how it seems as if something could be coming within the next couple of weeks. I know those are almost the same comments that you used on the year-end conference call, but I guess since the year-end conference call has there been any new product positioning, or conversations in maybe partnering choline with a multi-vitamin company, ahead of the ruling by the FDA? Have you guys done anything new from the end of the fourth quarter conference call?

I think the short answer to that is absolutely, but nothing yet across the goal line that we're ready to talk about, but there certainly is a lot of anticipation in the marketplace around this ruling. There's a lot of interest in choline both in the supplement multi-vitamin area, as well as food fortification. Certainly since the last quarterly call, we have made good progress at certain customers in advancing these efforts, but again, nothing to report at this point in time, but I feel very good about the market interest in choline. There certainly have been more news reports and more articles written about choline in the last three or four months, and again, we view that all very positively, and progress in getting choline into new applications that we're working hard on is also progressing.

Okay. I'll jump back into queue, but I have got a couple more questions.

Okay. Great. Thank you.

Thank you. Our next question comes from the line of Robert Maltbie from Singular Research, please go ahead.

Thank you. This is Debra in for Robert, and I appreciate you taking our questions. Could I just ask for just a note of clarification? You mentioned that Albion is now going to be included in the human nutrition and in the specialty group, and the human nutrition I caught that it's a $7.1 million contribution in the quarter. Could you repeat the contribution for the specialty segment?

Sure, Debra it's $3.5 million. So in the plant nutrition business that goes into Specialty Products is $3.5 million, the human nutrition that goes into the human nutrition and health is $7.1 million totaling $10.6 million.

Okay. Wonderful. And that's for the two months since the clothing of the transaction?

Exactly. Yes.

All right. All right. Very good. And then turning then to the animal health group I was trying to get a grasp of where the profit margins ended up for that particular segment. And if you could just maybe return to that discussion, and tell us what the gross profit margins were, and the dynamic that was going on in the animal segment?

Sure. Bill maybe you want to take a look at gross profit margins, but overall our gross profit margins in the ANH business in Q1 were about 27.3%.

Right.

Which was up from 24.1% in Q4. So we thought that improvement was quite healthy, but down from 29% prior year, and that's really driven by the two points that we highlighted in the call. One is around the lower raw material cost driving our monogastric prices down, and what we're seeing there is that the raw material costs are declining at a slower pace today, than they were in Q1 last year. So we were getting more lag benefit, if you will, in Q1 of last year than we are now getting in Q1 of this year. And then secondly, as we have talked about in our ruminant business, we're very pleased with our ReaShure, really our flagship product, continues to grow very nicely in these difficult market conditions, but sales of some of our amino acid products are down, and those products are higher priced, lower margin percent, but higher priced and higher margin per pound, and that's also having a negative impact on our overall margins for ANH, but again, we're pleased with the 320 basis point improvement over sequential quarter, but obviously disappointed with the 170 basis point reduction over prior year.

Yes. Good. And how has the dairy herd management, and of course the milk costs have, or the milk selling prices I should say have come down. How do you view and is the total population of the dairy herds is that impacting your sales?

It's really not. Milk production continues to be up a little bit in the US over prior year. It's up significantly in Europe. That's part of the overall problem with milk prices, and at the end of the day, our ReaShure product, helps dairies produce more milk, and in this environment they're still interested in doing that, but the amino acids are typically added to enhance milk protein production, and milk protein prices are very low, and so we do find historically and today that some dairies are choosing to take out relatively high priced amino acid nutrient in the feed, to avoid that additional cost because they're just not getting the return on sales. So that's really what's impacting us today, and again, as I said, we're very pleased with the ReaShure growth. The really nice thing about our growth in ReaShure is we are really creating demand with that product line. We, again, are only partially penetrated in the US. We feel like we're in about 25% of the herds in the country, or the cows in the country, and we're moving forward to driving that towards 50% and 75%. So we believe that we can continue to grow our ReaShure flagship product, even during these difficult times, but the amino acids, it's going to be more difficult and we're seeing that impact.

Okay. Very good. And then the last question and this, too, is still about the animal health and nutrition and Albion. Are there any technologies or capacities that Albion has brought to the mix, that you think could be applied in the animal segment as well as in the human segment?

Absolutely. We have talked about that briefly in the past, and it probably a little bit more mid to longer-term for us. Albion was not in the animal nutrition space, but they used to be many years ago, and they have a manufacturing facility that is largely dedicated to animal nutrition, that they did not sell along with that business. So we now have increased manufacturing capacity for animal nutrition, and that's one area that we actually were limited, and so we're quite excited about our ability to increase our production capability for animal nutrition, and we are taking advantage of that as we speak. But also since Albion sold their animal nutrition business many years ago, technology has advanced, and we do believe that we can leverage some of the advancement in technology that they have on the human side, to improve our already are existing animal chelated mineral business. So we're kind of busily working on with the technology groups and the marketing groups on how to do that, but immediately we're benefiting from extra capacity, and we're pleased with that.

All right. Excellent. Thank you.

Thanks.

