Ted Harris - President and CEO Bill Backus - CFO.

Francesco Pellegrino - Sidoti Garo Norian - Palisade Capital Management Tony Pollock - Aegis Capital.

Greetings, and welcome to Balchem Corporation's Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A 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, CFO for Balchem Corporation. Thank you, Mr. Backus. 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, 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..

Thanks, Bill. Good morning ladies and gentlemen, and welcome to our conference call. This morning we reported third quarter consolidated net sales of $138.5 million, which resulted in third quarter net income of $14.0 million or $0.44 per share on a GAAP basis.

This result includes significant non-cash amortization expenses of $7.7 million for acquisition-related intangible assets and inventory fair valuation adjustment of $317,000 related to the Albion acquisition, and transaction and integration costs of $62,000, all of which were recorded in these third quarter GAAP financial statements.

The amortization expense and inventory fair valuation adjustments are a direct result of acquisition valuation and business combination accounting rules.

While the transaction and integration cost are related to the Albion acquisition, consequently our third quarter non-GAAP net earnings of $19.5 million or $0.61 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 $19.5 million or $0.61 per share were flat compared to the comparable prior year quarter. Adjusted EBITDA of $36.6 million for the quarter was $900,000 or 2.6% better than the $35.7 million posted in the prior year quarter.

Our adjusted EBITDA margin expanded to 26.4%, up 98 basis points compared to 25.5% from the third quarter 2015. And we delivered record third quarter free cash flow of $19.8 million, while also paying down $25.8 million of debt, including $17 million of accelerated payments.

In October, we also paid down an additional $8 million of revolver borrowings, which further reduced the balance to $20 million from the $65 million we borrowed to partially fund the Albion acquisition.

We are proud that the team delivered these strong earnings results especially when viewed in light of the ongoing macroeconomic pressures in certain segments of our business.

Our third quarter sales of $138.5 million were 1% lower than the $140.1 million result of the prior year comparable quarter, with the contribution of Albion and volume increases in Animal Nutrition & Health offset by the decline in industrial product sales of $7.2 million due to reduced oil and natural gas fracking, lower average selling prices related to reduced raw material costs, unfavorable mix, and reduced volumes in certain food and beverage markets.

Our consolidated gross margin percentage was 32.2% of sales in the quarter, up 140 basis points from a 30.8% of sales level in Q3 of 2015.

Adjusted gross margin percentage adjusted primarily for the previously mentioned $317,000 inventory fair valuation adjustment, and amortization expense as a direct result of acquisition valuation and business combination accounting rules, of $600,000, was 32.9% of sales, up 200 basis points from a 30.9% 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 decreased by 24 basis points, primarily due to lower volumes resulting in manufacturing inefficiencies.

Gross margin percentage increased for the Animal Nutrition & Health segment by 199 basis points primarily due to increased volumes and cost decreases of certain key raw material.

Gross margin percentage for the Specialty Products segment decreased by 540 basis points primarily due to the inclusion of plant nutrition sales which carry lower margins than the legacy Specialty Products business, and the valuation of acquired inventory, $317,000.

Industrial Products gross margin increased by 220 basis points due to a more favorable customer mix, and improved cost structure. Consolidated operating expenses for the three months ended September 30, 2016 were $21.7 million, as compared to $20.3 million for the three months ended September 30, 2015.

The increase was principally due to the inclusion of Albion operating expenses and amortization expense related to the previously mentioned acquisition, partially offset by a prior year one-time equity compensation charge of $1.5 million.

Excluding non-cash operating expense associated with amortization of intangible assets of $6.9 million and transaction and integration costs of $62,000. Operating expenses were $14.8 million or 10.7% 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 $22.9 million, which was flat compared with the prior year comparable quarter. On an adjusted basis, as detailed in our earnings release this morning, earnings from operations of $30.9 million, decreased $100,000 or 0.3% from the prior year comparable quarter.

Interest expense for the three months ended September 30, 2016 was $1.8 million, all of which related to the debt financing of the SensoryEffects and Albion acquisitions. Our net debt at September 30 was $267 million. The company's effective tax rates for the three months ended September 30, 2016 and 2015 were 32.5% and 34.0% respectively.

