Balchem's (BCPC) CEO Ted Harris on Q2 2016 Results - Earnings Call Transcript

| About: Balchem Corporation (BCPC)

Balchem Corporation (NASDAQ:BCPC)

Q2 2016 Earnings Conference Call

August 5, 2016 11:00 am ET

Executives

William A. Backus - CFO and Treasurer

Ted Harris - President and CEO

Analysts

Timothy Ramey - Pivotal Research Group

Francesco Pellegrino - Sidoti & Company

Lenny Dunn - Freedom Investors Corporation

Anthony Pollock - Aegis Capital

Operator

Greetings and welcome to the Balchem Corporation Second Quarter 2016 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, Bill Backus, Chief Financial Officer for Balchem. Thank you, sir. You may begin.

William A. Backus

Ladies and gentlemen, thank you for joining our conference call this morning to discuss the results of Balchem Corporation for the quarter ending June 30, 2016. My name is Bill Backus, Chief Financial Officer, and hosting this call with me is Ted Harris, our President and CEO.

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. The financial information that is referenced in this meeting was disclosed this morning in our quarterly press release.

Before I hand the call over to Ted to go through our consolidated results, I would like to remind everyone that given the first quarter's acquisition of Albion International, there are significant non-cash acquisition accounting items as well as cash transaction costs impacting our results in this quarter. For this reason, we will focus our discussion primarily on adjusted results which facilitate comparability to prior year and sequential quarterly performance.

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

Ted Harris

Thanks, Bill. Good morning, ladies and gentlemen, and welcome to our conference call. This morning we reported second quarter consolidated net sales of $138 million, which resulted in second quarter net income of $14.2 million or $0.44 per share on a GAAP basis.

This result includes significant non-cash amortization expenses of $7.6 million for acquisition related intangible assets and inventory fair valuation adjustment of $2.6 million related to the Albion acquisition, and transaction and integration costs of $300,000, all of which were recorded in these second quarter GAAP financial statements. The amortization expense and inventory fair valuation adjustment are a direct result of acquisition valuation and business combination accounting rules, while the transaction and integration costs are related to the Albion acquisition.

Consequently, our second quarter non-GAAP net earnings of $21.1 million or $0.66 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 $21.1 million are an all-time quarterly record for Balchem when compared to $19.5 million or $0.62 per share in the comparable prior year quarter.

Adjusted EBITDA of $39.5 million for the quarter was $4.5 million better than the $35 million posted in the prior year quarter and was up $4.1 million sequentially. Our adjusted EBITDA margin expanded further to 28.5% compared to 26.0% and 26.2% respectively from the second quarter 2015 and sequentially from the first quarter 2016.

And we delivered record second quarter cash generated from operations of $26.6 million, while also paying down $28.8 million of debt including $20 million of accelerated payments. We are pleased with these strong earnings results, especially when viewed in light of the ongoing macroeconomic pressures in certain segments of our business.

Our second quarter sales of $138.8 million were 3% higher than the $134.8 million result of the prior-year comparable quarter, with the contribution of Albion and volume increases in Human Nutrition & Health, Animal Nutrition & Health and Specialty Products offsetting the decline in Industrial Products sales of $6.8 million due to reduced oil and natural gas fracking and lower average selling prices related to reduced raw material costs and unfavorable mix.

Our consolidated gross margin percentage was 33.5% of sales in the quarter, up 240 basis points from a 31.1% of sales level in Q2 of 2015. Adjusted gross margin percentage, adjusted primarily for the previously mentioned $2.6 million inventory fair valuation adjustment, was 35.8% of sales, up 460 basis points from a 31.2% of sales level in the prior year comparative period. The improvement was primarily due to a favorable product mix and lower raw material costs.

Gross margin percentage for the Human Nutrition & Health segment increased by 50 basis points, primarily due to improved product mix and lower raw material costs. Gross margin percentage increased for the Animal Nutrition & Health segment by 300 basis points, primarily due to cost decreases of certain key raw materials. Gross margin percentage for the Specialty Products segment decreased by 700 basis points, primarily due to an Albion acquisition related inventory fair valuation adjustment of $900,000. Industrial Products gross margin declined by 130 basis points, reflecting the reduced volumes and lower average selling prices.

