Innophos reports net sales of $209 million for fourth quarter 2012

Innophos Holdings, Inc. (NASDAQ: IPHS), a leading international producer of performance-critical and nutritional specialty ingredients, with applications in food, beverage, dietary supplements, pharmaceutical, oral care and industrial end markets, today announced its financial results for the fourth quarter and full year 2012.

Fourth Quarter Results

• Net sales for the fourth quarter 2012 were $209 million, flat with fourth quarter 2011. 
• Specialty Phosphates fourth quarter 2012 sales of $185 million decreased 1% compared to fourth quarter 2011.
• US/Canada Specialty Phosphates sales were up 4% entirely on growth related to acquisitions. Excluding acquisition benefits, sales were level compared to last year with the business experiencing a greater than normal seasonal slowdown arising from year-end customer destocking actions.
• Mexico Specialty Phosphates sales improved on a sequential basis but were lower by 11% compared to the year ago period.
• GTSP & Other sales at $24 million for the 2012 fourth quarter were $1 million above the year ago level on lower market prices, but higher volumes.    
• Diluted EPS for the fourth quarter 2012 was $0.60 compared to $0.93 for the fourth quarter 2011.  Included in the current quarter was $0.02 per share expense for accelerated deferred financing and interest rate premiums related to the senior credit facility refinanced in December 2012.  The fourth quarter 2011 results included a $0.05 per share benefit for changes in estimates on Mexican water duty charges and currency translation effects on the Mexican effective tax rate.  Giving effect to these adjustments, fourth quarter 2012 diluted EPS would have been $0.62 compared to $0.88 for the fourth quarter 2011. 

Full Year Results

• Net sales for 2012 were $862 million, a 6% increase over 2011. 
• Specialty Phosphates 2012 sales of $758 million increased 6% compared to 2011 primarily on higher prices. US/Canada organic volumes were flat, and acquisitions added 3% growth which exceeded a decline in Mexico volumes.   
• GTSP & Other sales at $105 million for 2012 were $6 million above the year ago level on lower market prices, but higher volumes.
• Diluted EPS for 2012 was $3.30 compared to $3.83 for 2011.  The fourth quarter adjustment items noted above, together with earlier adjustments noted in prior quarters, amounted to $0.22 per share for full year 2012 and $0.02 per share for full year 2011.  Giving effect to these adjustments, 2012 diluted EPS would have been $3.08 compared to $3.81 for 2011. 

Randy Gress, CEO of Innophos, commented on the results, "I am satisfied with the progress we made throughout 2012 in delivering on our strategic objectives and positioning the business for future growth. However, our results in 2012 have also reflected the challenging market conditions we have experienced.  The environment was particularly reflected in the fourth quarter, as the timing of the holiday season, combined with customer efforts to reduce inventories in an uncertain demand environment, resulted in a significantly more pronounced fourth quarter seasonal slowdown in our US and Canada Specialty Phosphates business.  That said, volumes have since recovered strongly in January 2013, which gives us confidence that the effect was limited to the fourth quarter." 

Mr. Gress continued, "Our strategic accomplishments in 2012 included two acquisitions in the attractive high growth nutritional ingredients space, as well as a significant step forward in the resources and capabilities dedicated to developing our business in higher growth geographies such as the Asia Pacific region.  Our latest acquisition, Triarco, was completed on December 31^st, and I believe Triarco's botanical and enzyme based ingredients business will prove highly complementary to the two mineral ingredients businesses, Kelatron and AMT, that we acquired in late 2011 and mid-2012. Through these acquisitions we have built a strong platform for future growth that will also support growth in our Specialty Phosphate product range."       

Mr. Gress concluded, "Looking ahead to the coming year, we are encouraged by what looks to be a strong start and we are confident of continued success with our strategic initiatives. We will also continue to take the necessary steps to ensure we are maximizing shareholder value by leveraging our strong cash flow and balance sheet both to invest in growth and improve cash returns to shareholders, and I expect 2013 to show further progress against both of these goals."

Segment Results – full year and fourth quarter 2012 versus 2011

Specialty Phosphates

For the full year, Specialty Phosphates sales revenue was up 6% year over year with prices up 5%.  US/Canada volumes were up 4%, with moderately lower market demand offset by growth initiatives, while acquisitions contributed 3% to growth. Mexico volumes were also affected adversely by lower market demand. 

For the quarter, Specialty Phosphates sales revenue was down 1% year over year.

Full year operating income at $108 million was $8 million below 2011 levels as the effects of 2011's market raw material cost inflation were more fully realized in cost of goods sold, thus catching up to selling price increases achieved in earlier periods.  Operating income margin for 2012 was 14%, down 210 basis points from 2011 levels, with US/Canada at 15% and Mexico at its expected 12%. 

For the quarter, operating income at $20 million was $6 million below fourth quarter 2011 levels primarily due to lower volumes in Mexico. Fourth quarter operating income margin was 11%, down 290 basis points against the fourth quarter 2011 and down 240 points sequentially, with lower volumes and unfavorable mix the primary reason for the quarter margin sequential decline. 

US/Canada

US/Canada Specialty Phosphates sales increased 8% for 2012 on 5% higher prices and 3% growth from acquisitions.  Excluding acquisitions, volumes were flat due to moderately lower market demand offset by growth initiatives. 

