And gentlemen, greetings and welcome to the Balchem Corporation Third Quarter Financial Results Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bill Backus.
Thank you. You may begin.
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 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 ks.
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.
Thanks, Bill. Good morning, ladies and gentlemen, and welcome to our conference call. This morning, we reported quarterly consolidated net sales of $155,000,000 which resulted in record 3rd quarter net income of $19,200,000 or $0.59 per share on a GAAP basis. This result includes non cash amortization expenses of $6,300,000 for acquisition related intangible assets, which were recorded in the Q3 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 costs, largely related to the acquisition of BioScream. Consequently, our 3rd quarter non GAAP net earnings of $23,700,000 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 $23,700,000 or $0.73 per share or 16.2 percent or $3,300,000 above the comparable prior year quarter of $20,400,000 or $0.63 per share and were a 3rd quarter record. Adjusted EBITDA of $38,400,000 was also a 3rd quarter record and was $2,700,000 or 7.4 percent above the $35,700,000 posted in the Q3 of 2017. We also delivered 3rd quarter free cash flow of 26.9 $1,000,000 Our quarterly net sales of $155,000,000 were 2.9% higher than the $150,700,000 result of the prior year comparable quarter, despite a significant 22% decline in the oil and gas business within industrial products.
3 out of 4 of our reporting segments delivered solid year over year sales growth in the quarter with human nutrition and health achieving all time record quarterly sales and specialty products achieving record 3rd quarter sales. Our Q3 consolidated gross margin dollars of $48,000,000 were up $1,800,000 or 3.9 percent compared with the same period in the prior year and were a 3rd 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 and 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 and Health segment by 48 basis points to 24.0 percent, primarily due to improved monogastric gross margins resulting primarily from increased volumes, mix and average selling prices. Gross margin for the Specialty Products 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 2 73 basis points, primarily due to increased average selling prices. Consolidated operating expenses for the 3 months ended September 30, 2018 were $22,500,000 as compared to $23,100,000 for the 3 months ended September 30, 2017. The decrease was principally due to the timing of an insurance recovery and lower non cash operating expense associated with amortization of intangible assets, partially offset by certain higher compensation related expenses and impairment charge related to the IFP trade name and certain higher selling and marketing expenses.
Excluding transaction and integration costs $202,000 and non cash operating expense associated with amortization of intangible assets of $5,400,000 operating expenses were $16,900,000 or 10.9 percent of sales. Looking forward, we will continue to focus on tightly controlling our operating expenses and leveraging our existing SG and A infrastructure. Record 3rd quarter GAAP earnings from operations were $25,500,000 which increased $2,400,000 or 10.5% compared with the prior year comparable quarter. This increase was primarily due to earnings growth in human nutrition and health and specialty products. On an adjusted basis, as detailed in our earnings release this morning, earnings from operations of $31,900,000 increased $2,000,000 or 6.7% from the prior year comparable quarter due to all time record adjusted earnings in our Human Nutrition and Health segment and record 3rd quarter adjusted earnings in our Specialty Products segment.
Interest expense for the 3 months ended September 30, 2018 was $1,800,000 and our net debt on September 30 was $135,300,000 This net debt reflects a 3rd quarter pay down of $32,800,000 on our revolving loan and our net debt leverage ratio as of September 30 was 0.8. The company's effective tax rates for the 3 months ended September 30, 2018 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 3rd quarter record of $19,200,000 up $3,200,000 from the prior year quarter. This quarterly net income translated into diluted net earnings per share of $0.59 per for the current year, an increase of $0.09 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 3rd quarter record adjusted net earnings were $23,700,000 or $0.73 per diluted share, up $3,300,000 or 16.2 percent compared with $20,400,000 or $0.63 per diluted share in the prior year quarter.
