Aug 1, 2012
Executives
Frank Fitzpatrick – CFO and Treasurer Dino Rossi – Chairman, President and CEO
Analysts
Tim Ramey – DA Davidson & Company Daniel Rizzo – Sidoti & Company Greg Garner – Singular Research Andrew O’Connor – Harris Investments Lenny Dunn – Freedom Investors Corporation Lawrence Goldstein – Santa Monica Partners Tony Polak – Maxim Group
Operator
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.
Frank Fitzpatrick
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 statements.
This release does contain or likely will contain forward-looking statements, which reflects 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 expectation, 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.
Dino Rossi
Thanks, Frank. Good morning, ladies and gentlemen and welcome to our conference call.
We’re 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, ARC Specialty Products segment generated record quarterly sales of 12.5 million, a 3.6% improvement over the prior year quarter, a confined 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 AN&H 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 Nitroshure products, which was up 34%, was partially offset by lower quarterly sales of the encapsulated products sold in to the food market. 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 in to 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 in the prior year quarter, does reflect slight gross margin improvement in the Food, Pharma & Nutrition and our Specialty Products segment. These improvements were however offset by approximately 800,000 in the Animal Nutrition and Health segment due to the aforementioned product sales suspension and related inventory reserves.
Gross margins in the Animal Nutrition and Health segment were also impacted again by higher costs for certain key raw materials. These raw material increases largely (inaudible) derivatives continue 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 expansion – suspension issue, but otherwise represents normalized levels as we continue to leverage up of our existing SG&A infrastructure and exercise, take control over all controllable operating expenses.
Overall, it was a solid bottom line quarter, especially considering the new product suspension in the escalation of the raw material costs. Consolidated earnings from operations percentages remain 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 ‘11 were 32.7% and 33.3% respectively. This decrease in the effective tax rate is primarily attributable to the 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 continue to aggressively manage all areas of working capital, driving strong cash flow, improving cash earnings and generating quality organic results from our core businesses. In an effort to detail our consolidated results better for our shareholders, I’m now going to have Frank Fitzpatrick discuss the ARC Specialty Products and Food, Pharma & Nutrition segments.
Frank Fitzpatrick
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 escalation and seek to implement price increases within contractual guidelines. For the quarter, Food, Pharma & Nutrition segment realized a 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 realized double-digit growth in sales of our human choline products for nutritional enhancements.
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 this restructured 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 affect of pipeline filled 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 continue.
In the quarter, we do not generate any R&D milestone payments, however, with a license fee of our technology concluding the Phase III clinical trial, we await the unwinding of this trial and are working with them in support of their NDA filings. 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.
Dino Rossi
In the Animal Nutrition & Health, 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, a ANH ruminant product sales realized 36% growth from the prior year comparable quarter and excellent – as excellent product performance and very economics continue 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 dispend sales of its AMINOSHURE-L 52% lysine products.
Again, there were no safety concerns relating to this product, however research indicated that that lysine bioavailability of the product was lower than originally designed and projected, hence found do 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 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 U.S. and certain export markets continue to support strong demand for our rumen stable products despite increase in 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 product as our managers will still look to maximize results of production animals. As mentioned in this morning’s press release, and to support of this expected growth, a new manufacturing facility in Virginia is being constructed which were more than double output capacity for our ruminant stable products and it’s scheduled to be commissioned later this call.
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 the 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 markets, but found Q2 to be a continuously challenging export market when combining raw material cost increases and pulling competitor activity.
In the coming quarters, we may like to be more aggressive in seeking to win additional business, depending upon the 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, it did improve 14%, particularly due to volumes.
Sales of (inaudible), derivatives and choline for industrial applications in Europe were soft in the quarter, but did decrease 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 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 re-evaluation of global raw material cost, product reformulation, currency review and ultimately, ultimate ability to economically meet market needs from our various global facility to enter in those sites.
The opportunity to capitalize in this fashion is a direct result of our effective integration of acquisitions, growth strategy and 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’re very sensitive to continued economic pressures on the large production animal integrators.
Feed ration costs are projected to increase due to the U.S. drought situation and 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 have time to see a revenue rollercoaster attract 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, yield and 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 improvement, 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 unit asset base.
This now concludes the formal portion of the conference. At this point, I will open the conference call for questions.
Operator
(Operator Instructions) Our first question comes from Tim Ramey of DA Davidson & Co. Caller, please proceed with your question.
Tim Ramey – DA 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 and in terms of product returns, so presumably there was something like a $2 million impact on just a ratable quarter-by-quarter basis. How did I misunderstand what have –?
