Balchem Corp

NASDAQ:BCPC

Earnings Call Transcript 2019-Q1

[Operator]

Greetings, and welcome to Balchem Corporation's quarterly conference call for our first quarter financial results. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to your host, Mr. Martin Bengtsson, Chief Financial Officer. Thank you. You may begin.

[Carl Bengtsson, executive]

Good morning, ladies and gentlemen. Thank you for joining our conference call this morning to discuss the results of Balchem Corporation for the quarter ending March 31, 2019. My name is Martin Bengtsson, Chief Financial Officer. And hosting this call with me is Ted Harris, our Chairman, CEO and President. Following the advice of our counsel, auditors and the SEC, at this time, I would like to read our forward-looking statement.

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

I will now turn over the call to Ted Harris, our Chairman, CEO and President.

[Theodore Harris, executive]

Thanks, Martin. Good morning, ladies and gentlemen, and welcome to our conference call. This morning, we reported quarterly consolidated net sales of $157 million, which resulted in first quarter net income of $18.8 million or $0.58 per share on a GAAP basis. Our first quarter non-GAAP net earnings of $23.7 million or $0.73 per share reported in our press release earlier this morning exclude tax-adjusted noncash amortization expense, transaction and integration costs, unallocated legal fees and excess tax benefits from equity compensation of $4.9 million to facilitate comparative evaluation of operating performance versus the prior year period. These non-GAAP net earnings of $23.7 million or $0.73 per share represent a decrease of $0.7 million or $0.03 per share compared with the prior year quarter of $24.4 million or $0.76 per share. We also delivered quarterly cash flows from operations of $22.5 million for the first quarter 2019 with quarterly free cash flow of $14 million. Our quarterly net sales of $157 million were 2.7% lower than the prior year comparable quarter. We achieved record first quarter sales in Human Nutrition & Health and saw continued strength in our Specialty Products segment offset by the expected decline in the Animal Nutrition & Health segment, driven by the prior year benefits from Chinese supply disruptions not repeating this year along with the decline in our Industrial Products segment, where volumes related to oil and gas fracking remain low compared to prior year. The impact of foreign exchange to our sales was a negative $1.4 million due to the weaker euro, driving a negative 90 basis point impact to our year-over-year growth.

Our Q1 consolidated gross margin dollars of $49.1 million were down $2.4 million or 4.6% compared with the same period in the prior year of $51.5 million. Our consolidated gross margin percent was 31.3% of sales in the quarter, down 60 basis points from 31.9% in Q1 of 2018. The decrease was primarily due to increased competitive activity in the European monogastric market, mix and certain inefficiencies primarily due to lower volumes in the monogastric and oil and gas businesses.

Consolidated operating expenses for the first quarter 2019 were $22.6 million as compared to $24.2 million in the prior year. The decrease was principally due to a decrease in certain compensation-related expenses. Excluding noncash operating expense associated with amortization of intangible assets of $5.1 million, operating expenses were $17.5 million or 11.1% of sales. Looking forward, we will continue to focus on tightly controlling our operating expenses and leveraging our existing SG&A infrastructure.

First quarter GAAP earnings from operations were $26.5 million which decreased $0.8 million or 2.8% compared to prior year. On an adjusted basis, as detailed in our earnings release this morning, earnings from operations of $33.1 million were down $1.1 million compared to $34.2 million in the prior year. Adjusted EBITDA of $39.7 million was $1.1 million or 2.6% below the $40.7 million posted in the first quarter of 2018.

Interest expense for the first quarter 2019 was $1.6 million and our net debt was $101 million. The company's effective tax rates for the first quarter 2019 and 2018 were 24.2% and 23.2%, respectively. The increase in the effective tax rate was primarily attributable to lower excess tax benefits from stock-based compensation and higher state taxes.

Consolidated net income closed the quarter at $18.8 million, down $0.6 million from the prior year quarter. This quarterly net income translated into diluted net earnings per share of $0.58 for the current year, a decrease of $0.02 per share over last year's comparable quarterly result of $0.60.

On an adjusted basis, and as detailed in our earnings release, our first quarter adjusted net earnings were $23.7 million or $0.73 per diluted share, down $0.7 million or 2.8% compared with $24.4 million or $0.76 per diluted share in the prior year quarter.

