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Balchem Corp (NASDAQ:BCPC)

Q4 2013 Earnings Conference Call

February 27, 2013 11:00 AM ET

Executives

Frank J. Fitzpatrick – Chief Financial Officer, Treasurer and Assistant Secretary

Dino A. Rossi – President and Chief Executive Officer

William A. Backus – Chief Accounting Officer and Assistant Treasurer

Analysts

Mike Ritzenthaler – Piper Jaffray & Co.

Daniel D. Rizzo – Sidoti & Co. LLC

Anthony G. Polak – Aegis Capital Corp.

Operator

Greetings, and welcome to Balchem Corporation’s Fourth Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Frank Fitzpatrick, Chief Financial Office for Balchem Corporation. Thank you, sir you may begin.

Frank J. Fitzpatrick

Thank you. Ladies and gentlemen, thank you for joining our conference call this morning to discuss the results of Balchem Corporation for the period ending December 31, 2013. My name is Frank Fitzpatrick, Chief Financial Officer and hosting this call with me is Dino Rossi, our Chairman, President and CEO.

Following the advice of our counsel, auditors and the SEC, at this time I would like to read our forward-looking statements. This release does contain or likely will contain forward-looking statements, which reflects Balchem’s expectation or belief concerning future events that involves 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.

Dino Rossi

Thanks, Frank. Good morning ladies and gentlemen and welcome to our conference call. We are pleased to report quarterly net earnings of $10.7 million on quarter consolidated net sales of $81.6 million achieving new fourth quarter records for those earnings and sales. These fourth quarter sales of $81.6 million were 2% greater than the $80 million result for the prior year comparable quarter.

In the quarter, ARC Specialty Products segment generated fourth quarter sales of $12.7 million, a modest 2% decline from the prior year quarter. This result was principally due to a slight decline in volumes sold of propylene oxide for use in nutmeat fumigation and ethylene oxide products for medical device sterilization.

Animal Nutrition & Health sales at $56.9 million was up 1% over the prior year comparable quarter. The ANH Specialty Ingredients largely targeted to the ruminant animal markets, realized an approximately 12.8% sales increase from the prior year comparable quarter led principally by strong volume growth of Reashure and NitroShure.

Our AminoShure and chelated product pipelines also have another very solid quarter. Sales of choline, choline derivatives and other products from our industrial applications were down approximately $300,000 from the comparative prior period, particularly due to slower product sales in Europe.

Sales of choline for monogastric animals, poultry and swine were also down in the quarter with product sales into the international markets, particularly slow in the quarter. Food, Pharma & Nutrition sales at $12.1 million were up 13.2% led by strong double-digit sales growth of human choline products for nutritional enhancement and sales of the encapsulated products sold into both the domestic and international food market.

Earnings from operations of $16.1 million improved $1.1 million or 7.4% over the prior year quarter, improving 1% full percentage point to equal 19.8% of sales. As previously noted, consolidated net income quarter-to-quarter at $10.7 million, up from $9.98 million in the prior year quarter. This quarterly net income translated in to diluted net earnings per share of $0.35 as compared to $0.33 we posted in the comparable quarter of 2012 an increase of 6.1%.

Looking between the top and bottom line, you will see that our consolidated gross profits were $23.8 or 29% of sales in the quarter, up from 28% in Q4 of 2012. We continue to focus on maximizing transportation fees and de-bottlenecking as we continue to realize strong sales volumes in our various plants.

Raw material increases had an unfavorable impact on our choline product again this quarter. As mentioned in previous conference calls, we continue to monitor and challenge raw material cost increases, and seek to adjust prices timely within contractual guidelines. Our businesses are likely to be affected by these types of fluctuations going forward.

On the consolidated operating expense level, you will note a $275,000 increase, totaling 7.6 million for the quarter, which equaled 9.4% of sales versus the prior year metric of 9.2% of sales. This level of spending represents certain increases in staffing along with additional expenses relating to recruiting, relocation and certain marketing programs, which are investments in the future growth of the company.

We also incurred additional legal expenses in the quarter associated with the previously standout production JV with Taminco and other strategic growth initiatives. We continue to leverage off of our existing SG&A infrastructure, and exercise tight control over all controllable operating expenses.

