Innophos Holdings' (IPHS) CEO Kim Ann Mink on Q4 2015 Results - Earnings Call Transcript

| About: Innophos Holdings, (IPHS)

Innophos Holdings, Inc. (NASDAQ:IPHS)

Q4 2015 Earnings Conference Call

February 23, 2016 10:00 AM ET


Mark Feuerbach - IR

Kim Ann Mink - CEO


Larry Solow - CJS Securities

Kirk Sigmeyer - KeyBanc Capital Markets

Chris Shaw - Monness, Crespi

Mike Sison - KeyBanc

Adam France - 1492 Capital


Welcome to the Q4 2015 Innophos Earnings Conference Call. My name is Cynthia, and I will be your operator for today’s call. 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 will now turn the call over to Mark Feuerbach. Mr. Feuerbach you may begin.

Mark Feuerbach

Good morning and thank you for joining us today for Innophos' fourth quarter 2015 results conference call. Joining me on the call today is Kim Ann Mink, Chief Executive Officer. Kim Ann will start with comments on her initial views of the business as Innophos’ newly appointed Chief Executive Officer. I will then provide details on our financial results and further comments on our outlook for 2016. Kim Ann will then conclude with some final remarks before we open up the call to your questions.

During the course of this call, management may make or reiterate forward-looking statements made in our February 22 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 risks and other factors, as set forth in the Forward-Looking Statements section; and in Item 1A, Risk Factors, in our Annual Report 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 the press release and via webcast available on the company Web site. In addition, please note that the date of this conference call is February 23rd. Also note that the presentation for this call can be found on our website at in the investor relations events section. 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 Kim Ann Mink, CEO of Innophos. Kim Ann?

Kim Ann Mink

Thanks, Mark and good morning, everyone and thank you for joining us today. As you are aware I recently joined Innophos as CEO and President. Although the Company is facing a challenging industry environment I joined Innophos for because I strongly believe in the common core with our company, FX, integrity, innovative spirit and perseverance. And perhaps most importantly I believe in this company’s future and what we can achieve by channeling our intellectual capital and resources in the right areas and maximizing the values of our business I am honored and excited to be leading this company.

I bring to Innophos 25 plus years of experience across a wide range of roles and breadth of markets and specialty businesses in the chemical industry. Most recently at the Dow Chemical Company which I believe has equipped me with what is required to get Innophos back on track. My experience has taught me that significant value can be created from driving operational discipline while simultaneously maintaining a strong customer and market centric approach and focus on innovation.

I’ll look forward to bringing a new perspective to the company and the opportunity to do things, yes a bit differently. Going forward, it will be about both productivity and growth as the means in which business is done at this company, pushing to address the key business goals and strategic priorities.

Now with so many competing priories as the new CEO I know that I must be laser focused on constructing a roadmap for the strategic direction of Innophos, while at the same time identifying the value creations levers that will drive sustainable improvement in the company’s financial performance all built on the right organization founded on the right talent, the right structure and right processes. Now although I’ve only been at the helm for two months I spent much of this time immersing myself in the business details and getting familiar with the current management team to accelerate my assessment on how we operate today.

As I am two thirds of the way through my plan from my first 100 days, I’d like to share my initial insights as well as key areas and critical actions upon which I am focusing as we pen a new chapter in Innophos journey. In my review of the company to-date as shown on Slide 4, I’ve identified three critical areas of improvement and where changes are very quickly needed. Operational excellence, commercial excellence and strategic growth. These areas of focus will serve as a good framework today and as we progress through the coming months we will be sure to share with you more details and specifics on how we will execute these changes.

Now it's clear that our company needs to become more flexible and agile when market conditions change. In the past quite frankly our inability to quickly adapt to a low demand environment has hurt us. Going forward we will work to improve in part by driving operational excellence or as I’d like to say getting the business fit. Looking through my operational lens then I recognized that we must breakdown the remaining functional silos within this company to eliminate competing goals and objectives. This will lead to better alignment between our financial commitments, our supply and demand plans and working capital projections.

