Bill Backus - CFO Dino Rossi - Chairman, President and CEO

Tim Ramey - Pivotal Research Group Lawrence Goldstein - Santa Monica Partners Mike Ritzenthaler - Piper Jaffray & Co. Jack Balsam - Private Investor Lenny Dunn - Freedom Investors Corporation Dusty Henderson - Eagle Asset Management Anthony Polak - Aegis Capital Hamed Khorsand - BWS Financial

Thank you. Ladies and gentlemen, thank you for joining our conference call this morning to discuss the results of Balchem Corporation for the quarter ending December 31st, 2014.

My name is Bill Backus, Chief Financial Officer, and hosting this call with me is Dino Rossi, our Chairman, President, and CEO. Following advice of our counsel, orders and the SEC, at this time I would like to read our forward-looking statement.

This release does contain or likely will contain forward-looking statements, which reflect Balchem's expectation or belief concerning future events that involve risks and uncertainties. We can give no assurance that the expectations reflected in forward-looking statements will prove correct, and various factors could cause results to differ materially from our expectations, including risks and factors identified in Balchem's Form 10-K.

Forward-looking statements are qualified in their entirety by this cautionary statement. The financial information that is referenced in this meeting was disclosed this morning in our quarterly press release at 9.30 AM Eastern Time.

I will now turn the call over to Dino Rossi, our Chairman, President and CEO.

Thanks Bill. Good morning, ladies and gentlemen, and welcome to our conference call.

This morning we reported record quarter consolidated net sales of $162.7 million, which resulted in record net income for the quarter of $19 million, or $0.61 a share. As disclosed in this morning's press release, these fourth quarter results include items relating to the acquisition of SensoryEffects that impacted our results.

As a reminder, on May 7th Balchem acquired SensoryEffects, a privately held supplier of customized food and beverage ingredient systems. We are happy to provide additional details for you on these items as we proceed through this call.

As mentioned for the fourth quarter we reported earnings of $0.61 per share on a GAAP basis. This result includes certain non-operational items that I would like to highlight.

Amortization expenses of $7.1 million, are a direct result of the valuation of the purchase accounting rules. Consequently our non-GAAP earnings exclude these expenses to facilitate an evaluation of our current operating performance, and reflect equivalent accounting comparisons to our operating performance of the prior year period.

In the quarter we also incurred additional integration costs related to the acquisition totaling $310,000, which were expensed in our GAAP financial statements. Our fourth quarter sales of $162.7 million were 99.3% greater than the $81.6 million result of the prior year comparable quarter, excluding the impact of SensoryEffects acquisition, net sales were up 24.7% compared with the fourth quarter 2013, despite the negative impact of foreign currency which totaled $1.4 million.

In the quarter ARC Specialty Products segment generated record quarterly sales of $14 million, and grew 10.3% over the prior year quarter. Animal Nutrition and Health sales of $75.8 million were up 33.2% over the comparable quarter.

Sales in the ANH ruminant ingredients sector were particularly strong, increasing approximately 42% from the comparable prior year quarter, primarily due to higher volumes sold and a favorable product mix, with particular strength in rumen protected choline and amino acids. Monogastric product sales were up 11%, primarily due to increased volumes sold in both domestic and international poultry markets, as well as products for the companion animal and aqua culture species.

Sales of industrial grade products were up approximately 65% from the prior year comparable quarter, as volumes sold at various choline and choline derivatives for industrial applications notably for shale fracking increased depreciably. In the SensoryEffects segment, which includes the former Food Pharma and Nutrition grew net sales of $72.9 million, an increase of $60.9 million from the comparable prior year quarter.

Net sales from the newly acquired SensoryEffects business drove this increase as sales of legacy product lines were static, with considerable strength in encapsulating ingredients for baking and food preservation in the domestic markets, being offset somewhat by lower international sales, due primarily to order timing and the negative impact of the strength in the US dollar, as we are an exporter into the international markets served. US GAAP reported earnings from operations of $27 million increased $10.9 million, or 67.2% from the prior year comparable quarter.

On a non-GAAP basis as detailed in our earnings release this morning, earnings from operations of $31.3 million increased $14.1 million, or 82.5% from the prior year comparable quarter. As previously noted, consolidated net income closed the quarter at $19 million, up from $10.7 million in the prior year quarter.