We generated quarterly free cash flow of $14 million and we closed out the quarter with $39 million of cash on the balance sheet. As indicated on our last call, our cash flow was particularly strong in the fourth quarter of 2018 due to the favorable timing of several capital expenditure and working capital items. These items totaled approximately $8 million and, as noted, would likely reverse in the first quarter of 2019. This expected Q1 2019 impact did occur and we now expect to see normalized cash flow generation through the remainder of the year. The $39 million of cash on the balance sheet reflects revolving loan payments of $16 million, dividend payments of $15.1 million and capital expenditures of $8.5 million in the first quarter of 2019.

Before passing the call back to Martin to cover the detailed results by segment, I would like to update you on a few of our key strategic activities and growth initiatives. Late yesterday, we announced that Balchem has signed a definitive agreement to acquire Chemogas NV, a privately held specialty gases company headquartered in Grimbergen, Belgium for a purchase price of EUR 95 million. Chemogas is a leader in the packaging and distribution of ethylene oxide for medical device sterilization, primarily in the European and Asian markets. This acquisition is a great addition to our existing leading position in the U.S. and significantly expands our geographic presence to position Balchem as the global leader in the critical supply of ethylene oxide to the medical device sterilization industry. The combination of our 2 companies will significantly enhance our ability to service and support our customers on a more global basis. Chemogas' 2019 revenues are expected to be approximately EUR 29 million, with an EBITDA margin of approximately 30%. This transaction is expected to be accretive to Balchem's earnings per share in 2019 on an adjusted basis.

Our Animal Nutrition & Health team has achieved some important milestones in both our ruminant protein and PetShure ingredient platforms. This past week at the internationally recognized Petfood Forum event in Kansas City, our teams introduced several new products to the industry. These novel offerings provide superior functionality for food and treat manufacturers, expanding ability for preservation and pH control as well as some enhanced solutions to deliver essential and required choline in convenient and efficient forms. These exciting additions to an already unique portfolio that is targeting a new course in the growing pet food space and creating value for pets and their pet parents.

In the ruminant business, our dedicated dairy research and commercial specialists are proud to announce the launch of our newest innovation in amino acid nutrition with the arrival of AminoShure XM, rumen-protected methionine. This next-generation product offers enhanced bioavailability and superior feed stability that allows it to deliver industry-leading value for dairy farmers around the world. This research-proven innovation is being launched in both our North American and European markets over the next several weeks.

Within our Human Nutrition & Health business, as we have discussed on previous calls, Balchem invested in a follow-on study to the Cornell University choline supplementation study during pregnancy to see if the cognitive benefits seen in the first year of life during the initial study persist into later childhood. The researchers at Cornell have conducted extensive neurologic and cognitive testing on the same children who are now 7 years old. We are pleased to report that the results from this follow-on study will be presented by Dr. Rick Canfield from Cornell University at the European Society for Gastroenterology, Hepatology and Nutrition Congress in Edinburgh, Scotland on June 7, 2019. We look forward to learning about the enduring effects of choline in these 7-year-olds.

With regards to CureMark and their work to develop a unique treatment for autism, we recently met with Joan Fallon, CureMark's Founder and CEO, who informed us about several important updates relative to the progress they're making. The CureMark team recently met with the U.S. Food and Drug Administration to have their pre-submission meeting. Amongst other topics, Joan Fallon informed us they discussed the results from the most recent Phase III clinical study that was completed at the end of 2017 as well as the necessary steps that need to be taken for ultimate submission of an application for approval.

Regarding the results from the most recent Phase III clinical study, we are pleased to hear that the principal investigator on the study, Dr. Deborah Pearson, from the University of Texas Health Science Center at Houston, will be presenting certain findings from the Phase III studies later today at that 2019 Annual Meeting of the International Society for Autism Research, or INSAR in Montreal, Canada.

Regarding the necessary steps that need to be taken for the ultimate submission of an application for approval, we were informed that CureMark will need to file a BLA, or Biologics License Application, instead of an NDA, or a New Drug Application, given both the nature of the product and evolving in recent guidance provided by FDA on the approval process of biologics. We are working with CureMark and their consultants to understand the implications of this development broadly for the whole project but also specifically for the work that Balchem needs to contribute relative to the manufacturing process.

The one fact that we have learned is that 12 years of exclusivity come with the successful BLA approval versus 5 years with an NDA, which would be a very positive development for both CureMark and Balchem. We appreciate Joan Fallon's recent update report and are encouraged by the progress being made.

I'm also excited to share that earlier this week, Balchem released its first sustainability report, which captures the company's commitment to managing our environmental, social and governance, or ESG, performance. While this is our first formal sustainability report, we have the past 50 years passionately engaged in developing and delivering innovative solutions for the health and nutritional needs of the world while operating our facilities and businesses to the expectations of all of our stakeholders. Our ambition is to be a stronger and more vibrant company that meaningfully contributes to making the world a healthier place. This report shares the foundation we have built and communicates our goals and commitments to these objectives.