To this end to promote shared accountability of our company’s performance I will be rolling out a clear and meaningful corporate score card based on a shared common set of financial metrics. We already have the wheels in motion for this scorecard, the metrics for which will include volume, EBITDA, working capital, expense, CapEx and ROIC and we’re very excited for full implementation across the business very-very soon. Going forward, our dash board of scorecard will be a critical tool embedded into our revitalized executive sales and operations planning or ES&OP business management process, establishing a more routine and robust integrated business management process founded on a cross-functional collaboration and data driven decision making will ensure a balanced demand and supply that is fully integrated with financial planning such as diligent management operational reviews will be focused on measuring progress, areas for improvements and swift course correction.

Further in the supply chain area, I firmly believe we at this company need a higher level of visibility, a visibility into our full supply chain to help us drive better inventory management we do supply chain cost and risk and ultimately improve customer satisfaction. Done properly this will enable us to respond more quickly and effectively to changing market conditions developing a more nimble and transparent fully integrated end-to-end supply chain process is critical going forward. And finally, in the area of manufacturing we will be implementing a number of lean manufacturing initiatives to drive efficiency reduce cost and increase utilization.

Now briefly turning to the commercial excellence pillar, here we are evaluating a number of ways to improve the infrastructure behind our commercial operations. This includes looking at our customer base by segments, to allow for better more meaningful alignment of our product and service offering with customers’ needs and preferences. This will also help us evaluate our sales channels to ensure we have the appropriate go to market strategy across our products and sales professionals. Further, it is clear that pricing plays a very critical role in driving our performance and should be a strategic capability. This requires the right process and discipline so that we can be more decisive and take swift actions to better manage our price and margins.

In an effort to drive improved pricing performance that is sustainable over time we are therefore working to strengthening our pricing activity by establishing purposeful decision processes branded on robust tools to ensure that we are capturing the value we deliver to the market.

Finally, it's imperative that we also develop the appropriate strategy that will serve as the cornerstone of designing our plans for future growth and profitability. Going forward, it's important to properly manage our current product portfolio, strategically invest in our innovation to develop new complementary products that address higher value market needs as well as evaluate adjacent market for growth opportunities.

In addition, from an internal perspective having a clear strategy and vision is important to an organization because it provides a sense of direction. Simply put, if there is not clarity around directions people will not know where to go. So as a leader I want to motivate my employees about the future capturing both their heart and mind and creating a strong followership of this growth journey.

Now to successfully grow in its targeted markets however a company must both understand and effectively communicate its value proposition. I view marketing as an essential ingredient and key enabler of such growth. Quite frankly marketing at this company has historically played a very limited role in strategy and market decisions. Marketing however is only part of the recipe for growth the other key ingredients is R&D which is an integral factor in developing new competitive advantages. Therefore, developing a robust marketing organization that dovetails with R&D will be crucial to ensuring a sustained focus on growth through market leadership, innovation and customer intimacy.

And underlying all three of these pillars is a foundation, a foundation based on building a strong management team and organization to help move Innophos significantly down a transformational path where we’re thinking and acting based on where we’re going and not where we are coming from. As such this transformation will be bolstered by thoughtfully introducing external talents into key positions to quickly bring required new skill sets, new ideas and external best practices.

So, where do we go from here? On Slide 5 I’ve outlined my immediate priorities and next steps in our journey including the implementation of identified operational and commercial excellence initiatives. In addition, we’ll also finalize our restructuring efforts which are largely complete and as previously reported we anticipate an annual cost savings of $13 million, 75% of which will materialized by the start to 2016. That said, we continue to seriously and actively evaluate the business for additional cost reduction opportunities.

Now as part of my initial review of Innphos I’ve also taken a look at what can be done with the GTSP business. Although we continue to look at ways to minimize the effect of GTSP performance on our business including toll producing for fertilizer company, it's my belief that we haven’t moved fast enough on this project. It is therefore a key priority for me in 2016 that we find the appropriate solution for our GTSP business going forward.

Further the board and I have determined that we will continue to support the dividends at current levels. The business continues to generate significant cash flow in spite of the challenging environment and our balance sheet and liquidity remains strong. As always the board will continue to evaluate our capital allocation policy on a quarterly basis at a minimum to ensure we are investing in the highest risk adjusted return alternatives.

And finally, to identify our longer term strategic priorities and key business goals, I am honored to be working hand-in-hand with my strong board of directors whose knowledge base will help set the tone for strategic decision making and was recently complemented by the deep experienced and valuable perspective of our two new board members, Peter Thomas and Bob Zatta. I look forward to sharing with you more details on this effort in the coming months.