This quarterly net income translated into diluted net earnings per share of $0.61, compared to the $0.35 we posted in the comparable quarter of 2013. On a non-GAAP basis and as detailed in our earnings release, our diluted net earnings per share were $0.67, as compared to $0.37 in the prior year quarter, or an 81.1% increase.

Our consolidated gross profits were $44.1 million, or 27.1% of sales in the quarter, an increase of $20.4 million or 86%, but down from a 29.1% of sales level in Q4 of 2013. Gross margin for the combined SensoryEffects segment, was reduced primarily due to a product mix more heavily weighted toward the powdered and flavored systems of SensoryEffects, which generates a slightly lower gross margin.

In the period, we also realized some inventory write-offs due to aging and off-spec production in this combined SensoryEffects segment. Gross margin percentage increased for the Animal Nutrition and Health segment by 1%, primarily due to a favorable product mix and efficiencies resulting from higher volumes.

Consolidated operating expenses for the 3 months ended December 31 were $17.1 million, or 10.5% of net sales, as compared to $7.6 million, or 9.4% of net sales for the 3 months ended December 31, 2013. The increase was primarily due to the inclusion of SensoryEffects operating expenses, increased amortization expense of $5.8 million related to the acquired intangible SensoryEffects acquisition assets, as well as integration expenses of $310,000.

Partially offsetting these increased operating expenses was a $2.9 million net legal settlement. Looking forward we expect to leverage off of our existing SG&A infrastructure, and exercise tight control over all controllable operating expenses.

Interest expense for the 3 months ended December 31 was $1.8 million, and is related to the term loan for the acquisition of SensoryEffects. The term loan has a remaining balance of $332.5 million at December 31.

The Company's effective tax rate for the 3 months ended December 31, 2014 and 2013 was 24.5% and 33.7% respectively. This decrease in the effective tax rate was primarily attributable to the benefit of the full year renewal of the R&D tax credit in the US at the end of 2014, a change in apportionment relating to state income taxes, the determination of state income tax filing requirements related to unitary combined returns, and a nontaxable legal settlement.

As outlined in our earnings release our fourth quarter results generated approximately $35.6 million of adjusted EBITDA in the quarter, which translates to 22% of sales, and equals approximately $1.13 per diluted share. Our balance sheet continued to strengthen and our cash flow remains strong, as we closed out the quarter with approximately $50 million of cash.

I am now going to have Bill Backus discuss the ARC Specialty Products and the Animal Nutrition and Health segments.

Thanks Dino. The ARC Specialty Products segment posted quarterly sales of approximately $14 million for the 3 months ended December 31, 2014, as compared with $12.7 million for the 3 months ended December 31, 2013, an increase of $1.3 million, or 10.3%.

These higher sales were derived from higher volumes of ethylene oxide products used for medical device sterilization. All quarterly earnings from operations were $5.7 million, an increase of $552,000, or 10.6%.

This increase is principally due to the noted volume increase in sales. During the quarter we continued to incur additional expenses pursuing other new end market applications.

In the Animal Nutrition and Health segment we realized sales of $75.8 million, as compared with $56.9 million for the 3 months ended December 31, 2013, an increase of $18.9 million, or 33.2%. Sales of product lines targeted for ruminant animal feed markets increased by $4.4 million, or 42% from the prior year comparable period, resulting from increased sales volumes of our products, particularly ReaShure, NitroShure and AminoShure.

The health of the US dairy industry continues to support strong demand for our products. Lower feed prices along with continued strong demand for milk in Q4 were key factors.

These positive indicators provide support for greater expected utilization of our products, which are targeted to maximize results of production animals. Global monogastric species sales including feed grade choline products increased $3 million, or 11% primarily due to higher volumes sold in both domestic and international markets.

North American choline volumes sold typically tracked closely with broiler chick placements and eggs sets. As lower feed prices and favorable economic conditions provide incentive for broiler integrators to expand production, there has been an increase in egg sets and a higher number of chicks placed for grow out, which has resulted in the USDA broiler meat production forecast for 2015 being up 2% to 3%.

Sales for industrial applications comprised approximately 39% of sales in the segment, as compared to 31% for the comparable 3 months ended December 31st 2013. Industrial sales grew $11.5 million, or 65% over the prior year period, principally due to volume increases of various choline and choline derivatives for industrial applications, most notably for shale fracking.

With a keen focus on the recent trends to curb hydrocarbon production, and projected industry activity during downturn, we realized sequential growth on the quarter of 4.2%. That success in this space continues to attraction competition from offshore producers, and lower oil and gas could have an ultimately negative impact on fracking.

