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Executives

Mark Feuerbach – VP, Treasury, Financial Planning & Analysis

Randy Gress – Chairman, President and CEO

Neil Salmon – VP and CFO

Analysts

Sabina Chatterjee – BB&T Capital Markets

Christopher Butler – Sidoti & Company

Edward Yang – Oppenheimer

Chris Shaw – Monness Crespi

Elie Mishaan – Corsair Capital Management

Adam France – 1492 Capital

Eric Mason – WL Ross

Innophos Holdings, Inc. (IPHS) Q3 2010 Earnings Call Transcript November 3, 2010 10:00 AM ET

Operator

Good day, ladies and gentlemen and welcome to the Innophos third quarter results conference call. My name is Fab and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of today's conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Mark Feuerbach, Vice President, Treasury, Financial Planning & Analysis. Please proceed.

Mark Feuerbach

Thanks for joining us today for the Innophos Holdings, Inc. conference call to discuss third quarter 2010 results. Conducting the call today are Randy Gress, Chief Executive Officer; Neil Salmon, Chief Financial Officer; Bill Farran, General Counsel; and myself, Mark Feuerbach.

During the course of this call, management may reiterate forward-looking statements made in our November 2nd 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 and other factors as set forth in the forward-looking statements 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 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 3rd, 2010. 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 would like to turn the call over to Randy Gress, CEO of Innophos. Randy?

Randy Gress

Thanks, Mark and good morning, everyone. Today, I will be providing you with the update on third quarter results. After the quarter’s highlights, Neil will summarize the financial results and then I will conclude.

While we don't have any additional scripted right now on the Mexico CNA tax position beyond what we disclosed in the announcement a few weeks ago, Bill Farran is available to take your questions.

In the course of these comments, we will discuss some adjusted quarterly operating results that exclude the one-time charges detailed in the press release in order to better illustrate developments with the business. Of course, full GAAP results are available in the financial tables attached to the press release.

We had a good quarter, especially in the U.S. and Canada. Overall, net sales for the third quarter 2010 were $169 million, a 4% increase over third quarter 2009 on 13% higher volume.

Compared to the third quarter 2009, Specialty Phosphate sales revenue was up 4%, with volumes up 17% year-over-year. The third quarter of 2009 was a period when Specialty Phosphate selling prices were declining from the peak levels reached in early 2009. That's why Specialty Phosphate prices were, on average, 13% below their year-ago level, although prices have been stable to improving since the end of the first quarter this year.

GTSP prices generally track with market prices for other phosphate fertilizers and so, were significantly up this year. They were also over 50% higher than the third quarter 2009. As I will outline later, we expect GTSP prices to continue to increase in the fourth quarter and we expect to be able to raise Specialty Phosphate prices going forward as well.

Underlying demand remained strong for our businesses. Our U.S. and Canada Specialty Phosphates business in particular continued to produce excellent results. Our Mexican Specialty Phosphates business and our GTSP & Other segment were impacted by a number of factors as I will outline, and results in Mexico were therefore below our expectation.

First though, a reminder on our segments. Our core business is the Specialty Phosphate business. Within it, our core markets are products serving the food and beverage, pharmaceutical and oral care markets, which represent around half of total company revenue.

We also participate in a small way in less specialized fertilizer markets, primarily through sales of granular triple super-phosphate or GTSP as a result of co-products produced in our acid purification processes in Mexico. And we record this business within our GTSP & Other segment.

Demand in Specialty Phosphates remains strong with high value products performing particularly well. Although, as I mentioned – and our core markets are the consumer-oriented ones, we also have some attractive niche positions for industrial applications. And in these sectors, we saw both continued recovery related to the improved economic environment versus last year and also continued success with our innovative, differentiated Specialty Phosphates, particularly our INNOVALT asphalt modifier.

In consumer-oriented markets, we saw ongoing strength of demand and notable success, working in partnership with our food manufacturer customers. There were some great examples this quarter of our customers launching new end products where an Innophos ingredient is key to the positioning of the product as heart-healthy or reduce sodium. We expect further success on this front in the fourth quarter and into 2011.

