Greetings, and welcome to the Balchem Third Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Mr.
Bill Backus, CFO for Balchem Corporation. 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, 2015. 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 ks.
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 Ted Harris, our President and CEO.
Thanks, Bill. Good morning, ladies and gentlemen, and welcome to our conference call. This morning, we reported 3rd quarter consolidated net sales of $140,100,000 which resulted in 3rd quarter net income of $14,000,000 or $0.44 per share on a GAAP basis. This result includes significant non cash of $1,500,000 both of which were expensed in these 3rd quarter GAAP financial statements. The amortization expense is a direct result of acquisition valuation and business combination accounting rules, while the one time equity compensation expense is associated with the retirement from the company of the former CEO and current Chairman of the Board of Directors, Dina Rossi.
Consequently, our non GAAP earnings of $0.61 per share reported in our press release earlier this morning exclude these expenses to facilitate comparative evaluation of this current period operating performance versus the prior year period. Our 3rd quarter sales of $140,100,000 were 12.7 percent lower than the $160,500,000 result of the prior year comparable quarter. This sales result was unfavorably impacted 9.6% by the significant downturn in the fracking market and 1.8% by the foreign currency translation. Excluding the negative impacts related to fracking and foreign currency, net sales decreased 1.3% compared to the prior year comparable quarter, largely due to reduced export sales. In the Sensory effects segment, net sales were $73,000,000 an increase of $1,200,000 from the comparable prior year quarter and up $5,700,000 sequentially compared with the 2nd quarter, with particular volume strength in the domestic food markets.
Animal Nutrition and Health volumes were flat year over year and up 1% sequentially, while sales at $39,900,000 decreased 12.8% over the comparable quarter or a 7.9% decrease when adjusting for foreign currency and decreased $1,700,000 sequentially from the Q2 2015. While global monogastric species volumes were relatively strong, our ruminant species volumes fell far short of expectations, primarily due to significantly lower export sales as a result of very challenging global dairy market dynamics combined with the ongoing strength of the dollar. Lower average selling prices of monogastric products driven by lower raw material costs also negatively impacted sales. In the quarter, specialty products generated record 3rd quarter sales of $13,800,000 and grew 1.2% over the prior year quarter, with particular strength in sales of ethylene oxide products for medical device sterilization. Industrial product sales decreased 54.2% from the prior year comparable quarter as volumes sold of choline and choline derivatives for industrial applications, notably for shale fracking, decreased due to the well publicized significant downturn in the fracking market.
Additionally, average selling prices were lower as a result of pressures related to this industry activity downturn and operators desire to curb hydrocarbon production costs. Our consolidated gross margin percentage was 30.8% of sales in the quarter, up 3 10 basis points from a 27.7% of sales level in Q3 of 2014. The gross margin improvement was primarily due to a favorable product mix and lower raw material costs, which were partially offset by the impact of previously noted lower volumes and lower average selling prices. Gross margin percentage for the Sensory effects segment increased by 4 10 basis points, primarily due to improved product and customer mix, lower raw material costs and plant efficiencies. Gross margin percentage decreased for the Animal Nutrition and Health segment by 40 basis points, primarily due to an unfavorable product mix, partially offset by cost decreases of certain key petrochemical raw materials.
Gross margin percentage for the ARC Specialty Products segment increased by 3 70 basis points, primarily due to product mix, manufacturing efficiencies and cost decreases of certain key petrochemical raw materials. Industrial Products gross margin declined by 580 basis points, reflecting the reduced volumes and lower average selling which were slightly offset by favorable purchase prices of certain raw materials. Consolidated operating expenses for the 3 months ended September 30, 2015 were $20,300,000 or 14.5 percent of net sales as compared to $19,200,000 or 12% of net sales for the 3 months ended September 30, 2014. Excluding non cash operating expenses associated with amortization of intangible assets of $6,400,000 and the noted one time equity compensation, operating expenses were $12,400,000 or 8.8 percent of sales. Looking forward, we expect to leverage off of our existing SG and A infrastructure and exercise tight control over all controllable operating expenses.