For the quarter, sales increased 4%, all attributable to acquisitions. Prices were flat with the year ago period, while continuing success with growth initiatives was fully offset by a greater than anticipated year-end destocking effect.       

Operating income at $86 million for 2012 was $8 million below 2011, as the effects described above of raw material cost increases catching up to selling price increases outweighed the selling price increases recognized in 2012. As a result, operating income margins for 2012 at 15% were 280 basis points below 2011 levels. 

For the fourth quarter 2012, operating income of $16 million was similar to the year ago quarter, but down $7 million sequentially, resulting in an operating margin of 12%, down 90 basis points against fourth quarter 2011 and down 420 basis points sequentially.  The large sequential decline is primarily due to lower volumes causing lower cost leverage with unfavorable product mix also contributing.

Mexico

Mexico Specialty Phosphates 2012 sales were 1% above 2011 on 6% higher prices, but 5% lower volumes, due to soft market demand.  

Fourth quarter 2012 volumes improved sequentially to similar levels seen in the 2012 first half. However, fourth quarter sales were down 11% against a very strong fourth quarter 2011, with prices down 5% in the less differentiated technical grade products and volumes down 6%.   

Operating income at $22 million for 2012 was flat with 2011 despite the previously noted lower volumes.  Operating income margin was 12% for 2012, level with 2011.

For the fourth quarter 2012, operating income of $5 million was down $5 million from fourth quarter 2011 levels, but up $2 million sequentially.  The variance against prior year is primarily due to lower sales, along with $2 million of planned maintenance outage expenses in the current quarter.   Operating income margin was 10% for the 2012 fourth quarter, below the full year average, as a result of the higher maintenance expense. 

GTSP & Other

GTSP & Other sales (primarily fertilizer co-product) increased 6% for 2012 compared to 2011, with volumes up 19% but prices down 13% on average.  Market prices increased during the first half of 2012, but fell throughout the second half, returning back to the seasonal lows seen at the beginning of the year.  

For the fourth quarter, sales increased 2% compared to fourth quarter 2011, with volumes up 14%, but prices down 12%.  

GTSP & Other recorded $2 million of operating income in 2012 compared to $21 million for 2011.  Included in the 2012 results is $7 million of income related to the settlement with Rhodia over Mexican water duties charges and $2 million of adjustments related to prior periods.  2011 included $3 million of income resulting from a reduction in the provision for excess Mexican water duties charges.  Excluding these adjustments, 2012 had an operating loss of $3 million compared to an operating income of $18 million for 2011.  Operating income margins were -3% for 2012 compared to 18% for 2011, excluding the noted adjustments.

For the fourth quarter 2012, GTSP & Other was just above break-even at $0.5 million, down $4 million from the year ago period on a combination of lower phosphate fertilizer market prices and relatively high market raw material costs.  Operating income margins were 2% for the fourth quarter 2012 compared to 20% for the fourth quarter 2011.

Recent Trends and Outlook

Market demand was flat to moderately lower in 2012, with this trend accentuated by the year-end destocking already noted. Although we are encouraged by what looks to be a strong start to 2013, this partly represents a carry-over of December orders to January, and we remain cautious on overall demand levels for 2013.

Momentum continues to improve in our product innovation and geographic expansion initiatives; however, we currently expect only modest market growth in 2013. Overall, we expect growth in Specialty Phosphates around the low end of our 4-6% long term target, with further growth of approximately 5% anticipated from the full year benefit of acquisitions completed in 2012.  First quarter 2013 revenue growth is expected to be moderately below the full year expectation in comparison to a strong first quarter 2012 for Mexico Specialty Phosphates.

We do not expect any major change in raw material purchase prices or underlying selling prices through the first quarter 2013. However, the US & Canada segment will have higher sequential costs of goods sold in the first quarter reflecting purchase accounting effects for the Triarco acquisition. 

We will see a further significant reduction in depreciation as the stepped up asset values created at the formation of the Company in 2004 reach the end of their depreciation lives. This will be partly offset by the amortization of the intangibles associated with recent acquisitions. Overall, we expect depreciation and amortization expense to be $7 million lower in 2013 than in 2012, of which $4.5 million will benefit Specialty Phosphates.  This benefit, combined with improved mix and better operating leverage, is expected to increase Specialty Phosphates operating income margins by approximately 200 basis points sequentially.  We expect full year Specialty Phosphates operating income margins to be similar to the 15% achieved for the first three quarters of 2012.

For the short term, GTSP is expected to continue near break-even through the first quarter. As with last year, fertilizer prices have been declining through the winter period, and no improvement in pricing is anticipated before the second quarter.  Mining expenses for the development of our Mexico phosphate concessions were lower than initially anticipated in the second half of 2012 and are expected to continue at approximately their current run rate for the first half of 2013.

Net debt increased by $69 million in the 2012 fourth quarter to $149 million resulting primarily from the $45 million of cash paid for the Triarco acquisition and a temporary increase in Mexico working capital.

Capital Expenditures

Capital expenditures were $33 million in 2012, with a higher spend rate in the fourth quarter as activity increased on some of the larger initiatives that had been delayed from earlier in the year by changes in engineering specifications. Investment continues to be focused on capacity enhancements for US/Canada and Mexico Specialty Ingredients facilities, expanding geographically, including the investment in China, and enhancing Mexico's capability to process multiple grades of rock, consistent with the Company's supply chain diversification strategy.  Our expectation for 2013 is for capital expenditures in the $40-45 million range.