Overall, we are generally pleased with our earnings from operations for the quarter, especially considering the ongoing challenging economic environment in North America and European markets that we serve.

The company’s effective tax rate for the three months ended December 31, 2013 and 2012 was 33.7% and 34.5% respectively. This decrease in the effective tax rate is primarily attributable to the timing of certain tax credit and deduction.

Our annualized effective income tax rate for all of 2014 is currently estimated to be approximately 33%. As previously noted net income of $10.7 million equated to $0.35 per diluted common share, which is a 6.1% improvement over the comparative prior year quarter. These results generated approximately $18.8 million of EBITDA in the quarter, which translates into $0.61 per diluted share and when including our non-cash stock based compensation charge, we generated $19.7 million of EBITDA or 24% of sales in the quarter equaling approximately $0.64 per share.

Our balance sheet continues to strengthen and our cash flow remains strong as we closed out the quarter with $209 million of cash. We have spent $8.2 million of capital for the 12 months ended December 31, 2013, which includes normal stay in business, plant de-bottlenecking, and capital spend relating to the new manufacturing faculty in Virginia.

Capital expenditures for all of 2014 are expected to be approximately $20 million, including key projects for energy savings in Europe, additional plant expansion and participation in the production JV with Taminco.

As you can see in our balance sheet, we continue to aggressively manage all areas of working capital, driving strong cash flow, improving cash earnings and generating quality organic results from our core businesses.

And in effort to detail our consolidated results better for shareholders, I am now going to have Frank Fitzpatrick to discuss the ARC Specialty Products and Food, Pharma, Nutrition segment.

Frank J. Fitzpatrick

Thanks Dino. The ARC Specialty Products segment posted quarterly sales of approximately $12.7 million or approximately 2% decline as compared to the prior year comparable quarter. This decrease was principally the result of relatively minor declines in volumes sold of both ethylene oxide products for medical device sterilization and propylene oxide for nutmeat fumigation.

The previously noted decline in U.S. hospital admissions has continued affecting the number of operations, medical device utilization, a trend that may persist as companies and consumers grapple with the shifts and health care policies and economic.

Both of these product lines did however show modest volume growth on a sequential basis. ARC quarterly business earnings declined 5.8% to $5.2 million versus the prior year comparable quarter. This decrease is principally due to the noted sales softness, higher raw material costs and increase operating expenses.

During the quarter, we did realize increases in the cost of certain petrochemical commodities. We also incurred additional expenses pursuing other end of market applications, where in the products handled today by us may have new market opportunities. However, on a sequential basis operating income did 7.1%.

For the quarter, the Food, Pharma and Nutrition segment realized sales of $12.1 million, up approximately 13.2% over the prior year comparable quarter. Correspondingly, business segment earnings of $2.7 million were up approximately 15.3% from the prior year quarter largely due to increased volumes sold and the product mix.

These positive results were achieved from a 20% increase in sales in the food sector and a 15% increase in sales of our human choline products for nutritional enhancement. And if we continue to focus on building consumer awareness of the benefits of choline, positioning choline with food and nutritional supplement companies as an essential ingredient with excellent therapeutic benefits for all ages.

We continue to utilize the structured function claims awarded to Balchem by EFSA in Europe, support additional scientific research externally, and are excited with the growing number of projects in the pipeline targeting choline inclusion.

As also mentioned, contributing to the higher sales with 20% increase in sales in the food sector, principally from encapsulated ingredients for baking and food preservation end markets.

Strong results for our foot products were realized in both domestic and international markets. Results for this segment continue to reflect the rollercoaster effect of pipeline fills, inventory level management, and customer marketing initiatives.

Our pharmaceutical delivery development effort continues. As previously reported, the licensing of our technology being used for treating autism, concluded a Phase 3 clinical trial, has conducted a successful pre and new drug application meeting with the U.S. Food and Drug Administration and has begun filing its New Drug Application. We continue to work closely with them in support of the NDA filings. In the near-term, this sector remains a net expense for the business segment.

I will now turn over the call to Dino for him to discuss the Animal Nutrition and Health segment.

Dino A. Rossi

Thanks Frank. In the Animal Nutrition and Health segment we realized sales of $56.9, a modest increase of 1% as compared to the prior year comparable quarter. ANH ruminant product sales realized a 12.8% increase from the prior year comparable quarter, as mentioned in this morning's press release this increase was led principally by strong double-digit volume growth of ReaShure, NitroShure, AminoShure, and chelated minerals.

