Innospec Inc (IOSP) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen. At this time I would like to welcome everyone to the Innospec Inc. first quarter 2006 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

Thank you. It is now my pleasure to turn to call over to your host, Victoria Hofstad from Citigate Sard Verbinnen. You may begin your conference.

Thank you. Good day and welcome to Innospec Inc.'s first quarter 2006 financial results conference call. Today's call is being recorded. An audio webcast of the call and a slide presentation on the results are now available and will be archived on the Company's website, www.InnospecInc.com.

This conference call and presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements include all statements which address operating performance, events or developments that we expect or anticipate will occur in the future. Although such statements are believed by management to be reasonable when made, caution should be exercised not to place undue reliance on forward-looking statements, which are subject to certain risk, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, actual results may differ materially from those expressed or implied by such forward-looking statements and assumptions.

Risks, assumptions, and uncertainties include without limitation changes in the terms of trading with significant customers or gain or loss thereof. The effect of change in government regulations and economic and market conditions, competition and changes in demand, and business and legal risks inherent in non U.S. activities, including political and economic uncertainty, import and export limitations and market risks related to changes in interest rates and foreign exchange rates, government investigation, material fines or other penalties resulting from the Company's voluntary disclosure, the office of foreign assets control of the U.S. Dept. of the Treasury and other risks, uncertainties and assumptions identified in the Company's annual report on Form 10-K for the year ended December 31st, 2005, and those identified in the Company's other reports filed with the Securities and Exchange Commission.

The Company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise.

With us today from Innospec is Paul Jennings, President and Chief Executive Officer; and Jim Lawler, Executive Vice President and Chief Financial Officer. At this time I would like to turn the call over to Mr. Jennings. Please go ahead.

Thank you, Victoria, and good day to everyone. I'm Paul Jennings, President and Chief Executive Officer of Innospec and I'm joined on this quarter's call by Jim Lawler, our CFO.

I will make a few introductory comments and then I will pass over to Jim, who will take you through the financial statements in detail.

Innospec has started the year well. We have been able to record a profit for the first quarter despite our regular non-cash charge for goodwill impairment and the progress in our two fee growth areas has been promising. Fuel Specialties continues to show growth in line with or slightly ahead of expectations and having proved its margins. Our business within Performance Chemicals have improved their profitability in the aggregate, and are now nicely positioned for the future. Octane Additives has always been a lumpy business if viewed from quarter to quarter; and this is more apparent than usual, given the reduced size of the market.

I am potentially pleased with the 39% reduction year-over-year in corporate costs as we establish a [fit for purpose] cost structure in the Company. The growth in our share price in 2006 of over 66% as at the close of play yesterday is encouraging as it starts to move towards a more accurate reflection of the true value of the Company.

I would now like to pass you over to Jim Lawler, our CFO, for his financial report.

Thank you Paul. Good day everyone. I would like to review with you Innospec's financial results for the first quarter 2006. During my review of the first quarter, I will refer to some non GAAP financial measures. A reconciliation to U.S. GAAP is provided in the presentation available on our website.

As you are aware we have to provide you with a statement on non GAAP financial measures and forward-looking statements which are contained within the presentation.

I'm now on slide six of the presentation. Quarter 1 2006 Key Messages. The Innospec first quarter results continue to demonstrate the tangible process we are making as a company. Innospec recorded a net income of 0.6 million which is an income of $0.05 per diluted share, which compares to a net loss of 2.4 million and a loss of $0.19 per diluted share for the first quarter 2005.

Gross margins have improved across all our businesses in the first quarter to 38.6%, which is one percentage point higher than in the same period last year.

Sales and administration costs have been reduced by 19.1% when compared to the same period for the prior year. This reflects the streamlining of corporate costs structure undertaken during 2005 and the cost initiatives across the businesses.

In summary, our return to profitability was a lean and healthy infrastructure evidenced by 5.7 percentage points improvement in EBITDA, pre restructuring margins as a percentage of revenues when compared to the full year 2005.

I am now moving on to slide 7, The Innospec Income Statement. I will now move on to discuss the specifics contained with Innospec's results for the first quarter 2006. Sales revenue for the first quarter 2006 was 117.9 million which was an 11.6% decline year-over-year for the first quarter 2006, and is essentially driven by a 47.3% decline in Octane Additives, partially offset by an 11.4% growth in our Fuel Specialties businesses. I will talk further about the dynamics occurring in these businesses later in the presentation.