We have also achieved significant success over the last 18 months in developing a position in new higher-growth markets. Exports, overall, increased as a percent of revenue to 17% of total Specialty Phosphates, up from 12% last year. Clearly, we are still underrepresented in export markets in comparison to our North American position. So, there is significant long-term opportunity for further growth.

Summarizing our volume growth by segment, in the U.S. and Canada, Specialty Phosphate volumes were up 13% year-over-year and 3% sequentially. In Mexico, Specialty Phosphate volumes were up 36% year-over-year, but sales were down 15% sequentially with roughly one-third of the 15% decline due to shipping delays caused by a very unusual pattern of hurricanes that affected port access, railroad service, and roadways.

The higher-value specialty salts and food grade acid product groups performed very strongly with combined volumes up 14% sequentially, but a significantly lower quarter for STPP and detergent-grade acid more than offset this. GTSP & Other volumes were down more than 50% both sequentially and against the same quarter last year.

Turning now to the reasons for the lower STPP and GTSP volumes in Mexico. For GTSP & Other, there was an order pattern issue. As we have said many times, most GTSP sales are in shipload quantities. So the timing of orders can lead to significant variation quarter-on-quarter. In the case of the most recent quarter and what was already a relatively light quarter, billed volumes were further reduced when a shipload with a $9 million value was delayed by weather conditions from departing until a few days into the fourth quarter.

The severe weather that impacted the region was unprecedented in our operating history, with four tropical storms or hurricanes impacting the region over a space of a month. Our operations team in Mexico has excelled in keeping the plant running and identifying alternative transportation options to keep customers supplied, and although orders were delayed, we do not believe we have lost any business as a result.

The reason for the lower STPP sales sequentially was a combined impact of an unfavorable order pattern and the impact of some further reformulation by major multinational detergent manufacturers, eliminating the use of STPP in laundry detergents sold to some South American markets.

We have indicated for a long time that we expect further reduction in the use of STPP in laundry detergent in South America and that our strategy anticipates redirecting the capacity made available as this happens to alternative and higher-value end markets, a strategy that is already largely complete for our U.S. and Canadian production.

However, we don't currently expect phosphates to be legislated out of detergent use in South America. Although major multinational laundry detergent manufacturers have taken voluntary steps to reduce phosphates in detergent formulations, currently we see no similar steps being taken by regional South American detergent manufacturers. In fact, regional manufacturers may have an incentive to stay with the existing high-performance STPP detergent formulations, which remain popular with South American consumers.

Our sales in the third quarter were almost entirely to regional detergent manufacturers and while we expect there to be still some sales to global multinational customers going forward, which would represent upside to the third quarter level, our base business to regional detergent manufacturers looks relatively stable.

So with some sales to multinationals expected, what could be an improving position with regional players and a more favorable order pattern in the fourth quarter, we expect a significant improvement in fourth quarter STPP sales. So, although it is disappointing that Mexico did not continue the overall substantial sequential revenue improvement seen in recent quarters, the higher-value product groups did improve and Specialty Phosphate volumes overall for the business are still up 36% year-over-year. Looking forward, we remain confident in our ability to restore the pre-2008 profitability of this business by 2012 with a more differentiated and specialty orientation.

I am encouraged by the ongoing strength of Specialty Phosphates in the U.S. and progress in higher-value products in Mexico, and consequently, we now plan to increase our rate of investment in production and technical support.

During the quarter, we announced plans for the $4.5 million expansion of our Nashville, Tennessee facility for the production of the reduced sodium leavening acid CAL-RISE, a calcium phosphate product that has been performing well and supports customers seeking reduced sodium formulations for their baked products. This calcium phosphate expansion which is due to be completed by midyear 2011 will double our current capacity for the production line on which this product is manufactured.

By the end of the year, we also expect to complete two other smaller investments to support the organic growth of the Specialty Phosphates business. The first is improving the capability our of our Port Maitland, Canada facility to manufacture potassium phosphates, which was previously (inaudible) manufactured externally. The second is continuing to improve incrementally our specialty salts capability and capacity in Mexico.

Combined with the product development work we do to support customers and meeting demand for food and beverage products with reduced sodium, these investments are part of our plan to steadily improve product mix and grow earnings. Going forward, we are reviewing a number of further investment opportunities with similar goals, which we think will enhance the growth potential of the business and further improve the specialty capability of our Mexican operation.

