Balchem Corp

NASDAQ:BCPC

Earnings Call Transcript 2018-Q3

[Operator]

Ladies and gentlemen, greetings and welcome to the Balchem Corporation Third Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Bill Backus. Thank you, you may begin.

[Bill Backus, Chief Accounting Officer]

Ladies and gentlemen, thank you, for joining our conference call this morning to discuss the results of Balchem Corporation for the quarter ending September 30, 2018. My name is Bill Backus, Chief Accounting 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 reflects Balchem's expectation or beliefs concerning future events that involve risks and uncertainties. We can give no assurance that the expectations reflected in forward-looking statements will prove correct, and various factors could cause results to differ materially from our 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 the call over to Ted Harris, our Chairman, CEO and President.

[Theodore Harris, Chairman, Chief Executive Officer, President]

Thanks, Bill. Good morning, ladies and gentlemen, and welcome to our conference call. This morning, we reported quarterly consolidated net sales of $155 million, which resulted in record third quarter net income of $19.2 million or $0.59 per share on a GAAP basis. This result includes non-cash amortization expenses of $6.3 million for acquisition related intangible assets, which were recorded in the third quarter GAAP financial statements. The amortization expense is a direct result of acquisition, valuation and business combination accounting rules. This quarter also includes $202,000 of transaction and integration cost, largely related to the acquisition of Bioscreen.

Consequently, our third quarter non-GAAP net earnings of $23.7 million or $0.73 per share, reported in our press release earlier this morning, exclude these items to facilitate comparative evaluation of this current period operating performance, versus the prior-year period. These non-GAAP net earnings of $23.7 million or $0.73 per share were 16.2% or $3.3 million above the comparable prior year quarter of $20.4 million or $0.63 per share and were a third quarter record.

Adjusted EBITDA of $38.4 million, was also a third quarter record and was $2.7 million or 7.4% above the $35.7 million posted in the third quarter of 2017. We also delivered third quarter free cash flow of $26.9 million. Our quarterly net sales of $155 million were 2.9% higher than the $150.7 million result of the prior year comparable quarter despite a significant 22% decline in the oil and gas business within Industrial Products. Three out of four of our reporting segments delivered solid year-over-year sales growth in the quarter, with Human Nutrition & Health achieving all-time record quarterly sales, and Specialty Products, achieving record third quarter sales.

Our Q3 consolidated gross margin dollars of $48 million were up $1.8 million or 3.9% compared with the same period in the prior year and were a third quarter record. The increase was primarily driven by the higher sales. Our consolidated gross margin percent was 31.0% of sales in the quarter, up 32 basis points from 30.6% in Q3 of 2017, primarily due to mix and certain higher average selling prices. Gross margin for the Human Nutrition & Health segment decreased by 67 basis points to 30.1%, primarily due to mix and certain higher raw material costs.

Gross margin increased for the Animal Nutrition & Health segment by 48 basis points to 24.0%, primarily due to improved monogastric gross margins resulting primarily from increased volumes, mix and average selling price. Gross margin for the Specialty Product segment increased by 152 basis points as compared to the prior year comparable quarter, primarily due to mix and increased plant nutrition volumes. Industrial Products gross margin increased by 273 basis points, primarily due to increased average selling prices. Consolidated operating expenses for the three months ended September 30, 2018, were $22.5 million as compared to $23.1 million for the three months ended September 30, 2017. The decrease was principally due to the timing of an insurance recovery, and lower noncash operating expense associated with amortization of intangible assets, partially offset by certain higher compensation related expenses and impairment charge related to the IFP tradename, and certain higher selling and marketing expenses. Excluding transaction and integration cost of $202,000 and noncash operating expense associated with amortization of intangible assets of $5.4 million, operating expenses were $16.9 million or 10.9% of sales.

