Innophos (IPHS) Q1 2019 Earnings Call Transcript

Innophos (IPHS)
Q1 2019 Earnings Call
April 30, 2019 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to Innophos first-quarter 2019 earnings conference call. My name is Robert and I'll be your operator for today's call. [Operator instructions] It is now my pleasure to turn the call over to your host, Mark Feuerbach, interim chief financial officer. Thank you.

You may begin.

Mark Feuerbach -- Interim Chief Financial Officer

Good morning, and thank you for joining us today for Innophos' first-quarter 2019 results conference call. Joining me on the call today is Kim Ann Mink, chairman, president and chief executive officer. Please turn to Slide 2. During the course of this call, management may make or reiterate forward-looking statements made in this morning's 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, estimates 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. Also, I would like to remind you that during the course of this conference call, management will discuss non-GAAP measures in talking about the company's performance.

Our adjusted EBITDA financial measure excludes stock-based compensation, currency translation, severance, value chain transition expenses and the associated supplier Q4 2018 payment amortization, Mexico natural gas supply and balance charges and M&A related costs. Please refer to our press release, the appendix of today's presentation and our SEC filings for the GAAP to non-GAAP reconciliations. 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 30, 2019, 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. Please turn to Slide 3. During the call today, we will be reviewing our first-quarter 2019 financial performance and 2019 outlook, after which we will open the call up for questions. With that, please turn to Slide 4 as I turn the call over to Dr.

Kim Ann Mink.

Kim Ann Mink -- Chairman, President and Chief Executive Officer

Thanks, Mark, and good morning, everyone, and thank you for joining us today. Our first-quarter performance was marked by our ability to deliver an adjusted EBITDA margin in line with last year despite a difficult year-over-year comparison on the top line. In addition, we continue to make solid progress executing against our Vision 2022 strategic roadmap and strategic pillars to build the critical capabilities that will transform Innophos' growth profile. Notably, during the quarter we advanced our efforts to transition to our lower-cost multi-faceted value chain structure, continued to develop innovative solutions that enhance our position in attractive food health and nutrition end markets and capitalize on our value selling commercial model.

First-quarter sales of $191 million were down 7% compared to the prior-year quarter as our pricing power and growth in several key categories were offset by several factors. This included the planned discontinuation of low-margin nutrition trading business, orders shifting out of the quarter due to customer timing and Midwest flooding and softer-than-expected demand certain industrial specialties categories related in part to indirect tariff impacts. Now GAAP net income for the quarter was $9 million or $0.44 per share, down from $11 million or $0.55 per share the prior-year quarter due primarily to severance costs and Mexico natural gas supply adjustment charges. On this note, we continue to closely monitor the supply imbalance in Mexico's natural gas network and are proactively managing the situation where possible to mitigate the impact.

This includes engaging with an energy consultant, assembling an energy reduction team and implementing several energy reduction programs. The infrastructure projects in Mexico are currently on schedule for completion in Q3, providing better access to natural gas in the second half of this year. Now in Q1, we delivered adjusted EBITDA of $30 million which was down $2 million or 7% year on year but sequentially flat. Of note, this marks the fourth straight quarter of relatively stable adjusted EBITDA.

Adjusted EBITDA margin of 16% was up four basis points compared with the prior-year quarter due to our cost management efforts implemented in the second half of 2018, continued success in capturing price increases and improved mix, all of which helped to offset the lower volume effects. Now as Mark will expand upon later, today we are reiterating our 2019 adjusted EBITDA guidance and resetting our revenue guidance. Although we continue to see growth in several service markets, as a result of the pockets of softer market demand that we began to see in Q1, we believe it is prudent to adjust revenue guidance for 2019 to a range of 1% to 2% below 2018 revenues. Even so, we are confident that by proactively managing near-term market dynamics and advancing our key initiatives under our strategic pillars, we will be able to deliver 2019 adjusted EBITDA 2 growth of 1% to 3%.

Now with that, please turn to Slide 5 to take a closer look at some of our key strategic pillar achievements in Q1. In Operational Excellence, our transition to the new multi-faceted supply chain has advanced on schedule with several milestones completed in the quarter. The Geismar facility is now successfully operating under the new multi-sourcing structure put in place in 2018 to receive the key raw material MGA from our Coatzacoalcos facility as well external sources. Now Geismar was able to optimize the processing of the new MGA supply mix and scale up to targeted run rates by the end of the quarter.