Now before I turn it over to Mark to review our financial performance in greater detail I would like to touch on the market environment on Slide 6. We anticipate that underlying demand through most of the markets will serve -- that we serve, will remain soft throughout 2016. As a result we expect our volumes overall will be relatively flat with 2015 levels. In addition although we expect that increased pricing pressure will impact our margins, we are working to minimize the impact as much as possible. This includes maximizing the benefit of favorable raw material cost to help offset these headwinds.

Now although the market environment is challenging, we are taking clear accountability and collaboratively working across all functions and geographies to overcome the challenges we face increased efficiency and more decisive and swift aggressive management of cost control, price volume and margins, and innovation growth. Really, it's about taking responsibility for controlling what we can control.

Going forward, we are committed to making meaningful changes to drive operational excellence, commercial excellence and strategic growth. Getting it right in these critical areas of focus will ensure that the company operates at its full potential.

I will now turn it over to Mark for additional detail on financial results in the quarter and on our 2016 outlook, Mark?

Mark Feuerbach

Thanks Kim Ann. Moving to Slide 8, we see net sales of $171 million for the fourth quarter 2015 which consistent of $166 million from specialty phosphates and $5 million from GTSP and other. This represents a 12% or $24 million decrease compared to the same quarter last year resulting from very weak demands particularly in the export, food, asphalts and fertilizer markets coupled with unfavorable customer mix and continued competitive pricing pressures due to the strong U.S. dollar which began in the fourth quarter 2014 and continued throughout 2015.

Diluted earnings per share for the fourth quarter 2015 we’re at a loss of $0.24 per share, which included management transition expenses of $0.41, approximately half of which was accelerated non-cash stock compensation. $0.12 for increased specialty phosphate inventory reserves and $0.07 for supplier revision of 2014 costs. Excluding these items and $0.04 of translation income, fourth quarter EPS would have been $0.32 compared to an adjusted EPS of $0.65 for the fourth quarter of 2014.

Just to add some color to the increased inventory reserves, this relates to specialty phosphate products that do not meet food, beverage or pharma product grades and are typically sold into the fertilizer of feed markets. Due to the significant deterioration in both demand and selling prices within those markets which resulted in higher year-end inventory levels, increased obsolescence and net realizable value inventory reserves were required with obsolescence accounting for the majority of the charge in the quarter.

For the full year our net sales was $789 million, a 6% decrease compared to 2014. Specialty phosphate sales declined 4% year-over-year from $762 million to $733 million. GTSP and other sales were down 27% versus the prior year totaling $56 million for the fiscal year 2015.

Diluted EPS for 2015 was $1.29 which included management transition expenses of $0.39, restructuring charges of $0.28, translation expense of $0.13, increased specialty phosphate inventory reserves of $0.11 and a supplier revision of 2014 cost of $0.07. Excluding these items, 2015 EPS would have been $2.27 compared to an adjusted EPS of $3.11 for 2014.

Slide 9 shows the sales results of our specialty phosphate segments. U.S. and Canada specialty phosphates recorded fourth quarter 2015 sales of $128 million, down 8% from the prior year period due to 5% lower prices almost entirely due to unfavorable customer mix and 3% lower volumes due to very weak market demand particularly for food and asphalt markets.

Full year sales of $569 million were down 4% compared to the prior year on 3% lower selling prices due to increased pressures from European competitors on the strength of the U.S. dollar and 1% lower volumes.

Mexico specialty phosphates fourth quarter 2015 sales of $38 million were down 2% from the prior year period due to 1% higher volumes but 3% lower prices, as competitive pricing pressures continues. Full year Mexico specialty phosphate sales of $164 million were 2% below 2014 on lower selling prices due to competitive pricing pressures. Operating income results for our specialty phosphate segments are shown on Slide 10. Total specialty phosphates generated $8 million of operating income for the fourth quarter down $15 million versus the prior year quarter primarily due to the U.S. and Canada segments which I will discuss momentarily.