However we remain confident in the competitiveness and efficacy of our products, and believe there is still opportunity to gain additional market share. Our earnings from operations for this entire segment were $11.5 million, an increase of 39.5%, primarily due to higher net sales derived from volume growth.

I will now turn the call over to Dino, for him to discuss the SensoryEffects segment.

Thanks Bill. As previously noted for the quarter sales of our consolidated SensoryEffects segment were $72.9 million, an increase of $60.9 million from the comparable prior year quarter.

Earnings from operations for this segment were $7 million versus $2.7 million in the prior year comparable quarter. Excluding the effect of noncash expenses associated with amortization of SensoryEffects acquired intangible assets, non-GAAP earnings of operations for this segment were $13 million.

Clearly the profitability of this combined segment is contributing to the level of our expectations except for the additional integration costs and inventory adjustments previously noted. The sales level realized significant ups and downs to close out the quarter, up a modest 1.5% on a sequential basis.

The legacy powder business of Sensory was up sequentially 15%, the cereal business was up 20% with the flavor and inclusions business down 17%, netting a 3.4% increase sequentially. In the flavor business, certain levels of seasonality affected this business, due to products sold for frozen dessert, which as a market realized a weak year due to weather and high milk prices, particularly affecting ice cream sales.

Certain beverage and dairy sales of fruit juices to the international markets, as well as slowness of juice and smoothie sales also negatively impacted the store level, also negatively impacted this sector of this segment. Sequentially legacy Balchem sales were soft, particularly in the international end cap line due to foreign exchange rate pressures and order timing.

We continue to focus on the integration of the combined SensoryEffects on building consumer awareness of the benefits of choline, positioning choline in the food and the nutritional supplement companies, an essential ingredient to be included in existing, new and novel Sensory solutions, which we expect to introduce to the market later in 2015. We are supporting additional external scientific research, and are excited with the recent FDA proposal that an RDI recommended daily intake for choline be accepted.

As previously discussed, our pharmaceutical delivery development efforts continue. We continue to work closely with the licensee of our Talk technology, who has completed Phase 3 clinicals for their drug to be utilized in the treatment of autism.

Their New Drug Application is being filed with the US FDA, and we are collaborating as required. In the near term, the sector remains a net expense to the business segment.

We are always looking to expand our product offerings, particularly via new end use applications and moving into new geographies. We expect to strengthen our global growth platform particularly in the human and animal nutrition markets, and are confident that more business can be generated based on the unique portfolio of technologies and products that we offer.

Our business continues to generate and create good balance, yielding profitable growth opportunities across the served value chain. We remain focused on helping our customers generate reinvestment level returns, while maintaining our own operating discipline.

We continue to build the financial strength of the Company, managing the working capital base aggressively, and yielding solid financial results to be a quality supplier. Near term we remain focused on integrating SensoryEffects.

We continue to explore possible alliances, acquisitions, and/or joint ventures to build and leverage on our strategic intentions, technology and strong human asset base. This now concludes the formal portion of the conference.

At this point I will open the conference call for questions.

Good morning. Congratulations on a wonderful quarter.

Thanks.

A couple of things come to mind. I wondered about the impact of declining petro chemical prices on gross margin.

I know you linked those with contracts, and any benefit is likely short-term, but did you see a benefit in the quarter? How should we think about margins in 4Q, relative to maybe the next couple of quarters?

Were they elevated as a result?

I don't know that I could say they were elevated, Tim. Certainly as you all know what is going on in the oil and gas space, and there is a lot of pressure coming from the service providers in that space, as it relates to price across the board.

Not necessarily directed at us, but pretty much across the board. As I commented here almost casually, that we look to work with our customers to generate reinvestment type returns, and so to that end we are very cognizant, and we were cognizant even in the quarter of some requests for some price relief.

You are right. We do have formulas that take into consideration pricing opportunities for those customers under contract.

The real part of this is have the raw materials going down. We started to see some of that relief in Q1 I would say in a bigger way certainly than even Q4.

A little bit in Q4, but more in Q1. So again working with those folks, we’re probably going to look to pass on those raw material costs decreases to them per formula, and trying to stay very, very cognizant of what is going on in that market right now.