Looking forward, we will continue to focus on tightly controlling our operating expenses and leveraging our existing SG&A infrastructure. Record third quarter GAAP earnings from operations were $25.5 million, which increased $2.4 million or 10.5% compared with the prior year comparable quarter. This increase was primarily due to earnings growth in Human Nutrition & Health and Specialty Products. On an adjusted basis, as detailed in our earnings release this morning, earnings from operations of $31.9 million increased $2 million or 6.7% from the prior year comparable quarter, due to all-time record adjusted earnings in our Human Nutrition & Health segment and record third quarter adjusted earnings in our Specialty Products segment. Interest expense for the three months ended September 30, 2018, was $1.8 million, and our net debt on September 30 was $135.3 million. This net debt reflects a third quarter pay down of $32.8 million on our revolving loan. And our net debt leverage ratio as of September 30 was 0.8. The company's effective tax rate for the three months ended September 30, 2018 and 2017, were 18.3% and 22.5%, respectively. The decrease in the effective tax rate is primarily attributable to the impact of tax reform. As previously noted, consolidated net income closed the quarter at a third quarter record of $19.2 million, up $3.2 million from the prior year quarter. This quarterly net income translated into diluted net earnings per share of $0.59 -- for the current year, an increase of $0.09 cents per share over the last year's comparable quarterly result of $0.50. On an adjusted basis, and as detailed in our earnings release, our third quarter record adjusted net earnings were $23.7 million or $0.73 per diluted share, up $3.3 million or 16.2% compared with $20.4 million or $0.63 per diluted share in the prior year quarter. Our quarterly results generated record third quarter adjusted EBITDA of $38.4 million or 24.8% of sales compared with $35.7 million or 23.7% of sales in the prior year, an increase of $2.7 million or 7.4%.

As previously noted, our cash flow remains strong, as we generated record third quarter free cash flow of $26.9 million and closed out the quarter with $42.7 million of cash on the balance sheet. This cash balance reflects the growth in net earnings and $5.6 million of capital expenditure funding in the quarter as well as revolver payments of $32.8 million in the Bioscreen acquisition of $17.4 million.

Before passing the call back to Bill to cover the detailed results by segment, I would like to update you on a few of our key strategic activities and growth initiatives. We are very pleased with the acquisition of the Bioscreen technologies S.r.l, a manufacturer of encapsulated and fermented seed nutrition ingredients for the Animal Nutrition & Health markets, headquartered in Bertinoro, Italy, about three hours from our Murano facility. While the primary strategic rationale for the acquisition, was to provide Balchem with an encapsulation manufacturing site in Europe to accelerate growth of our highly engineered encapsulated nutritional ingredients such as NitroShare, ReaShure, NiaShure and AminoShure-M and L for the European dairy market. Bioscreen also brings to Balchem a talented team of employees and unique technology platforms including multilayer coating and spray chilling and encapsulation technologies as well fermentation processes, which broaden our capabilities and product portfolio.

The fermentation technologies acquired are comprised of both bacterial and non-bacterial fermentation streams, which achieve benefits across those ruminant and monogastric species. These benefits include helping animal producers to improve digestive health, achieve better feed and fiber digestibility and inhibit negative impacts from the most common intestinal pathogens. We're excited to have Bioscreen as part of Balchem. We continue to work hard to progress awareness around choline after the issuance of the Reference Dietary Intake by the Food and Drug Administration and the European Food Safety Authority's first ever intake recommendations for this essential nutrient.

As we mentioned last quarter, a study that we have helped fund that we are particularly excited about is a follow-on study to the Dr. Caudill study from Cornell University, that showed the benefits on infant neurologic function from adequate and increased levels of choline supplementation by mothers during pregnancy and early nursing. The researchers at Cornell have been conducting extensive neurologic and cognitive testing on the same children, who are now seven years old to determine if the positive benefits seen in the first year of life are sustained into childhood. We recently received an update on this study, and while we do not have results to share yet, the study has been completed, and we expect several published reports of the findings from this study over the next three to nine months. We believe the findings from this study will expand our understanding and appreciation of the critical role of choline in pregnancy and early childhood development, and we are pleased that we will soon be able to utilize the findings.

I would also like to briefly update you on the integration activities associated with the Innovative Food Processors, or IFP, acquisition that we made in June of last year. Last quarter, we indicated that we would complete the planned closure of the Hayfield Minnesota manufacturing site within Q3, transferring the production from this facility to two other manufacturing sites within the Balchem network. We are pleased to report the Hayfield facility is now fully closed, and production has indeed been transferred to the other sites. In fact, we just closed on the sale of the Hayfield property yesterday as well, so this project and the integration of IFP into Balchem is now complete.

And lastly, as many of you know, we have embarked on an important project to consolidate our five ERP systems into one, Microsoft dynamics 365. This $12 million initiative is critical for the continued growth and operational efficiency of the company. The project was kicked off about a year ago, and we are pleased to report after much planning, we are starting the implement the system. In April, we went live with the initial financial consolidation part of the project and just last week, we went live across our first business unit Cereal Systems. This is an important project for us and we look forward to full implementation across the company by early 2020.