Thank you. Our next question comes from the line of Timothy Ramey from Pivotal Research Group. Please go ahead.

Thank you. Good morning. Just to better understand the plant nutrition business of Albion. First of all is that a seasonal business? I would guess the sales to end users are quite seasonal, but it didn't look like there was a lot of seasonality if it was a $20 million business, and you had roughly $3 million in sales in two months.

Right. Tim, thanks for the question. There is some seasonality in that business. One thing that helps us manage that is our business is quite international. We sell a fair amount in the Northern Hemisphere and in the Southern Hemisphere, and that helps mitigate some of the seasonality, but the second half the year tends to be softer than the first half of the year, and we will be talking about that more going forward, but when you blend it into the overall company, it's not a significant impact to the seasonality of our Company, but the plant nutrition business is certainly stronger in the first half of the year than the second half.

Was there any evidence when you got inside the business of any kind of channel load before the sale, or were customer inventories relatively in line?

Customer inventories were relatively in line, and so we have seen no evidence of that at all. We were, you're always concerned about that when you acquire a company. We were extremely pleased to see on the human side, the very strong first couple of months. The plant nutrition business did have a price increase on February 1 that was completely market related, that probably drove a little bit of advanced sales in January, but we do not believe and have not seen any significant impact, from kind of stuffing the channel prior to the transition.

And sorry to focus on such a small part of the business, but I'm interested, I use chelated minerals in my vineyard, and I think it's reasonably well adopted in pretty high value crops, but I would love to hear your commentary on kind of what the penetration is, and what the awareness is with various end markets?

I didn't know you had a vineyard. I might have to have a meeting on your vineyard some day, but you're absolutely right. Our products particularly our premium chelated minerals, and are used typically in premium crops, and grapes our number one application, and I think that our strongest position is certainly in California. So I think the penetration is relatively high in those premium crops, but we do feel, and this is really coming from Albion, so it's not necessarily new thinking that Balchem is bringing, but there is more applicability in some of the moderately premium crops, and we're in the midst of really developing new products, and introducing those products to sort of mid-tier crops, to expand the overall market for Balchem. Interestingly, also Albion historically, while we do have sales internationally, was much stronger on the West Coast being based in Salt Lake City, and the team just had more focus on the West Coast than the East Coast, and we also see some geographic expansion opportunity even within the US to further penetrate the market, but I think on the premium crops on the West Coast we're pretty highly penetrated.

Good. Okay. And then just a second on the animal nutrition segment. It's hard, you have now had four quarters of negative sales year-over-year sales, so as you mentioned the curve is flattening out on the decline in raw materials, and the pass-through pricing on that. Would you have any commentary on how we should think about the remainder of the year for animal nutrition, in terms of sales growth rates, or should it be just sort of bumping along the bottom here in the $40 million range?

I think my commentary would be that in the second and third quarter we should have better year-over-year comparability, we had a very strong first quarter last year, so my expectation is that we will start to show growth as the year progresses. Again, very pleased with the strong volume growth that we delivered, despite the sales reduction. I think that will ultimately start to drive the sales growth as the year progresses. So I would love to see certainly some increases in Q3 and Q4.

And just one quick one for Bill. The looks like net debt is up you just a little shade over $50 million. Do you have a full year kind of outlook for interest expense on the updated debt structure?

Yes. I think our intention at this point, Tim, we're going to continue to look to allocate capital not towards prepaying any debt, so I would expect that we're going to just continue to pay the $8.8 million payments that we pay quarterly right now, and our interest rate is less than 2%. So you could apply that, assume that the net debt is going to come down by at least $8 million to $9 million a quarter, we are paying less than 2%, unless interest rates significantly rise that would be our expectation as far as interest expense going forward.

Perfect. Thanks.

Thanks.

Thank you. Our next question comes from the line of Tony Polak from Aegis Capital. Please go ahead.

Good morning.

Morning.

Could you give us an idea why stock compensation expense went up $1 million?

I think part of it, Tony, is obviously as the Company has gotten larger there are some other people involved in getting stock compensation. I think that's part of it. There's also been, there was some overlap with Ted coming in also, so I think that that's a parts of it, also. In terms of what Ted came on through as CEO, so I think that's a big part of it also, and then so we have some overlap there, especially when Luke at some again of the acquisitions, and how it cycles through, in terms of amortizing the expense over time, and you gets some incremental pieces until you get through that cycle.

So are we supposed to model that it should be $2.2 million a quarter going forward?

No. I think let me take a look at it here for you, Tony, but I think that's probably a little high from where we would expect it to be at. I think we're expecting to be somewhere around $7 million for the year, I believe.

On CureMark you're sort of implying its a matter of when, not if. Just wanted to know why if I'm correct in that statement, and why you're so confident of it?

Tony, I certainly believe that it's a matter of when, not if. The clinical trials up until now have been quite successful. The third Phase III trial to me is more about understanding whether this drug should be prescribed to all autistic children, or simply those with a biomarker. So I do have a high degree of confidence that it's a matter of when rather than if. I did spend some time with Joan Fallon, and some of her team last week, and we spent some time talking about this, and more time talking about future developments, but I certainly see no signs of getting in the way at this point, and approval of the NDA.