The decrease in the effective tax rate is primarily attributable to certain tax credits and deductions. Going forward, we expect our annualized tax rate to be approximately 32% compared to 31.4% in the prior year. As previously noted, consolidated net income closed the quarter at $14.0 million, flat to the prior year quarter.

This quarterly net income translated into diluted net earnings per share of $0.44 for the current year, as well as the comparable quarter of 2015.

On an adjusted basis, and as detailed in our earnings release, our adjusted net earnings were $19.5 million or $0.61 per diluted share compared with $19.4 million or $0.61 per diluted share in the prior year quarter.

As outlined in our earnings release, our third quarter results generated $36.6 million of adjusted EBITDA in the quarter, compared with $35.7 million in the prior year, an increase of 2.6%.

Adjusted EBITDA as a percent of sales for the quarter was 26.4% of sales, a 98 basis point increase over the prior year quarter, and equals $1.14 per diluted share. As previously noted, our cash flow remains strong as we generated third quarter free cash flow of $19.8 million, and closed out the quarter with $32.5 million of cash.

And this reflects scheduled principal and accelerated payments on long-term debt of $25.8 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.

As we 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. As previously noted, on July 25, we had a fire at one of the four sites acquired as part of the acquisition.

We implemented our contingency response plan, and this plan of utilizing our existing manufacturing infrastructure, along with selected partners has allowed us to minimize disruption to our business and our customer base. We continue to believe the overall impact on our company will not be material.

As we mentioned last quarter, we are fully insured for the property, and also have business interruption insurance to cover any lost income. I would just like to say again how very proud I am of the Balchem team, and how efficiently and effectively they reacted to this incident, and executed the contingency response plan.

We continue to make progress to leverage the reference dietary intake issued by the Food and Drug Administration and the European Food Safety Authority first ever intake recommendations for choline by building awareness around this essential nutrient.

As evidenced by the number of new articles and studies published just in the last quarter about choline nutrition, at the same time drive in inclusion of VitaCholine, Balchem's premier brand of choline for supplementation, and to multi-vitamin supplement and food fortification applications.

The third Phase III clinical trial for the Curemark drug to be utilized in the treatment of autism is now enrolling at all of the 30 targeted clinical sites across the country. Now that all 30 sites are recruiting, we look forward to the completion of this clinical trial and the important milestone it represents.

In the meantime, we continue to finalize 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. And we are pleased with our recently announced strategic alliance with Perdue AgriBusiness.

This alliance will focus on advancing the science of precision feeding for dairy cattle, and bringing new products to the dairy industry. The initial efforts will be in the area of ruminant amino acid nutrition, and will evolve into creating precision feeding systems for other nutrients such as minerals, lipids, and carbohydrates.

This alliance, along with our previously announced collaboration with BASF, which focuses on improving feed hygiene, safety, and overall animal performance in the swine industry, signals our continued intention to provide science-based innovative products to the animal nutrition and health markets.

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

Thanks Ted. For the question, sales of our consolidated Human Nutrition & Health segment were $74.9 million, an all-time record quarter, and an increase of $1.9 million or 2.7% from the comparable prior year quarter.

The sales increase was a result of the contribution of the human nutrition portion of Albion, and was partially offset by an unfavorable mix and reduced volumes in certain food markets, particularly related to Powder Systems.

Contributing to the Power System's shortfall was a competitor's acquisition of a former customer of ours, warm weather negatively impacting the purchase of hot beverage products, and increased competition.

Sequentially, from the second quarter 2016 without the impact of Albion, volumes in H&H increased to 1.8% with particular improvement in Powder Systems. Third quarter earnings from operations for this segment were $10.5 million versus $11.6 million in the prior year comparable quarter, a decrease of $1.1 million or 9.9%.

Excluding the effect of non-cash expense associated with amortization of acquired intangible assets of $6.0 million, adjusted earnings from operations for this segment were $16.5 million compared to $17.2 million in the prior year quarter, a decrease of $700,000 or 4.1%.

Earnings in this segment were negatively impacted primarily by the previously mentioned lower sales related to Powder Systems. While we are pleased with the contribution from Albion and the sequential Human Nutrition & Health increased volumes, the year-over-year top line was challenged by the unfavorable mix and certain food sector softness.

This segment has continued to see strong margins with an improved mix, management of supply chain costs, and the enhanced value proposition of our product portfolio.

