Innophos Holdings, Inc. Q1 2008 Earnings Call Transcript

Innophos Holdings, Inc. (IPHS)

Q1 2008 Earnings Call Transcript

May 6, 2008 10:00 am ET

Executives

Bill Farran – VP and General Counsel

Randy Gress – CEO

Richard Heyse – CFO

Analysts

Scott Burk – Bear Stearns

Nils Wallin – Credit Suisse

Ed Yang – Oppenheimer

Christopher Butler – Sidoti & Co.

Chris Shaw – UBS

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2008 Innophos Holdings conference call. My name is Lisa, and I'll be your coordinator for today. (Operator instructions) I would now like to turn the presentation over to your host for today's call, Mr. Bill Farran, Vice President and General Counsel. Please proceed, sir.

Bill Farran

Thanks for joining us today for the Innophos Holdings, Inc., conference call to discuss first quarter 2008 results. Conducting the call today are Randy Gress, Chief Executive Officer, Richard Heyse, Chief Financial Officer, and myself, Bill Farran, General Counsel.

During the course of this call, management may reiterate forward-looking statements made in our May 5 press release regarding financial performance and future results. We will attempt to identify these statements by use of words such as expect, believe, anticipate, intend and other words that denote future events. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. We caution you to consider the important risk factors that could cause actual results to differ from those in the forward-looking statements, as contained in this conference call and in our earnings reports and filings we make with the SEC.

We will make a replay of this conference call available for a limited time over the telephone at the number set forth in our press release, and via webcast, available on the company web site.

In addition, please note that the date of this conference call is May 6, 2008. Any forward-looking statements we 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. We also note that our release of factual business and forward-looking information in this call should not be construed as an offer to sell or the solicitation of an offer to buy any securities of Innophos. Lastly, this conference call is the property of Innophos and any recording, reproduction or rebroadcast of this conference call without the express written permission of Innophos is strictly prohibited.

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

Randy Gress

Good morning, everyone. I would like to update you on our successful first quarter and give you an update on the outlook for 2008. Then Richard Heyse will discuss highlights of the quarter. As usual, Bill Farran will provide an update on current legal matters. After closing remarks, we will take questions. First, we are extremely pleased that for this quarter, Innophos produced its best result so far.

Our operating and net income performance were record high in our short history as a public company, at $23.4 million and $9.3 million, respectively. In order to achieve these results in very challenging times, we have continued to focus on providing excellent customer service, assuring reliable product supply and improving efficiency and the strength of our supply chain. We have also anticipated and responded rapidly to the dynamic rate of change in our markets and successfully implemented necessary price increases.

I would like to share some of the industry dynamics that impacted the first quarter. As we expected, the market demand conditions are proving to be strong in the specialty phosphate business. Supply continued to tighten during the first quarter. The demand for our key raw materials has continued to grow due to record levels of fertilizer demand, and so prices for sulfur, phosphate rock and agricultural-grade phosphoric acid continued their increase in the first quarter and have increased further during April.

During the first quarter, agricultural-grade phosphoric acid, sometimes referred to as merchant green acid, or MGA, prices were reported to increase more than 50% or rise about $1,900 per metric ton versus $1,200 per metric ton at the beginning of the quarter. This is due to strong fertilizer demand and high grain prices. As you know, this strong agricultural demand creates competition for phosphate supply.

The effect on our North American market is a tightening of competing specialty phosphate supply because some of our large competitors are also major players in the phosphate fertilizer marketplace and can ship their supply toward that market. Overall, the rapid increase in fertilizer value as well as raw material costs are forcing specialty phosphate prices to rise significantly.

In our last call, we discussed that the estimated near-term impact of raw material cost increases to be approximately 30% of 2007 annual sales. Based on estimated current market prices, we are revising that expectation. We now expect that by this time next year, our raw materials cost increases, which we expect to offset with selling price increases will have increased by approximately 50% to 60% of 2007 annual sales from their level during the fourth quarter of 2007.

We expect approximately 25% to 30% or about half of the total of this cost increase to occur during 2008 and the balance to happen in the first quarter of 2009. As we have discussed many times, we purchase our key raw materials under long-term contracts that have confidential pricing formulas or mechanisms that buffer, but do not necessarily fully insulate us from market trends.