I'm now going to turn the call back over to Martin to go through the detailed results for each of our segments.

[Carl Bengtsson, executive]

Thank you, Ted. For the quarter, our Human Nutrition & Health segment achieved a record first quarter sales of $85.1 million, an increase of $2.1 million or 2.5% from the prior year. The sales increase was primarily driven by higher ingredient solution sales into food and beverage markets, along with increased Cereal Systems sales. Human Nutrition & Health also delivered record quarterly earnings from operations of $13.7 million, an increase of $0.8 million or 6% compared to prior year, primarily due to higher sales and lower amortization expense partially offset by mix. Excluding the effect of noncash expense associated with amortization of acquired intangible assets of $5 million, adjusted earnings from operations for this segment were $18.7 million compared to $18.4 million in the prior quarter.

Sales for our Animal Nutrition & Health segment were $43.4 million, a decrease of 6% or $2.8 million compared to the prior year. The impact of foreign exchange is most notable in our ANH segment with negative $0.9 million impact in the first quarter, driving a negative 2% impact to year-over-year growth.

Sales of product lines targeted for ruminant animal feed markets increased by $0.5 million or 4.7% compared to the prior year driven by increased volumes partially offset by lower average selling prices due to mix.

Sales into the global monogastric species market decreased $3.3 million or 9.5% from the prior year due to lower European monogastric species volumes as a result of increased competitive activity as prior year benefits from Chinese choline supply disruptions are not repeating this year. As we've noted on prior calls, we benefited approximately $4 million in Q1 of 2018 and $4 million in Q2 of 2018 from this temporary disruption.

Animal Nutrition & Health quarterly earnings from operations of $5.3 million were down from the prior year quarter of $7.5 million primarily due to lower volumes and margins in the European monogastric business as a result of increased competitive activity.

Specialty Products first quarter sales were $18.4 million as compared with $17.7 million for the prior year quarter. The increase of 3.9% was driven by higher sales of ethylene oxide for the medical device sterilization market. The Specialty Products segment achieved a record first quarter earnings from operations of $6.7 million versus $5 million in the prior year quarter, an increase of $1.7 million. Excluding the effect of noncash expense associated with amortization of intangible assets of $0.7 million, the first quarter adjusted earnings from operations for this segment were $7.4 million compared to $5.8 million in the prior year. The increase was primarily driven by the aforementioned higher sales and an improved mix.

In the Industrial Products segment, sales of $10.1 million decreased $4.4 million or 30.2% from the prior year quarter, primarily due to reduced sales of choline and choline derivatives used in shale fracking applications. We believe the primary driver of the decline has been slower fracking activity in the Permian Basin. We do expect this business to pick back up in the second half of 2019 as logistical solutions for oil and gas, transportation come online around the Permian Basin. But as we've discussed in the past, we remain cautious about this historically cyclical market and it is hard to accurately forecast the ups and downs.

Our earnings from operations for the Industrial Products segment were $1.6 million, a decrease of $0.8 million compared with the prior year quarter due to lower sales volumes.

I'm now going to turn the call back over to Ted for some closing remarks.

[Theodore Harris, executive]

Thanks, Martin. In the first quarter, we delivered year-over-year revenue growth across 2 of our core segments, with solid, albeit slightly down, consolidated net earnings while facing certain previously noted comparative headwinds, particularly the elimination of monogastric benefits from Chinese supply disruptions and lower shale fracking activity. We believe these headwinds will continue in Q2 but should ramp down in the second half of the year as the benefits we saw in our monogastric business last year wane and fracking activity picks up with the completion of the pipelines in the Permian Basin. At the same time, we are cautiously encouraged by recent increases in U.S. milk component prices. The combination of improved milk and milk protein prices and lower feed costs will aid in dairy farm profitability, and this in turn should provide a healthier dairy economic environment for us to operate within as the year progresses.

We're very excited about the acquisition of Chemogas NV. The combination of our 2 companies clearly creates the global leader in the critical supply of ethylene oxide to the medical device sterilization industry which will significantly enhance our ability to service and support our customers on a more global basis. We are pleased with the progress made on our key strategic growth initiatives in Q1 2019, and we believe that we are well positioned to capitalize on the growth opportunities in our markets. We will continue to strengthen our company by focusing on our core strategies, exercising disciplined cost management and seeking value-creating acquisition opportunities.

I would now like to hand the call back over to Martin, who will open up the call for questions. Martin?

