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Innophos Holdings Inc. (NASDAQ:IPHS)

Q2 2012 Earnings Call

August 07, 2012 10:00 am ET

Executives

Mark Feuerbach - VP, IR

Randy Gress - CEO

Neil Salmon - CFO

Analysts

Larry Solow - CJS Securities

Peter Cozzone - KeyBanc Capital Markets

Chris Butler - Sidoti & Company

Edward Yang - Oppenheimer

Chris Shaw - Monness Crespi

Operator

Welcome to the Q2 2012 Innophos earnings conference call. My name is Kim and I am 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 like to turn the call over to Mr. Mark Feuerbach. Mr. Feuerbach you may begin.

Mark Feuerbach

Good morning and thank you for joining us today, for Innophos' second quarter 2012 results. Joining me on the call today are Randy Gress, Chief Executive Officer and Neil Salmon, Chief Financial Officer.

During the course of this call, management may make or reiterate forward-looking statements made in our August 6 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 risk and other factors as set forth in the forward-looking statement section and in Item 1A, Risk Factors in our annual reports on Form 10-K as filed with the SEC that could cause actual results to differ from those in the forward-looking statements made in this conference call.

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

In addition, please note that the date of this conference call is August 7th, 2012. 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 Randy Gress, CEO of Innophos. Randy?

Randy Gress

Thanks, Mark and good morning, everyone. My opening comments will concentrate on second quarter performance and how we have continued to deliver on our strategic initiatives. Neil will then summarize our financial results and provide a look ahead to the third quarter and the balance of 2012, after which I will conclude with some final remarks and then we will take your questions.

Overall for the company, we achieved net sales of $214 million in the second quarter, up 6% from last year with strong Specialty Phosphates revenue growth offsetting a decline in sales of our GTSP co-product. These results were achieved in an environment in which challenging macroeconomic condition undoubtedly contributed to a softening in market demand as the quarter progressed.

We were therefore pleased with the strength of our Specially Phosphates business and our ability to demonstrate continued growth. We recorded second quarter diluted earnings per share of $0.81 excluding an $0.08 per share adjustment in the GTSP and other segment which Neil will discuss in more detail.

This compares to $0.92 per share in the year-ago period with lower earnings attributable entirely to lower profitability on our GTSP co-product sales. Specialty Phosphates revenue was up 14% compared to the year-ago period driven by both price and volume improvement and good results from Kelatron.

For the US and Canada, the second quarter saw both sequential and year-over-year volume improvement. While our US Canada volumes were off from our expectations by about 2% to 3% due to softer demand, our new Bioactive Mineral Ingredients business contributed to our performance in the quarter and our Mexico Specialty Phosphates volumes were up 70% from year-ago levels.

As a result we maintained our Specialty Phosphates operating income above year-ago levels despite lower market demand and significant raw material cost increases. So overall we are pleased with the performance of our Specialty Phosphates business.

That said our business continues to deal with the effects of weak demand conditions in various segments in both food and industrial end markets while we also saw some further limited reformulation away from STPP in the industrial cleaning applications market.

Although, we now expect market demand to be moderately lower for the rest of the year, we continue to project organic growth 2% to 3% better than the market trend and so we expect to achieve organic growth of about 1% to 3% for the second half.

Ongoing success of our growth initiatives will be key to achieving these results. After including sales from our recent acquisitions, we're now targeting second half volume growth of 5% to 7% in comparison to the 3% achieved in the first half.

Our GTSP and other business recorded sales of $20 million, a decrease of 35% from the year-ago period. Profitability improved as expected versus the first quarter as fertilizer market prices improved moderately. However they remained well below their year-ago levels while market raw material costs remained high and have not yet adjusted by an equivalent amount.

Overall GTSP and other was a breakeven in the quarter, down $5 million on last year after excluding the prior-period adjustments. Market conditions for phosphate fertilizers in general seem to have plateaued again after improving for most for the second quarter.

Commentators are divided on whether the US drought and higher commodity food prices will lead to higher fertilizer demand and therefore higher prices or to deferral of demand until next year.

Our best view currently is of underlying GTSP performance, excluding the one-off items mentioned will continue to hold steady although you then need to consider the impact of higher mining and the schedule maintenance outages in the second half.