Consolidated operating expenses for the three months ended June 30, 2016 were $23.1 million or 16.7% of net sales, as compared to $18.1 million or 13.4% of net sales for the three months ended June 30, 2015. The increase was principally due to the inclusion of Albion operating expenses, transaction and integration costs and amortization expense related to the previously mentioned acquisition. Excluding transaction and integration costs of $300,000 and non-cash operating expense associated with amortization of intangible assets of $6.8 million, operating expenses were $16 million or 11.6% of sales. Looking forward, we will continue to focus on tightly controlling our operating expenses and leveraging our existing SG&A infrastructure.

U.S. GAAP earnings from operations were $23.3 million, a decrease of $400,000 or 1.9% compared with the prior-year comparable quarter. On an adjusted basis, as detailed in our earnings release this morning, earnings from operations of $33.7 million increased $3.3 million or 10.9% from the prior-year comparable quarter.

Interest expense for the three months ended June 30, 2016 was $1.9 million, all of which related to the debt financing of the SensoryEffects and Albion acquisitions. Our net debt at June 30 was $292 million.

The Company's effective tax rates for the three months ended June 30, 2016 and 2015 were 33.8% and 32.7% respectively. The increase in the effective tax rate is primarily attributable to the impact of new jurisdictions and a change in the income proportion towards jurisdictions with higher tax rates.

As previously noted, consolidated net income closed the quarter at $14.2 million, down from $14.9 million in the prior year quarter. This quarterly net income translated into diluted net earnings per share of $0.44 as compared to the $0.47 we posted in the comparable quarter of 2015. On an adjusted basis, as detailed in our earnings release, our adjusted net earnings were $21.1 million or $0.66 per diluted share compared with $19.5 million or $0.62 per diluted share in the prior year quarter.

As outlined in our earnings release, our second quarter results generated an all-time record $39.5 million of adjusted EBITDA in the quarter, compared with $35.0 million in the prior year quarter and $35.5 million in the first quarter of 2016. Adjusted EBITDA as a percent of sales for the quarter was 28.5% of sales, 250 basis point and 230 basis point increases over the prior year quarter and sequentially respectively, and equals $1.24 per diluted share.

As previously noted, our cash flow remained strong as we generated record second quarter cash from operations of $26.6 million and closed out the quarter with $33.4 million of cash, and this reflects scheduled principal and accelerated payments on long-term debt of $28.8 million along with $4.1 million of capital expenditure funding in the quarter.

Before I hand the call back over to Bill to go through the segments' detailed results, I'd like to update you on a few of our key growth initiatives. We are very pleased that the Food and Drug Administration issued the long-awaited food nutrition labeling final rule. In it, the FDA recognized choline as an essential nutrient and established a Reference Dietary Intake or RDI for choline for foods and supplement products that include the nutrient.

Products with claims on choline content or benefits will now show choline and its percent daily value on the label, providing consumers with a highly visible measure of the choline content of foods. In providing for choline labeling on foods and dietary supplements, the FDA has taken an important step towards helping consumers ensure they get sufficient choline in their diets.

We are working with supplements and food manufacturers to leverage the recognition of this essential nutrient, both in the domestic and international marketplaces as choline visibility continues to gain even further traction, evidenced by the recent European Food Safety Authority, EFSA, release of a large multinational study that showed that choline intakes in Europe are also low. EFSA's proposal of European adequate intakes for choline quickly followed. It is clear that regulatory agencies across the globe now recognize the importance of this essential nutrient and Balchem stands ready to help fill the dietary gap with VitaCholine, the premier brand of choline for supplementation.

As reported last quarter, the Albion International integration is progressing well and we are working hard to deliver on both our cost and sales synergies, with results to date meeting our expectations. We continue to be pleased with the response we are receiving from our collective customer base and the contribution Albion is making to our business model.

On July 25, as many of you may already be aware, we had a fire at one of our four sites acquired as part of the acquisition. Most importantly, no one was hurt. Our team did an outstanding job responding to the fire and evacuating the facility. While we are still investigating the cause of the fire, the damage to the site was significant. We're implementing our contingency response plan.