Operating income margin was 5% for the fourth quarter below the 11% expectation and down 830 basis points year-over-year due primarily to lower average selling prices, higher raw material costs and $3 million of increased inventory reserves due to the deteriorating market conditions. Fourth quarter operating income for U.S. and Canada specialty phosphates was $3 million down $13 million versus the same period last year. Operating income margins in the segment were 3% for the fourth quarter down 940 basis points year-over-year with 530 basis points due to lower average selling prices from poor customer mix and the remainder due to the previously mentioned higher costs from raw materials and inventory reserves.

Operating income from Mexico specialty phosphates in the fourth quarter was $5 million, a decrease of $2 million compared to the same period last year due to lower selling prices and unfavorable product mix within specialty ingredients. Operating income margin was 13% for the fourth quarter down 500 basis points versus the prior year period.

For the full year of 2015, specialty phosphates generated $71 million of operating income which is $39 million below 2014 primarily due to the U.S. and Canada segment which I will touch on in a moment. Operating income margin was 10% for the full year 2015, a decrease of 480 basis points compared to the prior year level. Full year 2015 operating income for the U.S. and Canada specialty phosphate segment was $48 million a decrease of $33 million versus the year ago period with lower selling prices accounting for more than half of the variance. The remainder of the year-over-year variance is due to higher raw material costs, increased inventory reserves and increased cost of goods sold through the changes in fixed and inventories.

Operating income margin was 9% to 2015 down 530 basis points compared to 2014. Operating income margin for Mexico specialty phosphates was $23 million for full year 2015 down $6 million compared to the prior year due to lower selling prices, higher raw material costs and higher planned maintenance outage expenses. 2015 operating income margin of 14% was 340 basis points below 2014.

Turning to GTSP and other on Slide 11, we generated $5 million in revenues in the fourth quarter down 68% or $11 million year-over-year due primarily to lower volumes amidst the weakest fertilizer market demand conditions in two years. For the 2015 full year GTSP and other revenues were $56 million which were $21 million below 2014 again due to weak fertilizer market demands. Excluding management transition expenses and restructuring recorded in other, GTSP and other recorded breakeven operating income for the fourth quarter despite the effects of the $1 million lower cost for market reserves and recorded $1 million of operating profit for the full year 2015, up $5 million versus 2014.

On Slide 12 we see that our effective tax rate for the fourth quarter was 17% and the full year was 34%. The fourth quarter rate was considerably below expectations due primarily to a revision of deferred tax liabilities for deconsolidation adjustments for Mexico tax reporting purposes. We expect an effective tax rate in the range of 32% to 34% for 2016. Depreciation and amortization was $9 million for the quarter flat with the year ago period and full year 2015 up $38 million was $3 million higher than 2014.

The balance sheet items on Slide 13 show net debt decreased sequentially by $5 million in the fourth quarter of 2015 to $195 million. Gross debt was reduced by $73 million during the quarter primarily due to advanced payments from foreign entities in conjunction with a cash repatriation program optimizing foreign tax credits and enabling $266 million of future cash returns to the United States. We are opening up tax returns for some previous years in order to recapture the noted foreign tax credits. This will result in some interest penalties that were recorded in the fourth quarter but those were mostly offset by a tax benefit also recorded in the quarter resulting in only a modest effect on EPS.

Slide 14 shows capital expenditures of $10 million in the fourth quarter and $32 million for the full year 2015. Approximately 75% of the full year capital spending was for maintenance and the remaining 25% was for strategic growth initiatives. The majority of this strategic growth investments were focused on automating packaging at Port Maitland, increasing capacity at Nashville, and improving capabilities at Coatzacoalcos. In 2016 we expect approximately $40 million in capital expenditures due to additional requirements to support the manufacturing portion of the restructuring program and continued investment in the capability of Coatzacoalcos.

With our solid balance sheet and our ability to generate free cash flow on a recurring basis we remain committed to continue to maximize shareholder value. In the fourth quarter we generated free cash flow of $14 million having paid $9 million in dividends on top of the $5 million reduction in net debt. For the full year 2015 we returned more than six times our full year net income to our shareholders via dividends and share buybacks.

Before I discuss our outlook for 2016, I would like to give a quick update on where we seeing and expected the restructuring on Slide 15. We have begun realizing the savings from our restructuring efforts and are in line with the 50% realization expected in the fourth quarter, recording a $1.6 million sequential cost reduction. As we mentioned last quarter 85% of this restructuring was booked in the U.S. and 15% in Mexico. We still expect 75% of the $13 million annual savings to materialize at the start of 2016.

