Innophos Holdings, Inc. (NASDAQ:IPHS)
Q1 2016 Earnings Conference Call
April 28, 2016, 10:00 ET
Mark Feuerbach - IR
Kim Ann Mink - CEO & President
Han Kieftenbeld - CFO
Larry Solow - CJS Securities
Chris Shaw - Monness, Crespi
Welcome to the Q4 2015 Innophos Earnings Conference Call. My name is Sherry, and I will be your operator for today’s call. [Operator Instructions]. I would now like to turn the call over to Mark Feuerbach. Mark you may begin.
Good morning and thank you for joining us today for Innophos' first quarter 2016 results conference call. Joining me on the call today is Kim Ann Mink, Chief Executive Officer and Han Kieftenbeld, Chief Financial Officer. Kim Ann will start with comments on our first quarter results and provide updates on our progress in executing our strategic initiatives.
Han will then provide details on our financial results and further comments on our outlook for the remainder of 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 April 27 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 website. In addition, please note that the date of this conference call is April 28rd and the presentation for this call can be found on our website at www.innophos.com 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 has been an important one for Innophos as we began the construction of a blueprint for the long term strategic direction of our company while simultaneously identifying medium term levers that will drive substantial improvement in the company's financial performance all driven by focusing on the three strategic pillars that are the core of our transformation, operational excellence, commercial excellence and strategic growth.
We have made it very good progress from this quarter and executing against these initiatives and it is reflected in our financial performance as we experience. Significant sequential earnings and margin improvement.
Now as shown on slide 5, the first quarter 2016 adjusted EBITDA was $31 million which was in line with the first quarter 2015 and up 39% sequentially. This results in a year-over-year EBITDA margin increase of 90 basis points to 17% up 330 basis points sequentially. So our adjusted diluted earnings per share for the first quarter was $0.66 compared to $0.64 in the same quarter last year and $0.32 in the fourth quarter of 2015.
Furthermore cost improvements from the restructuring programs implemented in the third quarter 2015 were in line with expectations with $2.5 million of lower costs realized in the current quarter against the third quarter of 2015 baseline. Now given that challenging market conditions are expected quite frankly to prevail throughout 2016 we will continue to execute cost reduction actions and productivity initiatives. These results clearly demonstrate the improvement that we have been making to increase profitability and manage cost much more effectively and I'm confident that this momentum will continue as we move through 2016.
With that said, I would like to provide an update then on the progress that we've made on our strategic pillars. Turning to slide 6, in the operational excellence area we are making investments to improve our supply chain and manufacturing processes in order to increase our operational efficiency. Our supply chain initiatives include improved sourcing strategy, of that a forecasting and planning process and transforming our approach to inventory management.
On the manufacturing side we continue to evaluate our manufacturing practices to meet customers' needs with increased efficiency and adaptability to accommodate evolving market trends through targeted investments, application of principles and manufacturing resource optimization.
Moving to slide 7, adaptability is also increasingly important in our commercial excellence pillar as we strive to identify, understand and meet the complex and ever changing needs of our customer base. Commercial excellence initiatives are underway to segment our existing and target customer base, establish pricing discipline and achieve greater focus on managing our margins. We're also investing in sales tool, support and best practices to ensure our commercial organization is appropriately equipped to proactively meet customer needs and effectively realize the value of Innophos products and expertise to it's customers.
Further a comprehensive strategy development is also underway to drive future growth performance. This involves as shown on slide 8, a multifaceted approach. This approach includes detailed market analytics to identify external trends and opportunities, active management of the existing portfolio. Market specific competitive analysis, identification of market and product adjacencies and geographic expansion attractiveness and M&A growth opportunity identification. This approach is actively informing development of our go forward growth strategy by building upon our existing business capability and customer relationships while capturing both organic and inorganic growth components.
Now while we're focused on developing our long term view for strategic growth. We remained poised to capitalize on near term action and opportunities so as we continue to execute our strategic priorities at these early juncture we believe that we will see measurable benefits for the company in both the near and long term which will start to take effect later this year.
Now finally underlying all three of our strategic pillars is of course a foundation based on building a strong management team, a team to help move Innophos significantly down a transformational path by bringing required skill sets, new ideas and external best practices. So to that end as shown on slide 9, Han Kieftenbeld who you will have a chance to hear from shortly recently joined Innophos as our Chief Financial Officer.
He has a proven track record as a financial leader with substantial depth and breadth of experience within the food ingredients and of specialty chemicals industry. Han has driven operational change in both growth and turnaround businesses and has successfully developed and implemented business and functional strategies. His experience is well suited for a company and I'm thrilled to work alongside him as we execute our strategic initiative.