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

Neil Salmon

Thanks, Randy. Randy already summarized our sales performance, so let me just recap. Net sales for the third quarter 2010 were $160 million from Specialty Phosphates, $9 million from GTSP & Other, giving a total of $169 million, a 4% increase over third quarter 2009.

Volumes were up 17% for Specialty Phosphates, they are down significantly for GTSP & Other with a $9 million shipment delayed to the fourth quarter. Prices were down 13% against 2009 levels for Specialty Phosphates, they are 57% higher for GTSP & Other.

Turning to earnings now, initially I will comment on underlying results, excluding the one-time charges we have identified before summarizing the impact of those one-time charges and how they affected our overall earnings.

Operating income for the third quarter 2010 was $30 million for our Specialty Phosphates business, up $1 million on last year. GTSP & Other was breakeven, excluding one-time charges, also an improvement of $1 million on last year. So, an overall improvement excluding one-time charges of $2 million or 6% on last year.

The Specialty Phosphates improvement came in the U.S. and Canada where operating income was up over $1 million despite the impact of lower prices versus 2009 levels, while Mexico Specialty Phosphates operating income was $0.5 million below last year.

Turning to one-time charges, firstly, let me say that in earlier press releases we outlined in more detail than I will cover here the nature of these charges and the amounts. To recap the impact, we took two charges for expected prior-period additional water taxes and the penalties and inflation that we expect to be assessed on these. The charge relating to 1998 to 2002 with an after-tax impact of $20 million is fully indemnified by Rhodia, and so we have booked an offsetting receivable.

The second charge for the years 2005 to end third quarter 2010 for $12 million after-tax, should we believe also be indemnified by Rhodia. However, further litigation will be required to establish this. And so, for the second charge, we have not yet booked an offsetting receivable.

The Rhodia receivable booked offsetting the first amount is for the after-tax cost. And so the net effect of these two charges, less the receivable, is a $20 million charge to cost of goods sold and an $8 million tax benefit, giving a net impact to the $12 million or $0.32 per diluted share. Also, the remainder, on an ongoing basis we will be accrue at the higher water rate with an estimated impact of around $0.5 million per quarter, depending on plant operating rates.

The second one-time relates to our new five-year, $225 million senior secured credit facility, replacing the $190 million 8.875% notes and the prior bank line of credit. We incurred $10.8 million additional interest expense in the quarter as a result of writing the deferred financing cost of the prior structure and the call premium on the notes. Our capital structure going forward will be substantially more cost-effective and flexible in support of our strategic objectives, including ongoing investment plans.

On an annualized basis, we estimate that the new facility will reduce Innophos' consolidated net interest expense by approximately $11.5 million and improve earnings per share by $0.32. Combining this with a $56 million of 9.5% notes retired in the second quarter 2010 and we have improved our annual interest expense by almost $17 million or $0.47 per share. And so as a result, I am pleased to say that for the fourth quarter 2010, I'm expecting an interest expense of around $1.8 million.

Net debt decreased by $8 million from June 2010 levels to $115 million, despite call premiums and bank fees paid in the quarter related to the refinancing. The Q3 effective tax rate was impacted by the tax effects of the one-time charges. Excluding these, the underlying effective tax rate was 34% in the quarter and we anticipate a range of 34% to 36% for the fourth quarter also.

Turning now to some comments on the fourth quarter outlook and 2011 trends. Randy will put these in context in his concluding remarks, but let me give you some specifics first. Since our first quarter earnings release, we have been clear in our communications that the light nature of our raw material contracts would contribute to an advantage cost position in the second and third quarters of 2010 versus market-based raw material costs.

We indicated based on our expectation at that time that the catch-up impact when our raw material contracts reset will be around $5 million per quarter. What is now clear is that as strong fertilizer demand conditions continue, fourth quarter market prices are expected to rise significantly for sulfur, with some increases also reported in market prices for phosphate rock. If current market prices continue through 2011, we now anticipate a further increase in quarterly raw material purchases of $5 million to $10 million in addition to the $5 million we previously indicated.