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 $40.9 million, increased 2.5% or $1.0 million on a 6.6% increase in volumes compared to the prior year quarter.

Global monogastric species sales, including feed-grade culling products, decreased $1.7 million or 6.1% primarily due to lower monogastric average selling prices, resulting principally from reduced formula pricing based on lower raw material costs, and increased competitive activity.

Due to stronger production driven by lower feed costs and strong international demand for relatively low-priced meat protein, the USDA has increased its export forecast for both this year and 2017. Monogastric volumes did increase 2.8% from the prior year comparable quarter, and were also up 2.3% sequentially from the second quarter 2016.

Sales of product lines targeted for ruminant animal feed markets increased by $2.7 million or 24.0% on a 36.4% increase in volumes, largely due to strong growth of our flagship ReaShure product line. We recently have seen milk and milk protein prices improve, and the USDA forecasts improving milk prices to 2017.

Feed costs remain low and this coupled with higher milk prices should result in improved dairy farm income over feed costs and subsequently increase demand for nutritional ingredients.

We remain confident long term in animal nutrition and health as we further penetrate the market and introduce new and novel products to satisfy attractive and market demands to both organic development and strategic alliances such as the previously noted partnerships with the BASF and Purdue Agribusiness.

ANH quarterly earnings from operations were $6.8 million, an increase of $1.2 million or 20.6% from the prior year comparative quarter. The increase compared to the prior year quarter was a result of a noted higher sales, favorable product mix and cost decreases of certain key raw materials.

The specialty product segment achieved quarterly sales of $16.5 million for the three months ended September 30th 2016, that's compared with $13.8 million for the three months ended September 30, 2015, an increase of 19.2% due to the contribution from the Plant Nutrition portion of Albion.

Specialty Products achieved quarterly earnings from operations of $5.2 million versus $6.0 million in the prior year comparable quarter, an decrease of $800,000 or 13.2%.

Excluding the effect of non-cash expense associated with amortization of acquired intangible assets of $800,000 and inventory valuation adjustments of $317,000 relating to acquisition accounting, adjusted earnings from operations for this segment were $6.37 million compared to $6.2 million in the prior year quarter, an increase of $100,000 or 1.6% with the increase being due to the addition of the Albion Plant Nutrition business.

As we have communicated before the Albion Plant Nutrition business is seasonal with lower sales and profitability in the second half of the year as seen here in the third quarter.

In the industrial product segment, sales decreased $7.2 million or 53.9% from the prior comparable quarter primarily due to significantly reduced volumes sold of choline and choline derivatives for oil and natural gas fracking in North America. Compared sequentially to the second quarter 2016 sales increased $900,000 or 17.4%.

There remains significant uncertainty in the oil and gas industry and while the rig count in the United States continues to trend up, we still expect headwinds to likely continue although year-over-year comparatives should start to improve.

Our earnings from operations for the Industrial product segment were $527,000, a reduction of $597,000 compared with the prior year comparable quarter and primarily a reflection of the reduced volumes, sequentially earnings from operations increased by $269,000. I'm now going to turn the call back over to Ted for some closing remarks..

Thanks, Bill.

We are pleased that in the third quarter of 2016 we were able to deliver strong earnings with adjusted EBITDA of $36.6 million and record third quarter free cash flow of $19.8 million even as we continue to face top line challenges particularly in the oil and gas business within industrial products but also across certain other market segments.

Additionally, our continued strong cash generation enabled accelerated debt payments of $17 million, above and beyond the regularly scheduled payments of $8.8 million, reducing our net debt to $267 million on September 30 or less than 2x 12-months trailing adjusted EBITDA, further strengthening our balance sheet and financial position.

In addition we made an accelerated debt payment of $8 million in October reducing our outstanding revolver balance to $20 million from the $65 million that were borrowed in February to partially fund the Albion acquisition.

While top line challenges remain, we delivered year-over-year revenue growth in three of our four segments, Human Nutrition & Health, Animal Nutrition & Health, and Specialty Products. The global macroeconomic environment rank remains difficult and will continue to challenge our top line.

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 into 2017.

We are encouraged that there has been improvement in milk and milk protein prices and are particularly pleased to have realized a 36% increase in our quarterly ruminant species volumes.