Turning now to our growth initiatives. As I mentioned, we continue to see successful results from our first bolt-on acquisition of Kelatron Corporation. The first half of 2012 was strong for Kelatron, recording revenue growth well above 20% year-over-year.

We’ve seen a combination of the strong product line and sales channel synergies that we anticipated and we remain excited about the future of this business. Early in third quarter, we completed our second acquisition in this space by acquiring AMT Labs, a company with highly complementary capabilities to Kelatron.

The combination of Kelatron and AMT makes Innophos a leader in the higher growth US bioactive mineral ingredients market.

Additionally, we continue to deliver on our geographic growth objectives. We've completed construction of our facility in China, the final pieces of equipment will be delivered shortly and after we’ve commissioned the facility, we will begin the licensing process with the Chinese government.

We expect commercial sales to start in early 2013 as the process for achieving our food ingredient license in China take some months to complete. We also continue to work on a number of product enhancements and joint formulation projects with customers that will contribute to our ongoing target of above market growth.

Having already achieved strong industry recognition for our product range and low sodium applications for baked goods, we're pleased with the progress we're making in other applications, particularly meat and sea food.

Our announcement in June that we had achieved regulatory approval to sell Cal-Rise into the Canadian markets will support our growth in baked goods. Meanwhile our VersaCAL Clear calcium fortification product line continues to gain market acceptance being launched in several new beverage products so far this year. We are also very pleased with our progress in growing the market for our INNOVALT asphalt modification technology.

Challenging market conditions undoubtedly affect customer’s decision making and the emphasis they put on trials and launching new products. However, I'm confident that we will continue to execute on further product line innovations and achieve the above market growth we are targeting. I will now turn it over to Neil for some more detail on financial results in the quarter. Neil?

Neil Salmon

Thanks Randy. I will recap Randy’s comments on sales and business trends in order to put them into context of our second quarter results and then provide a little more detail to the Rhodia expectations Randy outlined.

Net sales for the second quarter of 2012 were $194 million from specialty phosphates and $20 million from GTSP & Other resulting in a total of $214 million, a 6% increase over the second quarter of 2011. Compared to the second quarter last year, specialty phosphates prices and volumes were each up 7%, including a 3% volume benefit from the acquisition of Kelatron.

The US and Canada specialty phosphate business recorded an 11% year-over-year increase in sales over second quarter driven by a 7% increase in prices. Volumes increased 4% when compared to the year ago period which included a 3% benefit from Kelatron. Operating income at $20 million was $6 million lower from the year ago period and $7 million lower sequentially. The sequential decline was due primarily as expected to the increase in raw material costs for which selling price increases had already been achieved in the 2012 first quarter

As a result, second quarter 2012 operating income margin was lower at 14% with our cost of goods sold now having fully caught up to recent market raw material cost levels. In comparison to the last several quarters in which we have successfully achieved selling price increases ahead of the impact on cost of goods sold on higher market prices of raw materials.

The Mexico specialty phosphates business recorded a 24% increase in year-over-year sales with prices up 7% and volumes higher by 17% versus the second quarter of 2011. These results were in comparison to a year ago period that was affected by production restrictions following a scheduled maintenance outage in the 2011 first quarter.

Operating income from Mexico’s specialty phosphates was $8 million, $7 million higher compared to the same period last year and up $2 million sequentially giving an operating margin in the second quarter of 18%, up significantly on the year ago period and also higher than the 12% we recorded in the first quarter.

Overall, specialty phosphates operating income for the second quarter of 2012 was $29 million, $1 million above the prior year quarter and $5 million lower sequentially entirely as a result of the raw material cost catch up that I mentioned which also was the reason operating income margin at 15% was down 260 basis points sequentially.

Let me now turn to the adjustments, we reported in the GTSP & Other segment for this quarter. During our review of the 2012 second quarter, we identified certain items in our financial statements related to 2011 through the 2012 first quarter that have not been correctly reported in those earlier quarters. We also revised our estimate for the effective contract terms on our raw material costs in 2012.