And then just specifically on SensoryEffects, you did call out some mix differences there, and we don't have a lot of experience modeling that business, if there is 1 variance from my expectation, it is that margins were a little lower in that segment than I thought they might be, but just due to naivety I suppose on what to expect. Should we expect seasonality in margins there, or was this particular quarter below what you would characterize as trend line?

Can you comment at all on EBIT margins there?

I would say it is a little bit lower than what we had gone into this expecting, but definitely there is a bit of seasonality as it relates to what historically has been their flavor and inclusion business, because of maybe more so where those products are aligned. But I do think that, I know we took some charges to the P&L for inventory, aging inventory, some off spec material that I certainly want to believe were one-time events.

You should see some restoration there. And certainly I think that we continue to look at logistic opportunities for that business, as well as leveraging our buying position, that we are still confident there are going to be some opportunities there.

But the real key for us is going to be to generate new products to the market, which we think we can get out there as new and novel or certainly I would say unique that should carry higher margins as well. I mean with that said too, we look to leverage on the existing infrastructure.

So with growth in sales should also come a reduction on a percentage basis of SG&A. So all of those things I think are being worked on right now, and certainly I would say our expectations is still yet to continue to see a higher level than what you saw in this quarter.

And 1 for Bill, obviously the tax rate benefited from the late inclusion of those R&D tax credits. Do you have some thoughts on what tax rate might look like in 2015 as a result of that?

Yeah, you can use it for modeling, it should be somewhere around 34.5%, approximately 34.5%. That takes into account that the R&D credit has not been extended into 2015, should that occur then that rate would go down somewhat.

So if you’re using a 34.5%, it might go to like a 34.2% at that point. But we'll wait and see what happens with that credit again.

Thanks so much.

Hi Dino, 2 questions. You indicated that basically you are pretty optimistic particularly with future profit margins, I think that you just commented on that again, you wrote it in the press release, and made some other positive comments.

What I don't understand is the use of the language in the press release. You expect a period of short-term geo-political disruptions, a year of opportunity to create more shareholder value.

I would tend to interpret that as meaning, we expect to see soft results, maybe negative results in some future quarter or quarters into the year. Maybe not a whole lot of change or negativity.

Maybe I am wrong. Could you interpret those words?

Sure. I think that, Larry again, we always get into periods of comparison here.

We made note here in this quarter that FX cost us $1.4 million on the top line. I think that, I don't know you hear about parity on the Euro, and how that’s going to shake through overall, and I don't know that it is just a question of FX, is it going to affect our ability to compete?

We will compete. We can be competitive for sure.

Will that affect margins near term, or will we make some counter measures to offset that near term? Near term could be 6 months, nine months.

I think the whole oil and gas market place is, there are certainly questions as to where the barrel is going to settle out. I don't know that that is going to happen near term, or as fast as it falls could it rise.

I don't think so, but I am not certain. That's why I allude to the geo-political issues that are certainly outside of our control, and what is really driving those things, that could have an impact here that are - if I had the crystal ball I probably would be doing something else.

But what I know is it creates a level of uncertainty, and that's why I hitched on that a little bit.

Another question, you indicated that you are continuing to work which CureMark, which submitted an FDA. They submitted the FDA following Phase 3 back in December of 2013.

What the hell is going on with them, that it takes a year and a couple of months and no word? It seems very odd.

What can you say about that?

They have filed what is called a rolling NDA, Larry, and that was by design. It was beginning with the idea that a lot of information clearly has to be submitted for any new drug.

So they continue to put information into that filing with the FDA. The FDA has come back and asked them to run some additional tests.

This is not in conflict with the Phase 3 approval. It is just some other tests they want to have run before issuing as [indiscernible].

When I made comments that we are working closely with them and collaborating, it is really to provide them some products for additional testing that the FDA has requested. Again I don't want to create any kind of scare here.

They have gone through Phase 3, and they are doing the rolling filing, which is kind of a standard in the industry, but sure it is taking a while. I am not going to pretend to be a pharmaceutical expert, but I have also talked to a number of people who say it is not so unusual for rolling NDAs to take this long.

One last question. I am currently calling from Tel Aviv, Israel.

As I have been around the country I have discovered that the most productive herds of cows producing milk in the world are here. Do you guys sell their product?

That I haven't been able to find out.

We are not selling any product into Israel. And I am not sure if they are necessarily the top performing, but I will tell you that we are not selling any product there today.

Lawrence Goldstein, Santa Monica Partners 18 Thank you. Why not, by the way?

Why not?