Milk prices remained strong in the quarter and expectations of moderating feed prices and continued demand strength in U.S. and export markets are all positive indicators that should support growing utilization of these products.

Our global feed grade choline product sales were down 2.3% as volumes internationally declined in the quarter, we constantly evaluate export choline sales opportunities for the poultry market, but again found Q4 to be a somewhat challenging export market, when factoring in raw material cost increases and foreign competitor activities.

In the coming quarters, we may elect to be more aggressive in seeking to win additional business depending upon the then current cost, export market condition and capacity availability.

Domestic sales of feed grade choline were approximately flat with the prior year quarter. In addition, volumes sold in these markets are strongly influenced by the various dynamics of our customer base predominantly the poultry production industry, but also swine and aquaculture markets.

North American choline volumes sold typically track closely with broiler chick placements and egg sets. The current USDA forecast for broiler meat production continues to forecast modest growth for the balance of 2014. Especially, due to the lower projected corn and soybean meal prices.

In Europe, sales of feed grade choline declined in the quarter. Competition from offshore producers in the European market due to unfavorable costs and market conditions were the principal reasons for this modest decline, but we do expect a rebounding into Q1 with market conditions constantly evolving.

Sales of industrial grade products were down approximately 1.7% from the prior year quarter, largely due to activities in European markets. Sales of methylamines derivatives, and choline for industrial applications in Europe were down in the quarter, while sales of industrial grade products sold into the North American fracking market grew marginally. Our growth in the fracking space was impacted by the severe cold weather, which swept across in mid United States, interrupting drilling and fracking.

In addition, our success in the space continues to attract competition from offshore producers. We do, however, remain confident that these products will continue to show strength in 2014 driving the steady to increasing levels of sales. We continue to evaluate other industrial opportunities with other core technology to determine how we may drive innovative solutions into this and other markets. We derive the most positive value.

Even with the noted modest sales growth in the quarter, our earnings from operations for this entire segment grew to $8.3 million as compared to $7.2 million in the prior year comparable quarter, principally a result of the favorable product mix. While these earnings improved nicely, we were unfavorably impacted by increases in certain raw materials during the quarter. We continue to challenge raw material price volatility and seek to implement price adjustments within our contractual guidelines.

In January of this year, we announced the Balchem and Taminco had reached an agreement to build and expand on the existing footprint of choline chloride facility in St. Gabriel, Louisiana. We expect the additional capacity from this production JV to be online in the second half of 2015.

As stated in our press release, the joint venture will manufacture choline chloride. Balchem and Taminco will market the products with separate and fully independent channels. This collaboration will lead to a state-of-the-art unit using the most advanced technology, generating advantages of scale and providing customers a high quality product and reliable supply at competitive costs.

This new capacity will help to serve the growing North American market, which is underpinned by increasing demand for choline chloride, a quaternary compound functioning as a clay stabilizer in oil and gas drilling and hydraulic fracturing applications. We will keep you appraised with the progress being made towards completing this facility in future conference calls.

As this quality result exhibits, the profitability of the ANH segment continues to be achieved with a constant reevaluation of global raw material costs, product reformulations, currency review and the ultimate ability to economically meet market needs from our various global facilities and logistic strategies.

The opportunity to capitalize in this fashion has been a direct result of constant multi-plant operational benchmarking and de-bottlenecking, marketing strategies and the ability to leverage all aspects of our business model. Overall we continue to see a revenue roller coaster effect quarter-to-quarter within the various products and market segments. This quarter was no different. we remain committed to organic growth as we look to continually expand our product offerings and move into new geographies.

We will continue to strengthen our global growth platform and are confident that more business can be generated based on the unique portfolio of products that we offer to markets we serve. Our business continues to create good balance, yielding profitable growth opportunities across the served value chain.

We also remain focused on helping our customers generate reinvestment level of 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 implementing operational and logistic improvements, new product development and new product introductions across all business segments. We continue to explore alliances, acquisitions and/or joint ventures to build and leverage on our strategic marketing direction, technology and strong human asset base. These efforts can and will impact operating expense levels beyond the normal levels we have seen in the past, but it consistent with a noted strategy to complement our organic growth.