Our quarterly results generated record 3rd quarter adjusted EBITDA of $38,400,000 or 24.8 percent of sales compared with $35,700,000 or 23.7 percent of sales in the prior year, an increase of 2 point $7,000,000 or 7.4 percent. As previously noted, our cash flow remains strong as we generated record 3rd quarter free cash flow of $26,900,000 and closed out the quarter with $42,700,000 of cash on the balance sheet. This cash balance reflects the growth in net earnings and $5,600,000 of capital expenditure funding in the quarter as well as revolver payments of $32,800,000 and the BioScreens acquisition of $17,400,000 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 BioScream Technologies, SRL, a manufacturer of encapsulated and fermented feed nutrition ingredients for the animal nutrition and health markets, headquartered in Bertinoro, Italy, about 3 hours from our Murano, Italy 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 NitroSure, ReAssure, Niosure and Aminosure Am and L for the European dairy market.
BioScream also brings to Balchem a talented team of employees and unique technology platforms including multilayer coating and spray chilling encapsulation technologies as well as 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 both ruminant and monogastric species. These 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 are excited to have BioScreens 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 Doctor. Caudel 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 7 years old to determine if the positive benefits seen in the 1st 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 3 to 9 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 2 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 5 ERP systems into 1, Microsoft Dynamics 365. This $12,000,000 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 to 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 1st business unit, serial 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? Thanks, Ted. For the quarter, sales of
our Human Nutrition and Health segment were $85,900,000 a record quarter and an increase of $4,500,000 or 5.6 percent in 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 nutrients 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.
3rd quarter earnings from operations for this segment were $13,100,000 an increase of $2,700,000 or 25.7 percent compared with $10,400,000 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 materials costs. Excluding the effect of non cash expense associated with amortization of acquired intangible assets of $5,400,000 3rd quarter adjusted earnings from operations for this segment were $18,500,000 compared to $16,200,000 in the prior year quarter. The Animal Nutrition and Health segment sales of $40,400,000 increased 6.3% or 2 point $4,000,000 compared to the prior year comparable quarter. Sales of product lines targeted for ruminant animal feed markets decreased by $1,300,000 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 Q3. Despite the poor economic environment in the dairy market, we continue to be pleased with the performance of our flagship brand ReAssure, 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 $3,700,000 or 14.3 percent from the prior 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 $3,000,000 to $4,000,000 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 a 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 and Health quarterly earnings from operations of $5,100,000 were down slightly from the prior year comparable quarter of $5,200,000 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 3rd quarter sales of $17,600,000 for the 3 months ended September 30, 2018 as compared with $17,300,000 for the 3 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 $5,800,000 versus $5,600,000 in the prior year comparable quarter, an increase of $200,000 Excluding the effect of non cash expense associated with amortization of acquired intangible assets of $734,000 3rd quarter adjusted earnings from operations for this segment were $6,500,000 compared to $6,400,000 in the prior year 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 or contract terms permitted. In the Industrial Products segment, sales of $11,100,000 decreased $3,000,000 or 21.0 percent from the prior comparable quarter, primarily due to reduced sales of choline and choline derivatives used in shelf 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 $1,700,000 a decrease of $400,000 compared with the prior year quarter and primarily reflects the reduced sales volumes.
I'm now going to turn the call back over to Ted for some closing remarks.
Thanks, Bill. We delivered year over year revenue growth across 3 of our 4 segments with record 3rd quarter earnings from operations of $25,500,000 record 3rd quarter net earnings of $19,200,000 up 19.8 percent year over year, record 3rd quarter adjusted EBITDA of 38,400,000 dollars and record 3rd quarter free cash flow of $26,900,000 We continue to generate strong cash flows and our net debt has been reduced to $135,300,000 as of September 30 or 0.8 times 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 provide us the flexibility to capitalize on both organic and acquisition opportunities. Our strong Q3 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 and 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 their Animal Nutrition Health segment and provide a European manufacturing exercising disciplined cost management and seeking value 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 the call for questions. Bill? Thanks, Ted.