This manufacturing facility is one of five chelated mineral plants we have within our manufacturing network, performing granulation, blending and packaging operations. We are working hard to leverage our other manufacturing capabilities within the broader Balchem network of 20 facilities as well as outside partners to ensure minimal disruption to our business and our customer base. In addition, we are fully insured for the property and also have business interruption insurance to cover any lost income.

I'm very proud of the Balchem team and how efficiently and effectively they have reacted to this incident, and once again, particularly pleased that no one was hurt as a result of the disciplined evacuation and response to the fire. We'd also like to send our sincere thanks to the fire departments that responded and to the local police and business community in Clearfield, Utah who provided assistance during the fire. While the chelated mineral team is spending a significant amount of time and effort working through this situation, we do not expect this incident to have a material impact on our Company.

In the third Phase III clinical for the Curemark drug to be utilized in the treatment of autism, it is progressing with 29 sites across the country now actively recruiting participants. In the meantime, we are finalizing the validation of our quality systems and supply chain and manufacturing capabilities to ensure preparedness for the production of initial launch demand upon FDA approval.

I'm now going to have Bill Backus discuss the segments in more detail.

William A. Backus

Thanks Ted. For the quarter, sales of our consolidated Human Nutrition & Health segment were $74.8 million, an all-time record quarter and an increase of $7.6 million or 11.3% from the comparable prior year quarter. The sales increase was a result of the Human Nutrition portion of Albion contributing above expectations and volume increases of 9%, 7% and 5% for Flavor Systems, Choline Nutrients and Encapsulated Products respectively, with overall legacy sales negatively impacted by mix particularly in Cereal Systems and Powder Systems. Sequentially from the first quarter 2016, without the positive impact of Albion, volumes in HNH increased 4.5%, with particular strength in Flavor Systems, Cereal Systems and Encapsulated Products.

Second quarter earnings from operations for this segment were $9 million versus $9.1 million in the prior year comparable quarter, a decrease of $100,000 or 0.7%. Excluding the effect of non-cash expense associated with amortization of acquired intangible assets of $5.9 million and an inventory fair valuation adjustment of $1.7 million relating to acquisition accounting, adjusted earnings from operations for this segment were $16.7 million compared to $14.7 million in the prior year quarter, an increase of $2 million or 13.3%. Adjusted earnings from operations from this segment increased due to the higher sales, including from the Albion acquisition, and improved product mix and lower raw material cost.

We are pleased with the second quarter Human Nutrition & Health results including the contributions from Albion and the increased volumes across most product lines. This segment has continued to see margin expansion with an improved mix, better efficiencies, management of supply-chain costs and the enhanced value proposition of our product portfolio.

Albion has contributed to this margin expansion and adjusted gross margin, primarily adjusted for the previously noted inventory fair valuation adjustment of $1.7 million, increased to 34.1% of sales in the second quarter of 2016, an improvement of 320 basis points from the 30.9% of sales in the comparable prior year quarter. The opportunities presented by our pipeline, the now published RDI and EFSA first ever intake recommendations, agglomeration in Curemark, along with the Albion acquisition, will help fuel future growth for this segment.

The Animal Nutrition & Health segment sales of $38.4 million decreased 7.8% or $3.2 million on a 3.8% increase in volumes compared to the prior quarter. Global monogastric species sales, including feed grade choline products, decreased $2 million or 7.2%, primarily due to lower monogastric average selling prices resulting principally from reduced formula pricing based on lower raw material costs.

Lower feed prices and favorable economic conditions provide incentive for broiler integrators to expand production, and the USDA has increased its 2016 broiler production forecast as well as the export forecast as certain international markets have opened up. Monogastric volumes did increase 4.8% from the prior-year comparable quarter.

Sales of product lines targeted for ruminant animal feed markets decreased by $1.2 million or 9%, largely due to an unfavorable product mix driven by unfavorable dairy economics. The decline from the prior comparable quarter was most notably from decreased sales of AminoShure and NitroShure. While these global dairy market dynamics have been increasingly impactful, we were pleased that we were able to deliver strong growth of our flagship ReaShure product line through these tough conditions.

