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Executives

Mark Feuerbach – Vice President, Treasury, Financial Planning & Analysis

Randolph Gress – President, Chief Executive Officer

Neil Salmon – Vice President, Chief Financial Officer

Analysts

Larry Solow – CJS Securities, Inc.

Peter Cozzone – KeyBanc Capital Markets

Edward Hoon Shik Yang – Oppenheimer Securities

Christopher Butler – Sidoti & Company

Chris Shaw – Monness, Crespi, Hardt & Co., Inc.

Paul Owen Moomaw – Goshawk Global Investments Llc.

Rick D'Auteuil – Columbia Management

Innophos Holdings, Inc. (IPHS) Q4 2012 Earnings Call February 15, 2013 10:00 AM ET

Operator

Good morning ladies and gentlemen and welcome to the Innophos Fourth Quarter and Full Year 2012 Results Conference Call. My name is Christine and I’m your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I would now like to turn the presentation over to your host for today’s call Mr. Mark Feuerbach, Vice President, Investor Relations, Treasury, Financial Planning & Analysis. Sir, you may begin.

Mark Feuerbach

Good morning and thank you for joining us today for Innophos’ fourth quarter and full year 2012 results. Joining me on the call today are Randy Gress, Chief Executive Officer, and Neil Salmon, Chief Financial Officer.

During the course of this call, management may make or reiterate forward-looking statements made in our February 14 press release regarding financial performance and future events. We will attempt to identify these statements by use of words such as expects, believes, anticipates, intends, and other words that denote future events. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements.

We caution you to consider the important risk and other factors as set forth in the forward-looking statement section and in Item 1A Risk Factors in our annual reports on Form 10-K as filed with the SEC that could cause actual results to differ from those in the forward-looking statements made in this conference call.

We will make a replay of this conference call available for a limited time over the telephone at the numbers set forth in our press release and via webcast available on the company website. In addition, please note that the date of this conference call is February 15, 2013. Any forward-looking statements we may make today are based on assumptions that we believe to be reasonable as of this date and we undertake no obligation to update these statements.

Now, I would like to turn the call over to Randy Gress, CEO of Innophos. Randy?

Randolph Gress

Thanks, Mark, and good morning everyone. My opening comments will concentrate on fourth quarter performance and how we have continued to deliver on our strategic initiatives. Neil will then summarize our financial results and provide a look ahead to the 2013 first quarter after which I will conclude with some final remarks and then we will take your questions.

Overall, for the company, we achieved net sales of $209 million in the fourth quarter, flat from last year. Diluted earnings per share were $0.62 compared to the $0.88 recorded in the fourth quarter of 2011 after giving effect to the disclosed adjustments for each quarter. There were three main reasons for the lower earnings per share.

Firstly, and as expected, we continued to experience lower profitability in our co-product GTSP on a combination of lower phosphate fertilizer market prizes and relatively high market raw material cost compared to the advantage market conditions of last year. This accounts for roughly half of the earnings per share variance.

Secondly, although we achieved an improved sequential performance in our Mexico Specialty Phosphates business as that business recovered from the weather and production related issues in the third quarter, we were not able to match a very strong fourth quarter last year. Our Mexican manufacturing operations have successfully completed an extensive program of scheduled maintenance outages. However, the resulting production restrictions from the outages and subsequent higher maintenance expenses limited the business’ ability to match the quarterly result of a year ago.

Overall, for the year, Mexico Specialty Phosphates matched a strong 2011 performance and we have continued to invest in improved manufacturing capabilities in a more differentiated product line positioning this business for further improvement in 2013. The combined effects of these Mexico shortfalls were primarily responsible for year-over-year decline in earnings. The sequential declines primarily arose in our U.S./Canada business were the economic uncertainties that existed at the end of 2012 led to a larger than normal seasonal decline in our U.S. /Canada business and therefore the results in this segment excluding acquisitions were flat versus last year.

We believe the primary cause of weaker year end demand was customer destocking. The strong recovery in shipments in January 2013 supports our view. Excluding destocking effects, market demand continued to be flat or moderately lower than the year ago period. However, I'm confident that we are seeing improving momentum in our geographic and product led growth initiatives.

Overall, sales for the U.S./Canada Specialty Phosphates were up 4% on the benefit of our recent acquisitions. However, we did not see any significant earnings accretion in the quarter from these acquisitions after including acquisition accounting effects.

Our first acquisition, Kelatron, completed in the fourth quarter of 2011, performed very well on 2012 and with the acquisition of AMT Labs in the third quarter and our latest acquisition, Triarco Industries, completed on December 31 I believe we have a strong platform for future growth in an attractive market segment.

Triarco’s botanical and enzyme based ingredients business is highly complimentary to Kelatron and AMT to both focus on bioactive mineral ingredients. The three businesses combined have revenue in excess of $50 million with EBITDA margins in line with our more differentiated Specialty Phosphates. Also, they are well positioned in a market segment which has continued to grow at high single-digit rates even in this current more challenging economic environment.

While the main value we see from these acquisitions is in realizing their growth potential and synergistically supporting the growth of our specialty phosphate products, we’re also focused on operational improvement. I am pleased to say that cost synergy achievement is also ahead of our expectation. I am also confident 2013 will see further success from our geographical growth initiatives.