[Carl Bengtsson, executive]

Thank you, Ted. This now concludes the formal portion of the conference. At this point, we will open up the conference call for questions.

[Operator]

[Operator Instructions] Our first question comes from Brett Hundley with Seaport Global.

[Brett Hundley, analyst]

I wanted to start with Chemogas. Congratulations on that agreement. The -- it makes complete sense in a number of respects, and I completely understand the approach as far as business line expansion. It's a very attractive area with a number of moats in my opinion. I'm curious what it says insofar as the international aspect of it. And you guys have always had some business areas globally or outside North America. But when we thought of Balchem historically, we've thought about the meat of your operations coming in North America. Does a transaction like this signal that increasingly Balchem is going to look to become a global enterprise? Can you just talk to that a little bit?

[Theodore Harris, executive]

Sure, Brett, and we are very excited about Chemogas. We really like the market. We continue to find the market to be very attractive. We think this is a unique opportunity that we have to really create the global leader in this important product line that we're so strong in, in the U.S. There are good synergies. But your point is a good one around the what does this do for Balchem internationally. I don't think it necessarily means increasingly we will become a global company. Still, about 75% of our sales are in the U.S. We still feel like given the markets we're in, there's a lot of growth opportunity for us here in the U.S. So we don't feel like we have to go internationally to find growth. But having said that, there is very good growth opportunity for us in Europe, this acquisition specifically. We could not have expanded our -- that business specifically, the medical device sterilization business, into Europe or internationally without a significant acquisition like that. You know that we recently bought Bioscreen to expand our Animal Nutrition & Health business in Europe. We see significant growth opportunity there. But as you also know, there's a lot more penetration that needs to happen here in the U.S. So this was a logical next step for the sterilization business and it does make us more significant in Europe. It provides a little bit of infrastructure, if you will, for potentially further growth in Europe. And up until now, we've essentially had the Animal Nutrition & Health business headquartered in Europe with 2 operating plants. We'll now have a third. Two of our businesses will have significant operations over there and there's just more for us to leverage. So it could result ultimately in more expansion in Europe, but the primary reason really was just this is -- we feel this is a good market and a very unique opportunity for us to build a global leader in this product line.

[Brett Hundley, analyst]

That's great. And I'm glad that you touched on animal, because I have a bunch of questions on that. I'll try and just limit them into one big one here. But -- so on your animal business, you have been expanding that internationally. You have some new products coming up that you touched on in your prepared comments. So if I just exclude some temporary comparison noise that Martin mentioned, when I look at the whole of your animal business, I really would love to get some comments from you on how we need to think about forward growth expectations for this business. And frankly, I'm thinking if I need to readjust my growth expectations higher, at least over the next year or 2 because of some of the international moves that you've made, because of some of the new products that you're bringing online, like ruminant. And frankly, what I wanted to filter in as well is what's going on in China right now with the pig herd there. I mean, the government is fighting it a little bit, but what we hear and see is that the pig herd there has just been decimated by ASF. And I'm really trying to think through what the potential domino effects might be for your business, both on a volume and a pricing standpoint, in your gastro business because my immediate thought is that this could be a real positive for you and the business area that you supply here in North America. But I just wanted to get your view on the situation as -- again, as it relates to thinking about the growth specter for your animal business going forward?

[Theodore Harris, executive]

So obviously, a lot in there, Brett, but I'll try to capture as much of it as I can. I mean if I look at from a very high-level perspective, we are bullish on animal nutrition long term. We think that the world's consumption of protein will continue to increase and that our position in the poultry/swine markets within Europe and the U.S. and then our position within the dairy market and the products that we have to offer will allow us to grow with the market and grow faster than the market given our ability to further penetrate. So long term, we're bullish, but there are obviously a lot of short-term impact. There are some negative, some positive. Obviously, the one that really impacted this quarter and will also impact next quarter is that huge gain that we received in 2018 from the supply disruptions from China. That's gone away, so it makes year-over-year comparables difficult. On the positive side, we are seeing milk prices pick up. They're, I think, close to $16 per hundredweight now here in the U.S., which is a significant increase year-over-year. Milk protein prices are up significantly, near $2, which is a big increase year-over-year. So I think we're certainly -- was negatively impacted by the dairy economic environment for the last couple of years and there's a little bit of light at the end of the tunnel, and we use kind of words like cautiously encourage, cautiously optimistic around a rebounding of milk prices and the impact that, that could have on our dairy business that has been growing at significantly lower rates than we historically have been able to grow that business and think that it should be growing.