Our Coatzacoalcos facility successfully scaled up MGA production to the targeted production rates and the overall supply plan for external sources of MGA is now fully in place. We completed the transition of the multi-faceted supply chain in the first quarter as planned. We continue to expect to begin to capture the benefits of the lower cost structure during the latter half of the year. Now as a reminder, this timing is due to our expectation that second quarter production costs will still be in inventory at the end of Q2.

We remain on track to deliver adjusted diluted EPS improvement of 10%, which represents an estimated annual run rate up $0.25 to $0.27 per share by year end. Now beyond that, we remain committed to a continuous improvement culture across the organization to further optimize our operations and improve our cost structure. Under Commercial Excellence, our commercial organization has continued to successfully leverage our value selling model to capture pricing power and to offset input cost increases from inflation and higher freight expenses. Under strategic growth, we remain focused on advancing both organic and inorganic growth opportunities that strengthen Innophos' position as a value-adding higher-margin ingredient solutions provider for high growth FHN markets.

Now on the organic side, we continue to deliver wins through our SPARC new product development program. So we're focused on collaborating with our customers in the food, health and nutrition markets. Our scientists and engineers leverage our ingredient knowledge and process technology expertise to develop products that support our customers' product claims and consumer demand. During the first quarter, we developed several science-backed solutions to support healthy lifestyles.

This included a customized selenium-based solution for inclusion in a new instantized micronutrient rich product. This product has since been launched by a leader in the natural products industry to support healthy immune system and cardiovascular health claims. For a customer's new dietary supplement launch, our formulary has developed a nutritional ingredient blend and leveraged our processing technology to reduce the overall tablet size. The same processing technology was employed in the development of a new turmeric product supporting anti-inflammatory and antioxidant claims.

Now these SPARC-driven efforts support our strategy to shift our portfolio mix over time to a greater level of higher-margin, higher-value branded ingredient and formulated solutions. To drive inorganic growth, we continue to actively evaluate M&A opportunities that meet our disciplined and requisite corporate strategic and financial criteria to strengthen our FHN platform. Now our focus in 2019 remains on executing on the key initiatives across our strategic pillars in order to deliver improved profitability and realize our Vision 2022 goals for sustainable top and bottom-line growth. So with that, I will turn the call over to Mark.

Mark?

Mark Feuerbach -- Interim Chief Financial Officer

Thank you, Kim Ann. Please turn to Slide 6. As Kim Ann noted, and as shown here, our Q1 financial performance was marked by our ability to deliver adjusted EBITDA margin in line with last year despite a difficult year-over-year comparison on the top line. Now let's turn to Slide 7 to take a closer look at the quarter details.

Sales of $191 million in the quarter were 7% lower than the prior-year quarter as the 4% selling price increases were offset by three volume drivers. These included a 3% volume decline from the discontinued low-margin nutrition trading business, 6% lower volumes from order per share was due to customer timing and Midwest flooding and a 2% decline from softer-than-expected demand in certain industrial specialties categories. Q1 gross margin of 19% was up significantly from the sequential fourth quarter but down 153 basis points compared with last year due to the impacts of the value chain transition and Mexico natural gas charges. Excluding the impact from these costs, Q1 gross margin would have been 20% of sales.

Moving on to earnings on Slide 8. Q1 net income of $9 million was down 20% due primarily to severance costs and Mexico natural gas supply adjustment charges. As shown in the adjusted EBITDA bridge, selling price increases and SG&A benefits were offset by lower volumes and higher input and manufacturing costs. As a result, adjusted EBITDA of $30 million was down 7% year over year.

Adjusted EBITDA margin of 16% was up slightly year over year reflecting improved mix and the continued benefits of price and cost actions. Moving on to Slide 9 to review our performance by segment. FHN Q1 sales of $115 million represented 60% of total company sales and were down 9% overall as the 4% improvement from price increases was offset by a 13% decrease in volumes. The volume decline was due largely to our decision to discontinue a portion of low-margin nutrition trading business and customer timing delays.

FHN Q1 adjusted EBITDA margin of 15% was sequentially similar to the last three quarters but 173 basis points below the prior-year quarter due to increases in freight market rates and other input costs. IS Q1 sales of $63 million were flat as a 4% selling price increase was offset by a 4% volume decline that was impacted by Midwest flooding and indirect unfavorable tariff impact on our international sales from competition redirecting mostly technical grade products. The IS Q1 adjusted EBITDA margin of 15% was up 61 basis points sequentially but 167 basis points below the same quarter last year due to the noted indirect tariff impact. Other Q1 sales were $13 million, down 16% compared with the same period last year on lower volumes due primarily to order pattern.