We have completed the construction of our food grade blending facility and our food ingredient lab in China, and recently submitted our application for our food manufacturing license. While there are still some steps to go before the licensing process is complete, most likely taking us into the second quarter 2013, we have already increased our commercial resources in the region, both in sales and in technical service. We now have a much stronger presence in Asia-Pacific than we have ever had historically.

Now turning to capital allocation, capital expenditures increased in the quarter as some of the major projects that were delayed due to revised engineering requirements earlier in the year began to move forward. Our focus continues to be on supporting our future growth and enhancing Mexico's overall process capability. Additionally, our strong balance sheet allows us to continue to maximize value for our shareholders. We paid in an attractive $0.35 per share dividend in the quarter, which is more than double the rate we paid just two years ago.

Overall market conditions remain challenging, but we are focused on the areas which we can control such as product line execution that will drive the above market growth, the new product innovation including ingredients providing calcium and other mineral fortification options for foods and beverages, and those that reduce sodium content in baked goods and proteins, which we believe can leverage into long-term growth, along with operational improvement to drive cost and revenue synergies from our three recent acquisitions. Our continued execution on our growth strategies will enable us to achieve our ambitious long-term objectives.

I will now turn it over to Neil for some more detail on financial results in the quarter. Neil?

Neil Salmon

Thanks, Randy. Net sales for the fourth quarter of 2012 were $185 million from Specialty Phosphates and $24 million from GTSP & Other resulting in a total of $209 million, flat with the fourth quarter of 2011. Compared to last year, fourth quarter Specialty Phosphates revenue was 1% lower with volumes up 1% including a 3% benefit from the Kelatron and AMT acquisitions.

Our price variance indicates the decline versus last year, but this is primarily due to mix effects and some declines on technical grade products sold out of Mexico. Excluding these effects, selling prices were unchanged from the year ago levels.

The U.S. and Canada Specialty Phosphates business recorded a 4% year-over-year increase in sales for the fourth quarter, with the increase entirely attributable to the benefit from Kelatron and AMT. Prices were flat with the year ago period, while continuing success with growth initiatives was fully offset by a greater than anticipated year-end destocking effect.

Operating income for U.S./Canada at $16 million was similar to the year ago period, but down $7 million sequentially. Fourth quarter 2012 U.S. and Canada operating income margin was 12%, about 420 basis points lower on a sequential basis and lower by about 90 basis points from year ago level. The large sequential decline does not indicate any underlying decline in business profitability, but was closed by lower volumes resulting in lower cost leverage with unfavorable product mix also contributing. As these effects reverse in 2013, we expect margins to improve again.

The Mexico’s Specialty Phosphates business recorded 11% decline in sales from year ago levels, with prices down 5% in the less differentiated technical grade products and on some unfavorable mix effects. Volumes were lower by 6% versus a strong fourth quarter of 2011. Operating income for Mexico’s Specialty Phosphates was $5 million, which was $5 million lower than the same period last year, but up $2 million sequentially after recovering from third quarter weather and production issues.

Operating income margin in the fourth quarter was 10%, which was below the full year average as a result of higher planned maintenance outage expenses. Overall, Specialty Phosphates’ operating income for the fourth quarter of 2012 was $20 million, $6 million below the prior year quarter primarily due to lower volumes in Mexico.

GTSP & Other revenue was $24 million compared to revenue of $23 million in the prior year period. Revenue reflected higher volumes, partially offset by lower market prices. The segment recorded operating income just above breakeven at $0.5 million, about $4 million below the fourth quarter 2011.

The combination of lower phosphate fertilizer market prices and relatively high market raw material costs meant this segment continue to operate at approximately the breakeven level. Operating income margins were 2% for the fourth quarter 2012 compared to 20% for the fourth quarter 2011.

Our effective tax rate was 30.6% for the fourth quarter of 2012, slightly lower than expected primarily due to a small one-time net benefit realized in the quarter. Going forward, we anticipate an effective tax rate in the 32% to 34% range. Overall demand conditions, especially phosphates, were flat to moderately lower in 2012 with this trend accentuated by the year end destocking. Although we are encouraged by what looks to be a strong start to 2013, this partly represents a carryover of December orders to January and we remain cautious on overall demand levels for 2013 with only modest market growth anticipated.

We are confident of continued success with our product innovation and geographic expansion initiatives. And overall, we expect 2013 growth in Specialty Phosphates around the low end of our 46% long term target with further growth of approximately 5% anticipated from the full year benefit of acquisitions completed in 2012.

First quarter 2013 revenue growth is expected to be moderately below the full year expectation in comparison to a strong first quarter 2012 for Mexico Specialty Phosphates.

We do not expect any major change in raw material purchase prices or underlying selling prices through the first quarter of 2013. However, the U.S. and Canada segments will have higher sequential cost of goods sold in the first quarter reflecting purchase accounting effects for the Triarco acquisition. And overall, we anticipate around $1 million of expense in the first quarter 2013 for temporary acquisition accounting effects.