We made these corrections in the 2012 second quarter within our GTSP & Other segment which have the effect of increasing cost of goods sold by $2.7 million and decreasing net income by $1.8 million or $0.08 per share. These adjustments are not material to the financial results of the current or previously issued annual or interim financial statements, nor do we expect them to be material to our full year 2012 statements.

GTSP & Other revenue was $20 million compared to revenue of $31 million in the prior year period. The lower revenue reflected lower market prices and lower volumes although as it is typical in this segment, the lower volume was entirely a function of the timing of individual shipments and overall GTSP volumes continue in line with expectation.

The segment recorded an operating loss of $2.5 million arising from the adjustments I just described, excluding these adjustments operating income for GTSP & Other was just about breakeven for the second quarter 2012 in line with our expectations.

Operating income was up $3 million sequentially excluding the $7 million Rhodia settlement recorded in the 2012 first quarter but $5 million below the second quarter 2011 due to lower fertilizer market prices and higher raw material costs.

Our effective tax rate was 33.4% for the second quarter of 2012 in line with our first quarter effective rates after excluding the Rhodia settlement which was recorded as a discreet item for tax provision purposes.

We continued to project a 33% to 34% underlying tax rates to 2012. Overall as Randy mentioned, we have seen a moderate decline in market demand during the second quarter and our core specialty phosphates business. Demand conditions weakened on a combination of some limited further STPP reformulation in North America and customer de-stocking particularly in international markets and lower demand in a few market segments.

This was offset by good progress on targeted growth initiatives including excellent results from the recently acquired Kelatron business. As a result, we now expect market volume growth of 1% to 3% for specialty phosphates in the second half of the year. While the benefits from the already completed acquisitions including the recently announced AMT acquisition should contribute by further 4% to revenue growth.

Specialty phosphates selling prices were 9% higher in the first half versus the same period last year and improved moderately on a sequential basis. Well we did not announce price increases during the second quarter, we will continue to maintain a close watch on the market and overall material cost strengths and will consider additional price increases as market conditions allow.

Market prices Innophos key raw materials of phosphate rock and sulfur were relatively unchanged through the second quarter. Prices for finished fertilizer products including GTSP increased sequentially during the second quarter before stabilizing again and remained significantly below their last year levels.

As a result of the current amount and pricing environment we have outlined, we currently expect underlying operating performance in both specialty phosphates and GTSP & Other to be similar in the third quarter compared to the adjusted second quarter.

In addition, scheduled maintenance outages in Mexico and the US together with and increase level of mining activity as we continue to evaluate the quality of our mining confession to Mexico are expected to result in sequential increase in third and fourth quarter costs compared to the second quarter of approximately $2 million in each quarter effecting GTSP and specialty phosphates equally.

Turning to cash flow, our net debt in the second quarter of 2012 decreased by $33 million to $63 million on a strong operating cash flow including the benefits of delivering on working capital reduction targets.

The capital expenditures were $5 million in the 2012 second quarter and as a result for the 2012 full year, we expect the expenditures to be in the $25 million to $30 million range. This is below our previous expectation of approximately $40 million as a result of delays to some projects stemming from changes in engineering specification. Thus deferring some expenditure to 2013.

Investment continues to be focused on (inaudible) making, US, Canada and Mexico specialty ingredients facilities, expanding geographically including investment to China and enhancing Mexico’s capability to process multiple grades of rock consistent with the company's supply chain diversification strategy.

Depreciation and amortization was $11 million for the 2012 second quarter, up $1 million compared to prior year period due to our ERP project that went live in the 2011 third quarter.

For the 2012 full-year, we expect depreciation and amortization to remain in line with 2011 levels as increases from the ERP project should be offset by decreases coming from our 2004 step up accounting when (inaudible) was formed. Now back to you, Randy.

Randy Gress

Thanks Neil. While the broader environment is turning out to be more challenging than we have anticipated early in the year, we continue to make good progress on the strategic growth objectives that position us for success in the longer-term. We’re gaining traction with our new products. We also continue to see good progress in developing customer relationships, particularly through the pursuit of innovative projects around new products or leveraging our technical service expertise.

Overall, the substantial strategic progress we have made throughout the last five years continues to be strongly evident in the results we are delivering. However, I believe we are only just beginning to realize the benefits of our strategic growth focus; while economic growth in Asia has been slowing recently, we still see strong long term growth potential in this region and continue to be proactive in our investment strategy there.