Last week we also announced that Amy Hartzell joined our team as Vice President, Supply Chain and Purchasing. Amy is a seasoned professional in supply chain management and has an extensive background in the chemicals industry. She successfully led an organizational design transformation of the Center of Excellence at Dow Chemical and has a abundance of experience in developing and implementing Global supply chain and Operational improvement programs.
I am very confident that Amy will be a catalyst for change as it relates to our operational excellence pillar. I look forward to both Han and Amy's contribution and believe that they will both prove to be driving forces in our transformation as we execute our strategic priorities and strive to improve financial performance and create value for all of our shareholders.
Now before I turn it over to Han to review our financial performance I would like to briefly discuss the market environment on slide 10. Now as we discussed last quarter the demand environment quite frankly throughout most of the markets we serve has been remains to be soft, based on our current views we are expecting this softness to continue through the remainder of 2016. As a result we expect to volumes in 2016 to be down 3% to 5% compared to 2015 levels. Further the pricing environment in the industry continues to be highly competitive causing increased pricing pressures that are impacting our margins.
Having said that though, raw material cost continued to turn favorable and we're doing everything in our power to capitalize on this to partially offset these headwinds. Now despite a persistently challenging market environment we’re making progress in our strategic initiatives and have achieved sequential improvement on both the top and bottom line. We feel very good about where we are today versus where we were in our last call. So there is still much work to be done.
We are taking responsibility for controlling what is within our control and are making meaningful improvements to overcome the challenges we face and remain very committed to creating value for all of our shareholders.
With that said then, I like to now turn it over to Han for additional details on financial results of the quarter and on our 2016 outlook. Han?
Thanks, Kim Ann and hello to everyone joining us today. I joined the company at the start of the month and so far I’ve been very impressed with the talent and capability on both the senior leadership team and the financial function. I look forward to meeting everyone in the near future.
Now on slide 11, turning to our first quarter 2016 financial results. And by way of preamble let me note that we will emphasize adjusted earnings per share in our presentation as well as adjusted EBITDA rather than operating income. EBITDA is the profit measure on which management is being measured. So we believe alignment in that regard to be very important.
For the first quarter 2016 we generated adjusted earnings per share of $0.66 which is slightly up from $0.64 in the first quarter of 2015 despite lower net sales and up significantly from $0.32 in the fourth quarter of 2015. Net sales of $190 million were down 6% compared to the first quarter of 2015 but up 11% sequentially. Year-over-year demand continue to be negatively impacted by currency headwinds due to the stronger U.S. dollar and generally intensified competition in lower margin, less differentiated product applications.
The improvement in sequential sales was helped by the impact from seasonality with the first quarter typically being stronger than the fourth quarter of any given year. Gross profit margin at 22% of sales improved year over year by 137 basis points due to lower variable and fixed manufacturing expense as a result of cost controls and no plant maintenance stoppage cost in the current quarter. Adjusted EBITDA for the quarter of 31 million [Technical Difficulty] sequentially.
Yielding in margin 17% up 90 basis points compared to the prior year quarter. Sequential improvement in adjusted EBITDA underlines improvement in our cost controls. On note we are pleased to report that the restructuring actions taken are in line with expectations generating a savings of 2.5 million compared to the third quarter 2015 baseline despite being mostly offset in the first quarter by increased professional fees for the [indiscernible] program, strategy consulting, reestablishment of short incentives, a target and overlapping [indiscernible] cost.
Now turning to page 12, which is first quarter estimated EPS bridge, this slide demonstrates the element that drive the year-over-year improvement of adjusted EPS by $0.02 or 3%. System would be a [Technical Difficulty] principle driver for the year-over-year improvement were short fall in volume mix for a total of $0.16 per share unfavorable offset by the favorable impact of cost for a total of $0.15 per share.
The transactional effects from FX amounted to a favorable $0.07 which is a result of the weakened Mexican peso against the U.S. dollar. Operating results as we represented at the EBITDA line were down 1% per share year-over-year. In the table underneath we can see that non-operating results contributed total of $0.03 per share in part driven by the lower number of shares outstanding following the completion of the share buyback program in 2015 which resulted in approximately 2 million fewer participating shares.