At this point, I should provide a little more detail on the timing of pricing closes within our raw material contracts. Historically, the majority of purchasing contracts related to our phosphoric acid cost base had fixed annual pricing, set with reference to historical market prices for the key raw materials, sulfur and phosphate rock. This was favorable in periods of rising market prices, but a significant disadvantage in a year such as 2009.

For most of 2010, we have had a similar amount of raw material costs at fixed prices, hence our second and third quarter advantage to market. Going forward, and as part of our supply chain strategy, we have consciously shortened our raw material pricing lag to market. This will reduce the advantage in a period of rising raw materials, but also mean we are less disadvantaged when prices fall again.

So going forward, the majority of our raw material prices will adjust with a three to six-month lag to market. Only around 25% of our raw material cost remains fixed on an annual basis and for this fixed portion, fourth quarter market prices are the reference period for the following year.

Specifically, for the fourth quarter 2010, we expect some of the impact of higher market prices to begin to affect our costs and as disclosed in our press release, we expect to run $1 million of additional logistics costs in Mexico, as the business has implemented contingency plans to deal with the transportation disruption and shipping delays, as well as $0.5 million impact I mentioned earlier from higher water rates.

The earlier benefit to selling price increases will offset some of this high cost, but we may see a decline in underlying Specialty Phosphates operating income margin of around 1 percentage point, plus the impact of the higher Q4 costs noted in Mexico.

In GTSP & Other, as Randy mentioned earlier, we expect to recover strongly with a favorable order pattern anticipated for the fourth quarter and a similar operating income margin to the second quarter.

We are still expecting capital expenditure to come in within the $30 million to $35 million range we have discussed this year, although now more likely at the lower end of the range with the same major expenditures we had established previously. With some of the originally expected 2010 expenditure now expected to fall in 2011 and with the opportunities Randy has described to further enhance our Specialty Phosphate capabilities, our initial indication of 2011 expenditure would be around $40 million.

I would also remind you that with capital expenditure continuing below our depreciation rate even in the relatively high spend year such as 2011 and with some of the step-up take on asset values at the formation of Innophos now fully depreciation, we anticipate our annual D&A costs to decline, net of increases for our ERP project by around $5 million in 2011 versus 2010.

Now back to you, Randy.

Randy Gress

Thanks, Neil. To close, our key goals as we finish 2010 and look forward to 2011 include the following. With the ongoing success of our commercial programs including the product innovation I have described, together with sustainable demand growth, especially in our core food and beverage markets, we expect to end the year with fourth quarter net Specialty Phosphate sales 10% ahead of last year. We also anticipate a strong recovery in GTSP & Other volumes.

Going forward, we believe we can grow domestic sales volumes at greater than GDP rats by supporting new emerging trends like low sodium food formulations with new products and technical support and with ongoing targeted investment and high value capacity and capability that I have described. And although we have made good progress in developing new markets, there is still significant potential to participate more strongly in these higher growth regions.

From a low point in pricing in the first quarter of 2010, we also expect to continue to increase prices across our entire Specialty Phosphate product line. We expect to offset the cost impact of the further increase in raw material costs that we now anticipate versus our earlier expectations.

Despite a quarter in which our ability to deliver expected Specialty Phosphate volume increases saw some challenge from the lower-value specialty phosphate detergent business, with healthy demand in the higher value products, we continue to focus on developing our position in both and in existing markets. We believe we can deliver on the promise to continue to increase our presence in targeted geographic markets for high-value specialty phosphates. This growth will also contribute to our goal of returning Mexico to pre-2008 levels of profitability by 2012, with a more differentiated and specialty orientation.

With regards to our supply chain goals, we have successfully processed phosphate rock in 2010 from five suppliers and we are close to wrapping up 2011 agreements for the – for most of our supply, which is expected to be met by three of the five, while retaining the flexibility to continue developing new sources.

Finally of course, we hope to make progress on bolt-on acquisitions. As stated previously, we continue to focus on acquisition opportunities that we believe will accelerate achievement of our growth goals in Specialty Phosphates, both in existing and new geographic markets.

We are also reviewing opportunities in adjacent product areas, which we believe would support our current strength in the food and beverage markets we serve. We expect to be able to fund possible acquisitions, as well as the other organic investment projects that we discussed earlier through existing liquidity, particularly now that we have increased our financial flexibility and decreased cost with the new credit facility. We are also committed to continuing to pay our dividend.