We also see our acquisitions into strategic markets segments paying immediate dividends in the form of higher volumes and synergies in the coming quarters. While both Kelatron and AMT are relatively small additions, they are excellent examples of the benefits we see in our adjacency acquisition strategy.

We believe we will achieve strong returns on our investment both through driving operational cost efficiencies and more importantly by using Innophos’ market presence and focus on growth to bring significant sales channels benefits to both companies. While we cannot predict the timing of acquisitions, we are currently working on additional opportunities.

Finally, I am pleased with our ongoing strong cash flow generation and while our first priority is to identify and deliver attractive returns from growth projects, we also expect ongoing improvement and cash returns to shareholders.

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

Question-and-Answer Session

Operator

(Operator Instructions) And at this time we have a question from Larry Solow from CJS Securities. Please go ahead.

Larry Solow - CJS Securities

I wondering if you could just maybe give a little more color on the slowdown in growth, is it across mostly your food and industrial which make up more than half of your, on the specialty phosphates is it spotty or is it just sort of across the board slowdown? And then the follow on to that is what sort of the slowing in volume through the quarter it sounds like what gives you the confidence that you could still get actually better growth from the two quarters if you achieved sort of 2% growth from the back half of the year, sort of midpoint of your guidance?

Randy Gress

Well Larry, for the most market segments we are seeing relatively stable demand, but there are pockets of weakness in various segments which do include the meat and sea food. But then also in some of the industrial applications we have seen some slowness with some further reformulation away from the STPP in the industrial and institutional clean markets.

I think if you take a look at what we have achieved with some of the strength of our products and applications and tech service, we have been able to still show some progress on the growth side and some examples we have given there have been the CAL-RISE which helps in the baking and leavening with the sodium reduction and also some of the uptick on the beverage side of our calcium fortification product there with VersaCAL Clear and then in addition to that we still have some strength in our geographic expansion. So those combined, I think still expecting that 2% to 3% growth here in the second half

Larry Solow - CJS Securities

And if I can just follow on the STTP, rough ballpark, what percentage of revenue is that; today is it still sort if 10% ish is it formed below that and is there risk that this could continue to fall or despite the quarterly drop do you still think over the next few years it’s not going to really fall bad further?

Randy Gress

I think with the STTP market, yeah we have roughly 10% of sales revenue there in the business and you may recall that roughly three-quarters of that is from our Mexican operations and in Latin America which is fairly stable though the pressure there from the phosphates; but we have seen it fairly stable, so expect that to continue in the medium term at that level. And then for the US will that be in a quarter of that 10% roughly you know there is continued pressure, we expect some stability there so a little bit more reformulation, but and in the near term we expect that to be relatively stable too.

Operator

Our next question comes from Peter Cozzone from KeyBanc Capital Markets. Please go ahead.

Peter Cozzone - KeyBanc Capital Markets

So debottlenecking of the more specialty lines continues to be a focus going forward. I am just wondering can you give us maybe a general idea for what run rates are currently and from your more specialty lines and maybe more probably by region. I am just trying to get an idea for the timing of the debottlenecking activity and then how quickly you could ease up in kind of normal growth environment?

Randy Gress

Yeah, Neil, can you address that please?

Neil Salmon

Yeah. I think it’s always tough for us to give a precise figure on trust utilization of those, because we have the really in the portion situation of generally having the flexibility across all comps and through a continuous program of these kind of debottlenecking type investments releasing sufficient capacity to support growth.

So its not projects that we will see a step change in our growth profile and generally we will look to continue delivering on our overall growth targets and continue to win through the value proposition of our products and make sure that capacity continues to be available to support that. So, the program is more in support of growth objectives rather than leading to step change variations in the growth that we are delivering.

Peter Cozzone - KeyBanc Capital Markets

Okay, and then of the incremental $2 million in quarterly cost in the back half of the year, how much of that would be reoccurring looking into 2013 and then given a more uncertain macro-environment, are there any areas where you might be able to cut costs or drive productivity gains to kind of offset?