U. S. GAAP earnings from operations were $22,900,000 a decrease of $2,400,000 or 9.4 percent compared with the prior year comparable quarter. On a non GAAP basis, as detailed in our earnings release this morning, earnings from operations of $31,000,000 decreased 1,700,000 dollars or 5.3 percent from the prior year comparable quarter, but were up sequentially $600,000 or 2.0 percent. As previously noted, consolidated net income closed the quarter at $14,000,000 down from $15,200,000 in the prior year quarter.
This quarterly net income translated into diluted net earnings per share of $0.44 as compared to the $0.49 we posted in the comparable quarter of 2014 or a 10% decrease. On a non GAAP basis and as detailed in our earnings release, our diluted net earnings per share were $0.61 as compared to $0.65 in the prior year quarter or a 6% decrease. Interest expense for the 3 months ended September 30, 2015 was $1,600,000 and is related to the term loan for the acquisition of Sensory FX. The term loan has a remaining balance of $306,000,000 at September 30. Our net debt at September 30 was $225,000,000 The company's effective tax rate for the 3 months ended September 30, 2015 2014 was 34.0% and 34.6%, respectively.
This decrease in the effective tax rate was primarily attributable to a change in the apportionment relating to state income taxes and a change in the income proportion towards jurisdictions with lower tax rates. As outlined in our earnings release, our 3rd quarter results generated approximately $35,700,000 of adjusted EBITDA in the quarter, which translates to 25.5 percent of sales and equals approximately $1.12 per diluted share. Our balance sheet continued to strengthen and our cash flow remained strong as we generated $29,000,000 in cash from operations and closed out the quarter with approximately $82,000,000 of cash and this reflects scheduled principal payments on long term debt of $8,800,000 along with $12,800,000 of capital expenditure funding in the quarter. I'm now going to have Bill Backus discuss the segments.
Thanks, Ted. As previously noted for the quarter, sales of our consolidated sensory effects segment were $73,000,000 an increase of $1,200,000 from the comparable prior year quarter and up $5,700,000 sequentially from the Q2 2015. The higher sales were primarily due to volume increases, particularly in powder and cereal systems and choline nutrients. Earnings from operations for this segment were $11,600,000 versus $8,700,000 in the prior year comparable quarter, increase of $2,900,000 or 32.7 percent and were up sequentially $2,500,000 or 27.7 percent. Earnings from operations from this segment increased due to the noted higher sales, improved product and customer mix, lower raw material costs and manufacturing efficiencies.
We are pleased with the 3rd quarter Sensory FX results, especially when considering previously mentioned top line challenges, in part driven by our efforts to call lower margin business and certain customers' softness in their market space, particularly the single serve coffee and specialty beverage market. We remain optimistic regarding the opportunities presented by our pipeline, the agglomeration initiative, which is on track for the end of 2015, and the new and novel products we are introducing to the marketplace. This segment has continued to see margin expansion as we realize improved efficiencies, manage supply chain costs and improve the value proposition of our product portfolio. Q2 and Q3 do tend to be our strongest quarters from a margin perspective as there is some favorable product mix due to seasonality. We also continue to build consumer awareness on the benefits of choline, positioning choline with food and nutritional supplement companies as an essential ingredient to be included in existing new and novel sensory solutions, which we have recently started to introduce to the market.
We are supporting additional external scientific research and remain excited about the FDA proposal that an RDI recommended daily intake for choline be accepted. As previously discussed, our pharmaceutical delivery development efforts continue. We continue to work closely with the licensee of our technology, who is in the process of performing a 3rd Phase 3 clinical for their drug to be utilized in the treatment of autism. The new drug application is being filed with the U. S.
Food and Drug Administration and we are collaborating as required. In the near term, remains a net expense to the business segment. As noted, Animal Nutrition and Health segment volumes were flat year over year and up 1% sequentially, while sales at 39,900,000 decreased 12.8% or 5,900,000 compared to the prior year comparable quarter or a 7.9% decrease when adjusting for foreign currency and decreased $1,700,000 sequentially from the Q2 2015. Global monogastric species sales, including feed grade choline products, decreased $2,000,000 or 7% due to the noted negative impact of the currency exchange and lower average selling prices, which were driven by lower raw material costs. Lower feed prices and favorable economic conditions provide incentive for broiler integrators to expand production and the USDA has reported broiler production being up 4% in 2015.