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

Question-and-Answer Session

Operator

(Operator instructions) And your first question will come from the line of Frank Mitsch from BB&T Capital Markets.

Sabina Chatterjee – BB&T Capital Markets

Good morning. This is Sabina Chatterjee in for Frank Mitsch. I have a two-part question. Excluding the weather related impact in Specialty Phosphates, what would margins have looked like for the segment in Q3? And then, since margins have been pretty volatile historically, what do you feel is a normalized level and what's the potential with the more specialty orientation?

Randy Gress

Neil, why don't you address the margin question, please?

Neil Salmon

Sure. And I think as we have indicated before and Randy repeated today, our goal at Mexico is get back to the 2006-07 level of profitability, which as an operating income level was around $40 million in that period. The – if I talk about margin expectations in the short term, I think if you look at the first half and the second quarter profitability for Mexico Specialty Phosphates, that will give you an indication of where we are currently in the business. And clearly, as we both have indicated, as raw materials increase, our goal is to offset those with higher prices. So, hopefully that gives you the extra detail you were looking at, Sabina.

And specifically, if I talk to the reformulation impact in the third quarter in a sales dollar term, Specialty Phosphates Mexico was $6 million lower Q3 versus Q2 and around $2 million of that was specifically from reformulation, with the factors also impacting that we've mentioned.

Sabina Chatterjee – BB&T Capital Markets

Okay, great. And my next question is about the reformulation. So, thank you for that.

Neil Salmon

Thanks, Sabina.

Operator

Your next question will come from the line of Christopher Butler from Sidoti & Company.

Christopher Butler – Sidoti & Company

Hi. Good morning, guys.

Neil Salmon

Good morning, Chris.

Christopher Butler – Sidoti & Company

I wanted to talk about your product prices and looking at some of your raw materials had been climbing through the summer and into the fall, but it didn't seem that your are able to increase prices in the third quarter that significantly to match those. As you look forward, is it the fact that phosphate rock seem to be climbing, that gives you the confidence that you are going to be able to put in pricing going forward?

Randy Gress

Yes, Chris, on the pricing front, we did have some price increases that we had announced in the second quarter of this year. And that was partially successful as it offset some of the resets that we had, because again, we were realizing some of the resets in some of the contracts from the prior year that hadn’t set from the decline.

We really didn't expect much on the raw material increase front, expect for what we had expected and announced as far as the $5 million reset in our costs going into next year. It's really in the fourth quarter where we have seen some firming within the fertilizer market and with the firming of those prices, increases of those prices, we have seen some increase in market, the rock as well as sulfur, which has jumped going into the fourth quarter on a worldwide basis.

So I think a combination of the increase in the raw materials, as well as some of the increase in value that we see going forward helped support where we have gone now and announced some of the price increases here, one with the – in fact, in the fourth quarter and the second effective the 1st of January.

Christopher Butler – Sidoti & Company

And for modeling purposes, how quickly should we expect those price increases to really affect your top line? Is this something that we can see a boost here for the fourth quarter with your fourth quarter announcement or is it going to take a little time?

Randy Gress

Yes, Neil?

Neil Salmon

Well, we have indicated that we maybe a little behind the pace in the fourth quarter and that's why suggested a moderate decline in operating income margin for the fourth quarter. But by the second quarter, which is also when most of the discussed impact will impact because of the timing of purchases, we expect to fully offset the additional cost increase that we outlined.

Christopher Butler – Sidoti & Company

And looking at your suppliers, you had mentioned that you are doing the majority of your purchases through three suppliers. Are those – is this the situation that you are able to get the raw materials you need from these three suppliers or are you still looking to expand the list from five to something greater than that?

Randy Gress

Yes, just to be clear, what we've done in Mexico is we have used rock from five different suppliers during 2010. We had announced earlier that we had concluded agreement with one supplier on a long-term arrangement and looking to work closer [ph] with arrangements for two others. That will take care of what we believe most of our supply requirements in Mexico for rock with some additional room there for some additional supplies from the others, as well as some other new supply opportunities.