We are increasing the market prices for our specialty phosphates, responding very quickly to changed raw material costs and attempting to capture the full value of our products. Our most recent price increase announcement occurred in April. For the most part, our recent price increases are expected to be realized by July, 2008, and we expect them to meet or exceed the above estimated 2008 and early 2009 increases in raw material cost. Our ability to realize these announced increases by July is to a large extent due to our anticipating current market conditions and building pricing flexibility into our agreements with our customers during late 2007 and early 2008.

In our food-grade phosphate business, price and volumes are supported by a number of conditions. First, there are few effective substitutes for these products. Also, we are seeing that imports have been reduced, as we discussed during our last conference call. Next, we are also seeing solid growth in customer demand. This includes growth resulting from our strategy to expand sales geographically for our unique products in specialty salts.

This demand also allowed us to achieve favorable shift in our mix in the first quarter. Even though there had been very limited negative demand impacts due to higher prices, we are seeing some substitutes in the detergency markets. Remember that in North America, we have been planning for some loss of detergency products due to increasing government regulation and those changes are coming in the next couple years.

To respond, we have already invested in greater capability in our Port Maitland facility to produce additional food-grade specialty salts, including leavening phosphates. We have accomplished this well ahead of the 2010 midyear ban on Technical Sodium Tripolyphosphate, or STPP for the home auto dish wash detergency market.

As far as our Latin American markets are concerned, demand is strong enough for phosphates in general that in the short term, we can ship production and sales to alternative markets in the event of a drop in demand for detergency or other markets. We are also currently considering a number of potentially attractive investments in our Mexican operations to incorporate the long-term manufacturing flexibility that we have at many of our U.S. and Canadian facilities.

The dynamic conditions in our markets are not distracting us from our long-term strategies. We are continuing to invest in our facilities and equipment to take advantage of areas of potential growth and profit improvement. For example, we made the investments and process improvements needed to earn a Q7A quality certification status for our Chicago Heights facility.

By achieving the certification, which is required in many countries, we can better support the growth of our pharmaceutical (inaudible) sales in international markets and thus leverage the investment in the pharma calcium phosphate business that we made last year. I'm very confident in my team's ability to respond to dynamic raw materials cost changes in our marketplace, take advantage of rapidly changing supply-demand dynamics and yet maintain our focus on our initiatives that will drive long-term growth.

Now, I would like to turn the floor over to Richard to give some highlights of the quarter's results.

Richard Heyse

Thanks, Randy. As Randy mentioned, we are having outstanding results with improved pricing across the board in all product lines and geographies. Our efforts drove first quarter 2008 net sales improvements in each of our geographies. First quarter volumes in he U.S. were comparable to those achieved last year, but it was very positive mix shifts, as Randy mentioned, while in Mexico volumes were impacted approximately 6% to 8% due to phosphate rock supply shortages caused by port congestion and logistic issues in Morocco.

We had similar weather-related issues in the first quarter of 2007. In addition, during the first quarter, we had a delay in one GTSP shipment, which will ship during the second quarter. The impact of this delayed shipment at today's market prices was approximately $3.6 million on first quarter's operating income. Meanwhile, in the U.S., in the coming quarter, we will undergo a planned outage Geismar, Louisiana, PWA plant.

We expect a $5 million to $6 million impact on gross margin from the outage, primarily from lost production that we expect to recover during the remainder of the year, rather than the actual maintenance expense itself. Historically, we would have purchased increased purified acid from our suppliers and built inventory to replace production lost during this outage. However, given the current tight supply conditions, there is no purified phosphoric acid available for such spot purchases.

We expect that the anticipated extra GTSP shipment in the second quarter, along with our increasing margins due to market price increases exceeding raw material cost increases should more than offset the second quarter margin impact from this outage. I would also like to note that our cogeneration project is up, and running and we still anticipate that we will meet or exceed the targeted $6 million in annual savings from this project.

Two SG&A expenses significantly impacted our operating income during the quarter. The first was cost related to satisfying the DOJ's STPP industry investigation document subpoenas. We spent $2.1 million in the quarter in order to complete this submission. In addition, we also spent $1.3 million on professional expenses for various projects, primarily related to our growth initiatives during the first quarter.