This now concludes the formal portion
of the conference. At this point, we will open the conference call for questions.
Thank you. Ladies and gentlemen, we will now be conducting our Q and A session. Our first question comes from the line of Tim Ramey from Pivotal Research. You are now live.
Good morning. Thanks so much. Bill, it seems like you've 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. And as I heard your comments, I really didn't think I heard enough to add up to the number.
I heard $5,400,000 in amortization in human nutrition, I believe, and then $734,000 in specialty products. But did I miss here? What am I missing? Am I not reading correctly? Help me out here.
No, you heard
correctly and those are the reason we have those, Tim, we can certainly add back anything that's required to help out, but those are the 2 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 ones that represent the change.
Can you 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? That's in animal nutrition, I guess.
Animal nutrition, that's exactly right. You're not going to have much of a change. There's very little in terms of amortization related to the industrial product segment.
Right. Okay. Yes, I mean, if you can throw those in, in the release, it certainly helps. Any impacts from FX or tariff impacts that you would call out in the quarter?
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 $100,000 on the sales line, but and very little impact on operating earnings, but just ever so slightly negative for the quarter.
Okay. How about trade tariffs?
I'll take this, this is 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 the tariffs versus indirect, which is good example is soybeans have fallen and soybean meal is a competitive product to our Nitro Share product and that's created some new competitive dynamics. But the direct impact really has been fairly minimal. We buy we could buy about $22,000,000 of our raw materials from China that are on the tariff list. We actually only buy about $12,000,000 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 of $100,000 impact to us based on the 10% tariff as of now. That will increase substantially if it does move to 25%. But we're working really hard to try to diversify our supplier base to avoid those kinds of hits. We talked last time about the total impact to us could be about $2,000,000 to $3,000,000 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. A good example is we buy apple juice concentrate from China today and we're shifting that to Turkey to avoid that increase. And we're able to do that in large part across our business. But total impact could possibly be about $2,000,000 to $3,000,000
Thanks, guys. Just a couple of other clarifications on the Hayfield plant. Can you say what the proceeds were on that sale? And I assume that hits in the 4th quarter.
That will be in the Q4 and it will be about $200,000,000 gain over what $200,000 I'm sorry, what did I say? $200,000 gain over what the value of the property was.
Okay. And the notional amount, so I can think about that for debt reduction cash purposes?
Yes. It's
only going to be a few $100,000 ultimately of actual proceeds.
Okay. Not a big deal. And the impairment charge, did you take that out of your adjusted EPS and how big was that?
That was about $700,000 and we did not take it out of adjusted. We left it in the numbers. So if you added it back, obviously, the numbers would be even better.
Okay. Thanks so much, guys. Thanks. You're welcome.
Thank you. Our next question comes from the line of Ram Selvaraju from H. C. Wainwright. You are now
live. Hi, there. This is Julian
on for Ram Selvaraju. Thanks for taking my questions. First, I was curious if you have any visibility into current DC well trends and whether or not you think this might have any bearing on your recent choline based fracking agent demand?
I'm sorry, would you mind repeating that for me?
Yes, sure. So I was just curious if you could comment on recent DC well trends and if they have if that trend has any bearing on, I guess, calling base fracking agent demand?
Sure. Absolutely. Sorry, I just couldn't quite hear you at the beginning. But yes, as we referred 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 costs 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 up even 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.
Okay, great. Thanks for that. And it seems like the H and H segment this quarter had some pretty impressive results. I was just curious if you're able to provide any color on what might be the upstream drivers of demand growth for human nutritional choline?
Yes. Certainly, we were pleased with Q3 for human nutrition and 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 3 business units within human nutrition and all three of them actually performed very well with our human nutrition and pharma business, which includes choline up nicely. And the demand for human choline is I think 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're seeing those new product launches and availability of Target and Walmart showing up in our growth numbers.
Okay, great. And for my last question, I was just curious if there have been any recent updates to the CMAT autism drug program and when we might see data from that program?