Christopher Butler – Sidoti & Company

Thank you. I'll go back in the queue.

Randy Gress

Thanks, Chris.

Operator

Your next question will come from the line of Edward Yang from Oppenheimer.

Edward Yang – Oppenheimer

Hi, good morning. Just on the reformulation risk going forward, I believe STPP was already down to only about 12% of your total revenue in 2009. What is that at this point and how much more do you think is that risk of being reformulated?

Randy Gress

Yes, Chris for the – I mean, I'm sorry, Ed, for the 2009, we had STPP and detergent grade acid at roughly 12% in 2009, roughly within our mix, the STPP amount is roughly 10%. And certainly in the U.S. and Canada, we announced previously that we completed the – or we've pretty much seen the completion of any reformulation within the auto dishwash – from auto dishwash area, where there we had still some remaining volume within the I&I market, which certainly had more stability based on the performance requirements there.

And then Mexico and the rest of Latin America, right now most of our volume for the quarter is with the regionals and the regionals are fairly stable, based again on the performance characteristics of the STPP and the home laundry detergent. So we expect that to be relatively stable with maybe some upside, order pattern type possibilities with some of the majors [ph] that still have.

Edward Yang – Oppenheimer

Okay. And I have a bit of a more detail question now and maybe two-part. But your stock is down quite a bit today and it seems like there is – some people are missing the elephant in the room in that you are raising prices again with a greater sense of urgency across the board and phosphate fertilizer prices are starting to rise again pretty aggressively as well, and in the past that has been very helpful to your margins and your P&L.

First on the GTSP side, now that that fertilizer prices and phosphate rock prices are rising again – I think they are about double from where they were a year ago, where do you think that GTSP margins can settle? When you restated your financials, I think you only provided back to 2008 when GTSP margins were minus, I believe, about 30% or so. Right now, in the low-single digits positive, but I would believe that in '08 it was substantially positive. So what's the min-max range in GTSP margins?

Randy Gress

Yes. Neil, could you answer that, please?

Neil Salmon

Yes. I think, Ed, as you are aware, the biggest impact on – in 2008 was the timing difference between contract prices for raw materials and pricing in the market and that factor won't be there in 2011 and particularly won't be there for Mexico, which is the main change there. So, we won't see as much of an expansion in GTSP as we saw in that prior period. In fact, if we continue to buy – and I think we stated this previously, if we are buying at the market and selling at market, we should see a fairly constant GTSP margin and we aim to minimize – or reduce anyway the variability that we've seen in GTSP margins historically.

Edward Yang – Oppenheimer

Understood, Neil. But – so what do you – where do you think is the stable GTSP margin considering that it was substantially negative in '09 and it just started peaking above the breakeven level in '10? Is it low-double digits, high-single digits?

Neil Salmon

Well, we saw 9% in Q2 and I think that's a good indication for an underlying GTSP margin going forward. In that – yes, high-single digits would be my expectation going forward.

Edward Yang – Oppenheimer

Okay. And then the second part of that question, again related to how your profitability performs in an inflationary environment, it sounded like with your commentary on how you've changed some of your raw materials contracts that you were trying to downplay – again, the sort of margin leverage you saw a couple of years ago when you earned close to $0.10 in EPS and understand that again the rock contract has changed and that was a big source of that increase in EPS. But I was under the impression that back in '08, you changed your pricing frequency to your customer on a monthly basis. Is that still the case? And so, even if the bulk of your raw materials now reset biannually or even quarterly, do you still see some benefit from prices and raw material inflation?

Randy Gress

As far as the situation on the customer contracts, you are correct. For the most part back in 2008, we did convert quite a few of our contracts to a shorter term period. But going forward here, what we are – with the shorter time period with some of the raw material costs arrangements, we would expect to be able to grow pricing through two customers on a shorter-term basis. So that gap of where costs increase versus the customer pricing should be more in line.

Edward Yang – Oppenheimer

And there were probably four or five other contracts – long-term contracts outside of the rock that was, again, more longer term in nature and I think sulfur was one of them. But – so, did you renegotiate those contracts in the – just recently or in last year or do you still, again, maintain some of these contracts which were longer term in nature that were either market minus a discount or at somewhat of a lag again?