And then you throw the African swine fever in there, and honestly, we're not quite sure how that ultimately will impact us. I think that the reports out of China are muted compared to what's really happening. I think that the culling of the -- or the slaughtering of the pigs in China has been even more significant than most reports would reveal. Exports from the U.S. are skyrocketing, but largely I think that's coming out of inventory at this point in time. It takes a while to grow the basin of pigs in this country. We do think ultimately that will help us, but it may be 6, 9, 12 months away that we'll see increased sow populations, increased pig populations in the U.S., which will be fed choline and will benefit us undoubtedly. I think the shortage of pork will result in increased poultry consumption, and that should help us in the short term, and it is faster to replenish the bird population than the pig population. So that is an opportunity ahead. None of those would we say we're really seeing the day in our results or did we see in Q1, but I think it's a positive coming. On the negative side, and why I started by saying we're not quite sure the benefits of ASF is the fact that the choline producers in China have lower demand for choline and therefore are attempting to export more and tend to be exporting at the very low prices right now, maybe lower than we've historically seen. So we -- the elimination of the supply disruptions in Europe has even been further exacerbated by the fact that the Chinese are, yes, back but also without a lot of domestic demand in China. So I think that's negatively hurting us today. So we're watching it very closely. We do see that positive that you talked about in ASF. It hasn't really hurt us yet and we need to get through this negative period on the Chinese reentry into the market. But all in all, long term, we're pretty bullish on animal nutrition.

[Brett Hundley, analyst]

That's really helpful color, and I apologize for making you go through each species around the world but that's really helpful. Just one last one for me and I'll get out of here is HNH. I wanted to talk about trends on the ingredient solutions business within that segment. Your performance in HNH was a little bit better than I expected this quarter, and your comment about the strength in your solutions business kind of caught my eye, particularly because it coincides with commentary that I'm hearing from other ingredient players about larger food and beverage customers starting to come back to suppliers and talk about innovation again and focus on building new products after just years of cost cutting. Can you just talk a little bit about the segment areas that you're seeing strength for your ingredient solutions business and whether or not you feel like growth is picking up more broadly across that area?

[Theodore Harris, executive]

Yes. We were -- overall, HNH, we are pleased with the quarter both from a top line perspective and bottom line perspective. And as we indicated, the strength in ingredient solutions was really -- their food ingredient business was really the highlight. And we feel like we've turned a bit of a corner in that business. As you know, for a couple of years, a lot of this business came from -- not all of it, but a lot came from acquisition of SensoryEffects and we struggled with the growth profile. And we really feel like we've turned the corner a bit there. Drivers of growth, certainly, our nutritional beverage systems. So beverage is a big part of what we do. We feel like, as we all converted away from partially hydrogenated oils that we won more than our fair share, if you will, of those conversions. That's been part of the growth to simply has been the growth generally in nutritional beverages. Part of the growth has been that we've refocused our efforts away from some commodity applications to more specialty applications, and we feel like we're winning there. We've talked a little bit about our flavor systems business in the past and last year was a bit of a disappointing year. That business is really reliant on limited-time offers and seasonal products this year. We've, I think, done a very good job of winning many of those. And so we feel really good about the fundamentals of that business and our success in limited-time offerings and that's really an important part of that business, and you sort of brought it up. We do see increased food companies coming to companies like us saying, "We need some innovation. We need to introduce new products and we don't necessarily have the R&D staff that we used to and we need suppliers helping." And that's a very positive trend for us because we're really good at that. We're not basic in any of these -- we're not a flavor company like IFF or a systems company where we're buying flavors and we formulate. Now we do it really well and we typically can respond a little quicker than others. We -- our plants have a little bit more flexibility and smaller batch manufacturing capability so that we can make seasonal products. And so it is a bit of a trend that fits us quite well. And I think it's one reason that, that business is doing better this year. And we feel like we have good momentum in that business today.

[Operator]

Our next question comes from Ram Selvaraju with H.C. Wainwright.

[Raghuram Selvaraju, analyst]

So I wanted to start by going through a couple of aspects of the Chemogas acquisition. Can you confirm specifically what the purchase price was for Chemogas in dollars and where that cash is coming from and when the transaction is expected to close, please?

[Theodore Harris, executive]

Sure.