Depreciation and amortization was $10 million for the 2012 fourth quarter, $1 million lower than the year ago levels. For the 2013 full-year, we expect depreciation and amortization to be $7 million less than in 2012 with approximately $4.5 million benefiting Specialty Phosphates. This will result from asset values created as the formation of the company in 2004 reaching the end of that depreciation lines, partly offset by the amortization of the intangibles associated with recent acquisitions.

Lower depreciation and amortization costs combined with improved mix and better operating leverage are expected to increase Specialty Phosphates operating income margins by approximately 200 basis points sequentially. As we go through 2013, we expect further sequential improvement in margins as the acquisition accounting effects wind down and we benefit from the typical seasonal pattern of improved volumes and product mix in the middle quarters. We expect full-year Specialty Prospects operating income margins to be around 100 basis points better than the average achieved in 2012.

GTSP is expected to continue near break-even through the first quarter. Similar to last year, fertilizer prices have been declining through the winter period and no improvements in pricing is anticipated before the second quarter. Fertilizer majors remain confident of a strong application season in 2013 and this would suggest improving pricing from the second quarter. However, it is too early in the year for any such trend to be established in market pricing. And although we continue to expect an improvement in GTSP margins going forward, we do not have sufficient visibility on timing to make predictions beyond the first quarter.

Mining expenses for the development of our Mexico phosphate concessions were lower than initially anticipated in the second half of 2012. We have re-prioritized our activities to focus on key areas that will support a successful development of these deposits. We expect to continue at approximately our current expense run rate in the first half of 2013 with potentially $1 million to $2 million of additional expense over that run rate in the second half of 2013 depending on our progress against these initial objectives.

Turning to cash flow, our net debt in the fourth quarter of 2012 increased by $69 million to $149 million resulting primarily from the $45 million of cash paid for the acquisition of Triarco, and a temporary increase in working capital implemented in Mexico to reduce the risk of additional taxation under the Mexican cash-based alternative minimum tax.

Capital expenditures were $33 million in 2012 with a higher spend rate in the fourth quarter as activity increased on some of the larger initiatives that has been delayed from earlier in the year by changes in engineering specifications. Investment continue to be focused on capacity enhancements for U.S./Canada and Mexico, expanding geographically, including the investments in China and enhancing Mexico’s capability to process multiple grades of rock, consistent with the Company’s supply chain diversification strategy. Our expectation for 2013 is for capital expenditure in the $40 million to $45 million range.

Before turning the call back to Randy, let me just highlight our refinancing that we completed in December. We amended and restated our existing credit facility, which reduced interest rates by 75 basis points, expanded the capacity by $100 million, extended the term by two years to December 2017 and subsequently we sought out our LIBOR exposure on a $100 million of floating rate debt for five years at just under 95 basis points. Taking account of the new facility and the debt put in place to fund the Triarco acquisition, I anticipate interest expense to be flat compared to the expense seen in 2012.

Now, back to you, Randy.

Randolph Gress

Thanks, Neil. As I mentioned in my opening remarks, I believe we made good progress against our strategic priorities in 2012 and we will continue to focus on similar priorities in 2013 with strong start we have seen to 2013 suggest the destocking effect experienced at the end of 2012 was temporary. However, we are not currently anticipating any significant sustained improvement in the rate of market demand growth.

Our strategic priorities in 2013 include continued improvement in our product innovation driving domestic growth, realizing the benefits of our increased presence in higher growth geographies including the investment in our facility and lab in China, and continuing to invest in our supply chain and manufacturing capabilities to support growth, improved product differentiation and increased productivity. These should enable us to achieve 2013 volume growth around the low end of our long-term 4% to 6% per annum target even with continued softness in underlying market demand trends.

We expect to continue with our successful integration of our three acquisitions positioning these businesses well for the future growth, while also delivering revenue and cost synergies. Going forward, we will continue to explore additional bolt-on acquisition opportunities and while we cannot predict the timing of such acquisitions, this remains an important part of our overall growth strategy.

Finally, we will continue to take the necessary steps to ensure that we are maximizing shareholder value by leveraging our strong cash flow and balance sheet, both to support growth and improve cash returns to shareholders. Our track record is established against these objectives as evidenced by our acquisition successes and to dividend increases completed in 2012. And with the strong balance sheet and ample liquidity, we are well positioned to continue delivering against our goals in 2013.

Thank you for listening and we will now take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And our first question is from Larry Solow of CJS Securities. Please go ahead.

Larry Solow – CJS Securities, Inc.

Hi, good morning.

Randolph Gress

Hi, Larry.

Larry Solow – CJS Securities, Inc.

Just going to ask one question on the quarter and then one forward-looking. Just on the quarter itself, in the U.S. your realized prices were up about 5% for the year, but in the quarter themselves they were actually flat. Was that – is there anything other than the fact that the inventory drawdown skewed out or was there something else in there?

Randolph Gress

Yeah, Larry. There were some product mix effects that impacted the fourth quarter in the U.S./Canada. And actually we did see in some cases some slight improvement in pricing.

Larry Solow – CJS Securities, Inc.

So that can we view that as a temporary aberration or what’s in your outlook for next year, are you assuming prices there. And I guess sequentially looks like prices must have went down or that increased so much in the four or three quarters right, so they bouncing back up or they taking closer to Q4 levels?