Turning to slide 13 to discuss sales revenue, net sales for the first quarter 190 million, 93% of which was from specialty phosphates and 7% from GTSP and other. A very similar composition compares to the same quarter last year. Total net sales decreased 6% compared to first quarter 2015 due to 5% unfavorable volume and mix and 1% lower price. Specialty phosphate sales declined 7% in the quarter versus prior year, a year-over-year shortfall was seen in both the U.S., Canada at minus 7% and Mexico at minus 4% with the shortfall in volume and mix predominately seen in the U.S., Canada segment. This was partly offset by improved average selling prices. The latter was a result of reduced sales in lower margin product applications.
GTSP and other sales which represent 11% of total sales improved slightly by 2% in the quarter compared to the prior. Volume and mix improved by 18% but this was mostly offset by a reduction in average selling prices due to weak [indiscernible] market conditions.
Moving on to slide 14, taking a look at sequential sales improvement. Net sales increased 11% compared to the fourth quarter of 2015 driven by an improvement in sales volumes due to seasonality. The first quarter is typically stronger than the fourth quarter as we earlier commented. Specialty sales or specialty phosphate sales increased 7% sequentially and 5% higher volumes and a 2% improvement in average selling prices. Quarter over quarter improvements were seen in both the U.S., Canada and Mexico. GTSP and other sales more than doubled versus the prior quarter which was sales volume driven.
As a reminder Q4 2015 was the lowest sales quarter in the year for this segment. Moving on to adjusted EBITDA on slide 15. We are reporting first quarter 2016 adjusted EBITDA of 31 million which is in line with the first quarter 2015 despite lower year-over-year sales which we discussed just a moment ago. Adjusted EBITDA yielded a margin of 17% of sales up 90 basis points compared to the prior year quarter. Volume and mix along with average selling prices were below last year, the unfavorable impact from sales was offset by lower input costs from rock and Sulphur, also lower manufacturing cost due to a combination of cost control measures, restructuring actions and a phasing of annual maintenance stoppage along with a small favorable FX impact.
SG&A cost were favorably impacted by the result of restructuring actions taken in 2015 which were offset in the first quarter by the items I noted earlier. Sequentially, adjusted EBITDA was up 39% on the back of improved sales and lower cost. On the next slid, slide 16, we have provided a bridge from the first quarter 2015 to the first quarter 2016 to illustrate the impact to our adjusted EBITDA for specialty phosphates which represent 93% of sales and also GTSP and another which represent 7% of sales. As previously commented year-over-year adjusted even for the total company was flat. Now in the first quarter 2015 specialty phosphate generated an adjusted EBITDA of 32 million while GTSP and other generated a $1 million loss for a total of 31 million.
In the first quarter 2016 specialty phosphates generated an adjusted EBITDA of 31 million a $1 million decrease over last year while deep GTSP and other broke even, a $1 million over last year. Reported quarter one adjusted EBITDA was in-line despite lower sales. As a result adjusted EBITDA as a percent of sales improved for both specialty phosphates and GTSP and other.
Turning to slide 70, net interest expense in the first quarter 2016 was 1.8 million in-line with expectations. This compares to 1.2 million in the same quarter last year. The slight year over year increase was driven by higher debt levels following 2015 share repurchases. Our effective tax rate for the first quarter were 35% which is just somewhat higher than the 32% to 34% range that we had forecasted.
This compares to 33% for the first quarter of 2015. The somewhat higher than forecasted tax rate is due to a discrete inventory reserve adjustment non-deductible for Mexican income tax purposes. Capital expenditures in the quarter were 8 million which is below what we have planned partly due to a change in phasing a plant maintenance stoppage to Q2 instead of Q1, for the full year 2016 we expect capital expenditures to be approximately 40 million due to additional requirements to support city to manufacture initiatives and restructuring along with continuous improvement in our plants.
We continue to evaluate our options for uses of cash including share repurchases though we have no specific plans at this time to launch a share buyback plan. In the first quarter net debt was 240 million, a $19 million sequential increase due to tax payments made in the United States. After recognizing revenue received from foreign subsidiaries in the fourth quarter of 2015. As a reminder during last quarter we implemented a cash repatriation program to allow the optimal use of cash globally in a tax efficient manner. The program enables 266 million of future cash returns to the United States enabling a repayment of third party debt and funding of future investments.
Moving to slide 18, 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 first quarter we reported free cash flow of negative $11 million. When excluding the $20 million outflow for taxes free cash flow improved $13 million year over year. This was largely due to an inflow from working capital and more specifically an improvement in payables. The $20 million in taxes is part of the program that we just discussed on the previous slide.
Now turning to slide 19, I will discuss our outlook for the second quarter. Overall, we’re expecting Q2 to be broadly in-line with Q1. As we anticipate headwinds that we experienced in the first quarter to persist in the second impacting our sales.