Now moving on to Slide 16, 2016 outlook. It's clear that 2015 was a very tough year particularly during the fourth quarter, in terms of the market conditions in which we were operating and the persistent headwinds which we have discussed on our calls each quarter. Many of these headwinds are expected to continue into 2016. Specialty phosphate volumes are expected to decline 1% to 2% for the full year of 2016 compared to 2015 due to some STPP reformulation that will affect our Mexico segment. Full year 2016 specialty phosphate margins are expected to improve from the 10% recorded in 2015 to a range of 11% to 12%, driven by savings from the restructuring program and favorable raw material costs which in total are expected to exceed continued pricing pressures and expected volume declines.

Market phosphate lot prices were flat sequentially in the fourth quarter but it declined approximately 12% in the first quarter of 2016. We saw sulfur market prices decrease sequentially by 20% in the fourth quarter and settle another 14% lower for the first quarter of 2016 given the continued weak demand in fertilizer markets. We expect a reduction in 2016 of $4 million on our annual supply contract that we set on January 1, 2016 recouping two thirds of the increase experienced in 2015 compared to 2014. Due to the current weak fertilizer market conditions we expect GTSP and other to record an operating loss between $1 million to $2 million in the first quarter of 2016.

Now back to Kim Ann.

Kim Ann Mink

Thank Mark. So in conclusion turning to Slide 17, Innophos has a leading position in many product markets and serves top tier customers. Despite the challenge we’re facing in the industry our financial performance remains relatively stable and our cash flow generation strong. We will continue to return value to shareholders through our dividend as well as other avenues according to our disciplined capital allocation strategies.

Now although there is much work to be done I continue to be very excited about what the future holds. With renewed focus and energy, I am confident that we will take this company to the next level as an industry leader and growth oriented company, one that is able to quickly make well informed decision, seamless execution, proving value for all of our stakeholders.

I thank you for listening today and we’ll now take your questions, operator?

Question-and-Answer Session


Thank you. We will now begin the question-and-answer session [Operator Instructions]. And our first question comes from Larry Solow with CJS Securities. You may begin.

Larry Solow

Kim Ann welcome to the company, thank you for the great comprehensive overview and your thoughts. Just one question I had, just I realized you’ve been there a couple of months I mean during less than that, surprises and -- what sort of the biggest surprise you’ve seen from an outsider and now an insider on maybe on the positive side and on the negative side?

Kim Ann Mink

Thanks Larry also for welcoming, and I look forward to talking to you in the future as well. From a positive side, I talked about the perseverance, the folks at Innophos really would like to see us turn this ship around. So that’s very-very exciting to see that I’ve got a group of very excited and passionate people who want to not have another call like this again discussing such a fourth quarter.

I think from this side and it really goes in with the things I was talking about. Now from an operational [indiscernible], I think there is a bit more gap than I had thought there would be, but those things, some of which are low hanging fruits. So, I comment very actually excited and would like to look at it more as opportunities than major challenges because I know how to do this and getting the right, best practices and some external talent coming in, I know we can make an impasse there and I’m very excited about talking to you about this when we announce our first quarter earnings in the spring.

Larry Solow

That was my next question -- my next question was sort of without giving exact timeline or anything, but just thoughts on when some of these initiatives might start coming into play?

Kim Ann Mink

No Larry, great question. We are making a decision this week actually with bringing in some external experts into the company to help us with that. So I’ve already done my evaluations and the various experts out in the industry as you can imagine there are many and I have a lot of tentacles out there with the various companies I’ve work for. So some good people to help us and we will launch even deeper dive effectively March 1. So I feel confident that by the end of the -- by the next time we meet, we will have some more specific details to share with you Larry.

Larry Solow

And just one more last question just on the quarter and more importantly the outlook. Obviously volume has been lackluster for several years and that’s mostly a macro thing, hopefully we continue to inevitably -- I think what drew us to the story several years back was the pricing power or some pricing power you guys have had, clearly that’s not so much the case today. Just trying to break out, is there still an ability for you to -- I know last year there was some pricing increases in certain of your more proprietary markets. Is that ability still there?

And then obviously the offset is some of this more dollar strong, dollar related and foreign competitors coming in. But how do you view those hand-in-hand as you look out to ’16? I realized there is a moving target. But these prices declined I think 5% in the quarter which was ahead of the 3% of the year. Do you see those similar declines in ’16, or do you think maybe we can slow that down a bit at least?