[Carl Bengtsson, executive]

Sure, Ram, and this is Martin. Net price value for the acquisition was EUR 95 million. So as you do your quick math there, you would translate that to, call it, USD 105 million, USD 106 million. That's on a debt-fee, cash-free basis. That $106 million, they do come with some debt. So what we're actually paying in the end is a little bit lower than that, call it about $10 million lower than that in U.S. dollars in terms of cash out the door. This is being financed to our existing revolver. We have capacity of a $500 million revolver. We're currently using a lot less than that, closer to $140 million today. So we will take this out of our revolver and also our existing cash on hand. So if you look at our current net debt position, so to speak, we're at $100 million-ish, $101 million. So this will add another approximate $100 million to that debt position. So as a debt leverage, we're at about 0.6 today, so this will bring us up closer to the 1.2 from a debt leverage position for us.

[Raghuram Selvaraju, analyst]

Okay. And when do you expect the transaction to close?

[Theodore Harris, executive]

So this is a bit of an estimate at this point. We are just waiting for the approval from one country, and we expect that to be within a month and certainly hope that it'll be more like a week or 2 away. So that's really the only thing that we're waiting for, is regulatory approval from one country and we're pushing that as fast as we can.

[Raghuram Selvaraju, analyst]

Okay. Can you elucidate for us whether this was a competitive bidding process or if you were opportunistic about this, whether Chemogas had in fact put itself up for sale?

[Theodore Harris, executive]

So this was not a competitive situation. We approached -- Chemogas was owned by both management and private equity firm in Belgium and the Netherlands called Gilde Management, and we approached them. And while they had only owned it for a few years, saw the benefits of considering a transaction with Balchem and so we went into a process with them that was exclusive to us.

[Raghuram Selvaraju, analyst]

Okay. And just to confirm, Chemogas is only focused on serving European and Asian clients, right? Those are the only markets in which they operate. Is that correct?

[Theodore Harris, executive]

Predominantly. They did not play in the U.S. at all but they do ship some product to Central and South America. But the vast majority of their sales are in Europe and Asia, a little bit in the Middle East, but they did not play in the U.S.

[Raghuram Selvaraju, analyst]

Okay. Can you disclose what the...

[Carl Bengtsson, executive]

Ram, I think about 2/3 directionally of their sales are in Europe.

[Raghuram Selvaraju, analyst]

Okay. And can you disclose what the revenue multiple was that was paid based on the purchase price and whether there are, in fact, likely to be any synergies coming from this given your existing ethylene oxide business?

[Carl Bengtsson, executive]

Yes. I mean their revenue is about EUR 30 million as we sit here today. So EUR 95 million enterprise value on that is a 3, 3.1 multiple on revenue. It's about an 11 multiple on their 2019 EBITDA that we're paying. So from a multiple perspective, that's where we sit. And the second part of your question, Ram, was...

[Raghuram Selvaraju, analyst]

Synergies, if you expect any synergies here or not?

[Carl Bengtsson, executive]

Yes. We expect some synergies, and for the full year run rate synergy in the year 3, it's about $1.5 million that we have sort of baked in as we model things and that comes from procurement. It comes from some overhead savings and it also comes from some commercial synergies but it's about $1.5 million on a run rate basis.

[Raghuram Selvaraju, analyst]

Okay. And then I just had a couple of quick questions regarding the autism candidate. You said that some Phase III data are going to be presented at this INSAR meeting. Are you going to have access to whatever information is presented there? And would it be possible for you to provide that to us or not?

[Theodore Harris, executive]

I believe the answer to that is yes, we have a team that is at INSAR today who will be there for the presentation of the results and certainly will be reporting back to us. We have access to the abstract that will be presented as we signed up for the meeting. So certainly, our expectation is that, once that's publicly presented, that we would be able to share that more formally with you and our shareholders and we'll try to figure out how to do that. But firstly, we're attending the meeting today and very interested to see exactly what is presented. The brief information in the abstract certainly was quite positive from our perspective but we're looking forward to seeing more today in the broader presentation of the results.

[Raghuram Selvaraju, analyst]

Is the abstract publicly available at this juncture?

[Theodore Harris, executive]

I don't think it is. I think it was just available to people who registered for the INSAR meeting. That's what I believe. I'm not 100% sure about that, but that's how we got access to it. But I do believe also that once it's been presented at INSAR, it will be more readily available for public consumption, and we'll certainly check on that find a way to make it broadly available.

[Raghuram Selvaraju, analyst]

Okay. And can you elaborate on what the additional manufacturing information or additional work might be that you would be responsible for now that it's been formally classified as the subject of a BLA filing versus an NDA filing?