We believe that milk and milk protein prices will show signs of improvement in the second half of the year and the USDA recently increased its milk price forecast for the remainder of 2016 and for 2017 based on their expectation of robust domestic demand for all major dairy products along with improving international markets. The USDA also revised down feed price forecast and this coupled with higher milk prices should result in improved dairy farm income over feed costs and subsequently increased demand for nutritional ingredients. We remain confident long term as we further penetrate the market, gain market share and introduce new and novel products to satisfy attractive end market demands through both organic development and strategic alliances such as our recently noted partnership with BASF.

ANH quarterly earnings from operations were $7.3 million, a decrease of $200,000 or 2.2% from the prior-year comparative quarter and an increase of $800,000 or 11.8% sequentially from the first quarter 2016. The decrease compared to the prior year quarter was a result of the noted lower sales and unfavorable product mix, partially offset by cost decreases in certain key raw materials.

The Specialty Products segment achieved all-time record in quarterly sales of $20.3 million for the three months ended June 30, 2016, as compared with $13.8 million for the three months ended June 30, 2015, an increase of 47.2%, with contributions from the Plant Nutrition portion of Albion and a 5% increase in sales of the legacy sterilization and pasteurization business. Excluding the contribution from Albion, the legacy sterilization and pasteurization business also posted all-time record quarterly sales.

Specialty Products achieved all-time record quarterly earnings from operations of $7 million versus $6.1 million in the prior year comparable quarter, an increase of $900,000 or 15.2%. Excluding the effect of non-cash expense associated with amortization of acquired intangible assets of $700,000 and inventory valuation adjustments of $900,000 relating to acquisition accounting, adjusted earnings from operations for this segment were $8.7 million compared to $6.2 million in the prior year quarter, an increase of $2.5 million or 39.8%. This increase is due to the addition of the Albion Plant Nutrition business, higher legacy sterilization and pasteurization product line sales, and cost decreases of certain key petrochemical raw materials.

In the Industrial Products segment, sales decreased $6.8 million or 56.5% from the prior-year comparable quarter, primarily due to significantly reduced volumes sold of choline and choline derivatives for oil and natural gas fracking in North America. Additionally, average selling prices were lower as a result of pressures related to the industry activity downturn. There is significant uncertainty in the oil and gas industry, and while there has been a recent increase in the rig count in the United States, we continue to expect that headwinds are likely to continue through 2016.

On July 1, we closed the second phase of our choline chloride manufacturing joint venture with Eastman Chemical, formally Taminco USA, in St. Gabriel, Louisiana. Balchem and Eastman will share production capacity of the St. Gabriel facility on a two-thirds/one-third basis. While originally announced in conjunction with the planned expansion of the St. Gabriel facility, Balchem and Eastman will delay expansion as a result of the very weak oil and gas market demand for choline.

Our earnings from operations for the Industrial Products segment were $300,000, a reduction of $900,000 compared with the prior-year comparable quarter and primarily a reflection of the reduced volume and lower average selling prices.

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

Ted Harris

Thanks Bill. We are pleased with the financial performance of our Company for the second quarter of 2016 as we delivered an all-time record quarterly adjusted EBITDA of $39.5 million and record second quarter cash flows from operations of $26.6 million. Additionally, our continued strong cash generation enabled accelerated debt payments of $20 million, above and beyond the regularly scheduled payments of $8.8 million, reducing our net debt to $292 million on June 30 or 2x 12-months trailing adjusted EBITDA, further strengthening our balance sheet and financial position.

While top line challenges remain, we delivered 3% net sales growth with the added contribution of Albion sales and year-over-year volume growth in three of our four segments, Human Nutrition & Health, Animal Nutrition & Health, and Specialty Products. The global macroeconomic environment remains difficult and will continue to challenge our top line throughout the year.

Of particular note, the oil and gas market remains very challenging, and despite recent increases in rig counts, we remain cautious about this market for the rest of the year and likely into 2017. Additionally, low milk and milk protein prices are currently impacting our Animal Nutrition & Health segment. However, we do expect these market dynamics to slowly improve as the year progresses, as evidenced by recent increases in milk and milk protein prices, and we certainly believe the long-term fundamentals in the dairy market to be very strong.

We are pleased with the progress made on our key strategic growth initiatives, particularly with the finalization and publication of the FDA's RDI on choline which clearly provides tailwind for our VitaCholine market development activity. We will continue to strengthen our Company by focusing on our strategic growth initiatives while at the same time driving supply chain efficiencies, exercising disciplined cost management and seeking value creating acquisition opportunities.