Other adjusted EBITDA margin of 27% was up significantly from Q1 2018 due to improved product mix. Now turning to Slide 10. In the first quarter, net interest expense of $4 million was up $1 million due to higher market interest rates. The underlying effective Q1 tax rate was 29% in line with the prior year and expectations.

Capital expenditures of $10 million in the quarter were $5 million lower due to higher payments made from accrued payables in the prior-year quarter. We paid $9 million in dividends during the quarter and maintained our annual dividend rate of $1.92 per share. Net debt was $309 million in Q1, up $5 million year over year due to a small decrease in year-over-year free cash flow. And our net debt to adjusted EBITDA ratio was 2.5 times compared to 2.4 times last year.

Now turning to Slide 11. On a GAAP basis, earnings per share of $0.44 declined 20% due primarily to severance costs and Mexico natural gas supply adjustment charges incurred in the first quarter of 2019. Q1 adjusted diluted EPS was $0.57, down $0.03 year over year due to lower volumes. Moving to Slide 12.

Q1 cash from operations was an outflow of $9 million and free cash flow was an outflow of $19 million reflecting seasonal working capital effects that were more significant in the first quarter of 2019 due to decreases in accounts payable. Now turning to Slide 13 to review our outlook for 2019. Starting with revenue. We continue to expect positive year-over-year revenue contribution from price increases and new product wins.

These benefits will be offset by the discontinuation of lower-margin FHN nutrition trading business in 2018, lower co-product sales in the other segment due to efficiency improvements and indirect tariff pressure from competition redirecting mostly technical grade products to international markets. Additionally, although we expect the impact from the timing of orders in Midwest flooding experienced in the first quarter to rebound over the next two quarters, we now expect the slowing demand that we began to see in select industrial markets in Q1 to affect our outlook for this year. As a result, as Kim Ann mentioned earlier, we are revising our revenue forecast to be 1% to 2% below 2018 revenue of $802 million to better align with the current market demands. Despite the top line reset, we are maintaining our 2019 adjusted EBITDA guidance of 1% to 3% growth compared with the prior year, with phasing in the range of 42% to 45% in half one and 55% to 58% in half two.

In Q2 2019, Innophos will undergo and complete a planned annual maintenance shutdown on one of its production units at the Coatzacoalcos Mexico facility. This will result in $3 million of maintenance and under absorption costs which were already reflected in the company's 2019 guidance. From a GAAP and cash perspective, we continue to expect costs to be higher during H1. The anticipated nonrecurring portion is expected to be adjusted for non-GAAP reporting purposes such as value chain transition expense, which was completed in Q1 '19 and Mexico natural gas supply adjustment charges.

Capital investments are expected to be in line with 2018 to finalize the value chain and manufacturing optimization program that commenced last year. Average working capital is also estimated to remain in line with 2018. We expect to -- we continue to expect the effective tax rate in the 28% to 32% range. With that, I'll turn the call back over to Kim Ann.

Kim Ann Mink -- Chairman, President and Chief Executive Officer

Thanks, Mark. And before we open the call up for questions, please turn to Slide 14 as I highlight a few key points. Now although we expect to see some headwinds in 2019 including incremental softness in select markets, our overall base business remains stable and we're confident that we have the critical capabilities and strategic programs in place to deliver EBITDA margin growth this year. Now we continue to advance the transition to our multi-faceted value chain initiative, and as a result, we are on track to meaningfully reduce our cost basis as we move through 2019.

For our Commercial Excellence work, we've established the customer relationships and a strong commercial foundation that positions us to continue to proactively leverage our value selling approach. Now we also continue to have excellent momentum developing high-value new products through the SPARC program, which we expect to accelerate as we move through the year. And finally, we remain committed to pursuing inorganic growth initiatives through M&A to further shift our position over time to a value-adding higher-margin ingredient solutions provider. Now we do look forward to keeping you updated as we execute on our plan in 2019 and continue on our journey to deliver our longer-term Vision 2022 goals.

So with that now, we'll open the call for questions. 

Questions and Answers:

Operator

[Operator instructions] Our first question comes from Brett Hundley with Seaport Global. Please proceed with your question.