Neil Salmon

Well, that – I mean, we still retain the competitiveness of our contracts. But the – yes, there is now just one major contract that's on a fixed annual pricing as I mentioned. And that, as I also mentioned, is referred to Q4 market prices for both sulfur and phosphate rock and uses those as a reference to determining price for the coming year.

Edward Yang – Oppenheimer

Okay. Thank you for your time.

Operator

Your next question will come from the line of Chris Shaw from Monness Crespi.

Chris Shaw – Monness Crespi

Yes. Good morning, everyone. How are you doing?

Randy Gress

Good morning, Chris.

Neil Salmon

Hi, Chris.

Chris Shaw – Monness Crespi

Just – you are still getting rock from OCP through the end or are you done with that?

Randy Gress

Yes, as part of our agreement earlier in the year, we have the option to continue supply through the end of the year, yes.

Chris Shaw – Monness Crespi

You still receive some in the fourth quarter?

Randy Gress

Yes.

Chris Shaw – Monness Crespi

Okay. And then just on the comments around the Specialty Phosphates in Mexico and the margin, I guess giving more of a – give a base or a run rate and refer to through 2Q as sort of something to look at, I would guess in 4Q though, won't – you will then have the impact of water duties and I guess the increased logistics costs, is that right? So, you wouldn't expect a 2Q margin in 4Q?

Neil Salmon

Yes. Sorry, Chris. Thanks for mentioning that. I was going to look for an opportunity to come back to that. The – yes, that was an underlying margin that I referenced and in addition, we have the $1 million of additional transportation costs in the fourth quarter.

Chris Shaw – Monness Crespi

Okay. And this might be a stupid question, but the water duties, that show up in COGS; that's not a tax, right?

Neil Salmon

Yes, it shows up in COGS, yes.

Chris Shaw – Monness Crespi

All right. And then I was – I got distracted for a second, where you talking about 2011 CapEx? I missed the number that you did.

Neil Salmon

Yes, I indicated a first view [ph] on that of $40 million.

Chris Shaw – Monness Crespi

Okay. That's all I have. Thanks a lot.

Randy Gress

Thanks, Chris.

Operator

Your next question is a follow-up from the line of Christopher Butler.

Christopher Butler – Sidoti & Company

Hi, thanks for taking my follow-up. A quick question on the – your acquisition strategy. You had mentioned that you are doing a better job of exporting. I have to imagine that the weak dollar is helping you out there. Considering that you are relatively cost advantaged here in the United States as the dollar gets weakened and your purchasing power overseas is lesser, does that change your plans as far as geographic expansion for acquisition?

Randy Gress

I'd like to point out that it's not just the – I mean, we may have some short term or some advantage here with some weakening of the dollar. But what we are taking to other geographies are the higher value, higher performance, technical specialty phosphates, and I think as far as our growth plans with moving some of these higher, more specialized products to other geographies, we will continue to look at ways to support that growth going forward.

Christopher Butler – Sidoti & Company

I appreciate it.

Operator

Your next question will come from the line of Elie Mishaan from Corsair Capital Management.

Elie Mishaan – Corsair Capital Management

Hi guys, thanks for taking the question. You have mentioned in your prepared remarks that depreciation is going to be going down next year by $5 million?

Neil Salmon

That's right, yes.

Elie Mishaan – Corsair Capital Management

Yes. So, just on that topic, it looks like you reported about $13 million of depreciation this quarter. Do you know how much maintenance CapEx was? Was it around $6 million or so? Is that –?

Neil Salmon

Maintenance CapEx, which we take a broad definition on to include not just regular maintenance, but the base level of CapEx needed to keep operating is around $25 million per annum.

Elie Mishaan – Corsair Capital Management

Okay. So, it's about a little bit more than $6 million for the quarter.

Neil Salmon

Yes.

Elie Mishaan – Corsair Capital Management

So the gap between that $13 million and the $6 million of maintenance CapEx is from the stepped-up assets from LBO?

Neil Salmon

Well, the value – the value of the stepped-up assets is becoming fully depreciated as the main contributor to that – to the lower D&A number next year, yes.