Randolph Gress

No, they were – sequentially for U.S./Canada they were just down slightly, but that was purely product mix effect.

Larry Solow – CJS Securities, Inc.

Okay.

Randolph Gress

And expecting stable going forward here.

Larry Solow – CJS Securities, Inc.

Okay. And then I just as you look at, you have a nice improvement I guess you are implying 13% gross operating margin in Q1 in Specialty Phosphates and then getting up to 15% for the year and you call that seasonally you get higher sales in the middle part of the year. And I guess some of the acquisition expense went down, those are two main things and does that imply that sales will also sequentially grow through the year?

Randolph Gress

Yeah, Neil. Could you stress?

Neil Salmon

Yeah, typically we see around 26% of our annual revenue in the middle two quarters and that also tends to be a more favorable mix in the middle two quarters. So that’s the operating leverage that we are referring to in the middle two quarters. Otherwise, yeah, I think you baked up on the other (inaudible).

Larry Solow – CJS Securities, Inc.

So it was exactly – with the 13% or so margin in Q1, you basically have to have like a 16% average for the back three quarters or somewhere in that percentage? I mean that’s…

Neil Salmon

Yeah, yeah.

Larry Solow – CJS Securities, Inc.

Okay, great. Thanks.

Operator

Thank you. Our next question is from Peter Cozzone of KeyBanc Capital Markets. Please go ahead.

Peter Cozzone – KeyBanc Capital Markets

Good morning guys.

Randolph Gress

Good morning, Pete.

Peter Cozzone – KeyBanc Capital Markets

Randy, going through your organic growth outlook for Specialty Phosphate, what gives you confidence that you can achieve this number with the 1Q that appears to be trending below that, are there any specific strategic wins or new proxy you can point us to? And then maybe could you remind us what your underlying base market growth assumption is for this outlook?

Randolph Gress

So the successes that we have above the base organic growth, again they fall in two areas. One is in the mid-product development and application side of things, and I think a good example of some of the success we’ve seen is in one of our product CAL-RISE, which is the calcium-based product in the baking area and support some of the low-sodium trends that are developing.

And we've had some real good success in that product with some good growth roughly 50% improvement from 2011 to 2012 and then expecting some continued growth and acceptance by customers going forward. And there are a number of other focused application areas that we are increasing I referred in.

Also for the geographic growth, we expect as Neil pointed out some of the success from our investment in China, but also with the support of some of the growth geographically in Latin America as well as some limited growth in Europe as well. So those two areas are really the drivers for getting the above based market growth, which we are predicting just to be modest or slight through the year.

Peter Cozzone – KeyBanc Capital Markets

Okay. And then in order to get back to the top end of your long term growth target, is that simply a matter of the underlying market recovering a little bit better?

Randolph Gress

Yes, exactly.

Peter Cozzone – KeyBanc Capital Markets

Okay. And Neil, stripping out some of the one-time volume issues in costs, where do you think overall operating margins are running in the Mexico business on a normalized basis as we enter 2013? Are they in that low teens range that we saw in the first nine months of 2012?

Neil Salmon

Yeah. I think for a while now, I’ve been saying that the 12% is the base margin level in that business and that was the case in the fourth quarter as well if you back out the higher than usual maintenance expense, and certainly we aim to improve on that going forward. We’ve continued to invest in improving the differentiation of the product line there, but yes I think that’s a good read on where the business is today.

Peter Cozzone – KeyBanc Capital Markets

Okay. And then lastly, now that you’ve built some scale on the nutritional ingredients space, are there some opportunities to consolidate production and generate some cost synergies from these acquisitions?

Randolph Gress

For the three acquisitions we have made, we already began to optimize and achieve some of the operational synergies between AMT Labs and Kelatron, and a little bit early to assume anything for the Triarco addition. But going forward, I think there will be some operational synergies that we will be able to achieve. And in addition to that, I think there is also some synergistic effects that would expect to get on the market side as well. When we look at the combination of the Triarco products together with the AMT and Kelatron products and the bioactive minerals, combined with what we already have within Specialty Phosphates and the mineral supplementation we have there. So I think those are two areas where we would hope to get some synergies.

Peter Cozzone – KeyBanc Capital Markets

Great, thank you very much.

Randolph Gress

Thanks, Pete.

Operator

Thank you. Our next question is from Edward Yang of Oppenheimer. Please go ahead.

Edward Hoon Shik Yang – Oppenheimer Securities

Hi, good morning.

Randolph Gress

Good morning, Ed.

Edward Hoon Shik Yang – Oppenheimer Securities

Randy, it sounds like the wish down you saw in the fourth quarter was pretty short-lived, but were there any end markets that stood out in terms of the extent of the destocking and conversely which areas have led on the rebound?

Randolph Gress

Ed, we really haven't seen any differentiation there. I think normally when we're talking about that fourth quarter impact, it’s typically in that 2% to 3% of the decline and that's from areas that we typically see decline in the baking from a seasonal impact as well as areas like asphalt. But I think this time with the inventory destocking that we heard at many customers for December, it was more across-the-board, across-the-products, and then I think likewise the recovery we are seeing in January is similar in what we saw the decline in December.