I would have to default and ask our ANH guys, Larry. I don't have an answer off the top of my head.

Maybe we can get one. Thank you.

Yes, good morning. Dino, a follow-up on SensoryEffects, is there any color you can add to expectations in terms of organic growth as 2015 progresses, and as perhaps synergies start to become more of a significant part of the narrative?

Just wondering about 2015. Not looking for any specific guidance obviously, but in terms of SensoryEffects as it rolls out through 2015?

I think we still remain bullish, I know a number of people question the idea that this business could grow 10%, which is what we have said in the past. I can assure you we are working on a number of new products to bring to market.

I would say based on the current technology they have with the enhancements of those products to include some of the Balchem technology, so I would say that we are still bullish on the idea that it can be, I am going to say stronger than industry growth for sure, which in any particular sector of the food industry segment, you will find growth rates anywhere from 3% to 10%. And on average probably 3% to 5% is what's out there.

So we do expect to see growth on a go forward basis. I eluded to some sequential data here for you all to consider, because clearly there has been some significant growth going on in parts of the business, and then there has been softness.

If it wasn't for those particular soft spots which I think there was definitely seasonality aligned with, we probably would be talking about that type of growth number for the quarter. I am not going to make excuses for that.

There will be puts and takes, but overall still believe that there is good upside growth opportunity here.

Thanks. And the ruminant growth was quite robust, despite milk and cheese prices rolling over in 4Q.

Wondering if you can discuss a little the role that new products played in the quarter, and whether mid to high single growth in ruminant is a reasonable basis for 2015?

We have talked a lot about the ruminant space, and the percent market penetration in general for a lot of the products that we do take to market and far and away, we are very, very North American centric with that product line offering. I think as we look at this our expectation it is to see an indefinitely solid double-digit growth minimally around 20%.

And that is with new products coming to market. And certainly part of that is based on the amino acids we brought out earlier in 2014, and have continued to see good uptake of that line, as well as our, I am going to say our flagship ReaShure, which is an encapsulated choline product, where we continue to pick up more herds, if you will.

Just recently I was in a conference where they are still coming back to what is going on in that industry. I think they are still very strong feelings among herd managers that they are still making money.

I know milk prices have come down and feed prices are off a bit for sure and have stayed down, so I think the opportunity is still there for these guys to make very good money, and they are planning to execute on that. With that I think our products fit, if you will to help make them more profitable.

And the feedback certainly from our products in the space has been very positive.

That's helpful. Another question on the price sensitivity in ARC to ethylene oxide and propylene oxide gases.

I think is maybe a more specific follow-up to an earlier questions. As oil rolls over, is there any impact you can sort of quantify as we look at 2015 for the ethylene oxide and propylene oxide packaged gases in terms of margin?

Maybe a little bit of a drag on the top line, or something like that?

We have all of those customers under contract, and of course depending on size of those contracts have a different look to them. I think certainly we have the ability to pass on any cost increases at different times in the year, depending on the customer.

I'll be honest with you. I'm hoping that a little bit of the weakness we have seen in the petro chemical side of this, will translate in us not pushing through the price increases I will say for the good of the industry, and certainly look to maintain if you will, the kind of margin we are seeing out of that business today.

Again my sense is that there definitely has been relief to some degree. Probably not as much as people might otherwise expect, given what has happened with natural gas prices.

But I would say it is beginning to trickle down, which is I think good for us and certainly will be good for our customers as well.

Excellent. Thank you.

Thank you.

Yes, I am a long-term holder of Balchem going back more than 25 years. Of course, I'm very pleased with the growth of the investment over that period of time, and the numbers certainly reflect continued hopes for the future, but what bothers me is that in the past year, I am seeing a lot of insider selling, but no insider buying.

Is this the indication that insiders feel that the P ratio is a little too high?

Jack, I don't know that I would, and I am one of those sellers, so let's be clear. I'm sure people see that, so there is no hiding that.

I think a lot of this is just about financial planning, and I am out there well in advance with what my intentions are, and not trying to sell when it is $65 a share versus $53 a share, or anything like that. So it is not people here running scared for sure.

If anything I think you would probably find that most of the management team and the employees who own stock, and I will tell you that probably 95% of Balchem employees own stock in the Company, and continue to buy through 401k investment plans and what not, so that continues to happen in a significant way, including myself. I would tell you that there is not panic in the park trying to capitalize on a high multiple, or anything like that.