Kim Ann Mink

I think the pricing pressures will continue. But as I talked about on one of the pillars that I am focusing-on on the commercial excellence, we really need to make pricing excellence a strategic capability, and it's something that I think we’ve taken our eye off the ball a bit. Value based pricing really -- seeks to really truly, we won’t need to optimize revenue and profitability and we need to better understand and that goes hand-in-hand with customer segmentation on really understanding what the customer is willing to pay for based on the value of our offering.

That needs to be very closely linked and dovetailed with the right tools to ensure that our commercial organization is looking at things, whether it's competitive analysis reports, waterfall analysis, there are some areas that we’ve got to improve Larry, that’s not going to take away the pricing pressures that we’re going to feel with some of the competitors, I can’t necessarily control that, but what I can control is what I am doing to offset that. And I am hoping to have further detail in our first quarter earnings release about what we’re doing there because I do believe we can improve there.


And our next question comes from Kirk Sigmeyer with KeyBanc Capital Markets. You may begin.

Kirk Sigmeyer

Just had a couple questions, one on sort of the cadence of the margin improvement for specialty phosphate, you guys expect 11% or 12% margins and you mentioned some of the tailwinds that you expect to help kind of get you there in addition to the restructuring. But how should we think about that in terms of the raw material benefit mismatch with pricing, how does that lag worked its way through over the year? Should we expect a snapback pretty quickly, or how do we think about that first half versus second half?

Kim Ann Mink

I’ll start with that. Going into 2016 we’re seeing a slight change with our raw materials, which is a good thing. In the U.S. our PPA contract has been set for January 1 and we expect a $4 million cost decrease on this, recouping two thirds of this 2016 increase. Rock is fairly stable sequentially and in the fourth quarter and has declined approximately 12% in the first quarter and then we were seeing some further decreases in sulfur as well. So that is going to be critical that we reap the benefit of that. Quite frankly Kirk we also have to take a hard look at our controllable expenses to even further offset some of the pricing pressures to ensure that our margin stays -- that we stay in front of that. And that’s really with a sense of urgency, and we’re also looking at our working capital to determine if we can release some additional cash there. Mark, if you want to add anything further?

Mark Feuerbach

Yes, the only thing I would maybe add, I think Kirk asked about the lag as well. Our lag is typically it takes about a quarter from the time we spend the lower price to obtain the raw materials to when we actually get to see it in the P&L.

Kirk Sigmeyer

And do you guys think about the long-term margin potential any differently in this business, or how do you think about that? And then one other follow up I had on the GTSP, just any additional color maybe you might be able to provide in terms of the options and how you guys think about those now pros and cons of each going forward?

Kim Ann Mink

Yes, well as far as the margin potential going forward I think really focusing on that marketing piece and really trying to shift the mix that we have to those higher value segments and you’ll see some of that in the coming quarter as we start to launch some new products in some higher value more niche applications. Now as far as GTSP we continue to look at ways to minimize the effects, we hear you, we here the market asking about that. Again, I don’t believe we’ve moved fast enough with that and we are looking for solution, it’s a key priority for 2016.

Now I think it's important to mention though and I think all of you know on the calls, GTSP is a co-product stream of our PPA operation in Mexico. It does provide an outlet for low grade asset and gives us a good cost position for PPA. So really what we’re trying to do is look out ways to reduce the GTSP earnings volatility and that really is focusing on structuring the business perhaps as a tolling operation. So, we hear you, we know we’ve got to do something there, we want to do something there. Anything to add Mark?

Mark Feuerbach

No, I think you summed it up very well Kim Ann.


And our next question comes from Chris Shaw with Monness, Crespi. You may begin.

Chris Shaw

I think question on the outlook for specialty phosphate guidance I think 1% to 2% volume decline which is attributed to STPP in Mexico. Couple of questions around that and does that suggest that U.S. and Canada specialty phosphate volumes are going to be pretty much flat for the year, and if so what gives you confidence in that given that I think it was down a little bit and did seen and I think they were flat in ’14 despite an easy comp over there some of the plant issues from the year before?