Brett Hundley -- Seaport Global -- Analyst

Good morning, everyone. I just have a quick question to make sure that I'm clear on something. So it sounds to me like Midwest flooding is leading to somewhat of an unexpected incremental softness in certain business areas and also that, that recovery is expected to take multiple quarters as opposed to maybe just one quarter. Am I hearing that right? And then what's the connection between Midwest flooding and incremental softness over a longer-than-expected time period?

Kim Ann Mink -- Chairman, President and Chief Executive Officer

Yes. Thanks for that question, Brett. With the Midwest flooding, that specifically impacted our -- some of our products that go into the fertilizer area, and typically -- those orders typically would come in the mid to late March time frame. So right now as we monitor the situation, it could just be pushed out mostly in Q2, but we see some spillover to Q3 depending upon when the farmers will do their fertilizing.

Brett Hundley -- Seaport Global -- Analyst

Gotcha. OK, that's very clear. But within FHN itself, volumes there were a touch weaker than I would have expected and it sounds like maybe you saw some incremental softness there. I know you said that your base phosphates business is stable.

Were you surprised by anything on the FHN volume side? And then can you also -- to the extent that you can, can you give us some understanding of how Novel continues to perform?

Kim Ann Mink -- Chairman, President and Chief Executive Officer

OK. So yes, with regard to FHN, really that was more of an order timing. So the Midwest flooding was really in the industrial specialty segment, so we put that to the side. But for FHN, order timing was the bigger factor there.

That was primarily in our nutrition business, some of which was due to order phasing in some of our larger branded ingredients and some was due to further destocking by our customers where orders were just pushed out into the second quarter. So we've already begun to see movement, Brett, in the order book including some sales that already shipped in April, which is what gives us visibility and confidence that we'll see that.

Brett Hundley -- Seaport Global -- Analyst

Excellent. Thank you. And then I just had a question on pricing. So you guys have gone through multiple rounds with customers now.

Where do you think you stand today in so far as being close to made whole on your raw material inflation? That's the first part of my question. And then as a follow-up, when would be the next discussion point typically between you and a customer assuming that raw materials remain static? So I guess what I'm asking is, like what's the normal course of talks in a stable noninflationary environment? Would it be six months, months months? That color would be helpful too.

Kim Ann Mink -- Chairman, President and Chief Executive Officer

Yes. So we've actually more than covered our input cost so that -- to date. So that is good news and we've been very proactive. I would also mention that we came out with another price increase in -- effective March 1, and our competitors have followed.

We captured -- just to give you a sense, Brett, we captured $8 million in Q1 as far as price increases. So we're off to a very good start. Now I think we've discussed in the past that we have increased the amount of some of our products, in particularly in the phosphate area and have put those into longer-term contracts, and that has served us quite well. And we've just gone through a lot of the contract negotiations particularly in the Food, Health and Nutrition business.

And in fact, we have seen some nice price increases in that area, part of that $8 million that I just talked about. Typically, even in stable raw materials, we really don't index things to raw materials which I think is the right way to go because that commoditizes your business, quite frankly. So we really talk about our value proposition and the things that we're doing as a key supplier, as a key partner, if you will, regarding to our new product development, the quality programs and so forth and so on, our manufacturing optimization, all those things take time and money to be the best supplier we can possibly do. So typically, we are always reviewing that every two to three months, quite frankly.

We have those discussions internally and then decide how we move out, and that's probably consistent with what we did in 2018 because it was pretty much once a quarter that we were raising prices. So hopefully, that answers your question.

Brett Hundley -- Seaport Global -- Analyst

Yes, it does. I actually think that, that's a really important answer depending on what the raw material environment looks like in the coming quarters.

Kim Ann Mink -- Chairman, President and Chief Executive Officer

Correct.

Brett Hundley -- Seaport Global -- Analyst

So I appreciate that. A final question for me, probably your favorite topic now, Kim Ann, is M&A. So your M&A strategy makes sense in so far as acquiring smaller entities at hopefully relatively more attractive multiples than what we've seen out there and then letting those assets flourish on your platform against what's a wide base of application knowledge, customer relationships, et cetera. I think what I underappreciated in recent years was the quality or the fitness of these targets.