Edward Hoon Shik Yang – Oppenheimer Securities

And what’s your sense, your current sense of customer inventory levels and product destocking. I didn't get the sense that inventory levels were all that high to begin with, so what’s your thinking there?

Neil Salmon

Yeah, I think that’s right Ed. So I think it was a pretty short-lived effect and it was really in the first few days of January that we were shipping at an elevated rate and so we didn't see this as a step down, but as a timing issue over the year end.

Edward Hoon Shik Yang – Oppenheimer Securities

Okay. And for GTSP, the fertilizer side, you’re looking for breakeven again in the first quarter and that’s clearly an aberration again, but remind us what you think is a normal earnings run rate for that business. And if fundamentals change, how quickly can it revert back to trend and get back on that earnings run rate. Is this something that would occur gradually or would that be a snap back and do you see discrepancy coming on the pricing side or on the raw material side?

Neil Salmon

Yeah, we said in the past that we view $2 million to $3 million of operating income per quarter as the average earnings available for that business when you look at it over extended period of time and that’s where when raw material costs which are primarily phosphate rock and sulfur are in line with trends in fertilizer finished market prices. And while we’ve seen short time periods in which those margins have been compressed, we’ve not seen as longer period as we’ve seen over the last four, five quarters now.

And what’s happening in the market is that, generally demand conditions for phosphate rock are tighter than they have been for the fertilizer end market prices. But we think this is only a short term phenomenon, not may be facing a fundamental shift in the value chain in fertilizer market. So we do anticipate when normal demands of prior patterns re-emerge in both levels of the supply chain, we will get back towards that $2 million plus operating income level. But as I said in my comments earlier, although there is slightly some talk of selling price improvement in the second quarter, there is nothing yet established in markets and we’ve found in the past that it's quite difficult to predict things in the short term on fertilizer market trends.

Edward Hoon Shik Yang – Oppenheimer Securities

Okay, thanks, Neil. And Randy, you talked about returning cash to shareholders and at the same time balancing that out with your growth objectives, reinvestment in organic growth and also on the M&A pipeline. Clearly, you generate a lot of annual free cash flow, but your balance sheet is also fairly strong. Do you have a viewpoint in terms of what’s an optimal amount of leverage? Do you think that the lower you need to be or above you need to be in terms of leverage of the balance sheet?

Randolph Gress

Ed, I’m going to let Neil comment on the leverage piece. But again I want to reiterate our priorities with the cash first be in certainly investing in the business, the core business and improving the profitability. And then second, still looking at some of the adjacency strategies were some adjacent bolt-on type acquisitions are still focus for us. And then lastly, I think we have shown a good track record there with returns to the shareholder and thinking out consistent with what we have communicated before with improving returns to the business that being supported with improving cash returns to the shareholders.

Neil Salmon

Yeah, on leverage, I mean we don't operate a target leverage ratio, but we certainly feel that we could comfortably go up to two plus EBITDA and debt without any concern opposite our current rating or aspects such as that. But I think as Randy was saying, we’re looking for the value added opportunity to get that and but also looking to increase cash returns to shareholders on the way.

Edward Hoon Shik Yang – Oppenheimer Securities

Thank you.

Randolph Gress

Thanks, Ed.

Operator

Thank you. Our next question is from Christopher Butler of Sidoti & Company. Please go ahead.

Christopher Butler – Sidoti & Company

Hi. Good morning guys.

Randolph Gress

Good morning, Chris.

Christopher Butler – Sidoti & Company

Staying on that same subject, you had originally targeted a dividend payout that was in line with operating income growth with fertilizer declining this year. How should we be thinking of the dividend payout going forward seeing as that original target doesn’t really apply at this point.

Neil Salmon

Yeah, we increased the dividend while in the year where earnings declines, so the payout ratio improved but that – I don’t think that means that we are not able to further increase the dividend if earnings improved from this point going forward. But these are indications rather than firm figures I think because generally saying that we continue to be positive on opportunities for increasing cash returned to shareholders but those decisions will also probably depend on the opportunities we see for the growth investment.

Christopher Butler – Sidoti & Company

And looking at 2013, understanding that there are a lot of moving parts here, but from 2011 to 2012, you lost about $0.75 in adjusted earnings with acquisitions, better demand environment and hopefully fertilizer coming back to normal at some point during the course of the year, how much of that $0.75 do you think you can regain in 2013?

Neil Salmon

We are not giving a precise EPS guidance because as you know this is not something that we do, but I think I have to refer you back to a more general comments on volume growth and on margins is the best answer I can get to that. But definitely we see a good potential to grow earnings in 2013.

Christopher Butler – Sidoti & Company

Can you speak to the market demands following 2012 where we did see some sluggishness due to inventory de-stocking even before December? Why is it that we are looking at closer to 4% organic growth for you in 2013 again due to modest markets?

Neil Salmon

Yeah, the combination of (inaudible) market but as we indicated earlier in some of the response, expecting to see continued success there in the new product, new application side of the business supplementing that growth. I think historically we have communicated, we expect roughly 1% to 2% in that category. And then also the geographic growth that we expect to achieve going forward which was more I think based on some of our investments in Asia-Pacific expecting to be successful there, and all of those in combination being at that low end of that 4% to 6%.