Everybody kind of gets used to a multiple and has an expectation I think on a go forward basis. If anything, I would say internally we are up to the challenge of keeping the multiple there, and helping to drive it even higher.

That's kind of the internal flavor.

Okay. Thank you very much.

Thank you.

Good morning. A couple of things.

I think the acquisition was timed well, because now the choline sales to fracking are a smaller percentage of your business, so that worked out very well. Now going forward, clearly the fracking business will be slower, but that shouldn't affect you too much.

Because you are also getting the benefit of the lower petro chemical prices too. Correct me if I'm wrong?

There is certainly a level of truth there. I would say, Lenny, everybody likes to see the sales number grow, as we do as well.

Trying to make up for that on the back of lower raw material costs is always tricky. But certainly you are right.

There is some give and take there that is going to gravitate to the business based on those lower cost raw materials, that quite honestly go broader than simply on fracking choline material. So there is definitely some claw back that should take place.

And you are not modeling this much growth to sales fracking industry at least in the near term I assume, right?

Yes, I would say internally we are watching what is going on this that space. I noted here today we have seen sequential growth quarter-over-quarter, Q3, Q4 and clearly you saw the numbers in comparison to the prior year quarter, which are still quite strong.

We continue to see solid pull on that product line. Exactly, you have to be very, very careful where the product goes, which fields are continuing to be developed in terms of shale plays.

And which ones get slowed down a little bit, given the inventory levels of natural gas and oil in general. Certainly we don't see the valves being shut off, if you will.

From our standpoint we are still planning to see at least where we are, and hopefully some continued growth.

And the other thing in your news release you stated you had adequate capital for acquisitions, but in the past you have always been very conservative with your balance sheet. I don't think it is a leap of faith to think that you are probably not going to do large acquisitions this calendar year.

Is that accurate?

I think it is an accurate statement. I would say that I sit here today and don't have a large acquisition that we are even looking at.

There are some smaller ones, but certainly order of magnitude is not the size of the Sensory.

Okay. That's all I had.

Thank you very much and keep up the good work.

Thank you.

Thanks for the follow-up. Great cash generation in the 4Q, and I'm assuming that the $50 million cash balance is just held for the $35 million note payment that is coming up.

Can you comment on kind of what structural level of cash is advantageous for the business at this point? Assuming that's where the $50 million is going, or $35 million of it anyway?

Tim, well you mentioned $35 million debt payment, but we pay about $8.8 million per quarter so I just want to clarify on that, the terms of the principal payments, and the obviously the interest associated with that. We made a conscious decision at this point for the $50 million, Dino mentioned smaller acquisitions and we want cash available for that, as well as just our working capital needs.

We also have $100 million available with the revolver, so we have the ability to tap more cash if we need it. At this point, as far as our strategy, we just think it is better to hold on to it, the interest rates are really low at this point.

We have near term projects ROI projects that require some cash infusion also. That's why we are holding on to the $50 million at this point.

And just on the FX comment, was that $1.4 million at the top line for 4Q, or for the full year? I assume that was 4Q that you mentioned?

That's correct.

Do you though the number for the full year?

I don't know it offhand. I mean obviously the FX rate came down dramatically.

I can tell you if you look at Q3 it was another $1.1 million or so I believe at that point. Certainly the Euro came down dramatically in the second half of the year.

And as you kind of think about that going forward, that's primarily an impact in Animal Health Nutrition? Am I right there?

That's correct, yes.

Okay, thank you.

You're welcome.

Good morning. I'm trying to understand the fracking choline business better.

Is the industrial product used early or late in the process of fracking a well?

In the actual frack it goes in initially with the frack fluid. It is on the front end of that frack fluid, absolutely.

Great. What do you think your market share is there?

Defining that market share, I mean, versus other competitors I would say we are in a very strong position, as it relates to a compound used as a clay swelling inhibitor, and we talked about this before. There is displacement of KCL that takes place.

Having a clear view to how much KCL is still being used in fracking is a little bit difficult. There is no absolute disclosure of that anywhere.

Our sense is that we are probably around 35% to 40% market penetration, as we know the fracking space today. I mean if it shrinks tomorrow obviously that percent could change.

That's our sense right now.

Thanks. And also have you disclosed where your clients, the basins your clients are located in?

No, we haven't, and the reason we haven't done that is we go through distribution. We don't sell our product directly to those basins, which is not unusual for a lot of the chemicals that go out there.

