Randy Gress - Chairman, President & Chief Executive Officer
Neil Salmon - Chief Financial Officer
Mark Feuerbach - Vice President, Treasury, Financial Planning & Analysis
Bill Farran - Vice President & General Counsel
Edward Yang - Oppenheimer
Christopher Butler - Sidoti & Co.
Innophos Holdings Inc. (IPHS) Q3 2009 Earnings Call November 3, 2009 10:00 AM ET
Good day, ladies and gentlemen and welcome to the third quarter 2009 Innophos results conference call. My name is Thomas, and I will be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions).
I would now like to turn the conference over to your host for today, Mr. Bill Farran, Vice President and General Counsel of Innophos. Please proceed.
Thanks for joining us today for the Innophos Holdings Inc. conference call, to discuss third quarter 2009 results. Conducting the call today are Randy Gress, Chief Executive Officer; Neil Salmon, Chief Financial Officer; Mark Feuerbach, Vice President of Treasury, Financial Planning & Analysis; and myself, Bill Farran, General Counsel.
During the course of this call, management may reiterate forward-looking statements made in our November 2 press release regarding financial performance and future events. We will attempt to identify these statements by use of words such as expect, believe, anticipate, intend, 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 factors that could cause actual results to differ from those in the forward-looking statements as contained in this conference call and in our earnings reports and filings we make with the SEC.
We will make a replay of this conference call available for a limited time over the telephone at the number set forth in our press release and via a webcast available on the company website. In addition, please note that the date of this conference call is November 3, 2009. 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 as a result of future events.
Now, I’d like to turn the call over to Randy Gress, CEO of Innophos. Randy.
Thanks Bill, and good morning everyone. Thanks for joining us today. I will start off with some comments about the third quarter and discuss our current outlook. Then our new CFO, Neil Salmon will give us the highlights for the quarter, which will be followed by some legal comments from Bill Farran. I’ll finish with a short summary, after which we will take your questions.
First however, I’d like to welcome Neil Salmon who joined Innophos as Chief Financial Officer in early October. I’m very pleased to have Neil on the Innophos team, as he brings strong financial experience in 20 years in the chemical industry. Most recently, he served as Chief Financial Officer for ICI’s Adhesive’s Business Group, a $2 billion business unit with global operations.
I’d also like to take this opportunity to express my appreciation to Mark Feuerbach for serving as Interim CFO over the last quarter and doing a terrific job of overseeing the finance organization.
Now, let’s discuss our business results. Our financial performance during the quarter suffers from difficult comparisons against the record setting third quarter 2008. However, when we look at results on a sequential basis, I’m pleased to see several encouraging trends. Net sales for the third quarter 2009 were $161.9 million with the rate of decline sharply reduced since the first quarter of 2009.
On our second quarter call, we talked about expectations for downward selling price pressures to continue, and prices excluding our commodity fertilizer co-product, GTSP were down 8.9%. However, it’s clear that the rate of decline is slowing. We expect further price declines in the fourth quarter, but at a more modest rate.
Third quarter 2009 total sales volume excluding GTSP rose 2.8% over the second quarter 2009, with encouraging growth in the U.S. partly offset by ongoing demand weakness in Mexico. Let’s address Mexico first, we continue to experience weak demand and a challenging competitive environment as well as a limited ability to respond competitively given our unfavorable contract pricing on rock.
On the positive side, phosphoric acid sales have stabilized, and the loss of business at the company’s largest customer in recent years had no further impact in Q3. We also delivered good volume growth in specialty horticultural products sold into the U.S. Although, fertilizer markets remained soft overall, volumes of GTSP were up during the third quarter. We were able to move out most of the quarter’s production and have little inventory remaining. With the GTSP cost rate down to current market prices in the second quarter, our GTSP sales have no margin impact.
Now switching to the U.S. and Canada. Total volumes were up 6.6% over the second quarter 2009. Specialty Salts and Specialty Acids are core business in major area of strategic focus, drove this improvement with an increase of 9.7% in U.S. and Canada and 12.6% company wide.
A portion of the increase was partly seasonal as our third quarter traditionally marks the beginning of the holiday baking season while a significant portion of the improvement resulted from our business achieving strategic growth initiatives in focused market segments such as food, beverage, pharma and pet food. These segments are proven to be value driven, and we’ll continue to provide opportunities for growth in the future. Having maintained our leadership position, Innophos is well-positioned to benefit from economic recovery and further alignment with key global customers.
Turning to margins. I’m pleased to report that margins have held constant on a sequential basis versus the second quarter. However, as noted previously, our second quarter contain some one-off negative adjustments. Therefore, on an underlying basis, there are still some downward pressure with a $1 to $2 million increase in raw material cost incurred in the third quarter over the second.