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

Question-and-Answer Session

Operator

Thank you. We will now be conducting the question-and-answer session. (Operator Instructions) Thank you. Our first question comes from the line of Mike Ritzenthaler with Piper Jaffray. Please proceed with your question.

Mike Ritzenthaler – Piper Jaffray & Co.

Yes, good morning. On the – Dino, I was wondering if you wouldn’t spend a few minutes on the JV with Taminco, and just provide a bit more context on the genesis of that decision, and why it makes sense for Balchem?

Dino A. Rossi

Well, I think in the past if you were to go back and visit some of these other conference calls; we talked about the need to grow the choline capacity in particular in this North American market space. There have been a lot of discussions about what was required to do that. One of the key raw materials we have pointed to in the past was in tight supply. And that’s probably earlier on was a rate limiting factor infractures and decision to expand earlier.

But as things have developed, clearly, I would say, Taminco who is the largest amines producer globally and a key supplier of trimethyl amine to us, and also in the choline business in the European market and Asian market, really decided that they had an interest in coming into this North American market, and clearly, we had an interest in continuing our supply position. They announced and are working on expanding their methylamine facility in Florida. Clearly, we have continued to use them and expect to continue to use them as a quality supplier of trimethyl amine, and with that we managed to, I think strike what will be a good deal for both parties.

For us, securing longer-term investment – longer-term supply of the amine that we need without making a significant capital investment, and those guys getting some choline production locally, quite honestly in lieu of probably importing product. So I think it was kind of playing all ends toward the middle here and striking this joint venture production agreement.

Mike Ritzenthaler – Piper Jaffray & Co.

That makes sense. Just a brief question on the raw material environment, as we look out through 2014, should we expect to see continued tightness in certain key raw materials as 2014 unfolds or we’ll start to lap some of the times when that pet perked up later this year. But I’m just curious as to how we kind of see that playing out?

Dino A. Rossi

Well, I think as it relates to our key raw materials, certainly, the expectation is as I just mentioned the Taminco’s expansion will greatly alleviate any kind of tightness. Even though I would say that we are not in a tight mode today. But I think certainly, going forward as they bring that facility online, it will help with additional capacity. And then I think there is always a question of what happens with the ethylene molecule. The tightness kind of comes and goes, plants are up and down, and there are cycled if you will.

It is a relatively tight space today. I think clearly, if you just run the numbers on boiler plate capacity you’ll find that there is enough capacity. But that industry also looks to export derivatives of the ethylene molecule as well. So I think we are fine from that standpoint, and just remember too that all of these materials for us are under contract. But they do have a formula that goes back to a key driver in there, and that’s really what will probably called cause price movement, which is maybe the real point of your question rather than availability. I think the availability will be fine, but certainly, the formulas are going to dictate what happens with those prices.

Mike Ritzenthaler – Piper Jaffray & Co.

Okay, that makes sense. Switching a bit to the ruminant side, which I saw really good growth this quarter, I’m curious about your current penetration in the ruminant animal business with ReaShure, et cetera?

Dino A. Rossi

Yes. So our largest position there far away is here in North America, although we are beginning to see more sales into Europe and also into Asia. So those are all positive things. I mean but looking at, so I would say market penetration in rest of the world is pretty small on average. If it’s 1%, it’s probably a lot. Here in the North American market, I think our view is that we probably have about 25%, maybe 30% market penetration of available and maybe, target cows, if you will.

That doesn’t mean that there is alternative product out there, supplying the other 75%. It is a market that we’re growing. There’s a couple other players in this space, but I would say they have modest market position. Again, looking at the total available market, it’s not so much a question, I think of competitors fighting for market share, as it is good competitors growing the market. But that’s probably, our level of penetration today, so again, a lot of upside opportunity there.

Mike Ritzenthaler – Piper Jaffray & Co.

Okay. Just one last one from me then on AminoShure, this is a question that we get a lot with the sampling and things like that, that need to be done, having AminoShure pulled I guess it was last year or 2012, but your thoughts on timing there, and what still needs to happen from Balchem to get that product place back in the market.

Dino A. Rossi

Yes, there is a lot of work going on in the background for sure. I think it’s fair to say we are disappointed and we don’t have the product back out there today. But as I said, we are not going to bring the product back until we are really comfortable. It’s truly robust enough to service the industry and as the industry desires.