Neil Salmon

So half of four is related to the maintenance outages and we typically operate on 18 month to two year schedule for those. So they should not recur in 2013. However, our expenditure on money spend is a little below the rate we had previously anticipated for this year and although we haven't confirmed our 2013 plans that maybe a little bit higher than the amount that we projecting for this year. But certainly the maintenance and outage expenditure will not continue into next year.

And certainly, yes we retained a very strong control overall on our costs and that they are coming in currently below our internal projections for the year. We expect that to continue and we do have some productivity related investments within our capital plan, however, those are a larger project to the typically and it takes some quarters before we see the benefit of them. But certainly, as you would expect we are keeping a very strong focus on the one hand making sure we are still investing in key areas to support growth, but on the other making sure our base operations are operating as productively as they can.

Peter Cozzone - KeyBanc Capital Markets

And then just one more if I may, in the Mexico specialty business sequentially operating margins up over 500 basis points sequentially. Can you talk about the drivers there maybe kind of bucket that and what are the expectations I guess, what is the underlying business kind of running at now as that's historically been a little bit lower margin in the US business?

Neil Salmon

Mexico especially operating margins will always be a little bit more variable because of the nature of the business and you have more significant product mix effects on margin and also it’s a less stable margin profile across the business. So it’s difficult for me to breakdown too much the second versus first quarter. I think the average for the, I think that's around 15% now on the first quarter I said that 12% was my view of the underlying margin of the business at that point that we were aiming to improve it.

I think we are making some improvements, but we are probably only on an underlying basis one or two points above that 12% level and I think the second quarter number is higher than we would expect to be the sustainable margin for that business at this point time. But certainly we will continue to focus on improving the margin profile of our Mexico business.

Operator

Thank you. Our next question comes from Chris Butler from Sidoti & Company. Please go ahead.

Chris Butler - Sidoti & Company

If we are looking at your US and Canada specialty business back in the first quarter you had indicated that there is going to be about $4 million to $6 million of additional costs that was primarily in US and Canada. The actual results were about $7 million down. You had pointed to weak demand which I am sure that was part of it, but could you speak to the profitability in this quarter, is it compares to first quarter?

Neil Salmon

Well I think we had said four to six Specialty Phosphates in total and we said that impact was affecting the US business. In fact we had slightly higher (inaudible) inflation in the US business which was offset by a little bit of benefit we were able to achieve in Mexico.

So it actually panned pretty much expected, the number we gave was a total for Specialty Phosphates number of the first quarter.

Chris Butler - Sidoti & Company

In that case why was the US down 7 million. It seems that if that was a number that was. In total we got much more than that just in the US and Canada for this quarter.

Neil Salmon

Well we didn’t go into a region by region expectation, but it was -- we did anticipate some somewhat higher inflation than the (inaudible) in the US offset by a little bit of benefit we were expecting to achieve in Mexico. So we got to the net thing that we were expecting.

Chris Butler - Sidoti & Company

And looking at the profitability in US and Canada right now you know we should be fairly clean as far as contracts, raw material costs, they are fairly stable. Is this a good base line to be thinking about this point?

Neil Salmon

Yes I think so, the raw material costs are fully caught up to recent market levels. The one annual contract we have benchmarks of fourth quarter that was, so the prices we pay under that contract the next year will be examined by where the market is in the fourth quarter. And then the other at least how the US expenditure moves on about a three to six month lag to market, as I think we've discussed before.

Chris Butler - Sidoti & Company

And as far as the maintenance in the back half of the year, is there anything unusual there as far as the size or the timing or is it just happened to be that you have got a couple of them lumped together back to back?

Randy Gress

Based on you know some of the performance within Mexico, we decided to pull forward some of the outages there and they are spread through the second half. So that's where we have the cost split roughly $2 million for each of the quarters.

Chris Butler - Sidoti & Company

Can you talk about the delayed capital expenditures and whether that delays some of the growth that you are expecting from regions like China?

Randy Gress

Yeah for the delay on the capital expenditures, it's more of us doing some more thorough engineering and making sure of the scope. So it's just a delay in the timing, not any impact on what we expect to do as far as support of our growth.

Neil Salmon

And just to confirm, there is no delay in the China project, that continues on track. So none of this retiming have any effect on actually on growth expectations.