I will now hand the call back over to Bill who will open up the call for questions. Bill?

William A. Backus

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Tim Ramey with Pivotal Research. Please proceed with your question.

Timothy Ramey

I'd love to hear a little bit more about what the organic demand in Albion looks like as a good proxy for the nutraceutical market overall. Can you give us any insight into that now that you've had a few months of experience there?

Ted Harris

We are clearly seeing some good growth particularly in the Human Nutrition part. And just to remind everybody, there really were two parts to the Albion acquisition, the largest being the Human Nutrition part and the other being the Plant Nutrition part of the business. And in aggregate, the business is performing to our expectations and we are seeing mid-single digits type growth year-over-year in the total business. Right now for our first six months, we have seen a growth a bit higher than that in the Human Nutrition business, partly because of new customers that we have gained internationally. And in the Plant Nutrition business, we are seeing lower growth levels, partly because of weather patterns. But in aggregate, it is again performing about at our expectations and we had targeted mid-single digits type growth for the business and that's what we're seeing.

Timothy Ramey

And then just to follow up, if I could, on the dairy business, you made some comments that you think the pressure on milk prices might abate in 2017, but obviously we're looking at our big crop and so we might have lower for longer there. That said, it seems to me that in general demand for your products can improve when there's less pressure on the dairy operators' margins and they have lower input costs overall. Would you comment on that part?

Ted Harris

Yes, absolutely. It does have a lot to do with the profitability of the dairy farm and really the profit over the cost inputs, and we do have very low cost inputs, and I would say that that's relatively true for our monogastric business as well. So, we are seeing for example for ReaShure, which is our flagship encapsulated choline product, very good growth continuing through this cycle.

Milk protein prices impact our amino acid business and those prices have been even more depressed I would say than milk prices, and that has impacted some decisions around adding that nutrient to feed despite the low feed costs. But we actually believe that milk prices here in the second half of 2016 will start to really pick up. We've even seen in just the last few days some pretty encouraging news and reports around milk prices, milk protein prices. Just on Wednesday we saw milk proteins jump up to I think $1.90 a pound from something like $1.50 the month before, and that's very encouraging and that's just one example.

So we actually feel that in the second half of the year we'll start to see some benefit from some healthier dairy economics and that will continue into 2017. So we see some positive signs.

Operator

Our next question comes from the line of Francesco Pellegrino with Sidoti. Please proceed with your question.

Francesco Pellegrino

I want to ask you about the formula monogastric pricing that you elaborated on a little bit. Just so I understand, it led to reduced product sales – not product sales, pricing, right, so you had some price concessions, but you were discussing how the import of the – the fact that the international export market is now – the U.S. is now able to export poultry internationally, you are having your end market users, their margins going up, your costs are going down, and since the contracts that you negotiate are based on formula, it just seems as if your end market customers are doing really well right now and you guys really aren't in the monogastric part of the business. Is that fair to assume?

Ted Harris

I think it's a little bit more complicated, so let me talk about that for a minute. So I do think you're correct in that the poultry monogastric producers are doing quite well, they are experiencing a very low feed cost, similar to discussion we had about in the dairy market, and they are starting to see higher production volumes.

The recent forecast for the rest of the year and into next year were increased somewhat as far as production goes, and that's partly driven by the expectation and the start of increased export. So I would say, the market is quite healthy, and we're benefiting from that in that our volume in monogastric was up around 5% year-over-year in a market that we typically look at as growing at 2% to 3%. So our volume is strong.

Where kind of we have managed prices over the years, and this has been for a long time in this market because of some of the volatility, the vast majority of our customers do have pricing from us that is based on our raw material formula inputs. And so as our raw materials go down with petrochemicals, our customers benefit from that.

But based on the math, our margins actually expand on a percentage basis, and we saw that, we saw our margins expand year-over-year in the monogastric market because of that math. Obviously when raw materials start to increase, petrochemical raw materials starts to increase, we'll be able to pass that along to our customers as well. So we feel pretty good actually about the monogastric business. Volume is up, margin percent is up, it's doing quite well, as is the market.