I think minimally this is nothing, but a thumbnail. We are probably a year, year and half away. And again, like I said a lot of work going on in the background, looking at a lot of different scenarios to deal with everything from feed stability to rumen stability, to bioavailability. All things to play through in building that product. So we are a little ways away yet.

Mike Ritzenthaler – Piper Jaffray & Co.

Okay, thanks.

Dino A. Rossi

Sure.

Operator

Our next question comes from the line of Daniel Rizzo with Sidoti & Company. Please proceed with your question.

Daniel D. Rizzo – Sidoti & Co. LLC

Hi guys.

Dino A. Rossi

Hi, Dan.

Daniel D. Rizzo – Sidoti & Co. LLC

You indicated that Food, Pharma & Nutrition is going to be somewhat volatile based on pipeline and just inventory. It just seems like it has been fairly strong for six months now, and most of the past three quarters except for the first half of 2013. So, is this something we can expect going forward? Have you just reached critical mass, where it is growing much faster because your efforts are finally being realized, or is it going to be kind of up and down I guess in 2014 like it had been somewhat in the past?

Dino A. Rossi

Yes, I think I won't rule out the out the volatility, but you are right. There has been a pretty steady uptrend here over the last six months and we are pleased with that. We have seen pipeline conversions. I’m going to say more steadily happen. To some degree they is a bit unpredictable exactly, when that customers going to go, when they will make the marketing decisions to launch the end product into the market, which is somewhat out of our control.

But we do have a pretty rich pipeline there and feel pretty comfortable that we should be able to see this growth continue. With the other thing we can't predict is at what moment an end product that consumes our product for other market reasons gets pulled off the shelf. That's outside of our realm of influence that you will.

And to be honest, I mean they always happen, the question is whether it happens with our product where we have a larger presence or not. But right now I wouldn’t say there is any indication that we are looking at any of those kinds of situation. We are seeing really good uptick in the international markets. We change and put new distributors in place, people on the ground over there.

We are really pleased with the progress has taken place and moving some of those food platforms into that European marketplace. We have made significant efforts in the past and I think that maybe a lot of that groundwork that was done and starting to yield some good results.

Clearly we are bringing some new products to the market as well. Working closely with those customers as they want to have new products brought to market and clearly it’s nice we have that position with them, where they are working with us and have the opportunity to develop business solutions for them.

Daniel D. Rizzo – Sidoti & Co. LLC

Okay. And then you guys did a pretty good job of controlling costs even with in terms some of the challenges with input costs. The operating market was still up, a sizable amount year-over-year. Is it something where you changed a little bit structurally, where we can expect better results going forward? Is that something we can look forward to?

Dino A. Rossi

Yes, I mean there is always going to be some volatility in that. We are going to continue to invest in the SG&A area. And I think the flip of that getting down to operating income is, you saw the improvement in the gross margin. Again part of that is product mix, but we have made improvements in our plant operation. So, we continue to try and wring the costs out of that, and to some degree it maybe plow some of those monies into R&D efforts, regulatory efforts, again trying to open up new marketplaces.

So, you are right. It’s been a nice little uptick there that happened. I think I would like to tell you that it’s our objective to certainly kind of hold on to that kind of margin. But I think on the flip side we are managing it for the future, and any given quarter you might see us slip back a little bit and then fall back again. So, I don’t know that I sit here and predicted consistently quarter-to-quarter, but certainly it’s an objective of ours to be in that range.

Daniel D. Rizzo – Sidoti & Co. LLC

All right. Thank you, guys.

Dino A. Rossi

Thank you.

Operator

(Operator Instructions) Our next question comes from the line of Paul Sage, a Private Investor. Please proceed with your question.

Unidentified Analyst

My question is whether you can make any comment on all the insider selling that was mentioned on the internet, which I think was disquieting to small investors, who might have large positions in the company?

Dino A. Rossi

Well, I think the easy explanation is that a lot of the activity that was there was done under 10b5-1 filing. I would say that there was no secret the activity was going on. These programs are out there in advance for everybody to read.

Coincidentally, in December, there was also some vesting of options and some of the sell activity, while some was not very large, the number of people went up. But it was really to deal with the tax issues associated with that activity. Sort of that, I think you would find those people again, are not they’re actively selling. But it was to deal with that issue that quite honestly happened – it’s happened in the last few Decembers. So, that part was not really new.