So I guess what I'm asking is as you work down your focus list and meet with companies, are you encountering a lot of situations where the composition of the target is vastly different than what you see on the surface? And related, how can you get the investment community comfortable that Innophos can in fact deliver on its 2022 goals? Because I think a lot of us on this side of the phone are working through the math and we're seeing a runaway that's shortening a little bit. And so if you can kind of talk to your ability to deliver and get us comfortable, I think that would go a long way in helping.

Kim Ann Mink -- Chairman, President and Chief Executive Officer

Right. So clearly, another acquisition in 2019 is going to keep us on track to achieving our 2022 target. When we put out our Vision 2022, if you kind of think about our target, that would be meaning -- maybe that $95 million of revenue per year starting in 2018, we already have started that in 2017. So the fact that we did not complete in acquisition in 2018 should not be interpreted as we've fallen off the track.

And we were very active in 2018, extremely active but also very disciplined. So this was not about something we could not reach a final agreement. This is really about us deciding from and disciplined standpoint and because we do have disciplined criteria. So going back to your next question, while we feel our pipeline remains very active as we evaluate target acquisitions and we are actively pursuing that, we are remaining very disciplined.

So that's why they call it due diligence. And if we feel that there is a weakness in the acquisition we're looking at, we feel we'd be remiss as us -- on our part to allow -- to buy such an acquisition. I think that would be remiss for our shareholders. So that's how you should look at that.

But I wouldn't say -- I think the pipeline we're looking at, we continue feel very comfortable and I think there are still many, many targets out there that could be actionable.

Brett Hundley -- Seaport Global -- Analyst

Thank you so much.

Operator

Our next question comes from Larry Solow with CJS Securities. Please proceed with your question.

Larry Solow -- CJS Securities -- Analyst

Great. Good morning, guys. Thanks. Just Brett got a bunch questions in for me but I'll -- just a couple follow-ups.

On the price increases, it seems pretty consistent on both the FHN and industrial. Is that -- and you mentioned that maybe it's perhaps a little leaning more toward phosphates. Maybe they were a little bit behind the eight ball, if you will. Are you seeing -- just between phosphates and nutrients business, is the average increase is about that the 4%-ish? Or is there sort of a discrepancy between the two?

Mark Feuerbach -- Interim Chief Financial Officer

Yes, Larry, I'll take that. So yes, we're seeing more success in the phosphates portion of the business at this point. But looking at the segment overall, you're right, the percentages look pretty much the same this quarter on a year-over-year basis right. But as you know, we were raising prices all last year and we were more successful in the IS segment.

In fact, in the fourth quarter last year, we had about a 6.5% increase in IS and now we're about 3.5%. So some of that was due to the indirect tariffs pressures that were facing some pricing headwinds in the international markets, and so we saw a sort of a little bit of a step-down there, but still positive, which is good.

Larry Solow -- CJS Securities -- Analyst

Right. And you -- go ahead, please.

Kim Ann Mink -- Chairman, President and Chief Executive Officer

I would just add, Larry, is that I really felt, and I think I've discussed this with our investors, is that when I came into the company three years ago, there really was not this philosophy of taking as -- we weren't acting as a leader in the pricing area. So in the phosphate area, we really had ground to make up. So I think that our assertiveness has been very successful and I think that's why you've seen more activity or the numbers really indicate that. I think in the nutrition business, in many cases, while we have seen price increases, we were probably in a better position in that area to begin with because of the value selling there, if that makes sense.

Larry Solow -- CJS Securities -- Analyst

Absolutely. It seems like just the phosphates, were -- sounds like were a little bit underappreciated historically, at least some of them. So looks like you guys are shining a light on them a little better and getting the deserved price. Does that -- have you sort of -- has the gap been, I assume cut down a lot? Going forward, though, do you still see, and a sort of a follow-up to Brett's question too, a sort of a flatter or moderating rise on the raw materials? Do you see room for price increases? And is it more tilted still toward phosphate? Is there still more room to sort of catch up?

Kim Ann Mink -- Chairman, President and Chief Executive Officer

I think there's still more room to catch up because we are making improvements every day. And we are now -- with our broader portfolio, we are able now to bring solutions to our traditional customers that only traditionally have bought phosphate, we're now bringing them a much broader portfolio, again becoming a more meaningful partner in this. So again, it's all about the value proposition. So I really think there is more room there.

And quite frankly, we will -- when we continue to look at the nutrition business as well because of the segments we're serving there, that I think there's also some room there and I think that's an important statement. So it's all part of that Commercial Excellence. It's continuous improvement in all of those pillars, I would say.