As far as the fourth quarter outlook goes, as I mentioned earlier, selling prices are expected to continue to more download but have a slower pace, more likely in the low single digits. We expect volumes excluding GTS fee to remain roughly flat with the third quarter. Seasonally, the fourth quarter is usually below the third, however, this year we aim to offset this pattern with continued business gains.
With regard to our raw materials cost basis, a projected sourcing mix is likely to lead to $4 million to $5 million increase in input cost in the fourth quarter. Capital expenditures will come in lower than we have projected earlier in the year, a result of continuing to evaluate and spend only on those projects that will offer the most significant impact in the current challenging environment for our Mexico business.
Our highest priorities remain the conversion of our Coatzacoalcos Mexico production capabilities from technical to food grade acid and salts. In the diversification of our Mexico raw material sourcing. We are continuing with our strategy to develop additional food grade capacity and capability. We are focused on developing this aspect first because it is one of the highest value added portions of our business which serves stable industries.
Second, our operational and technical know-how in this area provides a competitive advantage, and our high end products allow us to overcome the logistics barriers that imports to the U.S. space. These products enable us to compete outside of the North America as well.
Finally, the development of middle income household plays a large role at increasing consumption for the types of consumer products that contains specialty phosphates. Although, the past year have seen an interruption to worldwide growth, the main thesis of a rising class of consumers in developing markets buying even greater amounts of our customer’s products has not fundamentally changed.
I will now turn it over to Neil for more detail on the quarter.
Thanks Randy. I’m very pleased to be with you this morning, and I look forward to meeting or speaking with the number of you going forward. I would also like to add my thanks to Mark and all in our finance and IT teams for ensuring those functions are in great shape as I assume my responsibilities.
Regarding third quarter 2009 results, operating income was $28.5 million, a decrease of $84.4 million or 74.8% over the comparable period in 2008. In addition to the pricing impacts on gross margins as described by Randy, manufacturing costs remained well controlled, with Mexico delivering $6 million of savings year-to-date through its restructuring and efficiency programs.
Third quarter operating expenses, included higher charges for our company wide enterprise resource planning or ERP projects, and legal fees related to trial preparation for the OCP arbitration. Regarding ERP, the one third of the project cost that must be expensed is primarily incurred upfront prior to the design phase. The first OCP arbitration hearings will be begin in mid November, so as we approach this phase, we see increased activity and therefore cost.
In the third quarter of 2009, net interest expense decreased to $6 million versus $8.9 million for the comparable 2008 period reflecting our lower debt levels. Net income for the third quarter 2009 was $15.1 million compared with $79.7 million in the same period in 2008, and diluted earnings per share for the third quarter with $0.69 compared to $3.62 for the third quarter last year.
Cash generation continues to be strong, at the end of 2009 third-quarter we had $124.3 million of cash and cash equivalents. Net debt decreased from $152.3 million at the end of the second quarter this year to $121.7 million at the end of the third quarter. Capital spending in the third quarter included the following projects.
Firstly, the debottlenecking of the specialty salts units in the U.S. and Canada, the continuing upgrade of Coatzacoalcos Mexico to food grade capability. Thirdly, evaluating the Baja, Mexico phosphate mineral rights concessions and our ongoing ERP projects. These projects will remain focus for capital spending in the fourth quarter. We now estimate that 2009 capital expenditures should approximate $18 to $20 million for the year.
Now Bill Farran will provide an update on legal measures.
Thanks Neil. I have just two items on the OCP arbitration that were covered in our press release. First, we have the first set of hearings next week in Paris, and there will be a second set next July on OCP’s counter claims which likely award in the arbitration being issued after that. The second item is OCP’s request for security for its counter claims for which is scheduled for briefing or hearing has not yet been set.
We believe it is unlikely that OCP’s request would be granted and more importantly, we have no way altered our evaluation of the arbitration case or the counter claims or altered our determination that no accruals awarded.
Now back over to you Randy.
Thanks Bill. Despite difficult year-over-year comparisons we are encouraged by the third quarter performance in the U.S. and Canada as evidenced by improving volume trends in the slowing rate or selling price decline. Going into next year, improving economic trends should lead to further volume recovery. While pricing will remain under pressure, we expect a reduced rate of decline. Our primary raw material sourcing goal remains to diversify our sources of supply once our OCP requirements contract ends in September 2010.
We’ve made good progress on this matter with discussions quite far advanced with several suppliers and analytical data on further potential sources encouraging. We would certainly welcome an ongoing relationship with OCP as an important supplier. However, we are not considering entering a new single source arrangement, as we do not believe that would be in our strategic interest.
In a short term, well uncertainty remains about the competitiveness of our rock pricing for the reminder of the current contract, conditions will remain difficult for the Mexico business, and we will remain very focused on delivering additional operating efficiencies.
In the long term, it is clear that a new sourcing environment and enhanced food grade capability will be key to restoring the profitability of our Mexican business. We are dedicated to achieving those goals as quickly as practicable. Finally, a comment on our cash position. As you would expect, we aim to continue paying dividends and maintain a strong balance sheet. However, we also feel we now have more flexibility to develop our geographic footprint and enhance our key market positions.