We're also pleased with the progress made on our key strategic growth initiatives, and we will continue to strengthen our company by focusing on these initiatives, while at the same time driving supply chain efficiencies, exercising discipline and cost management, and seeking value creating acquisition opportunities.

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

Bill?.

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

Ladies and gentlemen, at this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Francesco Pellegrino with Sidoti & Company. Please state your question..

Good morning guys..

Hi, Francesco..

Well, thanks in advance for taking the questions. Just going through the press release, overall it was really in line with what I was looking for on a consolidated basis. I think what you guys are doing in the industrial products makes sense just with -- where rig counts are. There's a lot of transparency there.

The Animal Nutrition & Health, you're probably getting a favorable product mix with -- as you've been citing higher milk protein prices, so you're probably able to sell more amino acids, but then when I start jumping into, I guess the two remaining product segments, Specialty Products and the Human Nutrition & Health segment.

I guess one of the things that I'm struggling a little bit with is where your organic revenue within, I guess, the legacy SensoryEffects business is. Is there a way to quantify that for the quarter? I know you cited the poor Powder product sales due to what sounds like a lost customer.

Is there a way to sort of quantify that a little bit better?.

Sure. You really had two questions there, Francesco. Maybe I'll answer the Specialty Products one first. I think what you're seeing, obviously Specialty Products revenues were up, largely reflecting the Plant Nutrition add to Specialty Products. The legacy business was about flat, both from a revenue and an earnings perspective.

And so what you're seeing in the growth side of things is really the contribution of the Plant Nutrition business. And about 70% of Plant Nutrition revenue, if not a little bit more, come in the first half of the year. So, Q3 was really the first quarter that we've seen fairly significant sequential decline in revenue, and subsequently profitability.

So there wasn't any decline in the legacy business of note. I would call it flattish. What you're really seeing there in kind of a difference in the revenue quarter-over-quarter is more driven by the Plant Nutrition business and the seasonality impact of that business..

Okay..

Hopefully that answers your Specialty Products question..

Yes..

Okay, so let's move on then to H&H where really there is a lot going on in H&H. We're very pleased with the contribution of Albion, despite the need to focus a lot of resources on the fire recovery, but the legacy business was disappointing.

We're experiencing some general softness, I would say, across the markets, certainly seeing some price deflation driven by lower raw material costs. And that's probably about half of the legacy decline year-over-year. And I'd like to quantify that number, I guess, is about $6 million, I think. I'm looking at Bill..

And that's half of the decline year-over-year?.

Yes, about half decline is deflation, and then the other half is volume losses really specifically in Powder Systems. And so our Powder Systems customer base is relatively fragmented, which I think is good. But we do have some larger customers, one of which was bought by a competitor of ours fairly recently.

And they are really more of a co-manufacturing type business for others, they were a customer of ours, and our competitor has taken that business in-house. And as Q3 came around, with the hot beverage season picking up it became more material in our overall sales, and hence we're noting that.

We're also suffering a little bit -- it's been a relatively warm fall so far. And so we've seen the hot beverage bill that we normally have this time of the year be less than what we expected, and what we saw last year. At this point we still feel like the cold is coming. It may be overall muted, the bill, but we do feel like it's coming.

And then we have seen just some increased competitive activity in the Powder Systems business. The market has stalled a little bit, I would say, as there is enormous refocus on PHO-free reformulation, as you know. By the end of next year PHOs are mandated to be formulated out. And so the whole industry is really focused on that reformulation.

I think that's created some increased competitive activity. But I do also think that gives us an opportunity going forward.

We really are formulation and systems experts, and we're really focused on rapidly introducing our new PHO-free solutions to the market in an effort to make that transition with our customers, but also to gain some share as the market goes to clearer labels.

So those really are the three items that you can -- or we can point to in the legacy business in addition to just some general deflation..

So is it fair to say that the legacy SensoryEffects business was down 16% year-over-year?.

No, that's not correct. The legacy business was down 90% [ph] from a revenue perspective. And as I said, probably about half that was price deflation, and half was where those three volume issues that I talked about..

Yes, almost 60% was price deflation actually, Francesco..

Okay, because I thought $6 million was price deflation, and the other $6 million, probably got $12 million..