With completion of the DOJ submission, we expect our spending rate on this project to decrease significantly going forward, but of course we do expect to continue funding our growth initiatives. Regarding our balance sheet, during the quarter we had $32 million in unfavorable changes in working capital, related to three items. The first is inventory value increases, a given in rising raw material cost environment.

Increases in accounts receivable also occurred, as one expects with rising selling prices. Decreases in accounts payable also played a role, as we made some advance payments to suppliers to ensure timely delivery of raw materials. We successfully managed the rapid rise in working capital during the first quarter, and do not expect this rate of change to continue during the rest of the year.

With our increasing margins, we expect very robust cash flow in 2008, and so expect to repay our first quarter revolver draws of $14 million back fairly quickly. However, we are reevaluating the optimum level of available cash the company will maintain throughout the year to fund our working capital needs, particularly in light of expecting another significant increase in working capital in the first quarter of 2009. This means we will need to be flexible in our cash-on-hand targets during 2008, versus the $15 million we've been using for the last year.

Now, I'll turn the call over to Bill Farran for an update on legal matters. Bill?

Bill Farran

Thanks, Richard. As I had mentioned briefly in our last conference call, in the first quarter we won the Rhodia indemnity case in a unanimous decision by New York's highest court, the New York Court of Appeals, confirming our full indemnity of the pre-closing fees and duties associated with over $30 million in claims for freshwater taxes for the years 1998 through 2002 that were filed against us in 2004 by the Mexican National Waters Commission or CNA.

The underlying case disputing those claims is still pending before the Mexican tax court, and the timing of that decision remains unknown. If that case were to be decided against us, the New York ruling means we would be fully indemnified by Rhodia. We also won our anti-dumping case against Chinese sodium hexametaphosphate or SHMP, one of our specialty salts resulting in duties against Chinese-supplied material of between 82% and 188%.

During this quarter, we also completed gathering and filing documents and information in response to the DOJ's subpoena issued in connection with its investigation of the STPP industry, incurring the $2.1 million expense Richard noted. As to the next steps in that case, we cannot comment further, except to note that we have not taken reserves for this matter.

Finally, we had mentioned in numerous prior filings the 2004 EPA compliance inspection at our Geismar, Louisiana, plant, certain EPA follow-up questions, and also that in 2006 we received an EPA report identifying certain areas of concern under its hazardous waste regulations under the Resource Conservation and Recovery Act, or RCRA.

We believe that we operate our Geismar facility in material compliance with all applicable environmental laws and regulations, including RCRA, and responded to those concerns by explaining how, in our judgment, our operations meet applicable regulations or recognized exemptions for mineral processing or recycling. We understand that the inspections and issues raised by EPA are part of a national enforcement priority as to facilities in the phosphate industry.

EPA has sought civil penalties from phosphate manufacturers or claimed RCRA violations, and from time to time has referred these matters to the Department of Justice or DOJ for possible litigation. On March 20, 2008, we received a letter from DOJ indicating that EPA had referred our case to the DOJ for civil enforcement, contending that our Geismar operations do not qualify for the exemptions we have claimed, and alleging that we violate RCRA by failing to manage two materials appropriately and related administrative violations.

The letter states that EPA and DOJ intends to seek unspecified penalties and corrective actions, but proposes to discuss the matter with us to explore possible resolution. As we believe the agencies have failed to consider properly the basis of why we maintain our Geismar operations are compliant, we have initiated such discussions with EPA and DOJ. At this time, we do not know whether such discussions will result in an agreed resolution, a consent decree or litigation.

Now, I would like to turn the floor back over to Randy for his closing remarks.

Randy Gress

Thanks, Bill. The first quarter of 2008 produced strong results for Innophos, and we expect our revenues, operating income and cash flow to improve through the next several quarters. We are seeking further investments, like the Cogen project that can deliver savings to the bottom line, and we will continue to invest in the flexibility of our equipment to respond to changing market and industry conditions.

We are continuing to focus on the value we offer our customers to strengthen our position in the market. Where we can regain or take new ground, such as the SHMP business or expanding our food-grade phosphate business, we are aggressively driving targeted initiatives. We are also seeing results in improved supply chain execution and operational efficiency in our U.S. business, and we are focused on making improvements in Mexico where possible, as well. To respond to market and demand changes, we are focused on continuing to expand the markets we serve through geographic expansion of our proprietary and new products.

I will now like to open the floor up for questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from the line of Scott Burk from Bear Stearns. Please proceed, sir.