For the full year we are expecting specialty phosphorus volumes to decline by 3% to 5% compared to 2015, primarily due to a decline in lower margin less differentiated products in the U.S. and its origin application reformulation that is expected to affect our Mexico operations.
Market demand in 2016 is expected to remain challenging. In the U.S. and Canada home markets due to continue pressured on packaged foods and soft drinks. We expect to see the impact of some softening of input cost which may somewhat offset headwinds in sales and benefit our gross profit margins and adjusted earnings. Market phosphate rock prices declined an estimated 12% in the first quarter compared to the fourth quarter of 2015 and we expect to see the effect come through in the second quarter.
So for market prices decrease by 14% in that same period. We expect to incur in an estimated $4 million in stoppage cost in the second quarter as some of our plants will shut down for schedule maintenance. In 2015 these costs were largely taken in the first quarter. Given the continued challenging market environment we remain focused on controlling our costs wherever possible in order to offset these headwinds.
We expect to continue to see the effects of the restructuring actions taken last year in our upcoming quarter two results and we'll continue to review opportunities to establish a more fit for purpose organizations and ways of working.
With that I'll turn a call back over to Kim Ann for final remarks.
Kim Ann Mink
Thanks, Han. In conclusion. I'd like to say we're very pleased with the progress we made in the first quarter and remain extremely optimistic on the outlook for Innophos. Despite the challenges we're facing in the industry our financial performance has improved sequentially and we’re confident that we are taking all of the necessary steps to continue to improve our performance. We made two excellent senior level hires recently with knowledge base and skill set, advance our collective management team to the next level, creating a solid foundation upon which we can effectively execute our strategic pillars again in the areas of operational excellence, commercial excellence and strategic growth.
We remain focused on making meaningful changes in the business by taking responsibility for controlling what we can control. We are very committed to getting it right in the three critical areas that we have defined which will lead to unlock Innophos' full potential creating value for all of our shareholders.
Thank you for listening this morning and we will now take your questions. Sherry?
[Operator Instructions]. And then our first question is from Larry Solow of CJS Securities.
Just a couple of quickies, just on the outlook for the 3% to 5% drop in volume it's a little worse I guess in the 2% to 3% is that mostly some of you guys walking away from some lower margin business, is that good way to characterize that and different or have things gotten a little bit worse?
Kim Ann Mink
Yes. We did reduce our sales in lower margin and less differentiated products and that’s aligned with our effort to manage our margin quite frankly and as part of our endeavor to shift the mix of this company to higher value, more differentiate products and applications in market segments so that is a big piece of it. So consistent with the strategy of making this company more specialty ingredients company.
So Larry and if you look at that maybe just to provide a little bit of color commentary -- we talk about the segmentation [Technical Difficulty].
And I realize it's a work in progress but you know I assume without quantifying it probably other areas so maybe in procurement and supply with the new head running that area too.
Kim Ann Mink
So I can comment on that Larry, first of all I said while we did announce the restructuring 2015, going forward we continue to look at our effort in cost reduction. Now I did talk about something we’re doing in the operational area and I'll be quite frank with you, you know we started our deep dive about six weeks ago we just recently hired two new leaders who bring in a wealth of knowledge in the area and you’re writing Amy Hartzell, in the area of supply chain and manufacturing. So realizing that we’re early in the process. We have identified potential EBITDA gains of at least $7 million.
Now however I think it's important to stress again we just launched the initiative in March, hired our key executives to leave those areas. Right as the month progressed the potential gains will become more refined from a size like it will go up and timing point of view.
So that will be an annual, that’s an annualized $7 million potential number? Got you and then just last question on the maintenance expense out there, there are no outages or planned outages this quarter. Next quarter, I guess essentially you will have a sequentially a $4 million increase expense because of maintenance.
Kim Ann Mink
That's exactly right.
And just remind is maintenance -- is that normally like once a year where you’ve this planned outage, how frequently is the?
Kim can support some comments here, but I think historically we've -- you know if you look at last year we had it concentrated in the first quarter. This year again you know we're looking at all our option and we're what makes most sense in the course of a solution so most of that will be concentrated in the second quarter of this year hence our [indiscernible] $4 million of maintenance cost this year.
But you know we'll look at our program at all the time and see what makes more sense from a supply chain, from a demand, supply chain and operational perspective.
So it's sounds like you have sequential underlying improvement quarter to quarter but there's still $4 million on maintenance will bring you basically back to Q1.
That is correct.
Kim Ann Mink
That’s how you should look at it.
And our next question comes from Chris Shaw of Monness, Crespi.