I'm now going to turn the call back over to Bill, who will go through the detailed results for the segments. Bill?

[Bill Backus, Chief Accounting Officer]

Thanks, Ted. For the quarter, sales of our Human Nutrition & Health segment were $85.9 million, a record quarter, and an increase of $4.5 million or 5.6% from the comparable prior year quarter. The sales increase was primarily driven by higher powder systems sales into food and beverage markets, and higher chelated minerals and choline nutrient sales, partially offset by lower flavor systems sales. The 2018 powder systems improvement was primarily due to increased volumes and higher average selling prices due to a favorable mix. We are very pleased with the strength in chelated minerals, in particular our branded Albion organic magnesium products continue to experience significant growth, as the critical role of magnesium in human nutrition continues to be better understood among brand owners and consumers.

Third quarter earnings from earning operations for this segment were $13.1 million, an increase of $2.7 million or 25.7% compared with $10.4 million in the prior year comparable quarter, primarily due to the aforementioned higher sales and lower operating expenses, partially offset by unfavorable mix, and certain higher raw material costs.

Excluding the effect of noncash expense associated with amortization of acquired intangible assets of $5.4 million, third quarter adjusted earnings from operations for this segment were $18.5 million compared to $16.2 million in the prior year quarter.

The Animal Nutrition & Health segment sales of $40.4 million increased 6.3% or $2.4 million compared to the prior comparable quarter. Sales of product lines targeted for ruminant animal feed markets decreased by $1.3 million or 11.1% compared to the prior year, primarily due to lower ruminant product volumes resulting from challenging dairy economics, particularly in North America where milk and milk protein prices remained low in the third quarter. Despite the poor economic environment in the dairy market, we continue to be pleased with the performance of our flagship brand, ReaShure, the market-leading rumen-protected choline, as sales for this product have continued to grow through these difficult market conditions and this was reflected by a 13.3% increase in volumes compared to the prior year. Sales into the global monogastric species market increased $3.7 million or 14.3% from the prior year comparable quarter, driven by healthy demand in North America and Europe, and higher average selling prices.

As we noted on last quarter's call, we benefited by $3 million to $4 million in Q4 of last year, and Q1 and Q2 of this year from supply disruptions of choline out of China. As we also previously indicated, this benefit would diminish through the second half of the year, and this indeed has occurred. In Q3, we only saw modest benefits from lower Chinese exports and in Q4, we expect to see no benefit from Chinese supply disruptions as their exported volumes have been restored. Animal Nutrition & Health quarterly earnings from operations of $5.1 million were down slightly from the prior comparable quarter of $5.2 million as the higher sales were offset by unfavorable mix, increased raw material costs and certain higher selling, marketing and research expenses.

The Specialty Products segment achieved record third quarter sales of $17.6 million for the three months ended September 30, 2018, as compared with $17.3 million for the three months ended September 30, 2017. The increase of 2.1% was driven by increased plant nutrition volumes and higher sales of ethylene oxide for the medical device sterilization market. Specialty products quarterly earnings from operations were $5.8 million versus $5.6 million in the prior year comparable quarter, an increase of $0.2 million. Excluding the effect of non-cash expense associated with amortization of acquired intangible assets of $734,000, third quarter adjusted earnings from operations for this segment were $6.5 million compared to $6.4 million in the prior quarter, an increase of 2.2%. The increase was primarily driven by higher volumes in the plant nutrition business, and certain pricing actions taken to help mitigate increased raw material costs as well as other rising costs where contract terms permitted.

In the Industrial Products segment, sales of $11.1 million decreased $3.0 million or 21.0% from the prior year comparable quarter, primarily due to reduced sales of choline and choline derivatives used in shale fracking applications. This marks the 3rd consecutive quarter of sequential decline for this business. We believe the primary driver of the decline has been slower fracking activity in the Permian basin, along with continued efforts to cost reduce fracking fluids through dilution. We do expect this business to pick back up in the middle of next year, as logistical solutions for oil and gas transportation are completed around the Permian basin. But as we have discussed in the past, we remain cautious about this historically cyclical market. Our earnings from operations for the Industrial Products segment were $1.7 million a decrease of $0.4 million compared with the prior year quarter, and primarily reflects the reduced sales volume.