But we do know we are in all of the major plays that are out there. On a percentage basis how many within the Permian Basin, or the Marcellus shale, and I will say or, or, or.

We are not certain penetration in any one of those fields happens because of the distribution channel. We are not on the front end of that.

And thanks for the additional disclosure that this sector comprises 39% of total sales for ANH. We appreciate it.

Keep up the good work.

Thank you.

Good morning.

Good morning.

Can you tell us what the inventory adjustments were for the new acquisition?

In the quarter?

Yes.

Order of magnitude, about $700,000.

And the dock strike, did that affect any of your competitors, choline coming into the country?

You are talking about the west coast dock strike?

Yes.

It is a little bit difficult to tell. We get a lot of data about imports coming in, and some of it we even pick up on as products are still on the water.

I can't tell you that at least at this moment any kind of significant change, we do know that it is creating some pressure there. The alternative is to come through the Panama Canal and through material into Houston.

We haven't seen yet where people reroute that, but I would say from the standpoint of servicing the market place, we haven't seen any significant difference to date.

Could you comment on the Chinese competition in choline?

I think it's pretty much as it's been. The same, if you will, players are there in the space.

We have, I would say our observation, and you get into fluctuations on any month. You will see a slug of choline come in, and then the next month you won't see any.

I think some goes to inventory and it gets bled out, so you are never really sure exactly how quickly it gets consumed, if you will. So that is always as we look at the data, it is a little bit difficult to tell.

We probably get a little alarm when we see a big number in any 1 month, and then the next month it falls off to practically zero. So that's where it is a little bit hard to say, but certainly I would say on an overall basis, quarterly, annually, it looks to be, I am going to say flat with where it has been, and maybe even down a little bit.

In terms of the super bug, do you see any increased ethylene oxide sales because of that in California?

Well again, we distribute our product for medical device sterilization. Our view to see that it is particularly being used for those scopes is not within our view, but we do know that the product is being used for those scopes that have been identified as I guess at least early indications are linked to that scope.

I won't make that accusation, but clearly we do know they are using our product at least now, and if you read some of the articles it would suggest that maybe that wasn't the case before. I can't be certain.

But certainly the latest articles have suggested that they are using it for that. Order of magnitude, I don't know even know how many of the scopes are built or used or re-used if you will, that would consume X amount of ethylene oxide.

But positive news is that we know for sure now it is being used.

Could you explain a little capital expenses for 2015, where that is going to be going?

Yes, we have talked before in the neighborhood of about $40 million which is a larger year than normal. We have certainly a number of significant projects going on, including the joint venture project that we are projecting in that number.

We are building a co-gen plant in Italy these days. We have talked about getting into the agglomeration business, and making that investment here, which would be a new technology for us.

Really more directly aligned with SensoryEffects. There are a number of large projects in that number, that are maybe from a large project standpoint it is more than normal, but I think as the business grows, and those opportunities look real, including return on capital-type investment projects, the good news is we are in a position to take advantage and execute on those, so that's what we are looking to do.

Could you comment on the joint venture I think it is called Taminco? Is that how you pronounce it?

It was Taminco, Taminco has now been bought by Eastman Chemical. Basically the project is underway and moving forward.

Expectation is the engineering expectation is Q3, it should be operational, all hedged to Q4, but certainly it continues to track to that end.

And what type of increase in sales would you think you would see from that project?

A lot of that was built around seeing choline continue to be consumed at a pretty steady rate for the fracking space. Rather than try to project that right now, Tony, I think I will wait another quarter or so, and see what happens in the oil and gas side of this.

So for me to project how much of that consumption will take place out in Q3, Q4, again, I don't have that crystal ball.

Anything on the choline labeling from the FDA?

I think absolute required labeling will be out in 2016, but we are certainly promoting here in between, and you are going to I think see people adopt it sooner than that, but mandatory is out in 2016.

Thanks, great quarter.

Thank you.

Well, I think a lot of it depends on how much a decline needs to be factored in. As I just commented we haven't seen the decline that I think people thought we might have seen already.

If you follow commentary from the large service providers, what you're going to read is that they may not be drilling new wells. You don't use choline in drilling new wells.

But where they have wells already sunk, sunk costs there, I think that the expectation is they will continue to harvest the hydrocarbon. Will it be pulled back some?

The answer is yes I think, but how severe that will be, I don't know. So I think that we plan to just pay very, very close attention to what the end market is telling us, and what they are looking to do.