Mark Feuerbach

Chris this is Mark. So, you’re right if you look at the product lines that make up the specialty phosphates the STPP is the piece that’s driving that potential 1% to 2% decline which then implies that we should be fairly flat on both the Mexico and the U.S. and Canada other specialty phosphates which would be the pure phosphoric acid or the specialty ingredients. We certainly are not expecting to have a repeat of the type of the demand environment that we saw in the fourth quarter here. We saw some really pretty significant wild swings, one in particular the intervals going into the asphalt markets those volumes were actually down 61% year-over-year and that of course was due to a lot of uncertainty about whether the highway trust funds would get replenished. That was getting bounced around throughout most of the second half of 2015 and actually didn’t get resolved until December. But thankfully they put in a new five year funding program. So that should really support some increased business in that regard.

Chris Shaw

I guess maybe what I was thinking about more in general is the demand from your major food customers and I know there is a trend for consumer to move away from more processed food or food with more additives. I mean, is that something you’re seeing in volumes, or is that just creating more flat environment or are you actually seeing declines from some food partners who are having to reformulate -- I mean I think because General Mills is at least business adjusting [ph] than moving all of the natural flavor and natural coloring, I don’t know if that had all that impacts on preserved and all, but what are you guys sort of seeing in that end?

Kim Ann Mink

I can take that. Food manufacturers, they continue to recognize the nutritional value along safety record and performance benefits of phosphates. I think you would imagine basically without phosphates won’t look or taste the same due to the phosphate key properties and functionality and FDA continues to include many phosphates in their list of substances that maybe used as ingredients in processed products labelled as organic.

So, being pragmatic though the organic natural push certainly has some effect on our growth rates with one source indicating that organic is capturing 55 basis points of the 70 basis points population gross market, but we are seeing pockets of growth on innovative products in some export markets and we do expect to support future innovation growth with investments in technical service and commercial development as well as geographic expansion.

Chris Shaw

Food that organic -- qualifies as organic some of your phosphate products actually do qualify for that, I wasn’t sure about that?

Mark Feuerbach

Well, that’s the headwind that’s out there, right. So, folks looking for organic or for clean label is what puts some of the pressure on our customers’ products and that -- you can sell an organic product though that includes some phosphates in it, yes.

Chris Shaw

Than moving on to, it didn’t seem like you guys bought back any shares in the fourth quarter, and I just trying to get on that and you bought a significant amounts for the full year. But I know just wondering here maybe Kim Ann’s thinking on the share buyback going forward? I know the dividend is important, so maybe that becomes a priority but just curious of your thoughts.

Kim Ann Mink

Sure and talking about our capital allocation strategy first, management and the board believe the current level is manageable given the strong cash flow generation of the business with respect to the dividend. And we don’t see a reason to adjust that piece. As I told you we will be doing a deeper dive in our strategic reviews to see if any changes are wanted, but our capital allocation priority still remained the same. So our first priority for capital allocation remains investing in support of growth objective. And as we’ve demonstrated through regular dividend payments, we also believe that cash we return to the shareholders are an important component of our value creation strategy.

With that said, from a buyback program, we think we achieved the desired outcomes with our 2015 programs, putting the balance sheet to work and increasing our net leverage from 0.7x in 2014 to 1.8x today when adjusting EBITDA for restructuring and management transition cost. We are always looking at our capital allocation priorities to maximize shareholder returns. But as the new CEO, I want to do a deeper strategic review before I make a decision on any other buyback programs.


And our next question comes from Mike Sison with KeyBanc. You may begin.

Mike Sison

Just I’ve missed a little bit at the beginning of the call. But when you think about operating margins for specialty phosphates, I think it ended the year at 10%, the business has been pretty steady in the mid-teens for quite some time. So, from your outside perspective when you think about ’15, how much of that was maybe self-inflicted to some degree and fixable? And how much of that is the external environment which for what it’s worth has played a lot havoc with several chemical companies this year, so you’re not alone. But just your perspective from that end?

Kim Ann Mink

Yes, I mean, the headwinds were very strong so I see them, I come from the chemical industry as you know, I feel them and live it every day and we all bear that cost, don’t worry. So I think where we have a bit of a gap is how we can control our own destiny and those are the pieces that I am really trying to focus on. Again really tightening our belt from a cost perspective, really tightening our belt from an efficiency and productivity perspective, working that back into the DNA [ph] of the Company if you will. Just as a way we do business in good times and in bad times.