Gross margin was 38.6%, which improved by one percentage point when compared with the relevant quarter in the prior year. All our businesses reported significant year-over-year margin improvements. SAR costs of 23.6 million for the quarter, representing 19.1% decline when compared to the same period in 2005. This demonstrates the significant inroads we have made in establishing a fit for purpose infrastructure and reduces the SAR to revenue ratio to 20 percentage points which is a 1.7 percentage point reduction when compared to the same period last year.

Restructuring costs of 0.9 million are primarily driven by residual restructuring and remediation activities. Octane Additives' noncash impairment for the quarter was 11.3 million, which compares with a 14.8 million charge for the same quarter in 2005. Other income and expense was 0.1 million and represents a 3.2 million reduction from prior year for the same period. The prior year income represented exchange gains in the period.

EBITDA prerestructuring of 25.1 million is $3 million lower than the prior year for the same period, due to the reduction in Octane Additives' revenues and represents a 21.3% EBITDA margin, which is 0.2 percentage points better than the prior year for the same period.

In summary, net income was a 0.6 million profit for the first quarter which compares with 2.4 million loss for the same period last year.

I'm now moving on to slide 8, which is the cash flow. Net operating cash used by operating activities was 7.7 million in the quarter, primarily driven by increased working capital partially offset by an inflow in respect of a tax reclaim. The 34 million outflow in working capital was a consequence of Octane Additives' receivables returning to more normal levels in to the first quarter which resulted in a 6.9 million outflow.

The release of a 4.5 million provision which was no longer acquired also impacted outflows in the quarter for this business. As communicated on previous quarterly conference calls, the strategic buildup of inventory to enable the resizing of the Octane Additives' manufacturing facility - coupled with the delay in shipments - resulted in a 5.2 million cash outflow.

The two growth businesses, Fuel Specialties and Performance Chemicals, also resulted in a 5.4 million outflow, associated with inventory and receivables due to higher sales than in the fourth quarter 2005.

In summary, accounts receivable are higher related to the growth driven by seasonality -- associated driven by seasonality and investing for growth in Fuel Specialties and Performance Chemicals businesses. Octane Additives' outflows were the consequence of the strategic buildup of inventory to reflect the new manufacturing methodology coupled with the timing delay of shipments. I'm also pleased to report a 12.7 million inflow from the UK tax authorities in respect of a UK tax reclaim.

I will now share with you the results for each of our business units, starting with Fuel Specialties. Fuel Specialties continued to build up to build on its success in 2005 by reporting a strong start to the year with 65.7 million sales revenues for the first quarter, which represent an 11.4% growth when compared to the same period in 2005.

The first quarter Fuel Specialties growth is primarily driven by a 63% growth in Asia-Pacific and a 17% growth in the Americas. This business continues to demonstrate a superior understanding of its chosen markets. Gross margins at 37.0% for the quarter represents a 4 percentage point improvement when compared to the same period last year. This improvement is driven by the robust management of material price increases, the growth in aviation additive margins, refinery [teaching] and fuel born catalysts margins.

In summary, for this business, sales growth for the first quarter is 11.4% with adjusted EBITDA being 13.5 million, which represents a circa 70% growth year-over-year when compared to the corresponding period in 2005. This financial performance is slightly ahead of our expectations and demonstrates the value of our business model.

I am now going to turn our focus to the results of our Performance Chemicals business. Our operational tactic in the first quarter was to focus on securing quality business, underpinning margin disciplines and the management of raw material price increases.

Keeping this conjectural framework in mind, I will now focus on the detail of the first quarter results. Performance Chemicals revenues at 27.5 million is flat when compared to the prior year for the same period. This performance was a consequence of our margin focus and the timing of product shipments which will be fully recovered in the second quarter 2006. Gross margins for the first quarter were 19.7%, which demonstrates a small improvement over the same period for the prior year plus represents a major recovery from the fourth quarter 2005 when margins were circa 13%. The first quarter does not fully reflect the impact of sales price increases for this business.

The EBITDA prerestructuring for the first quarter and 3.1 million which is flat when compared to the prior year and represents an adjusted EBITDA of 11.3%. Performance in our [fine techs, Loyner, and Procran] businesses continue to make significant balanced progress in managing quality revenue growth, good margin disciplines and cost containment. I'm confident that we will see marked progress year-over-year in this business in quarter 2, 2006.