So some of these are just aging options that quite honestly require some activity, and that’s what was going on there. I don’t think anything particularly unusual. And again, sort of that I think it was 10b5-1 program that were out there. I’m going to say predefine the sales over as much as six-month windows were put in place and exercised.

Again, I don’t think it was kind of one-off. I see the comments that are out there, and the idea that management is panicking. I don’t think is at all what the message should be. Again, the majority of the shares for sure were well advanced and documented for everybody to know about. So, I don’t know what else I could tell you other than that’s really what transpired.

Unidentified Analyst

Thank you.

Dino A. Rossi

Thank you.

Operator

Our next question comes from the line Tony Polak with Aegis. Please proceed with your question.

Anthony G. Polak – Aegis Capital Corp.

Good morning.

Dino A. Rossi

Hey, Tony.

Anthony G. Polak – Aegis Capital Corp.

Could you give us a little clarity on going forward. I noticed three different things, which in the quarter, which were sort of quarter related, avian flu, the cold weather, and the Affordable Care Act. Could you comment on those going forward whether they’ve abated? I mean certainly, the cold weather has not, but if you can comment on that I would appreciate it?

Dino A. Rossi

Yes, I won’t pretend to be the weather man, but everybody can see what is going on. But what I do think is that with the abatement of the cold weather, we are going to see uptick on the fracking side. And we know for sure, there was slowness there. We can track that pretty readily. It is not just us saying that. I think you would find the industry was noting issues, including equipment freezing up, and not being able to effectively function.

So I think that is going to abate and get back the normal rates on a go-forward basis. I think the consumption of natural gas has been tremendous through this entire period and I think you’re seeing, I would say, there’s kind of mixed stats out there, but our belief certainly is that inventory levels have declined. I think that there will be definitely a push to get the inventory levels back up, and certainly, natural gas prices have moved up, which is always an easier decision for these guys to frack more.

But going over to your question of the avian flu, I mean I think our view is that it’s being corrected. so I think in particular, in Mexico, we have seen some correction there and the major of our producers down there are absolutely talking about getting back to the normalized production rates.

China is a little more difficult to read, because it seems that their frequency of the event is, I won’t say common, but maybe more frequent at least. But there too our view is that it is not abated, there it still got a little ways to go. but certainly, I think you look at the demand for chicken. they want to get that resolved and I think they will. So I think part which will fix itself. The third...

Anthony G. Polak – Aegis Capital Corp

The Affordable Care Act in the ARC.

Dino A. Rossi

Yes. I don’t want to say too much about the Affordable Care Act other than I think it still is cost confusion. I think you still have a large population of people who either aren’t insured, or are not sure how they are insured. And what we do see and we do take see kind of a close pulse on admissions if you will, still has not bounced back and I think if you have ask the hospital industry, I think if you pay close attention you will see hospitals are still consolidating and laying people off and a lot of that has to do with admissions and until that’s remedied.

and again, I do think it will be remedied. Certainly, there is less of a requirement for medical devices if people are not in there having operations. So we see that and certainly the medical device manufactures are keeping inventory levels. I’m going to stay closer to the vest. They are not looking to go along on anything, given that level of uncertainty that sits out there as well. So it all ripples down, but I think we all know that people are going to medically be taken care of when they have to, maybe elective stuff gets postponed and certainly, I think the uncertainty with coverage is affecting a lot of that as well.

Anthony G. Polak – Aegis Capital Corp

In terms of Caremark, do you have any more feel for timing when it hopefully gets approved?

Dino A. Rossi

I can’t honestly tell you that I have that absolute insight there, we have done everything from our standpoint to assist Caremark and all of the requirements that they need to continue to do the rolling filing care. So that is all moving forward as far as and certainly I would say, some of the conversations we’re having with them, it seems continues to track albeit I will admit everybody knows it has so much slow, but I think it’s part of the process.

It hasn’t been because anything was purposely delayed or not that we are aware of, any kind of finding that have been negative. So I think it continues to track, albeit relative to – I think it will be inappropriate for me to predict when they’re going to get into the market. So as far as we know everything, conversations we have, it is tracking to be out there I won’t ponder a timeframe, probably a question better directed to the executives at Caremark.