Frank Fitzpatrick
Yeah. I think we had said that there was about $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 product 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 may be 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 would 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 opportunities to those customers that still had product and return it if they wanted to do. Some did, some didn’t because they were convinced with the product work and they continue to use it.
So it was a little bit of a – kind of a mixed response if you will, in terms of those returning and those continuing to use the product.
Tim Ramey – DA Davidson & Company
And it doesn’t look like there is any kind of franchise damage across your ruminant business, given that we have pretty strong results in ruminant?
Dino Rossi
Yeah, I think 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 are going to bring the new licensing product back to the market, I think generally there was a lot of people that talked to product worth and worked well. So I think we have positioned ourselves to come back neatly in the space when we do that with the replacement product.
Tim Ramey – DA Davidson & Company
Terrific, thanks.
Dino Rossi
Thank you.
Operator
Our next question comes from Daniel Rizzo of Sidoti & Co. Caller, please proceed with your question.
Daniel Rizzo – Sidoti & Company
Do you have a time line on when you would be back in the market with the raising product?
Dino Rossi
Yeah, we really don’t Dan, we are working on it and I don’t want to promise too much too soon and I am 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 plant largely in response to ruminant products.
And so our expectations fully is that we’re going to be back and – but it will be full embedded 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 exactly when we’ll have that product back on the market.
Daniel Rizzo – Sidoti & Company
Okay. And then with the current details, what were volumes down in the quarter?
Dino Rossi
Why?
Daniel Rizzo – Sidoti & Company
No, what, what – I don’t know if you gave a number for volumes?
Frank Fitzpatrick
Yeah. I don’t think that we said that.
If we said they were down, it was maybe 1% and that was larger because of the North American poultry market, just the broiler production being off. So, that’s, as it relates to poultry side, and then on the industrial side, we saw general flatness there.
Daniel Rizzo – Sidoti & Company
And then, I mean because I think the 2% price increases. Was there 3% volume growth in the segment AN&H, or is that I – did I miscalculate that?
Frank Fitzpatrick
Hold on just one second. For total AN&H, total AN&H was up 5.8% in the quarter.
Daniel Rizzo – Sidoti & Company
Right. And then half of that was price increases or –?
Frank Fitzpatrick
I think less than half of it was price increases. The price increases really revolves around the choline business, not the ruminant animal part of the business.
Remember, the ruminant part was up 36%.
Daniel Rizzo – Sidoti & Company
All right.
Frank Fitzpatrick
Again, it’s a smaller piece of the total pie. But – and I think of the – on a – 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.
Daniel Rizzo – Sidoti & Company
Okay. And then you indicated that towards the end of the quarter, you finally saw some relief with the – just the petroleum based feedstocks.
I assume since the end of the quarter, that’s continued like things are getting better as we continue in to this third quarter yet?
Dino Rossi
It’s a little bit of a – I’m going to say, in to July, the answer to that is yes. As we look forward here, there is rumors that number is going to start to move back up again.
And those are forecasts, not actually – yeah, we haven’t seen that. But – so certainly as we sit here at the end of July now, I can say, yeah, 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 – there’s definitely a bit of a push to move some of these numbers at least back up a bit.
Daniel Rizzo – Sidoti & Company
Okay. And I think in the past, my last question, I think in the past, 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?
Dino Rossi
We’re still in talks I would say. I would tell you 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 are 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 are falling off likely because of price and economics that have clearly gotten in the way of what I would say are good investment decision.
Daniel Rizzo – Sidoti & Company
Okay. Thank you, guys.
Dino Rossi
Thank you.
Operator
Our next question comes from Greg Garner of Singular Research. Caller, please proceed with your question.
Greg Garner – Singular Research
Yeah. Thanks for taking my question.
On the industrial choline for fracking, just seeing the trend how it was weak a few quarters ago, good sequential rebound in the first quarter, 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 area. 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?
Dino Rossi
Well, I think, you’re absolutely right in terms of the rig count shift away from gas and gone 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 do with the inventory build that happened versus 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. 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.
Greg Garner – Singular Research
Okay. Because you’re selling to intermediaries that don’t necessarily give you a good visibility into that, is that why –?
Dino Rossi
Yeah. I think that’s a significant part of the answer here is, because of that distribution channel that we have and so we don’t get absolute transparency into that end use.
Greg Garner – Singular Research
Okay. So the intermediaries are the ones that are actually creating the formulations?
Dino Rossi
No. Actually, there are more distributors.
I mean the formulations are still being driven by people like Schlumberger, Halliburton, BJ. The guys that are handling our products typically are very specifically distributors that are selling probably 20 different products for different well applications.
And so they really act as very spontaneous, if you will provider of those products that these other guys are going to be specking in.