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

[Theodore Harris, Chairman, Chief Executive Officer, President]

Thanks, Bill. We delivered year-over-year revenue growth across three of our four segments, with record third quarter earnings from operations of $25.5 million, record third quarter net earnings of $19.2 million, up 19.8% year-over-year. Record third quarter adjusted EBITDA of $38.4 million and record third quarter free cash flow of $26.9 million.

We continue to generate strong cash flows and our net debt has been reduced to $135.3 million as of September 30 or 0.8x trailing 12 months adjusted EBITDA, further strengthening our balance sheet. With current economic uncertainties, we are pleased that our strong balance sheet and revolving credit facility provides us the flexibility to capitalize on both growth organic and acquisition opportunities. Our strong third quarter results once again, highlight the strength and resilience of our business model. We do, however, continue to face a difficult dairy economic environment, within the ruminant side of the Animal Nutrition & Health segment, a slowdown in fracking within the Industrial Products segment, and increasing uncertainty across most of the markets we serve from a macroeconomic perspective, particularly, in light of likely global trade and foreign currency changes, and ultimately, their impact on demand, commodity prices and input costs.

We will be watching these macroeconomic challenges closely as they evolve and implementing mitigating strategies, where possible. We are pleased with the progress made on our key strategic growth initiatives, in particular, the growing awareness of choline as an essential nutrient, the exciting new research related to Balchem's rumen-protected choline for newborn calf health that we have discussed last quarter. And the acquisition of Bioscreen to expand our Animal Nutrition & Health segment and provide a European manufacturing platform for our encapsulated nutrients. We will continue to strengthen our company by focusing on these and our other growth initiatives, exercising disciplined cost management and seeking value creating acquisition opportunities. I would now like to hand the call back over to Bill, who will open up the call for questions. Bill?

[Bill Backus, Chief Accounting Officer]

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

[Operator]

Thank you. Ladies and gentlemen we’ll now be conducting our Q&A session. [Operator Instructions] Our first question comes from the line of Tim Ramey from Pivotal research.

[Tim Ramey, Pivotal Research]

Bill, it seems that you have dropped the disclosure of the segment amortization adjustments from this. And that does make it kind of hard to do our first look -- we're going to be wrong on where we put those adjustments in the EBIT line. As I heard your comments, I really didn't think I heard enough to add up to the number. I heard $5.4 million in amortization in Human Nutrition, I believe, and then $734,000 in Specialty Products. Did I mishear, what am I missing, am I not reading correctly, help me out here?

[Theodore Harris, Chairman, Chief Executive Officer, President]

You heard correctly, and those are -- the reasons why we have those, Tim. We can certainly add back anything that's required to help out, but those are the two amounts that are really different year-over-year. The other amounts are insignificant and not really different year-over-year, so that's why we chose to put these in because these are the one that represent the change.

[Tim Ramey, Pivotal Research]

If you could tell me what the other amount would be that would get me to -- bridge me to the full amount? Or what segment that's in, I assume that's in Animal Nutrition, I guess?

[Theodore Harris, Chairman, Chief Executive Officer, President]

Right. Animal Nutrition, that's exactly right, you're not going to have much of a change, its little in terms of amortization related to the Industrial Products segment.

[Tim Ramey, Pivotal Research]

If you can throw them in, it certainly helps. Any impacts from FX or tariff impacts that you would call out in the quarter?

[Theodore Harris, Chairman, Chief Executive Officer, President]

Yes, as far as the FX for the quarter, it was fairly inconsequential, it was actually slightly negative, I think it was maybe a couple of hundred thousand dollars on the sales line, but -- and very little impact on operating earnings, but just ever so slightly negative for the quarter.

[Tim Ramey, Pivotal Research]

Okay, how about trade tariffs?