Anthony G. Polak – Aegis Capital Corp

Acquisitions or all of the money that we have, is that getting close ever, or you just can’t find things to buy?

Dino A. Rossi

Well, we’ve been close. I have mentioned that the past. Deals have honestly fallen off of the table, but I think it’s also fair to say that we continue to look and we continue to work on transactions, I’m optimistic that will definitely have something done this year, again, deals are never done until they are done. so again, I won’t predict, but I would tell you that we have a couple things on the front burner and that we are pretty excited about, and we expect to push forward with the idea of getting a transaction concluded here timely.

Anthony G. Polak – Aegis Capital Corp

Good. Is it true that the income tax rate was a lot higher in the fourth quarter than the third quarter, and if so why?

Dino A. Rossi

I’m looking at cost to stable here. I’ll let the accounting/finance guys into that. I think on the second, Tony. Any other questions while they are looking at that?

Anthony G. Polak – Aegis Capital Corp

Any other applications in pharmaceutical products that we’re working on?

Dino A. Rossi

There is a couple, I would say that are off in the distance right now. I think we’re keeping focused from requirement standpoint of making sure with everything for Caremark, but there are – again, a couple of projects in the background, but they’re definitely off in the distance.

Anthony G. Polak – Aegis Capital Corp

Okay, thanks

Dino A. Rossi

Tony, was your question on a sequential basis third versus fourth?

Anthony G. Polak – Aegis Capital Corp

Yes. Third versus fourth.

Dino A. Rossi

All right, go ahead, Bill. Bill is here, he will answer.

William A. Backus

Hi, Tony. It’s really discrete items related to truing up the provisions for the returns from the prior in Q3, once we filed our returns and did a true up and that was favorable effect from that.

Anthony G. Polak – Aegis Capital Corp

Okay, okay. thanks, great job.

William A. Backus

Thank you.

Dino A. Rossi

Thanks, Tony.

Operator

Our next question comes from the line of Pamela Streed, a Private Investor. Please proceed with your question.

Unidentified Analyst

Yes, good morning. Thanks for taking my call. Hello?

Dino A. Rossi

Yes.

Unidentified Analyst

Good morning. Thanks for taking my call.

Dino A. Rossi

Thank you.

Unidentified Analyst

What did impact – do you see on your fracking product sales from more restrictive rail transport rules?

Dino A. Rossi

Well, I think it’s a great question I think, if as we see it today, lot of those transport rules are going to heavy oil, which we don’t really play into that market much, but I would not look past fact that there is not a strong infrastructure system in place today to handle the natural gas, lot of talk about getting these gas lines in place, but clearly not yet.

I think the demand for the natural gas is there and it continues to be there and it will continue to be there. And I think that they will get these gas pipeline in place. So, as it relates to some of the restrictions that are being talked about hauling by rail. Again not so much affecting the natural gas side of thing, yes it is more in the oil side.

Unidentified Analyst

Okay, thank you. I have another unrelated question. What’s your market penetration in nut fumigation? Is it still primarily almonds, or have you branched out to other nuts?

Dino A. Rossi

Well, yes, others are treated as well including pistachios and walnuts, and certainly far and away almonds are the largest. We are into these other nuts. I mean there is alternative technology out there. We compete with it. But clearly we are looking to continue to expand with other nut meats as well and continue to work with those different, if you will, those particular Nut Boards, other than the Almond Board to get

propylene oxide approved.

And I’d say the background that we continue to explore other technology for fumigation to deal with. There is lots of different issues with different nuts because of the oils and what not, that are affected by whatever the treatment methodologies, but we continue to explore other technologies as well.

Unidentified Analyst

Okay. Thank you very much.

Dino A. Rossi

Thank you.

Operator

Mr. Rossi, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Dino A. Rossi

Okay, thank you. And thank you everyone on the call today. Again I think we feel pretty good what’s the way that the quarter and the year turned out. I think it’s pretty much consistent with what we had talked about in terms of at or near close to double-digit growth and really all organic. So, pretty pleased with that.

As noted challenges at different spots, but I think we effectively deal with that so we’re pretty pleased. So, thanks again for your participation and your support and look forward to talking to you next quarter. Thanks. Bye.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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