Yes. There really have not been any updates. Curemark is still in the data analysis phase. It's obviously taking a little bit longer than we had originally thought. We were hoping that, that would have 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.
Okay. Thanks very much.
Thanks.
Thank you.
Our next question is a follow-up from the line of Tim Ramey from Pivotal Research. You are now live.
Thanks for the follow-up. Just a clarification, I think choline has been an 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?
That's correct, Tim. And that really represents the largest single market that we supply into today. So we have supplied human choline in the infant formula for many, many years. And so we're selling to Abbott, Mead Johnson and Nestle and Nestle and companies like that. So that's a very important part of our business.
And as we look at that business, it's probably about half of the business. So we could further penetrate infant formula. The locally made infant formula in China typically does not 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 the 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. And 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 kinds 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.
And is it your opinion that the data would suggest higher levels of choline in the big manufacturers that you're selling to now or are they where they should be?
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 Caudel study where basically she fed significantly higher doses of choline to pregnant mothers that showed significant cognitive benefits that there could be value in increasing the amount of choline in infant formula as well as in prenatal vitamins. And so we do think that there is some evidence that would suggest higher amounts could make sense.
Okay. And just one more 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 the 3Q perhaps from the China issue. And certainly, I don't think there's 14% more chickens out there.
What do you attribute that? Is that inventory stocking? Is that higher use in the feed ration? What's going on there?
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 about in the past some transitioning from BTAME, 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 coal mix last year, early last year and that really brought some we've been able to grow our business in Europe, 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.
And are the higher selling prices in any way 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?
Yes, to some extent, but really what's driven this is higher raw material costs. Our raw material costs 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 benefit us more in Q4 of last year and Q122 of this year and less so in Q3.
Terrific. Thanks for the help.
Yes.
I guess one other thing maybe, I know, 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.
Thank you. Ladies and gentlemen, our next question comes from the line of Mitra Ramgopal from Sidoti and Company. You are now live.
Yes. Hi. Good morning. First, I just wanted to follow-up. I'll tell on the raw material costs in terms of how much it might have impacted margins this quarter?
Yes, Mitra, thanks for the question. 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.
Okay. No, that'd be great. And Ted, I know you talked about investments in projects to improve efficiencies and overall capabilities. I was just wondering if you'd give us maybe some of the things you're doing on that front.
Sure. We 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 Coalmix. 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're not necessarily huge ticket items, but they're really important for us to continue to invest in to manage our costs.
Okay. No, 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 seeing any traction there?
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 a third of the business has been pet food. So we've sold into the pet food industry for years. And what we've been trying to do of late with our pitcher 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 relatively healthy growth off of a very small base, but it's starting to show that we're seeing some traction.
Okay. Thanks for the color. And then finally, as you look at priorities for capital allocation, obviously, you've done some acquisitions recently, you've paid down debt, I know 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?
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 and D or additional selling and marketing expenses or capital at our plants. We likely will be investing in 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, I think, fairly selective around our acquisition targets, try to be very surgical and require a significant return on those investments just like we would a capital investment. We're committed to the dividend. We have been increasing that 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.
Okay. Thanks again for taking the questions.
Thanks, Andrew.
Thank you. Ladies and gentlemen, we have no further questions in queue at this time. I'd like to turn the floor back over to Ted Harris for closing comments.
Just before we get into closing comments, I think Bill wanted to make an additional comment around the raw material impact.
Yes. So, Mitra, just to kind of get back to you, I mean, without looking at every individual raw, of course, 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 somewhere slightly above 10% year over year or quarter over quarter from the prior year. So and we've clearly had some other raw material costs inflation that's been significant too. Another one I can kind of point out is tartaric acid, which is also used as part of our choline nutrients product line. So I think that the choline chloride in particular, as you know, which is a big part of what we do, it's slightly above 10% increase quarter over quarter.
Okay. So with that, I just would 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 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.