Sales of product lines targeted for ruminant animal feed markets decreased by $3,800,000 or 25 percent from the prior year comparable period, most notably from decreased export sales volumes of ImmunoSure and NitroShore and primarily due to the noted challenging global dairy market dynamics and the strength of the dollar. While low milk prices have persisted for some time, milk protein prices fell to historic lows in Q3, further challenging the inclusion of nutritional ingredients in feed rations. These dynamics have been particularly challenging for us in export markets when coupled with the strength of the U. S. Dollar.
While these global market dynamics are increasingly We believe We believe these dynamics to be relatively short lived and expect overall milk and milk protein prices to rebound. We remain confident long term as we prove the value proposition of our innovative and efficacious product portfolio, further penetrate the market and gain market share and develop new and novel products to satisfy global market demands. A and H quarterly earnings from operations were $5,600,000 a decrease of $1,300,000 or 19.1 percent. This decrease was a result of the noted lower sales and unfavorable product mix, partially offset by cost decreases of certain key petrochemical raw materials. The ARC Specialty Products segment posted quarterly sales of approximately $13,800,000 for the 3 months ended September 30, 2015 as compared with $13,700,000 for the 3 months ended September 30, 2014, an increase of 1.2% and primarily due to higher sales of ethylene oxide products from medical device sterilization.
Our quarterly earnings from operations were $6,000,000 an increase of $725,000 or 13.6 percent. This increase is due to product mix, manufacturing efficiencies, cost decreases of certain key petrochemical raw materials and tight control of selling and administrative expenses along with the noted revenue growth. During the quarter, we continued to incur additional expenses pursuing other new end market applications. In the Industrial Products segment, sales declined 54.2% from the prior year comparable quarter as volumes sold to various choline and choline derivatives for industrial applications, notably for shale fracking, decreased due to the well publicized significant downturn in the fracking market. Additionally, average selling prices were lower as a result of pressures related to this industry activity downturn and operators' desire to curb hydrocarbon production costs.
And while our industrial product sales were modestly up sequentially, the headwinds in the oil and gas industry are likely to extend into 2016. We will look to continue to leverage the competitiveness and efficacy of our products, capitalizing on opportunities to gain additional market share through both our existing product portfolio and the development and introduction of more cost effective alternatives, while also aggressively managing supply chain costs. However, as indicated, we remain cautious about this industry. Our earnings from operations for the Industrial Products segment were $1,100,000 a reduction of $3,700,000 or 76.5 percent compared with the prior year comparable quarter and primarily a reflection of the reduced volume and lower average selling prices, which were only slightly offset by favorable purchase prices of certain raw materials. I'm now going to turn the call back over to Ted for some closing remarks.
Thanks, Bill. Our solid third quarter earnings continue to underscore the strength of our business model, particularly in light of the significant macroeconomic headwinds we have been facing in the shale fracking market and the global dairy market, coupled with the strength of the U. S. Dollar. While certain sales segments in particular were negatively impacted by these factors, we realized overall improved margins due largely to an improved product mix, lower raw material costs and a focus on management of base costs.
Cash flow remains strong and during the quarter we generated $16,000,000 in free cash flow. Strategically, I am pleased with the progress being made on our important capital investments. The new agglomeration unit is being installed as we speak and we will be up and running by January 1 as planned. We are also making progress in research and development and are encouraged by the activity in the marketplace in the supplement and food fortification markets relative to the pending RDI for choline. At the same time, we are actively pursuing several acquisition opportunities to strengthen and expand our existing market positions.
Looking ahead, while the macroeconomic headwinds we experienced in Q3 are likely continue in Q4 and into 2016. We will continue to drive our strategic growth initiatives and add value to the markets we serve, capitalize on supply chain strengths and control selling, general and administrative spend. I would now like to hand the call back over to Bill, who will open up the call for questions.
Thanks, Ted. This now concludes the formal portion of the conference. At this point, we will open the conference call for questions.
Our first question comes from the line of Jeremy Hellman from Singular Research. Please proceed with your question.
This is Deborah in for Jeremy today. You mentioned the agglomeration project a couple of times in your opening remarks, and I'm glad to hear that it's on schedule to begin in January. Could you review with this again why we be excited about that? What is that new capability going to give to us? How will that impact your sales going forward?