Operator

Thank you. Our next question comes from Edward Yang from Oppenheimer. Please go ahead.

Edward Yang - Oppenheimer

Sounds like the plant maintenance cost, you know, they were planned, but how much of that was that included in prior guidance for 7% to 10% specialty phosphate you know operating income growth and it sounds like there was a little bit more that you expected there?

Neil Salmon

That’s right, Ed. But We've also turned back a little bit on mining. So, again, if you remember about a year ago, we started talking about 2012 and we said we have additional cost of $4 million related to mining expense and it was still at about that number, but yes we had, we decided to, as Randy mentioned to bring forward a little of the timing of the Mexico outage and that’s offsetting what's now our reduced program or a revised program for our Mexico mining activity.

Edward Yang - Oppenheimer

Okay, thanks for that, Neil. On the mining cost, the $2 million in incremental cost this was above and beyond kind of a normal number that you were expecting and what was the number that you were budgeting for this year?

Neil Salmon

Well our base level of spend is around a $1 million. So that’s an addition to the base minimum level.

Edward Yang - Oppenheimer

That's still about $3 million in mining cost in 2012?

Neil Salmon

Yes.

Edward Yang - Oppenheimer

That’s about $0.09 in earnings probably. Isn’t that just using kind of back of the envelope numbers?

Neil Salmon

Yes.

Edward Yang - Oppenheimer

Is there a CapEx amount that’s associated with the mining as well?

Neil Salmon

No, because we’re not currently working with resources and the NI 43-101 certification. We have to recall that expense is certainly in our view it's more of an investment than an expense side but accounting centre is required to expense. Once we get to NI 43-101 which should be next year sometime according to the current schedule, then that would potentially change the way we reported future investment going forward. But as we discussed before we would also at that point be revisiting to what extent we continue with this project by ourselves consider involving others as a full development of these reserves would be quite a significant investments as we discussed previously.

Edward Yang - Oppenheimer

Got you. Considering what you’ve done in terms of strengthening your rock sourcing, you know, how maybe this is a question for Randy, I mean, how would you place a priority of exploring this concessions. Is this just kind of a nice option to have? It does seem like it is impacting your income statement somewhat or is this something that you feel is strategically important than its going to pay some nice financial returns going forward.

Randy Gress

I think in the past, we have said that we've gotten comfortable with our rock sourcing as we've been able to diversify the sourcing that we have and continue to invest to ensure the capability and flexibility going forward. I think as far as the investment in the mining it's an opportunity that presented itself and I think based on what we know could prove valuable in the future which is why we are spending this money to the exploration and valuation here.

Edward Yang - Oppenheimer

Okay. And GTSP, you know, any expectations there for 2013? I think your long-term assumption was earning somewhere between $10 million to $15 million in operating income from GTSP. This year its going to be a loss, are you expecting next year that GTSP will kind of make the normal amount of money that you expect?

Neil Salmon

I think the reason we are seeing lower margins than typical in GTSP is that the disconnect between finished fertilizer prices and raw material market prices which is continued along so far this year than we expected, in the past the spread between market prices for the raw materials and finished products has always reasserted itself. We expect that to be the case this time as well. It's difficult to predict when it will happen though but yes we would expect GTSP to return to a more normal earning level at some point in the future but there's no clear indication in market trends at the moment as to when that will be.

Operator

Our next question comes from Chris Shaw from Monness Crespi. Please go ahead.

Chris Shaw - Monness Crespi

I would like to go back to the US margins, I understand we were expecting the increased raw material cost sequentially and now that we are sort of caught up with pricing and raw materials, this margin is the lowest I think you done for a while except for the quarter with the ERP issues, is there anything else in there, I mean have you switched some higher margin business to Mexico or has the AMT and Kelatron acquisitions brought down margins or the ERP system itself that added different costs, it just seems lower than I would have expected?

Randy Gress

So Chris I think, yeah, I mean we kind of focus our comments on the overall specialty phosphates margin because you are right that there is some effect between the two businesses of some the items that you described including the ERP costs which we carried by the US business.