Scott Burk – Bear Stearns

Hi, good morning, guys.

Richard Heyse

Hi, Scott.

Scott Burk – Bear Stearns

Listened to a terrific quarter, and just wondering how this Geismar plant downtime, is that going to all happen in the second quarter?

Randy Gress

Yes.

Scott Burk – Bear Stearns

Okay, so that $6 million you mentioned all be in the second quarter. Can we still expect the price increases – are those going to overpower what the impact of that downtime in the second quarter? And then how are the price increases going to affect the third and fourth quarters? Can we see some more benefit like we saw in the first quarter?

Randy Gress

Yes, I think, as we stated before, we are increasing prices. We have already announced some price increases at the beginning of the year and through February. And then, we have also just recently announced some increases here in April to take effect through the middle of the year with most of that taking effect, as we said in the script. So, with that, we should see some continued improvement and recovery of price, which will offset what we see impacts on the Geismar.

Scott Burk – Bear Stearns

Okay. One question about the Shelf Filing that's out there, that you put out a few weeks ago. Can you tell us about any potential timing for a secondary offering?

Randy Gress

Yes, Richard, can you address that?

Richard Heyse

Sure, sure. The S-3 filing is currently being reviewed by the SEC, so we are going to work through that process, of course, in a timely fashion. We are really not aware of the specifics or timing that's being planned. But clearly, as I have talked to shareholders in the last year, we get the continued message that liquidity is important for our stock. So, as a management team, we are going to support any action that may improve the liquidity in the stock.

Scott Burk – Bear Stearns

Okay. Then just a couple of modeling questions, you did talk about last quarter about paying down some debt, and mentioned in your remarks, as well. Just wondering what kind of trends or what kind of interest cost savings we could expect for the rest of the year, by the end of the year, and also what kind of tax rates you anticipate seeing?

Randy Gress

Yes, Richard.

Richard Heyse

I think the interest rate savings, as we mentioned, we did draw on our revolver in the first quarter. We are targeting to have those draws paid back off during the second quarter, early third quarter. So, our debt balance should stay approximately the same, so I wouldn't bake in significant interest rate savings this year. So, what was the second part of the question?

Scott Burk – Bear Stearns

I wanted to know about the tax rate.

Richard Heyse

I think tax rates, again, in the U.S., we are not a taxpayer. We have NOLs and we have a valuation allowance, so the effective tax rate in the U.S. is zero, and Mexico we are a full taxpayer and the effective tax rate is in the 30s. So, I don't see that changing during the year.

Scott Burk – Bear Stearns

Okay. All right, thanks.

Operator

Our next question comes from Mark Connelly from Credit Suisse. Please proceed.

Nils Wallin – Credit Suisse

Good morning, this is actually Nils Wallin sitting in for Mark.

Richard Heyse

Hi, Nils.

Nils Wallin – Credit Suisse

Hi, a couple of questions. One, when I look at your purified phosphoric acid price increases are up roughly about 31% year over year. And then I compare that to your next comparable public competitor, and their price increases look like to wrap around in the mid 40s range. Is there anything different there that has to do with transfer since you are essentially selling it to your downstream specialty businesses or maybe it's different contracts? Any guidance you might be able to give would be helpful.

Randy Gress

Yes, Nils, I think, if you look at our asset increases, we are raising prices pretty significantly there. But with us, we do have significant sales in both U.S., Canada, as well as Mexico across the board there. So, that could be a factor in any different –

Richard Heyse

Yes, I think a slight difference.

Nils Wallin – Credit Suisse

Okay, I think in your most recent filing, and I may have missed something, but it say that you have agreed on an interim price for phosphate rock with OCP. Would you be able to give us any guidance on whether, this is for 2008, whether a final agreement has been reached and also with obviously the rapid rise in phosphate rock, if there is any indication what might happen for 2009?

Randy Gress

Yes. For the discussions on rock, we are still operating under an interim agreement and having confidential discussions, and then it's still being pursued here.

Nils Wallin – Credit Suisse

Great.

Richard Heyse

And I think in 2009, in our disclosures here, where we discussed our expectation on raw material cost increases by first quarter of 2009. Included in that is the expectation of our phosphate rock pricing increasing as our contract directs, which is we said, we are buffered but we are not insulated to market prices. So, we've got baked in there by 2009, essentially current market prices for phosphate rock in that disclosure.