Sure, Deborah. Thanks for your question. We're excited about it. It really is a natural extension of our spray drying capability and provides us really with unique and new capabilities. From a particle size perspective, we're now going to be able to build products with larger particle size, better solubility and more consistency and kind of our pre selling to the market.
We've gotten a significant amount of interest from existing customers as well as new customers and really allows us to expand our service offering beyond our traditional spray drying capabilities. So that's really what it does for us. Again, it allows us to participate more broadly with our existing customers and gain new customers.
Okay. When you say new customers, just to follow-up, when you say new customers, are they are these new customers of a certain type? Does this new capability open you up to say a new customer category? Could you just give us a little more color on how that might be working for you?
Sure. It will broaden our participation, particularly in the single serve market where, for example, in the beverage single serve market, most products there are agglomerated and today we've participated pretty significantly in that market, but not in the agglomeration aspect to it. So our products typically would be shipped to somebody who has agglomeration or we miss out on the opportunity because we don't have that capability. So, single serve customers. Okay.
And then just single serve customers.
Excellent. Thank you for that added color.
Thank you.
Our next question comes from the line of Tim Ramney from Pivotal Research Group. Please proceed with your question.
Thanks so much. Bill, can you update us on the total size of the CapEx? And is most of it related to the agglomeration unit? And any initial thoughts about 2016 CapEx? I would assume your cash flow improves quite a bit in 2016?
Yes. So Tim, as far as this year, our expectations are probably we'll do maybe another $15,000,000 in Q4. So we'll finish the year somewhere around $43,000,000 in CapEx. A portion of it is the agglomeration unit for sure, but there are other ROI projects, other capacity enhancements for ourselves and other types of improvements too. So it's a mix of different projects in there for sure.
Next year in 2016, our expectations at this point are we'll be somewhere from $25,000,000 to $30,000,000 of CapEx.
And kind of circling back to the previous question, is there any way to quantify what the new facility could mean to sales or is that just unknown until you actually get in the marketplace?
Yes. We've viewed the agglomeration project as kind of presenting us with about a $25,000,000 sales opportunity over the course of the next 3 years.
That's great. Thanks so much.
The next question comes from the line of David Bellin from Brown Investments. Please proceed with your question.
Two questions. You implied or you actually stated that next year you are optimistic about results improving quite a bit. And I wondered what you base that on? 2nd question, you've never mentioned you have not mentioned Jane Joan Fallon on Curemark. And recently, she at a conference at Como University, spoke and mentioned CMAT and mentioned a $1,000,000,000 sales potential, which I would assume would imply a $40,000,000 plus or minus royalty for this company.
And I wonder why you all don't pin her down to the floor and get some detail in detail, an understanding of why she's taking so damn long after having finished FDA Phase 3 studies without any difficulty 2 years ago and why she's involved in a second set of studies and exactly what the world is going on that she hasn't come to market. She also mentioned that she has presented her documentation so on to the British equivalent of the FDA. And she mentioned this back in early September. So what in the world is going on there? And thirdly, are you making any product and for schizophrenia product and her 4th product which is for addiction, which she's always talking about.
Would you get into some detail there? I can't understand why with so much potential for Balchem, your predecessor simply said that you don't know much about it and so on. And why you don't get in there and find out a lot about it?
Yes, Larry, I'll take a stab at that. We are very excited as a company about the Curemark opportunity and Bill did talk a little bit about that in his prepared remarks. Obviously, it's taken a long time to come to fruition, but we remain confident that toward the end of next year that she will indeed get NDA approval for the drug for autism. And we are making that product today for the trials. We do spend in fact, I'm having lunch with her on Thursday.
So we do spend a fair amount of time with her and believe we understand fairly well this process. In fact, we just this month spent some time with some clinical trial experts in the industry to help educate ourselves around the process and again feel comfortable with certainly her plan and the progress she's making. We do believe clearly that this is the last and final trial and a necessary part of the process. And she has made some announcements recently about $1,000,000,000 drug and she's received some equity income and hired some staff. And so she's certainly building up her capabilities to either go it alone to market or potentially to sell the business.