I'm sorry. I'm glad you clarified that. The overall was about $6 million, and half was price deflation, so three -- or I guess Bill is saying 60%, and the rest was where those couple of volume issues that I talked about..

Okay, that makes sense. And then had -- in the press release you start talking about strong margins. And to be honest with you, what was released with the EBIT numbers, I really don't see strong margins year-over-year, I see -- I mean, I see strong margins for Animal Nutrition & Health and the Industrial Products segment.

But those segments aren't large enough to really drive overall consolidated margin performance. So when I see strong margins, I'm just wondering what margins you're pointing to for each segment..

Overall, our gross margins, and let me just talk about gross margins for a second, which largely falls down to the bottom. But our gross margins, as a company, we're up about 200 basis points.

So 32.9% versus 30.9% last year, H&H was up modestly about half a percentage point, A&H was up 200 basis points, and that really was driven by flattish margins in monogastric, offset by higher margins in ruminant, and then the resulting mix of the growth in ruminant which clearly was stronger than the growth in mono.

Specialty Products were down, and that was really just because of the mix of the addition of Plant Nutrition. And actually, Plant Nutrition margins were up a little bit. And the legacy margins were flattish.

So we -- I think fundamentally, when you peel that onion back, if you take the mix out of it, margins were strong and have been strong, and Industrial Products were up a couple of hundred basis points as well. So when you kind of put that all together you see our overall margins up 200 basis points year-over-year.

And I would also say margins have generally been strong over the last 12 months or so. So as we are able to continue to build off of already relatively strong margins, that gives us, I think, the confidence to say we feel like the margins were strong..

Okay. So you're talking about the gross margins, which we don't get until you release your Q.

So the gross margins are strong, but it looks as if maybe lower operating leverage due to just lower volume within Human Nutrition could contribute to maybe some lower operating leverage, which sort of drove down the operating margin which contributed to the EBIT margins for those two segments experiencing the falloff, if that's a fair interpretation..

Yes, I think also, Francesco, you've got to keep in mind you're looking at obviously U.S. GAAP numbers. So the Albion acquisition for sure, at least in Industrial, and H&H is being impacted by certainly the inclusion of those expenses, but also, most relevantly, I think the non-cash amortization.

And so when you're looking at those EBIT margins that becomes a little bit diluted from the amortization again, which is on cash. That's why obviously we're trying to adjust for that to some degree.

But there is some leveraging issues going on because you're layering Albion for sure, and the sales are somewhat down, but I don't want to lose sight of the amortization, and the impact that that has on the numbers either. .

Okay. I'm going to jump back into queue, but I got a couple more questions..

Okay, thanks..

Our next question comes from the line of Garo Norian with Palisade Capital Management. Please state your question..

Hi guys. A couple of clarifications first, can you tell me what the intangible amortization in Animal Health & Nutrition was, I kind of backed into a number I think of around, about 85-86 or 860,000..

Yes, give me a second, Garo, and I'll get that answered for you here..

Okay.

And then I wanted to make sure I understood the tax rate comment, is that 32% for the year, and so what should that imply for the fourth quarter?.

We expect to finish the year with the tax rate at about 32%. That's kind of where we think the year is going to wind up..

Okay.

And so should the fourth quarter approximate that, because I was just looking at the last couple of years, maybe the fourth quarter tended to dip down in order to I guess maybe get to the full-year tax rate?.

Yes, I think it's going to be lower, because we're at year-to-date through the third quarter, so expecting to finish the year at 32% for sure. I want to point out; I think that it's a good opportunity to point that Q4 last year was unusually low. I mean, we had various items.

And certainly the R&D tax credit extension, which we got the full benefit in the quarter for the year, since it was extended late. There were some tax rate changes in individual states and some apportionment changes as we did our returns. And we had a number of discreet items that hit Q4 last year.

So if you go back in time and look at that, we finished the quarter somewhere just north of 24%. We're not going to be 24% this year. And that obviously impacted our earnings last year for sure. But I think you can expect it to be still a fairly good rate for the fourth quarter, sub-32% for sure.

Somewhere in that 30% range, it's going to all depend obviously on the earnings we wind up at two and Q4, but it's going to be less than 32%..

All right. And you guys have obviously a lot of positive things going on that Ted ran through.