Greg Garner – Singular Research
Okay. On the Food, Pharma & Nutrition, nice sequential increase in the encapsulated ingredients and it was mentioned that there is – pipeline or 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 –?
Dino Rossi
Yeah. I think that far and away, the largest product moving which continues to get real good uptake into a number of different applications actually on a global note.
So part of it is geography, just new products or new product applications so that’s all very positive, I think we have to claim that we secured last year, it definitely help to promote reasons why companies want to include those choline products in their end products. So that’s paid really nice dividends earlier on for us.
On the food side, as I mentioned, was down a little bit from last year, up sequentially as we’re getting more of existing products into applications either with existing customers and/or some new customers as well. It’s kind of a break out end product that we are in that’s overly exciting.
I would not say that’s the case, I think we’re working on platforms here that we’ve talked about whether it’s baked food or (inaudible) or confectionery market process needs, prepared meals, all of those are contributing neatly I would say in a more consistent fashion and as I say, getting conversion from products that are in the pipeline to commercial business.
Greg Garner – Singular Research
So the human choline is going into prepared foods then?
Dino Rossi
It’s going into – 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 meal replacement type products.
Greg Garner – Singular Research
Yeah.
Dino Rossi
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.
Greg Garner – Singular Research
So the European claims are coming to benefit even it’s working well with US-based manufacturers?
Dino Rossi
Oh, yes, absolutely.
Greg Garner – Singular Research
Okay.
Dino Rossi
Yeah, I mean they are kind of a ruling body on a global note, but everybody sits up and pays attention to it.
Greg Garner – Singular Research
Okay.
Dino Rossi
Yeah.
Greg Garner – Singular Research
Great. And on the ARC, is there any expansion possibilities from the propylene oxide with the not fumigation, any – it’s 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...
Dino Rossi
Yeah.
Greg Garner – Singular Research
Side of the market?
Dino Rossi
Yeah. Yeah, so I mean there are the nuts that are treated today, including the cashew, certainly almonds are far and away the largest nut, and the almond market is the one, who has talked about growth opportunities.
California is the largest growing home 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’s 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 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 to get the governments to move, very difficult to predict.
Greg Garner – Singular Research
Okay. And one follow-up question from your commentary on the acquisition that’s – discussions at your end.
Would these – if they were to come to fruition, would it be as large of a acquisition as it was few years back, when you entered the choline business or are they more tuck-in acquisitions?
Dino Rossi
I would say that a couple of definite – I could argue that individually the choline acquisitions were kind of tuck-in, given the size in how we went about that. So I would say that a number of them are of comparable size to that.
And then, there is one other that’s certainly I would say larger.
Greg Garner – Singular Research
Okay. All right.
Thank you.
Dino Rossi
Thank you.
Operator
Our next question comes from Andrew O’Connor of Harris Investments. Caller, please proceed with your question.
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.
Dino Rossi
Yeah. 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 quite honestly as quickly as we can.
But probability, we are 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 it’s – I would say it’s tracking based on the engineering guidelines that have been outlined and to be honest with you, we’re starting to hire people down there and move the program forward.
Andrew O’Connor – Harris Investments
Thanks, Dino. And then, the capacity from the new facility, the new Virginia facility, is that spoken for a contractor, what percent of the total is already spoken for?
Dino Rossi
Yeah. 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 in to some pinch point here.
So I think that beyond, 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 economic continue in the fashion that they are, I think we’ll see that move pretty quickly.
Andrew O’Connor – Harris Investments
Okay. And then I had a couple of other questions if that’s all right.
Is there an economic return that you do expect to realize on the $12 millions spent in Virginia, Dino?
Dino Rossi
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 optimistic update.
Andrew O’Connor – Harris Investments
Okay. So a two to three-year payback period?
Dino Rossi
Yes.
Andrew O’Connor – Harris Investments
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.
Dino Rossi
Yeah. 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.
So it depends on to some degree how well these guys bought futures that either impacts them 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, subsequent to wheat, corns and things like that, where generally it’s just a cheaper ration. Quite honestly, that kind opens the door to be supplemented with other products that we think will probably favor us given what our products do and performance that comes with it, not to say that were cheap products, but I think there’s a 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 what not, but at the end of the day, I think that our comments about 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 are going to look at that ration cost real hard, they’ll look to maximize milk productions truly, but likely from a smaller herd. Some of the cows can be called and sold for these.
So I think they are – they are looking to reshuffle the deck there if you will to figure out how they too can be profitable, but certainly in non-certain terms those grain prices are driving these guys to look at all of this real hard right now and decide how 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’ve felt the blunt of this yet either, I think that’s still, yeah, it’s going to be coming in third and fourth quarters. So very difficult to, no question, and I think a little bit difficult to predict, but generally, if you follow the poultry industry and our people that’s playing in that state, they’re still announcing some pretty decent numbers, but certainly hedging this to what’s going to happen in the balance of the year.