So we are excited about it. We're watching it very, very carefully. We believe that it's on track relative to what we've been saying over the last few quarters. And we're optimistic that we should see, in fact, even some benefits from this towards the end of next year. Going back to your initial question, why are you optimistic about next year?
I think that's really reflective of the Animal Nutrition and Health business, where we continue to feel the sensory effects business is a growth business for us and starting to see some of the growth that we've been talking about as delivered in Q3 of this year. I think the ARC business is very strong. Both of those continue into next year nicely. Obviously, Animal Nutrition and Health is facing some headwinds. But when you kind of step back and look at the macroeconomic trends behind the dairy market, which is where we're seeing particular headwinds today, they're very, very positive.
And our products are solidly positioned. We do see and most people are forecasting milk prices to increase again, milk protein prices to increase and that will return the business more to normal levels and we believe that will happen over the course of the next 6 months or so. So we are optimistic about that business turning around and moving into 2016.
And what about the other four products of Curemark? Are you making any of those?
Yes. We likely will participate in that, but technically we are not making any samples at this time for those products.
Somebody else making samples for us?
No. I think that right now it's more sort of lab scale type thing. But
Well, do you stand in line to make the samples if she needs them?
Yes.
Okay. Thank you very much.
Our next question comes from the line of Mike Wertzentheller from Piper Jaffray. Please proceed with your question.
Yes, good morning. Sorry to hop on the call late here. Just a couple of follow I guess. One within Sensory FX. It's certainly nice to see the organic growth and margin expansion in that business this quarter.
And I'm wondering if you can provide a bit more granularity around the pockets of strength that were that are there beyond sort of the domestic food sales. I think Bill provided a little bit more context in his comments in his prepared comments. But I guess the nature of the question is around the sustainability of that growth. As we look into Q4 in 2016. I know you don't provide any specific guidance, but I think it'd just be helpful directionally if that's where that business is headed.
Hey, Mike, thanks for the question. We are really pleased with the results of sensory effects for Q3 as well. And we really saw growth across much of the business. Choline nutrients were up nicely. Our Powder Systems business was up year over year.
Our flavor systems, when you exclude the kind of the hot beverage, the specialty beverage part was up very nicely. We are still seeing year over year negativity from the specialty beverage segment as well as from some of the culling. But flavor systems excluding that for dairy and beverage was up strongly. Cereal systems actually was up nicely as well in the quarter. So we saw fairly robust growth across most of the product lines.
Our international sales were down a little bit. Again, I think that's more reflective of currency than anything else. And like I said, we're still seeing some negativity from the Specialty Beverage segment. Q2 and Q3, there is some seasonality in our results both from a sales perspective as well as a margin perspective. Our margin profile in Q2 and Q3 tends to be better than Q4 and Q1.
And so that will be reflected in Q4 and the sales are not quite as strong typically in Q4 as Q3. But other than that, I do think that the results are sustainable. The culling is starting to largely be behind us, the specialty beverage is starting to largely be behind us and stabilize. And so I'm encouraged relative to that segment going forward.
Okay. Okay. That's a helpful commentary. I guess within A and H, maybe if we can just dive into a little bit more of the details there. Is there something structural that's causing these protein prices to be so low?
I mean, just looking at North American, like Class III milk prices have been pretty stable in the $15, $16 range, I think, all year. And the currency headwinds certainly aren't new this quarter. So I'm wondering if there's something more underneath those exports being soft and I guess maybe kind of a similar forward looking question I guess into Q4 that a lot of those it sounded like a lot of those headwinds might still be in place in Q4, but just some maybe some additional commentary on there would be helpful.
Yes, I do think those headwinds are largely still in place in Q4. I think that you're right certainly about the currency has been with us for a while. But given the further reduction, we really have seen milk prices come down, inch down as the year went on. And then obviously milk protein prices dramatically came down in the quarter. As well as some competitive products, soybean meal prices are almost at historic lows.
And those and they came down dramatically in Q3 and those provide competition to some of our products, for example, our NitroSure product. If soybean meal prices get to extremely low price is that impacts our ability to sell NitroSure. And so those trends have been going on for the last few quarters, but I would say accelerated and worsened in the last quarter and that coupled with the exchange rate really impacted particularly our export sales. And we see prices kind of forward looking prices do show prices starting to decline particularly in Q1 Q2 of next year. So again, to your point, I think we'll be seeing similar effects in Q4, but should start to see a turnaround in Q1 and Q2.