I will now share with you the results of our Octane Additives business. As we have discussed with you on many previous occasions, this market is best viewed over a rolling 12-month period of because of the irregular and fluctuating order and delivery patterns of this market. The first quarter results typifies the nature of this business. Octane Additives revenues at 24.7 million for the quarter declined 47.3% year-over-year, essentially driven by the loss of Venezuela - which took product in the first quarter 2005 - and the more recent exit of South Africa.

Activity in the first quarter has also been partially impacted by shipment timings and normal short-term logistical difficulties which occur from time to time in the regions within which we operate. Gross margins of 61.7% represents an 8.5 percentage point improvement, primarily the consequence of a richer product mix.

Octane Additives benefited from the release of a retrospective price intervention. This represents 6.6 million at the net sales line and 4.5 million at the gross profit line.

In summary, adjusted EBITDA for the first quarter was 13.5 million which represents a 39.5% year-over-year decline, primarily driven by volume reductions. The EBITDA prerestructuring margin at 54.6% represents a seven percentage point improvement over the prior year for the same period. Innospec continues to optimize margins and cash in the declining Octane Additives business.

Earnings per share puts $0.05 this year on a fully diluted basis and almost $1 a share on an adjusted earnings per share basis.

In summary Innospec is on track to deliver its financial target for 2006. Innospec is outperforming the market in the Americas and Asia-Pacific. Innospec is hard-wiring success into its business by becoming more global, more innovative, and more disciplined in managing margins and operating costs. Innospec share price has increased 57.5% since December 31st, 2005. Innospec is building reliable financial performance into its business model.

In the presentation, you have a U.S. GAAP reconciliation which I don't propose to go through. Thank you for your attention and I would now like to hand back to Paul Jennings, our President and CEO.

Thank you, Jim. Before I review our business performance I would like to remind everyone of our mission statement which was unveiled as part of our new corporate identity in early February this year. There are a number of key phrases within our mission statement that deserve more explanation. Being recognized covers the fact that we were a misunderstood company, previously lacking in visibility and we want to address this.

Chosen markets reflects the new focus we have in the Company that will deliver growth. Being a leading provider identifies that we are a leader in Fuel Specialties, Octane Additives and selected Performance Chemicals businesses. Innovation is one of our core values and is reflected in our new corporate identity and the way we operate; and delivering value to our customers and shareholders is the result of all our actions and is starting to show real progress.

Moving on to our performance for the first quarter, we have made a good start to 2006 and in particular with our key areas of focus. The hard work undertaken during the second half of last year to clearly identify meaningful and deliverable strategies for each of our businesses is now being reflected in our operating performance.

Fuel Specialties is showing growth slightly ahead of expectations in the majority of its markets and Performance Chemicals has improved margins in the aggregate from same period last year and the full year 2005. Octane Additives has, as expected, declined from last year which is more pronounced due to the timing of shipments. This is a business which is always best to view on a 12-month basis.

The establishment of the fit for purpose streamlined cost structure has been a primary goal and our last three quarters results reflect the results of this effort. Of course, our Fuel Specialties and Performance Chemicals businesses will need to invest more working capital to support their growth; and the reduction in Octane Additives manufacturing capacity during the quarter has also impacted inventory levels. We do not, however, expect to see this quarter's trend to continue on a full year basis. The repurchase of stock and significant improvements in our share price are further evidence that our strategy to improve shareholder values to better capital management is working.

I would now like to move onto the progress on delivering shareholder value. I previously identified three key strategies to improve shareholder value. The first of these is to run our basic business better and to grow organically. What we have been able to achieve the last quarter is a much improved margin performance in Fuel Specialties, principally through additional volume, pricing opportunities and new business. Our Performance Chemicals business have improved their profitability overall and are now well positioned for the remainder of the year.

We have been able to achieve a significant reduction in corporate cost year-over-year with a more simplified structure and increased accountability. The decline in Octane Additives is well understood and we are working closely with all of our customers to ensure that this is achieved in a responsible way.

Our second goal was to increase the understanding and visibility of the Company. The last three months have been game changing for Innospec. This started with a launch of our new name and visual identity in early February and was followed by a series of investor and analyst meetings where the strategy of the Company was clearly articulated.