Andrew O’Connor – Harris Investments
Thanks for your color. Good luck, guys.
Dino Rossi
Thank you.
Operator
Our next question comes from Lenny Dunn of Freedom Investors Corporation. Caller, please proceed with your questions.
Lenny Dunn – Freedom Investors Corporation
Good quarter. Taking in to consideration the (inaudible) and looking at the amount of cash that you are generating and your balance sheet, it seems to me that it would make sense to start a quarterly dividend policy, I don’t see how that would harm your abilities to make the 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, (inaudible) decreasing the float, because we like to have as much floats possible, but I do think it makes sense to start a quarter with dividend policy.
It would be a nice thing.
Dino Rossi
Lenny, we’ve looked at that in the past for sure. We’ve heard it from other people as well.
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 top line 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 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, as I said, we hear you, understand your position. I’ll tell you too that, yeah, I think you commented about a stock buyback, while the program is in place, not probably we’re looking to do anything on that front at least the near-term.
So – but, we hear you. So, thanks.
Lenny Dunn – Freedom Investors Corporation
Again, I think it’s a fine line that you work, but I think – I guess can’t see how it would deter you from making an acquisition to stay at quarterly dividend policy?
Dino Rossi
Well. I’ve said, I hear you.
And we’ll look at it real hard. (Inaudible) continues to grow, we hear you and maybe it’s something we’ll adopt.
So we’ll see.
Lenny Dunn – Freedom Investors Corporation
Okay. Thank you.
Dino Rossi
Thank you.
Operator
Next question comes from Lawrence Goldstein of Santa Monica Partners. Caller, please proceed with your question.
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, we have other products and some people or some companies might simply say we have a new improved product and wait till you have that and come out with it.
How does it all work?
Dino Rossi
Yeah. 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 high row 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 especially thought we had designed in and it was there. And so I think if we go out in a very scientific fashion and our product is going to do action 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 looked at the entire franchise and said, 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 – 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, I would say on a go forward basis, I think in general, we position ourselves to come back with a product that is desired by the market.
Lawrence Goldstein – Santa Monica Partners
A comment about dividends I can’t help to 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 than I hope a lot less even if the dividend amount is more. And we would do far better as long as you see acquisition of opportunities and historic 20% return on equity is the way for, so I don’t see any point in a dividend and I don’t think you should do it all.
Dino Rossi
Okay. 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 would be the acquisition opportunities for joint ventures make a dictated decision there, but as we know, historically we haven’t gone in that direction (inaudible) 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.
Operator
Our next question comes from Tony Polak of Maxim Group. Caller, please proceed with your question.
Tony Polak – Maxim Group
Good morning. In terms of the CureMark NDA filing, you said you’re doing everything to support their NDA filing, I guess that statement comes to when you would expect that filing to happen, I was wondering if you could give us timeframe before the winter?
Dino Rossi
Yeah. 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 thing dramatically for sure. But, it has slipped a little bit.
But I know it’s aggressively being worked on, not only our part of it, but the balance of that filing as well. My sense is in – and in my conversation, that it’s still yet going to be this year, could be late Q3, it could be in to Q4, but I think for sure, that filing will be done this year.
Tony Polak – Maxim Group
Okay. Good.
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?
Dino Rossi
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 yeah.
We’ve passed through what I think are pretty good numbers to cover what was happening in Q2. Again, saw a little bit 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 hold claw back a little bit on some of that margin.
Tony Polak – Maxim Group
Right. Okay.
Can I assume that you hope to earn something like $3 million next year on the new plant? Is that an accurate number?
Dino Rossi
Well, if you’re tying that to my comment about three year – 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, in a general economic situation to say the same, the earlier comment about the drought situation and what’s going to happen with feed costs could changes that view, but it probably wouldn’t be a bad assumption with all else being equal.
Tony Polak – Maxim Group
Thanks. Is there a number of capacity on the choline, both the industrial and even choline on where you’re at right now?
Dino Rossi
Yeah. 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.
Tony Polak – Maxim Group
Right. Okay.
Thank you.
Dino Rossi
Thank you.
Operator
It appears there are no further questions at this time. I would now like to turn the floor back to management for closing comments.
Dino Rossi
Okay. So, I’ll thank everybody for attending the meeting.
Again, thought it was a pretty solid last strong quarter, especially given the ups and downs going on out there, but we feel pretty strong about that. So again, thanks and look forward to talking to you next quarter.
Operator
This concludes today’s teleconference. You may now disconnect your lines at this time.
And have a wonderful day.