Okay. All right. That makes sense. I guess the would it be fair to say that your North American ruminant performance was maybe excluding NitroSure, I guess, because of the soybean dynamics. But would you say would it be fair to say that mostly North American performance in ruminant was within expectations?
Generally speaking, some of the reduction, particularly in the milk protein market. You're right, milk prices have been relatively stable in North America and it hasn't had much of an impact on us. We did see some impact in our amino acid business as a result of the lower milk protein prices. But generally, you're correct. We highlighted the fact that ReAssure, which really is not impacted by milk protein prices, remain strong.
We should be able to grow that product line by 20% this year. We saw a little bit lower growth of that in Q3, largely because of very unusually high September last year. But we see that product line growing about 20% for the year and kind of continuing at that pace going forward. We feel like we've gone from 20% penetrated as we've talked about in the past to something getting closer to 25% penetrated and we've got a long way to go. So we're still pretty bullish about that product line.
Just to give you a data point, Mike. Sorry, Mike, it's Bill. Just to give you a data point, I mean the milk protein prices are at the lowest level since 2,001, 2,002.
Okay. All right. That's interesting. Ted, maybe just last question for me on M and A and maybe I guess a subtle question And then And then, Bill, I think it'd be interesting to get a perspective on how much I guess, how much cash is needed to really lubricate the business versus what can be deployed?
We're seeing a real mix of opportunities. The kinds of opportunities we're looking at obviously range in size and range from smaller privately owned companies to larger properties and obviously kind of seeing a range of valuations. But we do see opportunities. We see some privately owned companies saying that this is a good opportunity to sell and kind of when coupled with synergies that bringing them together with Balchem can bring, we believe the valuations are reasonable. So we certainly spending a lot more time on the pipeline to certainly spending a lot more time on the pipeline today than we did a year ago when we were focused on integrating sensory effects.
And yes, we see opportunities out there that are reasonably valued. So again, we're spending a lot of time on that.
Yes. And I would say, Mike, just to add on to what Ted said, so there's large acquisitions we're looking at, smaller acquisitions, the bolt on, tuck in type acquisitions. When you look at our credit facility and the fact that right now on a net debt basis, our leverage is about 1.6 times. We absolutely have the opportunity to go out and get funding for anything we're looking to do. Obviously, we have other opportunities to use
other types of currencies too for something larger in terms of a
transformational transaction. But I think certainly we have the capacity funding that we need for any type of deal, we believe, at this point. And we're constantly meeting, obviously, with investment bankers as well as our bank syndicate to discuss these things. So I think there's obviously benefits that can happen from some of these smaller bolt ons and those are I won't say they're easier to integrate, but they can bring quick benefits. But I don't think we're concerned sitting here right now saying how we're going to execute a transaction if it comes along.
That makes sense. Thanks, gentlemen.
Thanks, Mike.
Our next question comes from the line of Lenny Dunn from Freedom Investors Corp. Please proceed with your question.
Yes. Good morning. Decent quarter and certainly the future, particularly for 20 16, looks bright from the things that I've heard discussed. And we may want to continue to add to our position. But just one thing, in the past, you've had these 3 for 2 or 5 for 4 or various splits.
And to add a little liquidity because the transaction costs when we buy tends to be higher than we'd like because of the spread on the stock. Can you consider when you meet in December doing a split so that the bid ask spread isn't quite as bad as it's been?
Lenny, this is Bill. We do every year take a look at this. It's part of what we do with the Board of Directors. I mean, there are certainly thoughts behind it. If you go back historically when it was done, there were liquidity issues and those are some of the reasons that those stock splits occurred.
We always do the analysis and take a look at it. And certainly one of the considerations that is a con to doing it is the cost of doing it when you're listed and the cost of having those additional shares out there. So we will consider it, we always do then make the right decision based off of that.
Okay. I just it just costs us more money to buy because of the spread. And you can sit there on the bid and be patient, but maybe then the bid scares the offer up. I mean, it's just it's a difficult stock to accumulate without paying more than we like in transactions costs. But we do have a substantial position and I'm just giving you our input.