Elie Mishaan – Corsair Capital Management

Right, right. Okay. So if I wanted to look at earnings, let's say, for this quarter, you guys are now at $0.75 as an adjusted number. If I want sort of more of a cash EPS and I adjusted for that D&A, I would get something above $0.90. I'm curious, so that's sort of how guys would look at it in terms of how's that business actually operating, because I guess the – that D&A seems a little bit artificial, not really what's happening in the business, not a real cost. So if we use the maintenance CapEx as sort of the proxy for the real cost in the business, is that sort of the right way of looking at it in terms of how the business is performing, sort of – seems like $0.90 plus?

Neil Salmon

I mean, I'm not commenting on that – on further adjustment to the EPS we put out. I think you are correct in the –

Elie Mishaan – Corsair Capital Management

Mathematics are correct?

Neil Salmon

The – our maintenance CapEx is around $25 million, but for this year and next year, we see – expect a higher level of spend for the investment opportunities that Randy had described.

Elie Mishaan – Corsair Capital Management

Right. And that without the, I guess, sort of growth CapEx? Maintenance CapEx will go up a little bit as a result of that. But there will still be – it sounds like D&A is going to be dropping over time towards the same level as maintenance CapEx, but there will still be that gap, just a smaller one next year, I guess.

Neil Salmon

Yes.

Elie Mishaan – Corsair Capital Management

All right, great. And I think despite what the market thinks, seems like it was a good quarter, showing stability in the business. Thanks and looking forward to speaking with you.

Neil Salmon

Thanks for your comments today.

Operator

(Operator instructions) And your next question will come from the line of Adam France from 1492 Capital.

Adam France – 1492 Capital

Yes. Good morning, guys.

Neil Salmon

Good morning.

Randy Gress

Good morning.

Adam France – 1492 Capital

Is there any way you can speak to sales lost to the whims of order variability, as well as what was lost in the Mexican Specialty Phosphate business due to weather?

Randy Gress

Yes, I think Neil tried to cover that a little bit earlier, Adam. What we saw in the Specialty Phosphate business in Mexico was a decline of $5.8 million overall. That includes an increase of $2 million that we saw in our higher value-added products. So that nets out to an $8 million decline in the other product area and that was split roughly 50% due to order pattern and then the other 50%, half of that was due to reformulation and half of that was due to weather.

Adam France – 1492 Capital

Okay.

Randy Gress

And then what we talked about also was the $9 million that carried – that would carry to the fourth quarter with the GTSP – delayed GTSP shipment.

Adam France – 1492 Capital

Got you, got you. And can you speak to – I've been watching sulfur prices and it looks they were kind of trending lower most of the year. What is the market price done most recently and has there been some sulfur mines that have gone offline that have tightened up the supply above and beyond and what's happening in the fertilizer, the DAP business?

Randy Gress

For the most part, the uptick in the demand and tightness on the sulfur side was driven by the increased demand on the fertilizer side and published numbers out there for the fourth quarter are indicating a number like $160 per ton.

Adam France – 1492 Capital

Okay. And how much would that be up off the – well, off the bottom? I want to say bottom was around under $100, is that correct?

Neil Salmon

A year ago, I believe, in the fourth quarter we were something like $20 a ton. But in the third quarter, we were at $95 a ton. So, it was – it was high in the second quarter, then it drops in the third quarter and now, it's gone back up again in the fourth quarter, which is not what we anticipated earlier in the year, as I mentioned. But – yes, we are not responding to that, because we described.

Adam France – 1492 Capital

Okay. And with respect to order variability, do you have a feel for what you may have lost in the U.S. and Canadian business due to that or did that behave more normally?

Randy Gress

For the U.S. and Canada, it was fairly normal.

Adam France – 1492 Capital

Okay, great. Thanks for your time, guys.

Randy Gress

Sure. Thanks, Adam.

Operator

Your next question will come from the line of Eric Mason from WL Ross.

Eric Mason – WL Ross

Hi, you guys actually answered it. But thanks very much.

Randy Gress

Okay. Thanks, Eric.

Operator

There are no further questions in the queue. I would now like to turn the call back over to Randy for closing comments.

Randy Gress

Well, I would like to thank you and – for listening to our call today, and I also look forward to updating you on our further progress again next quarter. Bye now.

Operator

Thank you all for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.

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