Christopher Butler – Sidoti & Company

I’m sorry if I wasn’t clear, why is the market growing at a slower rate this year with industrial production looking a little bit more optimistic than last year here in the United States and food being relatively stable?

Neil Salmon

Chris, generally we base our views on customer feedback, and I meant that we probably have a carrier one or two quarter code view through that channel. But if I calibrate what we say up a bit, here through the ingredient companies and our customers and generally consumer spending rates, what I can see in economic predictions, I think what we're saying is very much consistent or even slightly above what some others are saying in terms of volume or growth expectations through 2013. But I wouldn't claim to have any greater insight then you would have on how underlying economic trends develop beyond the first and second quarter.

Christopher Butler – Sidoti & Company

I appreciate your time.

Operator

Thank you. Our next question is from Chris Shaw of Monness, Crespi, Hardt & Co. Please go ahead.

Chris Shaw – Monness, Crespi, Hardt & Co., Inc.

Hey, good morning guys. How you're doing?

Randolph Gress

Good morning.

Chris Shaw – Analyst, Monness, Crespi, Hardt & Co., Inc.

I guess to take you back on Chris' questions a bit, but I think you said that the organic demand or market demand for 2012 was flat. I just want to figure out why that was – the North American markets, they fell like generally more on a GDP basis were growing. And what is it about your space or your end markets that were trailing that kind of growth, was it customer specific or was it timing or was it all the year-end destocking that hurt the number?

Neil Salmon

Yeah, I think in fact market demand was moderately lower for us in many markets through 2012. We had some decline in industrial markets say for example the road paving was lower year-over-year although we offset that with growth in our end product line. And then in many of the consumer oriented categories, demand was flat or moderately lower and it doesn’t include the year end destocking effect. So it was, yes, I mean really across a wide range of markets and we’ve had discussions with customers confirm that what they are saying to, there’s no shares changes that we are not aware of, we’re pretty confident on that view. And then also we’ve seen as we said, we saw some adjustment in our sales to export markets as particularly customers who were real exporting that to U.S. and Canada realized through the year that growth wasn’t what they anticipated and those long supply chain adjustments can then carry forward for a couple of quarters. So it’s a combination of those effects that we’ve seen throughout 2012.

I wouldn’t say the fourth quarter was any other than the year end destocking, there wasn’t any change in that. So I think we’ve been operating in a pretty steady, but low growth market environment for some quarters now.

Chris Shaw – Monness, Crespi, Hardt & Co., Inc.

I guess the part I’m not understanding are the consumer products or food companies, are there end markets not growing as well, I don’t obviously cover the consumer end but is that what’s happening? Is it flowing to you guys, because I’d thought those guys would be growing nominally at least? And so, are they using less product or I’m trying to figure out what the difference is?

Neil Salmon

No I think you see, I mean, for example, 2013 has been more sensitive this year because of feed related costs and that’s impacted sales. But in many of the base categories, there has not been a lot of growth this year. Some of the markets that are growing are the more fortifier beverage items, nutritionally fortified items and those are the markets that we are more focused on particular from AMT and Triarco positions, and Kelatron recorded very strong growth in 2012. So companies which are continuing to report growth year-over-year are from what I've seen any way those with the stronger position in those nutritionally oriented food items.

Chris Shaw – Analyst, Monness, Crespi, Hardt & Co., Inc.

Okay. Do you guys supply (inaudible). I mean I know obviously they shut down for a while and there is lot of baked food there?

Randolph Gress

That’s not commenting on fortified customers, but that hasn't been a major effect through the fourth quarter.

Chris Shaw – Analyst, Monness, Crespi, Hardt & Co., Inc.

I was more curious about that. And then SG&A was pretty low for the quarter, is that just a function of share based compensation or you guys moderately want to cut some cost from your end?

Neil Salmon

Combination of both of those, yes.

Chris Shaw – Analyst, Monness, Crespi, Hardt & Co., Inc.

Okay, great. Thanks a lot.

Operator

Thank you. Next, we have a follow-up from Larry Solow of CJS Securities. Please go ahead.

Larry Solow – CJS Securities, Inc.

Hi, just (inaudible). The 4% organic growth for 2013 that’s mostly or all volume assumption is that correct?

Neil Salmon

Yes. And it translates to revenue as well as in this case…

Larry Solow – CJS Securities, Inc.

Right. So I know you said no price increase, you’re assuming basically flat pricing...

Neil Salmon

Yes.

Larry Solow – CJS Securities, Inc.

Through the year..

Neil Salmon

The key number we continue is the volume number, yes.

Larry Solow – CJS Securities, Inc.

And then basically are your cost of goods too, you are assuming flat without good exception of their purchase accounting, but other than that you’re assuming flat or somewhere you stand today?

Neil Salmon

Yes. On annual contract that we set up significantly in the second quarter of last year, we should see some moderate improvement when it reset to gain in the second quarter this year.

Larry Solow – CJS Securities, Inc.

Okay. So that may help your margin a little bit I guess too. Just on STPP, how that’s doing for the year, is that still declining or further risks there?