Understood. Thanks, Larry.
Okay.
Our next question comes from the line of Tony Pulak from Aegis Capital. Please proceed with your question.
Good morning. Do you have any timing on the RDI for choline?
Unfortunately, I would say the update on the RDI for choline is no real news since the last call. It continues to progress. The public comment period is over. There were no unfavorable comments relative to choline. So we do anticipate the final rule late this year, early 2016 with choline on the labels by January 2018.
We are seeing, as I noted in my comments, a lot of anticipation in the market around the RDI. I'd say food companies, supplement companies and so forth are expecting it and we have a fair amount of activity in anticipation and we think that particularly 2017 in anticipation of the 2018 label change, we'll start to see some real incremental sales volume from it.
Do you have any projections in terms of whether that is $5,000,000 $20,000,000 or any number you can give us?
Our existing choline nutrient business is about $20,000,000 business and we can see obviously we need to execute and deliver, but we can see that business doubling over 3, 4 years, assuming that, again, we get some real benefit in the supplement market, the 1 a day market as well as increased food fortification.
Okay. Thank you. New products, occasionally you create new products there. Are there anything on the horizon from that?
No. We are, again in that area. We've had to develop some new products relative to the RDI to make choline more functional, if you will, or easier to work with in some of those applications. So that's something that we're working on. I would say in our sensory effects business, we're constantly coming out with new solutions.
I talked more recently about our pea protein products and our egg replacement products. And again, those are can't claim a whole lot of new incremental sales, but we're getting a lot of interest and working on various projects with those products. And of course, in Animal Nutrition and Health, we're constantly working on new and improved ruminant stable nutritional products. And again, we haven't launched any new products since last quarter, but we're working in that area as well.
Do you have an R and D line item or it just come just in the normal operating expenses?
We just reported publicly in operating expenses.
Yes. I mean, if you go to the when we published the 10 Q or look at some of our previous filings, you'll see the R and D line item broken out on that P and L. We just condensed it when we do the earnings report the earnings release.
Okay. Could you give us an idea of the CapEx in the 3rd quarter? The majority of that was for?
Yes. There was certainly some related to the agglomeration project. We continue to do some expansions in our Verona facility. And I think those are probably the biggest ones that we're probably talking about. Also in our Covington facility, we've done some additional work there also some capacity enhancements.
So it sort of goes across
the business lines, Animal Nutrition and Health as well as the Sensory Sensory Effect segment primarily are the segments that we'd be talking about.
Do you have any numbers on a possible return on investment on the Glamrsation project?
Well, I think part of this is, like Ted said, we're looking at $25,000,000 of sales here potentially existing business we may already have where we have this sort of vertical integration and then some of the new business that comes along. I mean typically we're using when we look at investments we're looking and using a WACC about 12%.
Could you
give us an idea of how much you're spending on Curemark
per quarter? It's not very significant. It's really not. This is, I think Ted's described it in the past as sort of, high reward, low risk at this point for us.
Okay. Thank you.
Thank you.
The next question comes from the line of Daryl Morean from Palisade Capital Management. Please proceed with your question.
Hi. Just first wanted to make sure the amortization of intangibles that you guys back out of the non GAAP number, is that all within Sensory FX segment?
No, that's all in, Garo. This is Bill. It includes what we've done. Most of it by far is related to sensory effects, but it is all in.
Okay. Is that going to be broken out in the queue?
I can give you an approximation here, if you
Okay. And then secondly, just thinking sequentially into the Q4, you guys highlighted the seasonality, certainly the sensory. Is there anything, any segment that you'd highlight, likely sequential improvement in moving into the 4th quarter?
Yes. I think that, again, seasonally, sensory effects, Q2 and Q3 tend to be the strongest. We talked about A and H kind of continuing to face some of these headwinds. I think our sterilization business, again, we'll see similar performance in that. Our oil and gas business is one that we haven't talked much about today and continues to be extremely volatile.
And that's one that we certainly could not at this point in time forecast any improvement over Q3.
All right. Thank you.
Thanks.
Okay. It appears there's no further questions at this time. Management, would you like to make any closing remarks?
I just want to I guess thank everybody for being on the call. We appreciate it. We appreciate the support and we look forward to speaking with you soon again.