[Theodore Harris, executive]

So we haven't -- we're really just learning this. I'm just trying to understand. We do have a meeting set up in the coming weeks with the consulting firm that would really help us very specifically understand this. I think from a very high-level perspective, we do expect more work on our part because just, again, and maybe I'm oversimplifying it or my understanding is not as specific as it will be, but if you think about an NDA and a specific drug approval, a lot of the work is around what is that specific molecule that is manufactured with bigger molecules like biologics. It seems like the BLA is more focused on the consistency of the manufacturing process, ensuring that the manufacturing parameters are clearly understood and it's clearly understood what happens when you're operating outside of those parameters. So we do expect more work will need to be done. And I'll just give a hypothetical example with false numbers. If we say that we need to operate at 100 degrees, I think we're going to have to clearly show, while we say 100 degrees plus or minus 5 degrees, we're going to have to show exactly what happens at plus 5 degrees and minus 5 degrees. So it's evident that we have a manufacturing process that's stable, sustainable and will produce the same product day in and day out. So we do see that there will be more work like that for us in this -- in the BLA as well as likely for the enzyme producer, but that will all be embedded in the coming weeks and month, and I'm sure we'll have much better and clearer information for you at -- on the next call.

[Raghuram Selvaraju, analyst]

And can you confirm or not whether you are, in fact, going to be the sole manufacturer of the product if and when it becomes commercialized or that there's going to need to be any kind of tech transfer to some other contract manufacturer that might become involved as well as whether or not you are going to be involved in generating batch-to-batch comparability data in support of the BLA?

[Theodore Harris, executive]

I think we absolutely will be involved in forming the batch-to-batch comparability data and we will be the only producer of this product. Obviously, if successful, likely, we would be looking for some redundancy in our manufacturing process and would look to do that pretty quickly. But we will be the only producer of this product, and we're particularly pleased with the prospects of potentially a 12-year exclusivity which comes with the BLA versus the traditional 5 years. And obviously, that's even better than a very strong patent portfolio protection. To have the exclusivity that comes with the BLA, I think, is a positive for us as the exclusive manufacturer and CureMark.

[Raghuram Selvaraju, analyst]

Okay. And then just one quick question on the choline aspect. You talked about this human pediatric data demonstrating the benefits of choline from a cognitive standpoint, I believe. Can you tell us whether that information is going to wind up being publicly available, disseminable by you folks? And if you have had potential interests since that information started to come out from entities that might be interested in working with you to develop specifically lines of products that are aimed at infant nutrition? And to what extent you expect that aspect of the business to grow going forward because of this new information?

[Theodore Harris, executive]

Well, Ram, yes. Thanks. Again, we have mentioned on previous calls that we invested in this study and the study is now complete. So the next step really is the publication of data, and we believe that there will be at least 3 essentially reports that will come out with the results from the study and one of those is the presentation that will be made on June 7 in Scotland. And similar to my comments about the presentation at INSAR, we do believe that once this is presented, that we will have access to these results and we'll be able to disseminate those results more broadly and minimally speak about some details on this call next quarter but also try to figure out how to more broadly communicate the results. We're really interested to see kind of the results here. I mean, just the idea of being able to show that -- those cognitive benefits that we're seeing in the instance persisted through childhood, through 7 years old, would be a fairly powerful message in our efforts to build awareness around choline and the cognitive benefits. And yes, we are seeing heightened interest in the area of cognition, specifically around prenatal vitamins. We really think that at some point in the near future, choline will be a fixed part of a prenatal regimen and commonly included in a prenatal vitamin regimen where it really has not been in the past. And I think that the Cornell first study and this follow-on study have played an important role in that.

And while there is some evidence, it's not where it needs to be around cognitive benefits in adults. We also think the strength of this information around infants and now older children is increasing the dialogue in adults and we're trying to figure out as a company how to harness that, how to further invest in that, how to do some studies around that to really be able to participate in the discussion around adult cognition, adult memory and sort of more to come there. But I do think this study not only has increased the discussion in infants and children but also starting discussion in adults.

[Raghuram Selvaraju, analyst]

Okay. Sorry, I just didn't catch the name of the Cornell researcher. Can you just tell me who was that again?

[Theodore Harris, executive]

Sure. His name is Rick Canfield, C-A-N-F-I-E-L-D, and he really led this follow-on study and he himself will be doing the presenting, to what I understand, in Scotland.

[Operator]

Our next question comes from Mitra Ramgopal with Sidoti & Company.

[Mitra Ramgopal, analyst]

Just 2 quick questions. First, Ted, I was wondering if you can give us an update on the ERP systems consolidation and any incremental costs that might have been incurred this quarter as a result of that.