I was just trying to see if you could help me get a sense of, over the next 12 months, which things are likely to be impacting positively the most? And then separately, some of these recent announcements Purdue Agribusiness and BASF, I mean that's kind of I guess in my head more of a three year out type of kind of we should see benefits from that type of relationship? How to think about those?.

Yes, Garo, I think I will just start where you ended with Purdue and BASF. I think obviously there is going to be some sort of startup if you will in those relationships. But we do see some real benefit in 2017 from both of those relationships. I agree it'll take 2 or 3 years to get to something that's really meaningful.

But, I would expect that we would be talking positively about of the contributions from those two relationships next year already. And even in the Purdue relationship, I would say that was a very minor but we did get some contribution during ANH results which of course were broadly very good in Q3. But, there was some benefit from Purdue there.

So, that's those two I think exciting new alliances for us.

As we kind of go through the others, I do think the benefiting from the choline RDI is going to show some benefit next year, but bigger more material impact will likely be in 2018 as companies take the next year - year and a half prior to the midyear 2018 label change implementation time to reformulate and hopefully we are working hard to include choline in there.

I think we will get some wins by next year, but I think 2018 will see the bulk. Curemark is obviously very difficult to tell. I think in the grand scheme of drug delivery approvals or new drug approvals, this will be relatively quick but it's taking a while. I don't think we necessarily will see significant benefit in 2017.

But based on where we are with the trials, I would like to think that approval will be gained in 2017 and will be off and running from there. So, we are still hopeful that we will see some benefit towards the end of 2017.

Other things that we talk about -- I didn't talk about a lot today but agglomeration within our Powder System business, I think that's going to be another investment that helps us return that segment to growth. We've already got sales out of that business, and we are starting to ramp up. And I think we'll see some real benefit in 2017 from that.

So, I think that kind of touches some of the big ones I think.

The other one is just simply ANH animal nutrition and the continued penetration in the market with ReaShure as well as our other rumen-protected products really very encouraged by obviously our growth there is a little bit lumpy but quarter-over-quarter overall our ruminant volumes were up 36% with ReaShure up, sales up 53% in the quarter which is pretty remarkable.

And I think when you combine that with something we have talked about in the past the new national research council review of choline and the hopeful inclusion of choline within that feed recommendation as well as some improving dairy economics, I am looking forward to delivering some growth in ANH next year based on all of those things.

And hopefully that gives you a little bit of a feel, Garo, for the timing of those strategic initiatives..

Hey, that's fantastic. Thanks so much for the color..

And I guess Bill is just coming back to you on….

I just wanted to clarify, Garo, you said animal nutrition and health, you are looking for, right?.

Yes, yes..

So on an annualized basis, amortization is somewhere around $3 million..

Okay..

Amortization..

All right. Thanks so much..

You are welcome..

[Operator Instructions] Our next question comes from the line of Tony Pollock with Aegis Capital. Please state your question..

Good morning..

Hi, Tony, how are you doing?.

Good.

Could you go a little on the capital expenditures what they were for this quarter and what you see going forward?.

Yes. So they were about $4 million this quarter. Year-to-date, we are somewhere around $18 million. And we expect to finish the year probably about $25 million..

Okay.

Can you give us an idea of what that's for?.

Yes, the -- I would say the $4 million is primarily stay in business type capital or as you know I think we spent about $43 million last year versus 24 or so this year. And that included some pretty significant growth investments.

One was the ReaShure expansion and the other was the agglomeration investment which carried on into the first half of this year, but that 4 million this quarter I would say was primarily stay in business type investments across our manufacturing network..

I said 18 million. It's closer to 19 million year-to-date through September. I just wanted to point that out to you..

Okay.

Next year any major capital expenditures or it's mostly maintenance?.

Yes, we do have a couple of growth investments that we're looking into. So, we think capital expenditures will be slightly higher next year but call it 30 as opposed to 25.

Certainly not going back to the 40 million of last year and that's largely around taking our encapsulation business more internationally as well as making I think product improvements to increase differentiation in our choline business -- human grade choline business that we're contemplating for next year..

Okay. Thanks..

Thanks, Tony..

That does conclude our Q&A session. I will now turn it back to Mr. Harris for further -- I mean for closing remarks..

Okay. Just again like to thank everybody for being on the call today and we look forward to our fourth quarter call early next year. Thanks a lot..

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time..