Randolph Gress

For the most part, we've had STPP I think earlier in the year we showed some slight decline in the I&I area, but thing has stabilized at year end. And for our operations on Mexico again it’s fairly stable although continued with some pressures there. But what we’re doing to offset any of that would be differentiating some of our product mix out of the Mexico. But the STPP portion of the business and on the tech side is greatly reduced from where it was a couple of years ago.

Larry Solow – CJS Securities, Inc.

Right it’s below 10% I guess. And when you say you are differentiating your product at Mexico, I completely don’t understand that, but as you do that do you know there is demand for it, or do you, in other words then you have go out and necessarily shops for demand.

Randolph Gress

We’re supporting both growths in Latin America with the products primarily and also support even sales in the U.S. and Canada, so continuing to do sourcing across our whole network.

Larry Solow – CJS Securities, Inc.

Okay. Just on Mexico, I know you had pretty good growth last year, so that was a tough comp, and sequentially it did improve. But the 11% drop year-over-year, is some of that due to a function and may be you mentioned some of that, some of that do to the function or just, I mean you knew growing in, you couldn’t meet that much demand because there was a supply issue and had you had no maintenance shutdown, you would have had X percent of less drop.

Randolph Gress

We would have done better I think in the later part of the year, we had the maintenance outages and the weather impacts in the third quarter in Mexico. And then some continued maintenance outages and into the fourth quarter in Mexico. So we expected some impact, but I think that we’ve made some investments and continue to make some improvements there to improve our capability.

Larry Solow – CJS Securities, Inc.

Okay. Just last question, on the GTSP & Other, especially on the other piece, it sounds like the mining expenses are lower than they were forecasted couple of quarters back. Are you scaling back just – is it being more efficient or is it just making the process spreading out over a longer period of time, any more color on to that?

Randolph Gress

I drive for the mining spending is to make sure that we are focusing on some of the key areas, where we are establishing a number of gates that we want to go through and prioritizing the spending as we move forward. We still think it’s an attractive concession to evaluate and we’ll continue to move forward, but as we said the increase some of the spending expected in the later half of the year.

Larry Solow – CJS Securities, Inc.

Okay, great. Thanks.

Randolph Gress

Thanks.

Operator

Thank you. Our next question is from Paul Moomaw of Goshawk Global Investments. Please go ahead.

Paul Owen Moomaw – Goshawk Global Investments Llc.

Yes, on Triarco, is there any way you could describe a typical customer of theirs, would you be able to give an example of being able to sell both Specialty Phosphate and Triarco product to that type of customer?

Randolph Gress

We think of the customer that is in the four to five beverage area, a combination of the botanicals that are included in the beverage combined with even the bioavailable minerals of our other products together with other than calcium or potassium based phosphate product will be a good example and combining all three areas of our nutritional capability across the businesses.

Paul Owen Moomaw – Goshawk Global Investments Llc.

So that just then becomes a sales effort may be over the next 18 months or something that make something like that happen?

Randolph Gress

I think it’s going to take some time certainly focusing on the integration of the businesses, but working together on the commercial front, as well as on the technical side, I think there is technical efforts in looking at the products in combination that we have to undertake.

Paul Owen Moomaw – Goshawk Global Investments Llc.

Okay. And switching to the maintenance in Mexico, Q3 and Q4, is that the type of expense that I think you may have described in the past is occurring every, may be 18 months or so?

Randolph Gress

For of the maintenance outages these are planned outages and we had talked about some of these outages occurring in the 12 months to 18 moths or even up to two years in some cases, but the plan going forward is to take some of these outages a little more frequently and enjoy the reliability of our operation.

Paul Owen Moomaw – Goshawk Global Investments Llc.

So for 2013 reduced level of expenditure on maintenance like that but then coming back maybe in 2014?

Neil Salmon

Well, in fact moving to the more frequent shorter duration turnarounds would mean similar expense in 2013 and going forward, and also trying to include (inaudible)?

Paul Owen Moomaw – Goshawk Global Investments Llc.

Okay, great. Thanks very much.

Randolph Gress

Thank you.

Operator

Thank you. Our next question is from a Rick D'Auteuil of Columbia Management. Please go ahead.

Rick D'Auteuil – Columbia Management

Good morning. Just actually follow-up on that last question, so year-over-year 2013 should be less interruption in the Mexico maintenance outages in 2012, is that fair?

Randolph Gress

Certainly it’s our objective Rick, yes.

Rick D'Auteuil – Columbia Management

Okay. What are the prospects for 2013 road-paving as it relates to your product?

Randolph Gress

I think government spend in that area is certainly remaining soft, not marketing to improve much, but we're very positive about the success we’ve made with our technology, both its being increasingly available market in the U.S. but also seeing some good success outside the U.S.

As you’re all remember, this is the technology that improves. [Roger] ability under extreme weather conditions and is also cost-effective in use and comparison to other asphalt modification technologies. So that is very well depended such as IP and technology that. We with soft market demand, its one of the product margin that we go very positive about going forward.

Rick D'Auteuil – Columbia Management

So I guess just to clear that down, it sounded like flat markets, but maybe you guys are gaining some share, so you expect growth?