I do think that they are going to continue to pump gas and oil, and they are going to do it via fracking. So that is the good news for us.

So I think as you ask us what our plan is here, it is almost a little premature on data, if you will, to say this is what we are going to do. There are things that can be postponed, if you will, in terms of new capacity, or interim steps that can be taken.

I will also point out the question that was raised earlier. Certainly I think expectation is raw material costs are expected to come down, so from a margin management standpoint, we would look to continue to take advantage of that if we can.

I think there is still yet a fair bit of unknown there, but believe me we pay very, very close attention to this daily including inventory levels that are out in trans load sites that we ship to, let alone the rate of pull either directly from our plants or from those trans load sites. Q - Hamed Khorsand And last question, can you divert inventory quickly, and how much of an impact would that have on margins?

When you say divert inventory? Q - Hamed Khorsand Meaning if you see a slow down as far as from oil customers, can you then transfer it to the other parts of the animal segment?

Yes, okay, so I have talked about this before. There is an international market.

We are a very large supplier already domestically, so to think we will divert it somewhere into the domestic market would be a real reach. International opportunities are there.

We have declined to participate, largely because of the competitive environment, which means really price points. It doesn't mean that we can't compete, but a redirect is a possibility, and I would say what we know is a lot of that international business is bid quarterly.

So how aggressive you want to get, the opportunity is there every quarter. So the idea of a redirect is definitely being looked at today, and those bids are being studied closely to see if we are going to pull any of those triggers.

Q - Hamed Khorsand Okay. Great.

Thank you.

Thank you.

Thanks again. Dino, if you mentioned it I missed it, can you describe what the legal settlement was about, the source of that?

Yes, it revolves there is a level of confidentiality here, it revolves around the purchases that we did with the SensoryEffects deal, and order of magnitude runs to the level of materiality necessarily, but it revolves around the transaction, and just a settlement that came out. Any time that you go into some of these transactions you learn things, and so there was an amicable settlement that was made on 1 or 2 different points, but we agreed to confidentiality so we are not going to give you anything for that.

Just from a modeling perspective, was the $700 million of obsolete inventory write-off in the number, but this was sort of out of the adjusted number? Or were they both out of the adjusted number?

Okay. Let me be clear Tim, it is $700,000 not $700 million.

Sorry.

I know that is a big gap. So it is in the numbers, it is reflected in the numbers, yes.

In adjusted?

Yes.

Okay. And then just 1 other follow-up on SensoryEffects, I know you had hope of cross fertilization and pollenization of customer lists between your existing business and their business.

Any commentary on that?

Yes, I think actually it is going quite well. Definitely where there are customers, to be honest with you I was in a conversation this morning with a couple of our people who are focused on what the new opportunity to bring some of what are legacy Balchem products, both choline and Acaps into an account that SensoryEffects has and it is a high level account to be sure.

But you are finding that the industry is starting to find out more about choline, they are asking to get introduced as a customer base is asking about getting introduced there, the idea of more nutritional value. So it is starting to happen.

Certainly our domestic sales group has been melded if you will with the SensoryEffects group, and they are operating as 1 group today, cross training has taken place. Accounts have been realigned, territories reassigned, and so that is all moving forward.

So again, it is still kind of early in the game, and getting people really trained up to the point where they are, sales people too need to be trained and feel comfortable with taking the story out there and running with it. But also to feel comfortable to tap into our applications people and pull them along where they need to, that is all starting to happen, so actually still a bit of the way that it is developing so far.

I assume SensoryEffects has as good visibility and relationships in the ready to eat cereal business, and to my knowledge you haven't really sold choline into RTE cereals, but with the RDA that seems logical, is that correct?

Well almost. There has been some choline that has moved into some of those RTEs, for sure.

I wouldn't say in a big, big way, but choline was not a new product to the people running this cereal business that we acquired. So there has been a little bit of that, and certainly they do a lot of work with the small box cereals if you will, which tend to be the higher end cereals, and certainly an expectation that we would see more growth out of that as we move forward here yet.

Thanks again.

Sure. Thank you.

Thanks. And I will say thanks everybody for being on the call today.

As I pointed out, I think that there has been some ups and downs along the way here, we are still yet learning about the SensoryEffects business, but feel good with the team that is in place there, and the opportunities moving forward. So we will continue to fight through a number of those issues, and I will just say, thanks for your support, and we will talk to you next quarter.