[Theodore Harris, Chairman, Chief Executive Officer, President]

I'll take this, the tariffs. The direct impact on Balchem, and really, when I think about tariffs, I think about direct impact being products that we buy from China that have increased in price because of tariffs versus indirect, which is a good example is soybeans have fallen and soybean meal is a competitive product to our NitroShure product, and that's created some new competitive dynamics. But the direct impact really has been fairly minimal. We buy, we could buy about $22 million of our raw materials from China that are on the tariff list. We actually only buy about $12 million of those products from China, and one of the biggest is sorbic acid which largely comes from China. So in Q4, that will be about a couple hundred thousand dollar impact to us based on the 10% tariffs as of now. That will increase substantially, if it does move to a 25%, but we are working really hard to try to diversify our supplier base to avoid those kind of hits. We talked last time about the total impact to us could be about $2 million to $3 million. We still think that that's a reasonable value of the total impact and then trying to offset that through buying from other countries and/or raising prices. So that's a little bit of a long answer, Tim, but the real impact is fairly minimal right now. And we're working really hard to offset it. Good example is we buy apple juice concentrate from China today, and we're shifting that to Turkey to avoid that increase, and we are able to do that in large part across our business. But total impact could possibly be about $2 million to $3 million.

[Tim Ramey, Pivotal Research]

Okay. Just a couple of other clarifications on the Hayfield plant. Can you say what the proceeds were on that sale and I'm assuming that hits in the fourth quarter?

[Theodore Harris, Chairman, Chief Executive Officer, President]

That will be in the fourth quarter and it will be about $200 million gain over what -- I'm sorry what did I say, $200,000 gain over what the value of the property was.

[Tim Ramey, Pivotal Research]

And the notional amount, so I can think about for debt reduction, cash purposes?

[Bill Backus, Chief Accounting Officer]

It's only going to be a few hundred thousand dollars, ultimately after proceeds.

[Tim Ramey, Pivotal Research]

Okay, not a big deal. And the impairment charge, did you take that out of your adjusted EPS. And how big was that?

[Bill Backus, Chief Accounting Officer]

That was about $700,000, and we did not take it out of adjusted, we left it in the number, so if you add it back, obviously, the numbers would be even better.

[Operator]

Our next question comes from the line of Ram Selvaraju from H.C. Wainwright. You are now live.

[Julian Harrison, H.C. Wainwright]

This is Julian on for Ram. First, I was just curious if you have any visibility into DC current world trends, and whether or not you think this might have any bearing on your recent choline-based fracking agent demand.

[Theodore Harris, Chairman, Chief Executive Officer, President]

I'm sorry, would you mind repeating that for me.

[Julian Harrison, H.C. Wainwright]

Yes, sure. I was just curious if you could comment on recent DC world trends. And if that trend has any bearing on I guess choline-based fracking agent demand?

[Theodore Harris, Chairman, Chief Executive Officer, President]

Absolutely, sorry, I just couldn't hear you at the beginning. But yes, as we refer to them as DUCs but, DUCs are up about 31% over 2017, and up about 7% over Q2, so. This is a, we think a really good indicator of what's going on in our business. We know that there are pipelines being completed in the Permian basin that will significantly reduce the transportation cost of oil and gas out of the region and the oil companies are really deciding to leave the oil and gas in the ground for now until those pipelines are completed early to mid-next year. And you really see that in the DUCs being up 31% and actually the DUCs are even up more than that in the Permian basin.

So That's why in Bill's prepared comments, we stated that we do feel as though we will start to see some increase in activity mid-next year as the DUCs start to get released in essence and fracking activity picks back up. But in the meantime, we expect Q4 for our Industrial business to be pretty similar to Q3, we don't see it going down from here, but we also don't see it picking back up until that occurs in the Permian basin.

[Julian Harrison, H.C. Wainwright]

It seems like H&H segment this quarter, had some pretty impressive results. I was just curious if you are able to provide any color on what might be the upstream drivers of demand growth for human nutritional choline?

[Theodore Harris, Chairman, Chief Executive Officer, President]

Yes, certainly. We were pleased with Q3 for Human Nutrition & Health, both from a revenue perspective as well as an operating income perspective. The quarter -- I'll get to your specific question, but the quarter really was pretty robust as we have three business units within Human Nutrition, and all three of them actually performed very well with our human nutrition pharma business, which include choline up nicely. Yes, the demand for human choline is really being driven by the increased awareness that we're investing in across the business. We announced a few quarters ago that choline singles are now available at Walmart and Target. Increased availability is certainly part of this. But we also see the number of new products that are being introduced that include choline is significantly up. So there's a lot of innovation going on out there with choline included whether it's in nutritional beverages or supplements. And that's really what's driving the numbers, and we are seeing those new product launches and availability at Target and Walmart showing up in our gross numbers.