Nils Wallin – Credit Suisse

Based on your interim agreement not necessarily your final agreement?

Richard Heyse

Again, we have a long-term agreement for phosphate rock. Every year there's a pricing mechanism that sets the pricing, but there's a process for agreeing to that settlement and we have an interim price, but it's still being discussed for 2008. But in our 2009 disclosures, included in that 50% to 60% increase as a percentage of 2007 sales is the assumption that current – today's rock price work through our pricing formula and we have that amount reflected by first quarter 2009.

Nils Wallin – Credit Suisse

Okay.

Richard Heyse

I think, to your concern, it's covered in that amount of that disclosure.

Nils Wallin – Credit Suisse

Okay, thanks, and just one final question, if I may. I noticed you did mention in the release and also in your comments that imports are down for some of the specialty salts. Is that a function of raw material costs and that you clearly have an advantage here, distribution, freight costs, or it has anything to do with any long-term trends?

Randy Gress

Yes. I think there are really a number of factors impacting the ability of imports to compete. One is we did mention we had the success in the anti-dumping against the Chinese producers. The other factors going to that is the demand for the raw materials within the fertilizer business, which is taking away, on a global basis some of the supply capability of some of the producers to export. In addition to that, there are the increases in cost, the availability of rock and energy and –.

Richard Heyse

Exchange rates, also. So, we got a lot of tailwinds right now as far as being an American producer in a global environment.

Nils Wallin – Credit Suisse

Great. Thanks very much.

Operator

Our next question comes from Ed Yang from Oppenheimer. Please proceed.

Ed Yang – Oppenheimer

Good morning, gentlemen.

Richard Heyse

Hi, Ed.

Ed Yang – Oppenheimer

My question is also just on supply. Is it fair to say that you are seeing supply being diverted towards fertilizer and you are getting that short-term benefit. But it does sound, qualitatively that this could be a longer-term trend. Would that be a fair characterization?

Randy Gress

Yes. We are getting some benefit with some shift to the supply in fertilizers with other people having opened those options. I guess as far as the longer-term trend, it's difficult to really speculate the length of this kind of trend.

Ed Yang – Oppenheimer

Would you, basically if fertilizer prices were to decline, how quickly would you see supply for specialty phosphates get back on the market?

Randy Gress

Richard?

Richard Heyse

I'm going to back up. One point on the supply as far as on trends. One thing that has been a benefit is the Chinese government has intervened in the phosphate marketplace, and really restricted exports of phosphates of all types to save their rock deposits for domestic use. The Chinese were one of those major sellers of specialty phosphates into North America and Europe, and they pretty well vanished from the scene. As long as the Chinese government maintains that kind of policy stance, we would expect to get a long-term benefit, just from industry structure. On the fertilizer prices, it's hard to speculate where things are going. As you all know, the world is short, there's a shortage of grain right now to the extent where there's food riots, etcetera in some developing countries. That's putting a lot of very strong demand on fertilizers to increase productivity of land.

I think most experts would say this is a multiyear trend. It's going to take multiple years to rebuild food stockpiles, and on top of that you got the pressure from biofuels that if grain prices start to drop people will take those grains and convert them into liquid fuels. So, I think it's really the current environment we are in is pretty unprecedented and to try to call whether or not it's going to turn, and when it's going to turn, and how it's going to turn, I think is pretty difficult at this point. We are going to stay focused on execution and doing what we need to do quarter to quarter. But I think given the unprecedented market conditions, it's hard for us to project or call how things are going to unfold two, three years down the road.

Ed Yang – Oppenheimer

Okay, fair enough. It does sound you do have a long-term agreement in place that does seem to have some formal parameters around the rock supply. But if I take your comments correctly, it does seem like there is a little bit of give and take, and just wondering at this point the status of your relationship with your primary rock supplier and any sort of ongoing negotiations there.

Randy Gress

Yes. As I said before, we are operating under an interim price and still having some discussions regarding the interpretation of the contract. It is long term, and they are shipping us rock. It's been a long term, good relationship and they are still providing for the contract. So, I don't expect any issues there.

Ed Yang – Oppenheimer

Thank you very much.

Operator

Our next question comes from Christopher Butler from Sidoti & Company. Please proceed.