I'm still unclear, I mean the earnings, the EBITDA in the Mexican segment quite strong, I think it was record or slightly go back all that far, but exactly what happened there. I mean I'm sure there was some currency benefits. It sounds like there was some cost cutting but volumes down and pricing down there I was surprised how strong that was.
We can actually, if you think about the big buck, you touched upon on it a little bit. I mean FX is a factor that help. But I think the two others that are of significance are year-over-year last year we had the stoppage cost in the first quarter this year we did not, that’s around I would say 500 basis points and then another 500 basis points probably on the EBITDA that is around raw material cost and input cost in the main.
So between those two you got your kind of delta explained with a little bit of FX in the mix too.
A huge chunk is raw material cost, how you anticipate having to give somewhat up throughout the course of the year on pricing them?
Kim Ann Mink
We’re really trying to hold on to the improvement in raw material cost quite frankly. This week I think we've discussed this in the past, rock is declining roughly 12% in the first quarter compared to fourth quarter, sulphur decreased and that is one of the things that in the area of commercial excellence is to really hold on to the benefits of seeing that. So we're working very hard to do that.
Then just on the Larry, asked the question sort on the lower volume guidance especially phosphates. Did something actually get I know you it's partially exiting lower margin business but did something change from last quarter this quarter were you made the decision that certain products added to the bucket that you don’t want to actually to sell into because of the margins or is the market also getting weaker, just last three months.
Kim Ann Mink
I would say from when we last spoke. The market is pretty similar to what we last spoke about. It's really a decision you know again in my first one 100 days now I really wanted to focus on and I've made this clear externally to change this Company's mix and to really focus our efforts where we think we can have higher value, higher margin, more differentiated products. So it is a conscious effort, Chris.
And if I can one more, is there any update on the plans for GTSP?
Kim Ann Mink
No that’s a great question because one that we often get and likely so and I said it was one of my top priorities while I can't discuss the details, we have a number of different discussions going on right now to again want to dampen that volatility on our business. So we do have a number of different discussions in irons and the fire to look at how we can move into a different business model particularly around becoming a total manufacturer of GTSP for fertilizer company. So we've made some good progress just not able to divulge the details on that at this point.
And our next question comes from [indiscernible] of KeyBanc Capital.
Just a couple of mine have been answered but on the pricing side, you know you did mention the competitor pressures that have been kind of persisting for a while but you were able to post positive pricing in U.S. and Canada. So I was just curious you know kind of how to think about that going forward you know is that maybe a onetime thing or are there any puts and takes there and how should we think about that going forward?
Kim Ann Mink
The pricing trends as we go forward and you know markets are still competitive right particularly with the strength of the U.S. dollar against the Euro and the Chinese are expect to remain competitive as we've discussed and I think we've discussed this in the past due to the China economy and government encouraged of exports by eliminating export tariff on sulphuric acid.
And the food and consumer good customers, they are financially challenging shutting down plants. So I think we still have to think we'll see those trends. I think we're putting more of an effort from a commercial excellence team though to be much more diligent in our more [indiscernible] management and where we feel we can basically reduce sales in certain areas that we're not going to competing in because of lower value.
So again that's really the message going forward.
And then maybe just one on sort of product categories, you know you mentioned pressure in packaged foods but could you talk about how some -- maybe [indiscernible] what those volumes were in the quarter and is there anything you could give in terms of an outlook?
Kim Ann Mink
Sure, again interval [ph] it's down 15% year-on-year but if you recall from the last call it was down significantly in the fourth quarter. So we're up 60% sequentially and what really has impacted us here is the five year funding of the highway trust fund which was approved in December. So we're very, very excited about that.
Now quite frankly we are seeing a weaker demand in exports and even in some of the food and some industrial fertilizer market. PPA volumes are down 3% overall, we've got some industrial applications for pickings going soft but in our more specialty areas we are bouncing back from fourth quarter. So again that area of innovation in the CAL-RISE or the [indiscernible] is a very important thing and we can't lose focus there.
Maybe just to add a small comment to that, I made some comments as related to page 14 where we talked about sales sequentially 11% up this quarter versus the last. If we were to think at a high level about the dynamics half of that is approximately seasonality because I mentioned seasonality and approximately half of that is what Kim Ann just described in terms of bouncing back in some of the core categories of business.
Thank you. We have now reached the allotted time for questions. At this time I would like to turn the call back to Kim for closing remarks.
Kim Ann Mink
Thanks. Sherry. And thank you all for joining us today. I do look forward to updating you on our progress in our second quarter earnings call in the summer. Thanks again and have a great day.
Thank you ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.
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