We’re looking at a number of potential projects covering both organic investments and bold on acquisitions to help us to reach these goals. It is too early to say whether any of these will go ahead, but we will remain similarly focused on enhancing value through investment and new business that make sense for Innophos.
I look forward to reporting on our progress at the end of the year. Thank you for listening and we would take your questions now. Operator.
(Operator Instructions). Your first question is from the line of Edward Yang with Oppenheimer.
Edward Yang – Oppenheimer
Hi, thank you. Good morning. Randy you’re looking for price pressures due substantially abate in the fourth quarter and down well single digits and they are down about 9% this quarter, were down about 17% the prior quarter. Yet you are still looking for prices to be down in 2010, and I’d like to understand why is that, and when do you think that prices will actually start trending stables as that go. Seems from the raw material side prices have already stabilized and are going up?
Thanks Ed. I think as we look at prices throughout 2008, we did have a series of increases throughout the year, and we’re successful with I think roughly about six price increases throughout the year. As we entered in the 2009, we did see pressures there it has been a competitive environment, especially in the purified phosphoric acid as well as the STPP area.
Through last year, we did go to a lot of quarterly pricing for our customers, but did have some residual annual contracts. And now we’re getting into some of the fourth quarter negotiations for pricing, and there is still some competitive activity out there, and may see some resets within the pricing into the first quarter, but we’d expect things to stabilize from there.
Edward Yang – Oppenheimer
Okay, and you mentioned your strong cash position now, and the potential for acquisitions, could you size some of these opportunities?
When I talk about our investments that it’s certainly we want to continue to focus on our core business, and some of the incremental the bottlenecks that we’ve actually done through 2009 and would continue in 2010. Then top of that, what we’ve talked about in the food grade conversion of asset in Mexico and some of the increased capability on the food side. When we talk about looking at some bolt-on acquisitions, I would typically consider that something less than $50 million.
Edward Yang – Oppenheimer
Okay, that’s very helpful. Lastly, if rock cost stay in terms of spot - require market raw cost stay where they are, when your contract with OCP resets next year, will your rock sourcing cost be competitive with the market at that point or would there still be a gap?
As you know Ed, we are in the arbitration for both 2008 and 2009 pricing and currently in discussions with pricing in 2010. So don’t yet have a final answer on that, but we’re expecting that pricing to trend towards market and get closer as you know, there has been some lag impact on the pricing. And then that would be through September and then beyond September, we would expect to be more at market.
Edward Yang – Oppenheimer
Okay, thank you very much.
(Operator Instructions) Your next question is from the line of Christopher Butler, Sidoti & Company. Please proceed.
Christopher Butler - Sidoti & Co
Hi, good morning guys. Looking at the quarter, it seems that you are more optimistic on a demand recovery started in the second quarter, but you continue to say better things here in the third quarter, I was hoping you might be able to speak on that, we are looking at specifically more of your higher end products that are improving or is this more across the board?
For the demand recovery as you can see in the third quarter, it was mostly in the specialty salts and specialty acids with some recovery there within the acid. I think as we’re going forward, we do expect some recovery within the overall market, and I would expect that would be especially in the specialty salts and specialty acids area.
Christopher Butler - Sidoti & Co
You had mentioned that in the quarter for GTSP volumes were up a little bit and that there was a nominal impact to margins as a result. If we look out a little bit, if we see a little bit better volumes next year, little bit better pricing environment, is this business that’s going to be profitable for you next year?
Regarding the GTSP, we did see some improved volumes there in the third quarter, but again GTSP, it is a co product from purified wet acid operations in Mexico, and as that market may recover would I think provides some marginal improvement.
Christopher Butler - Sidoti & Co
On that subject with the upgrades that you have going on in Mexico, once you achieve a food grade production, are we going to be looking at the GTSP in the purified wet acid, is the business that’s going to be kind of pushed aside or is that the STPP that’s going to be less volumes there?
We’ve already seen some decline there in the STPP as well as the acid sales to our major customer within acid that primarily within the detergency market, and where we expect some of the growth would be in the overall specialty salts and specialty acids business as well as some of the purified acid, but it would take some time to fill up that converted capacity.
Christopher Butler - Sidoti & Company
So just to be clear, because of the difficult demand environment that you face right now, it’s not a situation where some sales are being lost as a result of the conversion to higher grade production?
No, it’s not loss sales do the conversion, it’s where we would still have those sales, but it’s more of the transformation to the food grade capability.
Christopher Butler - Sidoti & Company
I appreciate your time, I will go back in the queue.
(Operator Instructions). Sir, there are no questions at this time. I would now like to turn the call over to Mr. Randy Gress for any closing remarks.
Well, again we’d like to thank you for joining us for the third quarter update and again look forward at the end of the year to update you with our progress. Thank you.
Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!