Randolph Gress

Yeah, in this case it's really growing the available market rather than share, yes. But flat paying miles. Yes, yes.

Rick D'Auteuil – Columbia Management

One of the issues around the fertilizer business was you got the double whammy of weak, weak pricing with your customers and also constrained rock supply from your suppliers, which compressed margin. We don't know where the pricing is going to end up, but what’s the update on constrained supply environment as some of the interrupted supply come back online or what's the status of that?

Randolph Gress

There's not been any major change there. [Serio] was one of the minor producers more to the European market and the next quarter it further appealed and then clearly still off the market. But we do see increased activity that is reports all the time of new concessions being developed or existing to probably see an standard. And so while I don’t see concessions being developed or existing to public being standard. And so while I didn’t see anything changing in the next quarter or two fundamentally longer term I think our view remains the case that we're going to see, so we’re going to see some improvement in the supply demand line.

Rick D'Auteuil – Columbia Management

So, year-over-year no relief on the supply issues...

Randolph Gress

I didn't give a year view, but as far as we can see there's no a major reason for change on the supply view, yes.

Rick D'Auteuil – Columbia Management

Okay. In your release and in your prepared statements you’ve talked about weak December as it relates to destocking in specialty markets, but recovery in January very strong were half through February, can you now look back on January and say that was really a blip in recovery, or is that recovery continued in February?

Randolph Gress

I think it’s too early to comment on February, but I think clearly with what we saw in January, we did have the bounce back from where we were down on December.

Rick D'Auteuil – Columbia Management

Is your expectations for the rest of the February and March periods that we go back to just normal? Not December levels, and not January levels, is your expectation it’s just floating along again?

Randolph Gress

Yes it’s right. Yeah.

Rick D'Auteuil – Columbia Management

Okay. Remind me again why with a strong January in specialty, why we’re looking at Q1 volumes being less than the average for the year?

Neil Salmon

Well, last year we started up strong, particularly in Mexico, but well flat in the U.S. I think everyone at the beginning of last year was optimistic on growth rates and we were positive through April, May, at the demand pattern in the business and then it was really end of the second quarter that we moved back to this flat to moderately down market condition that we have seen as a sense, so it’s more an account issue than anything else.

Rick D'Auteuil – Columbia Management

Okay. All right thank you.

Operator

Thank you. Next we have a follow-up from Chris Shaw of Monness, Crespi, Hardt & Company. Please go ahead.

Chris Shaw – Monness, Crespi, Hardt & Co., Inc.

Yeah. It’s another GTSP question; there is something special of GTSP right now or with sort of like a DAP and MAP producer who is not integrated also have really sort of slim margins at this point?

Randolph Gress

Yes, it’s across the non-integrated fertilizer stage. You are right, which is one of the reasons why we feel not sustainable because, because advantage of greater producers are an important piece of the market, and I believe anyway unless they have some advantage cost position, we’ll be suffering from the margin pressure that our core products is under.

Chris Shaw – Analyst, Monness, Crespi, Hardt & Co., Inc.

And you always characterize as a core product, does you guys push down any cost that from the Specialty Phosphate businesses into the GTSP segment and may be normally might not be. Say if you got stop selling GTSP, you shut down the business would it – they flow backup or...

Randolph Gress

Well, there is some allocation of costs there, but only appropriate to infectivity. I know it's an important part of our business model, because it is a core product and we need to find an economic outlet for the core product. So even at a break-even operating income level, it’s actually value adding to the overall economics of the cost of production complex.

Chris Shaw – Analyst, Monness, Crespi, Hardt & Co., Inc.

All right, I wasn’t just asking but you said it down. But I’m just curious about the crossword.

Randolph Gress

Right.

Chris Shaw – Analyst, Monness, Crespi, Hardt & Co., Inc.

Okay. Thanks a lot.

Operator

Thank you. And next we have a follow-up from Christopher Butler of Sidoti & Company. Please go ahead.

Christopher Butler – Sidoti & Company

Hi, thanks for taking the follow-up. At the risk of beating a dead horse looking at your end markets for specialty, which end markets do you expect to be down in 2013 that gets you to that flat to modestly down overall?

Randolph Gress

I think it's pretty consistent view across the features. There aren’t any markets that we are particularly concerned on the decline so I think it's across the space that we are viewing flat to modest demand growth is the best view going forward.

Christopher Butler – Sidoti & Company

And in regards to the Mexican mind just to be clear is this a change of direction for you, or is this you’ve just reached this point in the process and now you you’re adjusting the strategy going forward?

Randolph Gress

It’s not a track change in direction; it’s consistent with what we were looking at before. And just refocusing and prioritizing the efforts. And I think strategically going forward again evaluate what the potential is, but something that we would look at possibly finding a partner to help us in the development of the mines.

Christopher Butler – Sidoti & Company

That’s all I have. I appreciate it.

Randolph Gress

Thanks.

Operator

Thank you. We have no further questions at this time. I will now turn the call back over to Randy Gress for closing remarks.

Randolph Gress

I’d like to thank everyone for joining us today, and we certainly appreciate your interest in Innophos. We also look forward to speaking to you in the next quarter when we report our first quarter 2013 results. Thank you.

Operator

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.

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