So yeah, we look at it on a total specialty phosphates business and I think the other point I would make is we've always said our percentage margin would be lower in a high raw material cost environment because of the diluted effect of inflated revenue number and so if you go back over the last couple of years to before this current period of raw material inflation and relative to what it’s today then I think you will see that the change in the percent margin numbers pretty much what you would expect given our target of offsetting raw material cost inflation in the long term.

Chris Shaw - Monness Crespi

Yes even managing for dollar margin then?

Neil Salmon

Well that’s been our minimum goal and I think still one that we have achieved over this last couple year period of inflation, yes.

Chris Shaw - Monness Crespi

And since Phase III I guess starting in 2009 has it basically been -- have you been ahead on pricing the whole time, has been in the inflationary period at whole time?

Neil Salmon

Yes pretty much; it was cost started moving up during 2010 and it would normally be the case in an inflationary market that we will be ahead because we generally increase our prices in line with market conditions; our raw material cost is somewhat relative to the market conditions.

Chris Shaw - Monness Crespi

And then just to go back to the charges in GTSP that you took the reviewing I guess last year’s I guess what – I am not sure if I understand that, is that a LIFO adjustment there or was it something else that didn’t require restating five years period?

Neil Salmon

No, it’s not LIFO adjustment; the detail some are complicated, but it was paid a reconciliation issue that arose immediately after the [E1 Go Lite] which was not identified in the year-end close, but should have been and was only identified in the 2012 second quarter. And then also some adjustments as I mentioned to both the amounts of initiative provided for in 2011 and through these current quarters on the contract terms and how they impact final prices with raw materials, but no not a LIFO adjustment.

Chris Shaw - Monness Crespi

And just going back to your one annual contract you have is that as of now would with raw materials currently are at market price or would you expect that to be up or down or to reset right now?

Neil Salmon

It would be a bit lower if it’s to reset right now, but the key will be throughout the fourth quarter and (inaudible)

Chris Shaw - Monness Crespi

And so one quick last one; you said something here maybe your investment in the mining concessions; is that reflecting anything that you’ve seen so far there or just prudent?

Randy Gress

It’s just more and balance would be spend we have to do in the second half with our maintenance outages.

Operator

(Operator Instructions) And at this time, you have a follow-up from Larry Solow from CJS Securities. Please go ahead.

Larry Solow - CJS Securities

Just could you give us a little more color on, I know you briefly touched on the acquisition of AMT I guess which was closed a couple of weeks ago; it sounds like it’s about a little bit less than Kelatron size; is that fair to say? Could you talk about that and then some of the real estate that you acquire with it and what’s the plan to do with that?

Randy Gress

With the acquisition of AMT we’re looking at total revenues of roughly $30 million so it’s comparable in size and I think as far as the potential, we saw some performance within the Kelatron business and I think with the AMT we are expecting some greater synergies I guess in three areas, one is or a couple in the operational side of things, because we think we have a good asset as well as some good technologies there within AMT and then also leveraging the overall commercial channels that we have with both the existing Innophos business as well as what we’ve established with Kelatron.

Larry Solow - CJS Securities

Is the AMT business have been growing or Kelatron has been growing pretty nicely in a double-digit range. Is AMT also grown or is it sort of more of a synergistic acquisition that could accelerate growth with Kelatron under your umbrella?

Randy Gress

Well overall, we do expect you know, just the base market to be growing. I think forecast are more in the high single-digit area and based on our increased focus in combining the businesses, we expect to do a combined performance better than that.

Larry Solow - CJS Securities

And the real estate is that – did you have to purchase that, was that sort of a package deal any plans for that, and what’s the deal with that?

Randy Gress

You know, what we have there is the base plant and facility and then there is some additional production capability that we could expand into if necessary.

Larry Solow - CJS Securities

And then just lastly on China, I think you said sort of on target. Has that facility opened up yet?

Randy Gress

No, as I was saying you know when we completed the construction. We still have a few pieces of equipment that we’re expecting delivery here shortly and again with the overall sales based on the permitting requirements we would expect in early 2013.

Operator

Thank you. That concludes the time we have for the question-and-answer session. I will now turn the call back to Mr. Randy Gress for closing remarks.

Randy Gress

Well, I would like to thank everyone for joining us today and we certainly appreciate your interest in Innophos. We look forward to speaking to you next quarter when we report the third quarter results. Thank you.

Operator

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

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