Our dairy business has struggled because of the dairy economics, but again, based on my comments earlier, I think that that's relatively short-lived and we're seeing some positive signs, even yet this week, and we'll see things pick up as the year progresses and into next year.

Francesco Pellegrino

That was really helpful. It's helping me understand the ruminant part of your business a little bit more, but just staying on the monogastric part, so right now if margins are really healthy for end market customers, so they are able to buy more volume, you're taking price increases, what happens when the poultry market turns, margins go down for your end market customer, your costs are still relatively low and these guys start buying less volume from you? It's a double whammy on your end.

Ted Harris

Maybe let me give you kind of one more data point. Let's say kind of average ton of seed costs about $180, the choline input into that is about $0.75. Choline is really viewed as an essential nutrient in the poultry market. And so, historically we've gone through many cycles of high feed costs, low broiler prices and so forth, and really don't see choline being pulled out of feed. Obviously our customers are good purchasing people and they are going to pressure all of their suppliers, but we're a very, very small part of the total feed cost. And we have long-term contracts that benefit them to some extent in this period when our raw materials are going down, and so it's kind of a quid pro quo. But the fact that we're such a very small part of the overall feed cost, I think gives us some pretty nice protection in the scenario that you played out there.

Francesco Pellegrino

That example of like $0.75 in a ton, that really clears things up. If it's $0.75 for a ton, and just using that as an example, for the ruminant market what would be the parallel, would it be significantly higher?

Ted Harris

It's higher for sure. I don't have that exact number for you, Francesco, but it is higher. The nutrients that we're selling are certainly higher-priced and there is a lot of work that goes into the additional milk protein, additional milk production that you receive by adding the nutrients. ReaShure for example even at today's milk prices is 4-to-1 to 5-to-1 benefit. You spend this kind of money on a high-priced input like ReaShure and you'll get payback of 4x or 5x.

What we've been seeing right now though, as we said before on the amino acids, with milk protein prices falling all the way to $1.35 per pound, those economics aren't very strong and you start to see the dairies take amino acids out. Once that picks up back to about where it is now, $1.90 to $2, then there's a multiple time payback and you'll start seeing it added back into the feed.

Francesco Pellegrino

Okay. So simply put, on the ruminant side, choline represents a larger proportion of the feed cost as compared to ruminant and that's why there is a little bit more pressure in the ruminant market as compared to monogastric when the markets turn, is that fair just to summarize?

Ted Harris

Yes, so that's fair to say. It's still relatively small in the grand scheme of things but it is larger than in mono, yes.

Francesco Pellegrino

Okay. And the fact that you have such a high market share for both, is there a reason why there needs to be this formula pricing? I understand it is a commodity, but at the end of the day, when you control a majority of that commodity market, you can control pricing.

Ted Harris

Yes. First of all, it's worked relatively well for us in the past, as was seen. If you just go back not too many years ago, we were seeing, rapidly escalating petrochemical prices in these formulas really helped us in that environment to be able to pass it all on in a formulaic way to our customers. But we also have competition out there. We do have high share, we have competition from China, we have competition from others, and they are seeing petrochemical input declines and offering that in their prices. So it does speak to kind of the competitive dynamics as well.

Francesco Pellegrino

Okay, perfect. Thanks again. That's all for me.

Operator

Our next question comes from the line of [indiscernible] with [indiscernible]. Please proceed with your question.

Unidentified Analyst

I was wondering if you could help me just understand on the Specialty Products segment, is the Albion portion margin-wise kind of margin enhancing or is it a little bit lower than the historic margins of that segment?

William A. Backus

It actually lowers the margin, if you could believe it, in Specialty just because Specialty is obviously [indiscernible] high-end, so it is actually bringing it down somewhat.

Unidentified Analyst

Okay. And then what's the right way to think about the timing around how the business should benefit from the recent FDA and European Food Safety Authority decisions?

Ted Harris

I think the right way to think about that is kind of twofold. One is really the new labeling goes into effect in mid-2018. So by mid-2018, the major supplement manufacturers will have reformulated their products. And again, it's important to note that while we're obviously very excited about the choline change, there were quite a few other changes in the final rule, and so the supplement manufacturers are trying to figure all of that out. For example, they may have increased one mineral, decreased another vitamin, and so forth. So there's some complexity in looking at their formulas reformulating to kind of where they want to be when the final labels go into place in 2018, mid-2018.