Larry Solow -- CJS Securities -- Analyst

Right. OK. And you discussed and you qualify a little bit on the new product introductions that you refer to as SPARC. Can you just help us -- I don't know if you can give us exact quantification but sort of how much sort of these new products are moving the needle today and your expectations over the next couple years?

Kim Ann Mink -- Chairman, President and Chief Executive Officer

Yes. No, good question. And I know we're not at this point quantifying NPD. I had promised our investor community that toward the end of this year we'll really look at a vitality index, because we owe you that, because we should show you that to show that we are truly a specialty ingredients supplier.

I'll just give you some comparisons. So looking at 2018 versus 2017, by leveraging the skills of now our broader technology organization coupled with what we -- now is a very disciplined new product development process, we grew our NPD sales, our new product development sales by two-thirds. And we're targeting nearly a 50% growth in sales from NPD in 2019 versus 2018. So we're really picking up momentum.

And for me to report on a vitality index, I do need some history. And as you know, we put the SPARC new product development program in that 2017 time frame and cleaned up the old pipeline that we had come into in 2016 and really have refreshed. So I think we've been -- made very good progress from a momentum standpoint, but stay tuned for fourth quarter where we'll be able to talk about that more. But definitely, year on year, we're making strides.

Larry Solow -- CJS Securities -- Analyst

OK. And then it sounds like -- speaking of strides, obviously you're making great progress on your value chain initiatives. If we -- just on a quantifying basis, if we strip out sort of, and you guys have done that on your non-GAAP numbers, sort of the transition costs, is this still the investments that are going today? I realize it probably won't turn materially accretive until latter portion of the year. But if we strip out the -- or exclude sort of the transitions, is this still dilutive to your current performance or sort of neutral?

Mark Feuerbach -- Interim Chief Financial Officer

Well, I would say it was neutral for the quarter essentially because we're not only stripping out the costs that we incurred, but we're stripping out the amortization of the income from the Q4 payment we can receive from the supplier. I think there was net about $0.5 million impact there. As far as getting the benefits coming through, we wouldn't have had any benefits hitting our first-quarter P&L yet because we really didn't go to the new process until very late in the fourth quarter. So anything that would have occurred in the first quarter is hung up in inventory right now.

And as you know, we were fine-tuning the operations during that period as well. So it really wasn't until the very end of the quarter where we sort of got up to speed and are now set going forward. So we'll see lower production costs in the second quarter. Those will be stuck in inventory still at that point and then we'll start to see that benefit come out in the third quarter.

Kim Ann Mink -- Chairman, President and Chief Executive Officer

Right. And just to reiterate, we had $1.6 million of expenses, right, in that first -- in our first quarter mostly offset for the supplier payment amortization. But we'll no -- we'll have no further charges this year.

Mark Feuerbach -- Interim Chief Financial Officer

Yes, yes. So we're done with the transition. It's up and running and that's it for calling out any expenses.

Larry Solow -- CJS Securities -- Analyst

OK. Just two more if I may. Just on the adjusted EBITDA by segment. It looks like on the other segment had a nice -- at least on a year-over-year basis, a nice move-up, not so much sequentially, but year over year, and your margins in that, which I believe are mostly just a co-product 27%.

Is that -- and you mentioned -- you called out mix on that? Can you -- is that tolling better? Can you just help us sort of -- what was driving that sort of upside in that segment?

Mark Feuerbach -- Interim Chief Financial Officer

So there's -- it's lapping GTSP toll, and that was fairly flat year over year. First of all, there's a comparison period here. The lowest margin quarter of the year was the first quarter last year and we ramped up as the year went on. So if we were to look at it sequentially, we are up, but not anywhere near the amount that we are year over year.

So that's one point. The second point, it really was improved mix. There was some low grade asset sales in the prior-year quarter that were going into the fertilizer markets. So there's less of that hitting the results in this quarter, and it's a small revenue number of only $13 million.

So the profit sort of gets exaggerated because of that, but it is improved mix because we have some uphold in tolls as well, up in the U.S., there's a couple of contracts that we have. And those tend to make more money than the big GTSP one. So you're getting a blend of favorable mix from all of those factors.

Larry Solow -- CJS Securities -- Analyst

OK. Then just last question on your guidance on the first half, second half EBITDA portion. It sort of implies an EBITDA in Q2 of somewhere in the $24 million to $28 million or $25 million to $27 million, bit of a drop. Is that -- obviously, I think you called out there's maintenance expense.