[Julian Harrison, H.C. Wainwright]

And for my last question, I was just curious if there have any recent updates to the CM-AT autism program, and when we might get an update from the program?

[Theodore Harris, Chairman, Chief Executive Officer, President]

Yes, there really have not been any updates. CureMark is still in the data analysis phase, its obviously, taking little bit longer than we had originally thought. We were hoping that, that would've been completed by now and that CureMark would be filing an NDA here by the end of the year. That clearly is moving into next year, and we really don't have any insight into where CureMark is relative to that analysis. It does take time, and it has taken a little bit more time than we had originally thought.

[Operator]

[Operator Instructions] Our next question is a follow-up from the line of Tim Ramey from Pivotal research.

[TimRamey]

Just a clarification, I think choline has been in infant formula for a long time. Am I correct in that? And who supplies them, is that a market you can compete for, if you don't?

[Theodore Harris, Chairman, Chief Executive Officer, President]

That's correct, Tim, and that really represents the largest single market that we supply into today. So we have supplied human choline into infant formula for many, many years. So we're selling to Abbott, Mead Johnson and Nestle and companies like that. So that's a very important part of our business and, as we look at that business, its probably about half of the business. So we could further penetrate infant formula. The locally made infant formula in China typically does not have choline in it, that's obviously a big market and something that we're working on to change, that's an area of opportunity. And then amount of choline that is in infant formula, we feel like we have good evidence around why a higher percentage of choline could be included in infant formula. It's actually different levels in Europe to the U.S., so that's another way we can try to increase our infant formula business, but we are at this point highly penetrated, and it will take those kind of moves for us to increase our infant formula business. Most of our focus today is really on supplements, prenatal vitamins, multivitamins and nutritional beverages.

[Tim Ramey, Pivotal Research]

Is it your opinion that the data would suggest higher high levels of choline in the big manufacturers that you're selling to now, or are they where they should be?

[Theodore Harris, Chairman, Chief Executive Officer, President]

I think, Europe historically has had lower amounts, and we think that it makes sense for levels in Europe to increase. But we also do think that based on the recent Caudill study where, basically she fed significantly higher doses of choline to pregnant mothers that showed significant cognitive benefit, that there could be value in increasing the amount of choline in infant formula as well as in prenatal vitamins. So we do think that there is some evidence that would suggest higher amounts could make sense.

[Tim Ramey, Pivotal Research]

Okay, one more just follow-up on the monogastric sales. I think you said 14.3% increase, which was more than I was thinking, I was thinking we would see more of a deceleration in 3Q, perhaps from the China issues? Certainly I don't think there's 14% more chickens out there. To what do you attribute that, is it inventory stocking, is it higher use in the feed rations? What's going on there?

[Theodore Harris, Chairman, Chief Executive Officer, President]

We really don't see any higher use in the feed ration and that's actually one area of positivity, when there are some of these macroeconomic changes going on, the amount of choline fed in diets, typically, pretty much stays the same. We do see as we've talked in the past, some transitioning from betaine for example to choline, will allow us to increase our business a little bit more than the market would suggest. But really, the bigger driver has been selling prices are up significantly, our volume is not up that significant of amount, our selling prices are up pretty significantly. And our business in Europe, if you recall we bought Chol-Mix last year, early last year. And that really brought some additional volume to our company and ability to grow in Eastern Europe that we did not before and so -- we've been able to grow our business in Europe sort of aside from the China situation faster than you would think the market would be growing. So it's really a combination of that and higher selling prices that's getting us to that significant of a number.

[Tim Ramey, Pivotal Research]

Are the higher selling prices in anyway related to the trade tariffs or is choline from China or betaine, which I think is a non-U. S. product, is that being impacted and therefore providing a bit of a price umbrella for you?

[Theodore Harris, Chairman, Chief Executive Officer, President]

Yes, to some extent, but really what's driven this is higher raw material cost, our raw material cost are up and we do have good ability to pass those raw material costs on to our customers and that's been the primary driver. I think those things that you mentioned benefited us more in Q4 of last year, in Q1 and Q2 of this year and less so in Q3.

[Tim Ramey, Pivotal Research]

Terrific. Thanks for the help

[Theodore Harris, Chairman, Chief Executive Officer, President]

I think one other thing maybe. Tim, you probably fell off but just to finish that factor is we have been selling more dry product as we call it versus liquid product, and there is also a mix impact there as our dry product is sold at a premium to liquid and that's playing a bit of a role as well.