So that's obviously an important date. We're going to be working feverishly with all of those companies in the meantime. We do think that we're going to have some good successes prior to the middle of 2018 and we should see some modest kind of new business here in the next six months or so, 2017 I think will see even more, and then there will be a little bit of a pop in 2018, early in 2018, when these new formulas are laid out in anticipation of the new labels.

Unidentified Analyst

Great. And on the European side?

Ted Harris

On the European side, I would say it's fairly similar. I mean EFSA has come out not with a label change but a recommendation. And I think the eyes are on the U.S. Many of the companies we work with in the U.S. are the same as those in Europe, and I think they are all working to kind of a similar timeline.

Unidentified Analyst

Okay, great. And then a couple of just technical things. Is there going to be any financial impact in the third quarter related to the fire?

William A. Backus

It should be very small, if any. We're really working the contingency plan. Like Ted said, we have a number of facilities that we can redeploy in terms of using those facilities and there is some outside work that may need to be done, but this was not a significant portion of the business and so it should not be very impactful at all.

Unidentified Analyst

Okay. And then lastly, what should I expect sort of the tax rate for the full year?

William A. Backus

It should be about 34% for the full year.

Operator

Our next question comes from the line of Lenny Dunn with Freedom Investors Corp. Please proceed with your question.

Lenny Dunn

Good quarter, solid results, and can you give me a picture, because it looks to me like this is going to be an enormous opportunity with the supplement market both in the U.S. and Europe, and obviously this is a 2018 story as you explained, but it still looks like an enormous opportunity, am I misreading that?

Ted Harris

You're really not, Lenny. We do think it's an enormous opportunity. It's taken us arguably eight years or longer to get to this point of the FDA rule. It's early days in kind of responding once that rule was in place. But our business, which is a good business today, is largely focused on instant formula as well as I almost want to call it special supplementation for sort of pure choline for nutrition and sports supplements and so forth, I would call it a little bit niche.

Where we're moving now with this final rule is more into the mainstream, and certainly that market is significantly larger where we've got an opportunity based on this to be included in [indiscernible] multivitamins and more mainstream supplements, and obviously that market is significantly larger. As well as, we have not had a lot of success in the past based on our own efforts in the food fortification market and we believe that it is a significant opportunity as well, again with the support of the FDA final rule.

So it really is significant and I believe we are working with a lot of the right players in the supplement market, in the food market, having substantive discussions and making progress and doing laboratory trials, we have products in stability testing and so on and so forth. So we're working on this very hard, we're working closely with an outside PR firm to maximize the communication of the final rule and the benefits of choline. So this is an important strategic initiative for us, and yes, I agree it's a significant opportunity.

Lenny Dunn

Thank you. Then I'm not misreading it, and [indiscernible] 2018 is getting closer.

Ted Harris

That's right. Thanks Lenny.

Operator

Our next question comes from the line of Tony Pollock with Aegis Capital. Please proceed with your question.

Anthony Pollock

Is there any more timing on the Curemark trials in terms of what I read from the ustrials.com? Getting a little conflicting report. The trial was supposed to end in August and get a ruling in October, or is that not true?

Ted Harris

I have seen that same Web-site and I don't know that it's conflicting but I think that it's unlikely from my perspective that August will be the end. They now have 29 sites actively recruiting. We do not have access, nor actually does Curemark, to exactly how many participants they have recruited already, but we think that they are well on their way to the 300 total participants. And then it's really only a 90 day trial for that last participant.

There are some who have already been recruited. They are actively taking the drug. We have made additional batches of product to supply for the trial, and so some of the recruited patients are on it. But I think it's unlikely based on what I'm seeing that it will be done by August. Again, it's difficult to say, but I would think that certainly here in 2016 we should see the completion of the trial and the ability to move on to the next phase of the process.

Operator

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

Ted Harris

Sure. I'd just like to thank everyone for joining us on the second quarter earnings call this morning. We will be presenting our Company at the Jefferies 2016 Industrials Conference next Tuesday in New York. Hopefully, we will see some of you there. Otherwise, look forward to updating you on the Company's progress on our next earnings call in early November. Thanks again.

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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