Is that the biggest driver? Are there other things in there?

Mark Feuerbach -- Interim Chief Financial Officer

Yes. That's definitely the biggest driver is the $3 million charge is there both for expenses and under absorbed overheads that'll flush out to the P&L.

Kim Ann Mink -- Chairman, President and Chief Executive Officer

And that's a planned turnaround.

Mark Feuerbach -- Interim Chief Financial Officer

Yes. Yes.

Larry Solow -- CJS Securities -- Analyst

Right, right. And then you had said for the rest of business, I guess take that, that where you'll be flat to maybe slightly down, if I -- is that good way to characterize it?

Mark Feuerbach -- Interim Chief Financial Officer

I think the rest of the business should be performing similar to the way it did in the first quarter.

Kim Ann Mink -- Chairman, President and Chief Executive Officer

Yes.

Larry Solow -- CJS Securities -- Analyst

OK. Great. Thanks. Thanks a lot.

Appreciate it.

Operator

[Operator instructions] Our next question comes from Curt Siegmeyer with KeyBanc Capital Markets. Please proceed with your question.

Curt Siegmeyer -- KeyBanc Capital Markets -- Analyst

Good morning, Kim. Good morning, Mark. If I could just on FHN. You talked a little bit about the destocking that you saw and some of the softness in the nutrition piece of the business, but you talked about orders bouncing back here in March and April.

Would you -- would that imply -- do you expect volume growth in that business over the remaining three quarters of the year? Or do you see anything from just kind of what you're seeing so far that could still prevent that and maybe we should stay a little cautious here in the near term?

Mark Feuerbach -- Interim Chief Financial Officer

Well, certainly, FHN is going to be impacted by the business that we chose to not -- to discontinue late in 2018. So we're going to have that negative effect throughout the year. But yes, a lot of the timing issues that we saw in phasing on customer orders, we do expect to recover that over the next couple of quarters. But still over the year, we're going to have a negative comp because of the business we [Inaudible].

Kim Ann Mink -- Chairman, President and Chief Executive Officer

That's primarily due to what we had already talked about in the second half of last year, Curt.

Curt Siegmeyer -- KeyBanc Capital Markets -- Analyst

OK. OK. And then on the tariff effects that you've called out, how did that impact kind of trend throughout the quarter? Did it seem to intensify? Or do you feel like it's kind of just stable in terms of the headwind? Or any risk there that you see going forward of that potentially getting worse?

Kim Ann Mink -- Chairman, President and Chief Executive Officer

Yes. Well, last year, if you recall when we came out with our guidance, we did in fact call out that the gains that we would get in revenues would be expected to be offset by these indirect tariff pressure from competition. Again redirecting mostly the technical grade product, i.e. so those -- that product being used in industrial specialties really to the international market.

So rather than the Chinese competition coming into the U.S., they're going into some of our other markets because of the tariff disputes. We do anticipate limited direct impact on our North American sales now. So we had planned for some downside there. What we're talking about on this call should -- it has intensified a bit more, hence the reason why we did call that out and that's why we did see the weaker demand.

We do think we've got our heads around this now. But they did -- competition came in a little bit stronger not only to affect some of our pricing, hence the reason why Mark called out about the margin compression for this quarter in industrial specialties, but it did play into the volume decline. So it was just further weakening of demand that we had -- originally did not have visibility into, but we now do, and that's why you see the lower guidance.

Curt Siegmeyer -- KeyBanc Capital Markets -- Analyst

Got it. That's helpful. Thank you.

Operator

Ladies and gentlemen, we've reached the end of the question-and-answer session. At this time, I'd like to turn the call back to Kim Ann Mink for closing comments.

Kim Ann Mink -- Chairman, President and Chief Executive Officer

Thanks, Robin, and thank you all for joining us today, and we do really look forward to keeping you updated on our progress. Thank you.

Operator

[Operator signoff]

Duration: 46 minutes

Call Participants:

Mark Feuerbach -- Interim Chief Financial Officer

Kim Ann Mink -- Chairman, President and Chief Executive Officer

Brett Hundley -- Seaport Global -- Analyst

Larry Solow -- CJS Securities -- Analyst

Curt Siegmeyer -- KeyBanc Capital Markets -- Analyst

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