[Operator]

Our next question comes from the line of Mitra Ramgopal from Sidoti & Company.

[Mitra Ramgopal, Sidoti & Company]

First, I just wanted to follow-up on the raw material costs in terms of -- how much it might have impacted margins this quarter?

[Theodore Harris, Chairman, Chief Executive Officer, President]

Raw material costs are really a little bit difficult to get an exact answer to your question on. And maybe, we could just follow up separately, I don't have that at my fingertips.

[Mitra Ramgopal, Sidoti & Company]

Okay, no, that'd be great. And Ted, I know you talked about investments and projects to improve efficiencies and overall capabilities. I was wondering, if you could give us maybe some of the things you're doing on that front?

[Theodore Harris, Chairman, Chief Executive Officer, President]

Yes, sure. We've recently put in a brand-new dryer in our site in Murano, Italy that was significantly more efficient than the older dryers that were in there as well as the dryer that was at our acquired facility in Chol-Mix. That's a really good example. We've recently put in several heat exchangers in our choline manufacturing processes that are more efficient. We put in a natural gas cogeneration unit in one of our facilities, that's creating energy efficiency. So those are the kind of projects, they are not necessarily huge ticket items, but they are really important for us to continue to invest in to manage our cost.

[Mitra Ramgopal, Sidoti & Company]

Okay, that's great. And then on the Animal Nutrition segment, I know in the past you've talked about one of the opportunities is maybe transferring that technology, or technologies, to the animal market in terms of pet food. I was wondering if you have -- if you're seeing any traction there?

[Theodore Harris, Chairman, Chief Executive Officer, President]

Yes, we are starting to see some traction in the pet food area and, I think one thing that's important to note is that our monogastric business historically about one third of the business has been pet food. So we've sold into the pet food industry for years. And what we have been trying to do of late with our PetShure launch has been really to introduce new products into that market anywhere from a grain free version of choline chloride to acidulants for preservation of pet foods.

And so, this is in addition to our historical product line, and this business has been performing relatively well over the last few quarters and our business is up about I would say 25% year-over-year in these new products, which is a relatively healthy growth off of a very small base, but it's starting to show that we are seeing some traction.

[Mitra Ramgopal, Sidoti & Company]

And then finally, as you look at priorities for capital allocation, obviously, you've done some acquisitions recently, you paid down debt, you plan on increasing the dividend on a regular basis. How should we think in terms of the overall priority in light of the strong free cash you're generating and use going forward?

[Theodore Harris, Chairman, Chief Executive Officer, President]

I think, this is an area that really hasn't changed over the last few years. Our first priority is clearly investing in organic growth, whether that's R&D or additional selling and marketing expenses or capital at our plants, we likely will be investing in an additional human choline chloride crystal capacity next year, for example. So that really is our primary focus and then, secondarily, I would say acquisitions. We're fairly selective around our acquisition targets, try to be very surgical and require significant return on those investments just like we would a capital investments. We're committed to the dividend, we have been increasing that over year-over-year for some time, and we're committed to doing that. And then lastly, share repurchase, that really has not been something that has been on our focus screens over the last few years.

[Operator]

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

[Theodore Harris, Chairman, Chief Executive Officer, President]

Just before we get into closing comments, I think Bill wanted to make an additional comment around raw material impact.

[Bill Backus, Chief Accounting Officer]

Yes, Mitra, just to get back to you, without looking at every individual raw cost, if you look at some of our major feedstock raw materials, for example, for choline chloride, we're looking at the raw materials being up where somewhere slightly above 10% year-over-year or quarter-over-quarter from the prior year. And we've clearly had some other raw material costs inflation that's been significant too. Another one I can point out is tartaric acid which is also used for part of choline nutrients product line. So I think with the choline chloride in particular, as you know, it's a big part of what we do. It's slightly above 10% increase quarter-over-quarter.

[Theodore Harris, Chairman, Chief Executive Officer, President]

Okay, with that, I would just like to thank everybody for joining the call today and your continued support of our company. We feel like Q3 2018 was a good quarter for Balchem, both financially and strategically, very pleased with the Bioscreen acquisition and what it brings to our company. And we look forward to reporting out Q4 results and full year results, which will be in February of next year. So thanks again for joining the call.

[Operator]

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