We then took the bold decision to move from the New York Stock Exchange to the NASDAQ. This has provided a more cost-effective trading solution for our shareholders and also supported the new strategic direction. It has also enabled us to reduce our costs and provided us with more real-time information on the marketplace. I have also seen a noticeable increase in the level of interest in the Company - both from potential investors and the trade media. I've also given a number of interviews to broaden the understanding of the Company. This will take some time to come to fruition but the early signs are encouraging.

Finally, moving on to improve capital management, in the last couple of months we have been able to make some significant strides to improve the capital management of the Company. We announced a 14% increase in our semiannual dividend which was paid on April 3rd, 2006. We accelerated our share buyback program which has been [sanctioned] and we've been able to purchase over $3.6 million of stock at an average price of around $24 per share since the program began. And we have increased our share price since the start of the year and as of last night it had increased by over 66% placing us in the leading group of chemical companies showing growth in share price in 2006. Yesterday in fact, we reached our 52-week high.

All of these actions clearly show the real progress we are making in delivering our strategy and making it come to life. I would now like to open up the call for your questions.

(OPERATOR INSTRUCTIONS) Jeffrey Zekauskas with J.P. Morgan.

This is Olga (indiscernible) for Jeffrey Zekauskas. Good morning. Can we get back to this 4.5 million of benefits for (indiscernible) [additive] business. Could you explain what was that?

The 4.5 million in our books of accounts we had provided for the potential eventuality of a retrospect in price increase being applicable to one of our customers. In reality, this is no longer required and therefore we released it in the quarter.

So how should we think about gross margin excluding this benefit? I mean if we (MULTIPLE SPEAKERS) yes. Go ahead.

That's a very good question. About two-thirds of the margin improvement you see in the Octane Additives business is associated with that release - of that provision. The other third is real benefit associated with the richness of mix in the product.

Is it there to take out this 0.5 million from gross profits and -- ?

No. I think -- if I don't think my recommendation is we separately identified it for you. You understand the implications of it and therefore I would look at it. Otherwise you would have to restate prior year if you were going to back it out you would back out of both sides of the equations. And that would not be the appropriate thing to do.

So you should view it as communicated. Two-thirds is associated with the pricing provision. One-third improvement is associated with the richness of product mix. Thank you.

How good was the quarter for the aviation gas? Was it better than you expected?

We don't separately disclose those numbers in terms of the performance of that particular business. It's inherent within the over 11% improvements in the top line and velocity of sales in Fuel Specialties and also within their margin improvement.

But what do you expect this year? The same level as previous year or better?

For what, for Fuel Specialties or (MULTIPLE SPEAKERS)

For aviation gas.

As we previously said what we've -- on Fuel Specialties we've said 8 to 10% growth in sales, 2006 over 2005, and margins of between 32 and 37% for that business. And the [Octel] margin and sales are contained within those numbers.

And Fuel Specialties segment. Were there any acquisition effects in this quarter?

No. No acquisition effect at all.

We should allow somebody else to come through on the call if it's agreeable with you. Do you mind? (MULTIPLE SPEAKERS) We can come back to you. Is that okay?

That's okay. I will get back in the queue.

(OPERATOR INSTRUCTIONS) Mike McCarson. Cross River Partners.

Can you talk about the share count? Seems like it was up a little bit this quarter. Can you talk about why that is?

Are you looking at diluted shares or basic shares?

Diluted.

It's principally because last year -- when you have a loss the number of diluted shares isn't quite the same as the number of basic shares so there's no real share count increase at all on the diluted basis. It's just the fact that we had a loss last year and a profit this year.

Okay. Can you tell us how to think about in Fuel Specialties, the second quarter of '05 was a little bit lower. Is there seasonal effects or how should we think about that? I mean it went from 59 to 52 last year. Should we expect the same sort of thing going forward to this quarter?

I think there are seasonality effects within the overall Fuel Specialties business, because some of our business is based on heating oil, or based on quite seasonal factors within the different markets. I think from my perspective, the fundamental position with that business is that it is showing growth year-over-year. I think looking at it quarter to quarter it would show the seasonality; but looking at quarter, compared to the equivalent quarter last year you should be able to see the growth.

David Wilson. Smith Barney.

Good morning. Your corporate cost line looks pretty good. Is that something we can annualize for the year or even do better?