Christopher Butler – Sidoti & Co.

Hi, good morning, guys.

Richard Heyse

Hi, Chris.

Christopher Butler – Sidoti & Co.

I wanted to get back a little bit to the competitive environment, get a feel for exactly what's going on. You had mentioned that there had been some shift towards fertilizer from some of the other players. Is this a situation where they have actively changed some of their capacity to be able to do this? Or is this just allocating more of the raw materials to fertilizer and can be shifted back immediately if that's the case?

Richard Heyse

I think what we are seeing in our marketplace is a reduction of supply. It's our hypothesis that there's some sort of shifting going on. We don't have factual knowledge that says that's happening. What we do have is factual knowledge that we're having many parties come to us and ask for supply of specialty phosphates because they can't get it from their existing supplier. I think there's also reports in the industry on sulfur and sulfur availability, and that many producers are having a hard time in Europe and the Middle East getting sulfur. In our case, we buy sulfur from Pemex and the supply has been very reliable and we aren't having any issues. So, again, it's our thesis that there is given high fertilizer prices, a strong pull of raw materials into that marketplace. It seems logical. But to be specific about why, how it's happening, we really can't go there. But there are reports that the fertilizer companies are running as hard as they can, and what's limiting them is the ability to get certain raw materials like sulfur.

Christopher Butler – Sidoti & Co.

And you had mentioned that it seemed that there were fewer imports coming in. At some points, do exports make financial sense for you, moving outside of North America?

Randy Gress

Yes. That's been a part of our strategy and taking some of our unique products and new products out to other geographies to continue to grow the business that way.

Christopher Butler – Sidoti & Co.

Are there specific areas, geographies that you're looking at that you can talk about at this point?

Randy Gress

We have some focus and invested in some resources for distribution in Asia, as well as Europe and Latin America. This was all a part of our investment in the pharma business and setting up a global network there for distribution and sales.

Christopher Butler – Sidoti & Co.

And you had also mentioned that in the quarter, you had an improved mix of products. Could you help us understand what would be the better-margin products for you guys and exactly how that works?

Richard Heyse

I think clearly, like Randy mentioned, the calcium phosphates, we are a global leader in calcium phosphates. That's why the products, as Randy mentioned, we are projecting our capability out into Europe and Asia. Also some of the – there's related calcium phosphates. There's a number of – again, the food and beverage. If you look at that food and beverage end market segment, it's roughly 25% to 30% of our sales. Those products, there's premium know-how that goes into that. And, as demand is strong, clearly we are going to shift purified acid into producing salts to sell to those markets. That's our number one priority. So I would have to say it's more in the whole food and beverage market segment overall that we are putting a focus on, along with pharma.

Christopher Butler – Sidoti & Co.

Thank you for your time.

Operator

(Operator instructions) our next question comes from Chris Shaw from UBS. Please proceed.

Chris Shaw – UBS

Hi, good morning, guys. How are you doing? Good quarter. I guess just when we are at the end come say when all the cost increases come through in the first quarter 2009, and looking at your most recent price increases, as of April, are we ahead of margins at that point? If we look historically, they're actually expanding at this point?

Randy Gress

Richard, you want to handle that?

Richard Heyse

Sure. I think as we have said in our disclosure, our past brackets and current brackets is where we are recovering raw material cost increases from selling price increases. With what we know as of today, with the known trends, where raw materials are today, where our price increases have been year to date, we are expecting roughly parity by the first quarter of 2009. But, in addition, long term, we said we have a trend line EBITDA growth rate target of 6% to 9% per year. So, as Randy mentioned in our earlier comments, we are not taking our focus off of our growth initiatives, cost structure improvement initiatives. We are still driving those hard, but what you are going to see this year, current expectation, is expanding margins through July to August to where the August, if you run the numbers we provide in our disclosures, you get to the August or December timeframe, our gross margin dollar run rate will be roughly $12 million to $14 million expanded per month. And then what you'll see is our current expectation, it's pretty dynamic right now, is that then in the first quarters our raw material contracts reset, you'll see the remaining portion of the expected raw material cost increases occur, and the margins will come back down to more historical levels. Again, our goal is to over the trend line, long term to keep driving earnings improvement, of course.

Chris Shaw – UBS

Sure. In the raw materials, are your contracts set throughout the remainder of 2009 or just through the first quarter? Can they go up again in 2009 and the remainder of the year?