Did she give you any more feedback on timing?

Yes. That's one that we're all over, and we spend a lot of time talking about that. It's a very difficult one, and she's very hesitant to talk about timing. I was pleased to hear that the population of this trial is increasing, and those already part of this last trial are being treated with the drug. So I think that's a positive development from prior quarter, but other than that, I can't really speak to timing, because I really don't know.

Is this still a net expense to the Company?

Yes it's a net expense, but it's extremely minor. We do continue to manufacture small quantities of the product for trials, as well as continuing use by the older children who were treated in the earlier trials. So that's a net expense. We are spending a little bit of money upgrading the manufacturing facility, and so forth, but I would describe it as extremely minor at this point.

Could you give us an idea of how quickly you could ramp-up in terms of volume?

That's really what we're working on, and we've tried to articulate that we have set an internal target for Balchem to be ready to produce what we believe kind of the first year expectations would be by mid-year. So we're working hard to get our supply chain ready. We think that's a bit on the early side, but we are want to be ready. We certainly don't want to slow things down, if and when approval is ultimately given. So this first manufacturing facility will have ample capability to produce what's needed in our estimate for the first year or so, and duplicating that will be not a significant event. So we're not concerned about being constrained by our capacity.

Okay. I may have a couple more questions, you but I will let someone else ask. Thanks.

Thank you.

Thank you. Our next question is a follow-up from the line of Francesco Pellegrino from Sidoti & Company. Please go ahead.

All right. Back again you but I want to touch on the CureMark. Ted, I guess based upon the conversations that you had with the individual over at CureMark, help me understand the first Phase III trial targeted what subset of the overall autism spectrum, the specific biomarker that was being targeted?

Yes. So the first Phase III Francesco was about them having the enzyme deficiency, and now this latest clinical study is about seeing that even if they don't have the biomarker for the enzyme deficiency, will the drug still be effective for them also, and again, this is both related to the FDA being able to say yes or nay to parents of autistic children, as well as the issue of insurance coverage. So I think that's really where this one is about at this point.

So the second Phase III trial is for the entire spectrum, the first Phase III trial like what percentage of these patients represent the entire population? The biomarker that they have?

Right. About roughly 60% to 70%.

Okay.

Of autistic children have the biomarker, and in CureMark's initial trials their population came out at 62%. So kind of right in that range.

Okay. Question for Bill. Bill, what was the depreciation load for Albion during the quarter?

About $200,000.

Okay. So it's nothing really that big?

No. It's fairly insignificant to depreciation. Most of it is the incremental is the amortization.

Okay. I got you. And human grade choline on a quarterly basis even on an annual basis, not sure if it's even seasonal, how much revenue does it do?

Somewhere about $20 million to $25 million annually.

Okay. $20 million to $25 million. And last question is, so you just did the Albion acquisition. I'm seeing some acquisitions in my space. What are you guys seeing for multiples in conversations from businesses that would align well with Balchem?

We still continue to see pretty high multiples. Maybe inching down ever slow slightly, but we are seeing multiples that are kind of in the 10 type range, if not a little bit higher.

Perfect. That's it for me, thanks again, guys.

You are welcome. Thank you.

Thank you, Francesco.

Thank you. our next Lenny Dunn with Freedom Investors Company. Please go ahead.

Good morning. Really there's two comments. One is that you're doing a great job of integrating all of these diverse businesses, and the other is that you seem like right at this point, you would have your hands full, and that other than small bolt-ons, you would be better off working with organic growth, and digesting everything you have, because there's only so many directions you can look at at the same time. So if want to comment on that, I would appreciate it?

Thanks Lenny and we do feel good about the integration of both SensoryEffects and Albion, and our number one priority is organic growth, and so maybe that's completely agreeing with you, but we do continue to spend time on other acquisitions. We don't see ourselves as a kind of prolific acquisitor, and a Company solely focused on acquiring other companies. We see first and foremost we're focused on organic growth, but the Albion integration was obviously not as significant as SensoryEffects. We viewed it more as a bolt-on acquisition, and so after SensoryEffects we probably took a year or so to fully digest that, and fully focus on that. This is different. We feel like it's largely been integrated, and the teams, the business teams and supply teams are harnessing and going after those synergies, and we can do other acquisitions as soon as good ones come available, and we're ready to go. So we are focused primarily on our organic growth, but we continue to look at acquisitions as well. We're definitely not on the sidelines from an acquisition perspective.

Okay. Thank you very much.

You're welcome.

Thank you. Ladies and gentlemen, we have no further questions in queue at this time. I would like to turn the floor back over to management for closing comments.

Great. I would just like to quickly thank everybody for joining the call today, and your ongoing interest in our Company. I would like to take the opportunity to remind you that we will be holding our Annual Shareholders Meeting on June 15th at 11.00 AM at the Park Ridge Marriott in Park Ridge, New Jersey, so look forward to seeing some of you there, and sharing more with you at that time about our Company. So thanks again for joining the call today.

Thank you ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.