[Theodore Harris, executive]

Yes. Mitra, thanks. And we had some other things to talk about so we didn't talk about it in my kind of strategic initiative update. Well, that really is a pretty important project and the update relative to implementation, I think, is quite positive in that we're on track and on budget. We now have gone live. I think as we've talked about in the past, we do all of our financial consolidation work now in the new system. That was the first milestone. The second one was to start going live at individual manufacturing sites. And in November, we went live in Lincoln, Nebraska, which is -- was a good test site. We had a lot of learnings from that. We are completely stable and working very well at Lincoln. And April 1, we went live at our second site and there's plenty of time gap between Lincoln and Defiance, Ohio was the second site. That site has gone very well and I would say is close to being stable, if not already stable, and we're going to start ramping up now and doing more sites more quickly. Lincoln really was the first test site. We wanted to learn all the things that we needed to from there before we went live again. And the fact that Defiance has gone so well, we'll start ramping things up and we feel like by -- certainly by Q2 of next year, will be completely implemented. And relative to additional incremental cost, it's been very minor so far.

[Mitra Ramgopal, analyst]

Okay. No, that's great. And then quickly in terms of our new product introduction, you highlighted the next-generation ruminant product. I'm just wondering, in terms of your pipeline, if there are any other products in particular you feel could be pretty meaningful in that term.

[Theodore Harris, executive]

So yes, Mitra. We're really pleased with the launch of our historical product, what's called AminoShure-M, with the M standing for methionine, and we are -- we've launched our new higher bioavailable product as AminoShure XM. And again, this is a product that we're really excited to bring to market. But we are working on both upgraded next-generation versions of existing products. I would say broadly for our product line that I'm excited about it and bringing better efficacy, better higher bioavailability is a key theme there. But we're also exploring some new-to-the-market products that would bring nutrients that may not be available or even sold in the dairy market, for example, today that we feel could significantly benefit dairy health and ultimately its production. And so I feel good about the pipeline of opportunities and I feel really good that we're starting to bring some of these to the market as we speak.

[Operator]

Our next question is from Matt McGeary with Eagle Asset Management.

[Matthew McGeary, analyst]

Most of my questions have been answered, but I was hoping you could give us some more detail on the frack business. Just sort of help me understand exactly where you play in there and what -- I mean, obviously, that's been a volatile space but sort of what's driving the current results there.

[Theodore Harris, executive]

Sure. Yes. Thanks, Matt. So fundamentally, our choline product is a clay stabilizer and it's included in fracking fluids where clay stabilizer really is needed. And so not all geographies require clay stabilization, but the Permian Basin is one where clay stabilizers are quite commonly used. And so the Permian Basin, I would say, is our primary market, and certainly for the recent past, that's been where you really want to be. And so we're not involved in drilling. So rig counts don't necessarily tell the story for us because many wells are drilled but ultimately not fracked. And we believe that the primary impactor on our business today is just simply the lower fracking activity in the Permian Basin as the market really awaits the completion of these pipelines to reduce the cost of transporting the oil and gas out of the region, but there are other drivers of what happens to our business. So oil price, we think that, that may even be a bigger driver of ultimately our business. And while we saw oil prices picking back up a little bit a few weeks ago, they're in the low 60s today. If prices were to pick up much more significantly, that could have a positive impact on us. And then on the negative side, this is a market that has gotten really good at cost reducing and taking cost out to react to lower oil prices and so forth. So we do see some cutting of our product, diluting of our product. And instead of using 100% choline, they might be trying to dilute it here and there just to save money. So all of those factors go into play, but overall, we have seen fairly good correlation with fracking activity and our volume over time.

[Operator]

Ladies and gentlemen, we've reached the end of the question-and-answer session. At this time, I'd like to turn the call back to Ted Harris for closing comments.

[Theodore Harris, executive]

So thank you all for joining our call today. We look forward to the next call in early August to review our Q2 results and to update you on the progress on our strategic growth initiatives. On the next call, we should be able to report back on certainly the integration progress relative to Chemogas as well as we just talked a little bit about the published findings from the Cornell study as well as the CureMark study. In the meantime, Mark and I will be presenting at the BMO Capital Markets' Annual Farm to Market Conference in New York on May 16. On June 5 or 6, we'll be at the Deutsche Bank Global Industrials and Materials Conference in Chicago. And then we have 2 non-deal road shows planned at this point, one with Sidoti in Baltimore in mid-June, and then one with Seaport in late July in the Midwest. So hope to see some of you at one of those events. And other than that, we'll sign off, and thank you again for joining. Thanks.

[Carl Bengtsson, executive]

Thank you.

[Operator]

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.