Richard Heyse

Yes, they can. There's both the annual and quarterly factors. What we are trying to do, we are in pretty much unprecedented market conditions and situations and how our raw material pricing mechanisms are confidential, Reg S-K, there are some specific guidelines on how to approach that, and what's the good practice is. Good practice is from the point in the disclosure as of today, in the known trends, where does management expect it to be a year from now? So, each quarter we are going to continue to update. So, what our disclosure is saying is as of May of next year, and based on today's raw material prices, our expectation is that our raw material costs will go up approximately 50% to 60% of 2007 sales. That doesn't say – again, if raw materials continue to move up, that number will continue to move with it, but at least where we are today, current raw material prices, how our contracts have functioned, that's what we expect.

Likewise, on the revenue line, we are implementing price increases, given the conditions Randy said. The market prices are moving up rapidly. Price increases are being accepted today. So far, demand has been strong. We haven't seen a reduction in demand. So, the pricing increases are occurring and being received much more quickly, and so we are expecting the price increases that we need to offset current raw material cost increase in the marketplace will be in place by July. Again, we are trying to make that clear in our disclosure. So, it's based on today's known conditions, which clearly conditions change with time.

Chris Shaw – UBS

And, say, for instance, in the specialty salts and acids business, if raws for you come start falling significantly, are the customers going to come back and look for – I think they're probably – I'm guessing you go out there saying you are getting hit by raw material inflation and that's how you are trying to pass through pricings to some degree. But, how much of the pricing do you think you have to give up? How sticky do you think it can be?

Richard Heyse

I think first, as we said, the market is very tight. There's a shortage of supply, so the market is driving the pricing as much as us going out and saying, look, our raw material costs are going up. We are pushing price increases, but it's being driven by market conditions. Historically, selling prices and raw materials and specialty phosphates have tended to lag the fertilizer market a bit. But, again, these are really unprecedented conditions. There's really no historical equivalent. So, I think it's hard for us to project, like I said, how things are going to unfold two, three years down the road.

Randy Gress

I think just to add to that, a lot of our drive also is to capture the full value of our products and what they provide in use. I think also pretty important is what we have done in ensuring some of the supply to our long-term customers and relationship there, where reliability of supply is important to them.

Chris Shaw – UBS

Okay, thanks a lot.

Operator

And our next question comes from Mark Connelly from Credit Suisse. Please proceed.

Nils Wallin – Credit Suisse

Hi, this is Nils Wallin, just with a follow up. You mentioned that perhaps new customers were interested in getting some supply because of the tightness of raw materials, and obviously you've mentioned also the tightness you are experience in raw materials. Is there any possibility or do you have the capability to expand volumes more than you've planned for? Do you have options to be able to increase volumes to meet these perhaps new customer needs?

Randy Gress

Yes. I think what we have indicated, especially with the outage here in the second quarter in Geismar, there is tightness in the overall supply with the raw materials and some limits on us being able to get some incremental supply of raw materials. As far as opportunities in the future to support growth, we are continuing to look at and evaluate those options and our overall product mix as a part of where we should be focusing our efforts and investments going forward.

Nils Wallin – Credit Suisse

Thank you. And then, finally, on your cogeneration project in Mexico, I believe you said that you'd expect $6 million or so in savings. With rapid rise in natural gas prices recently, does that include that sort of current cost of natural gas or perhaps you have an advantage contract for natural gas pricing? How does that forecast figure in with current natural gas costs?

Richard Heyse

Actually, it's relatively neutral to natural gas because the region we are in Mexico, the electricity rates tend to move somewhat with natural gas. Also, the cogeneration unit is much more efficient in utilizing natural gas than our previous configuration. So it's an interesting project from that perspective because the savings, as I said, are pretty independent of a fairly wide range of natural gas prices.

Nils Wallin – Credit Suisse

Thank you, that's very helpful.

Operator

And I would now like to turn the call back over for closing remarks to Mr. Randy Gress. Please proceed.

Randy Gress

Thank you. I would like to thank everyone for joining us for the first quarter call here and look forward to sharing our progress and results in the next call. Thanks again.

Operator

Thank you for participating in today's conference. This concludes the presentation. You may now disconnect. Have a lovely day. Thank you.

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