So again I said in the beginning, it's about both productivity and growth, not either or. Quite frankly, when external markets are tough some worth can show, and those are the things that we found gaps in and we’re very excited about making sure we no longer have those gaps in 2016.

Mike Sison

And then maybe philosophically, I know your time at [indiscernible], running specialties was well documented. And so if you think about the specialty phosphates business, what do you see in that makes you feel that it's a good specialty business that you can maybe get back on track, what are the characteristics that you from the outside appreciate?

Kim Ann Mink

Sure, and now that I am on the inside I continue to appreciate it as well. I think what I saw in the business is that over time this company has actually shifted its mix to more of the specialty ingredients. And you’ve seen that, I actually looked historically on how that mix has changed. And they made great progress. And I think we can continue to do that. But what we need there and I mentioned this earlier in the call, it will be about applications development and really understanding not when we talk about markets truly down to the market segments and the sub-segments to ensure that we are playing in all of the right segments including ingredients, food, pharma and I think that will be important.

I’ve seen this in other businesses where perhaps the business might get a big stagnant, it sits with the tried and true applications, yes, those will ultimately mature over time and we’re seeing that.

But I think it's that constant reinventing ourselves, that’s just with the core business. When we get that we need to get that more thick [ph] and into higher value market segments, that notwithstanding concurrently we need to continue to look at adjacent markets where we leverage our technology and then expand our basket of tools.

So again it's really about making sure we reinvigorate marketing, tech service and R&D. Again, a lot of new applications development with some of our existing technology.

Mike Sison

And then if I were to just ask little bit more directly on some of the headwinds. The stronger dollar has put the European and Chinese in a little bit better position in specialty phosphates and it's been a challenge for you and some competitors in terms of being able to price accordingly. When you think about the cost savings program that you’ve initiated this year, will that get you back in the game where you can compete a little bit more effectively in some of those products as we head into ’16, and maybe ’17?

Kim Ann Mink

Yes I believe so, and you will hear more about that when we do our earnings call later in the spring. But I believe still in all the reasons why we’re doing this so quickly, we need to do this.

Mike Sison

And last question I apologize, but ICI [ph] was pretty positive on their call regarding the long-term prospects especially phosphates, it's kind of thinking it's a nice growth industry. When you think about your business three to five years from now, what type of growth off the cuff do you think the industry can provide?

Kim Ann Mink

Right now we’re really going to be looking at some of that much more deeply in our strategic review which again within the next week it’s starting in much deeper dive with some external experts. So I’ll be able to talk about that in the coming months.


And our next question comes from Adam France with 1492 Capital. You may begin.

Adam France

Couple of accounting questions here, just wanted to make sure I am understanding everything. When I am looking at your full year specialty phosphates margins mark of 9.7%, does that include this 12% specialty phosphates obsolescence and net realizable value inventory in there?

Mark Feuerbach

That does, yes.

Adam France

Do you know what that number was on a pre-tax basis?

Mark Feuerbach

It was a little over $3 million, I think it was $3.3 million.

Adam France

$3.3 million, okay. And then with respect to interest expense in 2016, you mentioned being $2 million lower. Are we working off of the full year ’15 number that has those penalties that you mentioned, or without those penalties, how should I think about that?

Mark Feuerbach

The $2 million reduction is just the value of that $73 million that we repay, that wouldn’t adjust out, there was approximately another $1 million of interest penalties in 2015 as well that certainly wouldn’t repeat itself.

Adam France

So looking at your -- let’s just keep this simple here we add 7.5 -- so you’re saying there is $1 million in penalties in that 7.5 and then are we doing $2 million beyond that as well, so we’re all the way down to $4.5 million is that --?

Mark Feuerbach

Probably the best way to do it since the interest was ramping up during the year as we were borrowing to do the buybacks, would be take the fourth quarter and pull a million out for the tax repatriation program and then whatever that number is annualize it and subtract it to for the interest savings that we’ll get.


And we have no further questions at this time. I will now turn the call over to Kim Ann Mink.

Kim Ann Mink

Thank you, Cynthia. And thank you, all for joining us today. And I really look forward to updating you on our progress, on our first quarter earnings call in the spring. Thank you.


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

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 All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!