I think it is certainly a number that you can annualize and obviously we are working hard to look at that number to try and see how we can reduce it still further. And there's always opportunities in the area but certainly on the - you can annualize it as a worst-case.

Could you talk a little bit more about the TEL deliveries that we -- did the ship just not come in until right after the quarter or something? What's the lumpiness due this time here?

You've been associated with this business probably longer than I have and understand what happens on a quarter to quarter basis. I think now that we've got the business down to a much smaller level than it was a few years ago, that if you do have any movements from one quarter to the next, they are looking a bit more pronounced.

Principally the rationale in the move, why there wasn't any significant shipments in quarter. One, was related to just obtaining and sign a letter of credit, clearance on certain shipments, and also waiting for final POs to come in.

But we certainly don't see the quarter one shift as being indicative of the full year.

You still -- if I recall correctly, I'm not sure. I don't have my notes here that it looked like for the year you thought 20% decline in volume and that business, is that still -- is that still holding?

What we said on that one was that at the sales value level we were looking at something depending on the size. It's something between high 40s, low 50s as far as overall decline year-over-year.

Obviously we are working hard to try to keep it as low as possible but for the full year impact, that is what we are looking to try -- that's what we are looking after right at this moment.

And to follow-up I was looking at the av gas there also. It would be good if at least for the first year or so here we could get some av gas numbers so that we can convert our old sheets and put that back to see where we stand on that. I understand your answer to Jeffrey Zekauskas's office before on that but it would be nice if you would release those just so we have some comparison measures.

Yes; I think that's a good point David; and obviously rather than just give amounts on the call etc., I think the best place to have that comparison is to show some of it in the queue so people can adjust their models accordingly.

Thank you very much.

(OPERATOR INSTRUCTIONS) Jeffrey Zekauskas.

Yes. Just the Fuel Specialties segment. As you said there were no acquisition effects but what was the volume growth or was it old pricing?

If you look at the Fuel Specialties business, the 11.4% revenue growth was essentially two-thirds pricing, one-third volume. But if you look at it within the original in each of the geographies, it's very much a different profile. But in summary two-thirds price, one-third volume. Of that 11.4% growth.

All right. Thank you. And restructuring charges of 0.9 million. It's kind of low compared to the previous year. Is it a representative number for this year?

Yes. If you recollect in your expectations that we publish we said restructuring charges for the year will be less than $5 million and the 0.9 million you see in this quarter is indicative of that overall less than 5 million for the full year.

Okay. Thank you. I have the follow-up question on the balance sheet. What is the other current liabilities? Why they went down 17 million for the quarter?

The other current liabilities actually includes accounts payable and the accounts payable on that one actually came down from the end of the year to the end of quarter one, which is all part of this 34 million shift in working capital that Jim mentioned earlier. And I mentioned that I didn't seek it indicative of full year position. Some of it was investing in growth as far as the businesses were concerned. Some of it is because we think (indiscernible) and Octane Additives or all in all that's where -- that's the principal reason in that number.

So all 17 million is accounts payable? Or how much is accounts payable?

The majority of it is accounts payable. There's also some offset of non-cash accruals and the impacts on the income statement coming out.

And if I may the last question on goodwill impairment. Would you remind us how you made the calculation of 11.3 million?

How long have we got? Yes, if you recollect, the goodwill impairment model really discounts future cash flows of the Octane Additives business. So the key parameters include the sales projections through our eyes going forward over -- into the new decade I should say at that point. And that's one of the primary factors.

One of the other factors which influences the quarter, so for example, you see in the quarter an 11.3 million charge is the inventory levels have a penalizing affect in the quarter for you. So you are actually penalized for holding more inventory. But those are the key parameters.

If you recollect, we have previously indicated a forecast charge for the year of circa $30 million -- three zero -- in fact, about $31.5 million for the year.

Okay.

My apologies, circa 30, I should said.

Okay. Thank you very much.

Thank you.

Yes; the 31.5 million is what will remain at the end of 2006. I speak very quickly sometimes.

(OPERATOR INSTRUCTIONS). David Wilson with Smith Barney.

For price increases from the raw materials, which price increases have been coming to you lately? On the last call we thought we would continue to be able to increase prices across the board on your products. How is that going and how does it look in the future?

I think that if you look at the three different businesses, actually, been quite pleased with our ability to manage our margins and to look hard at some of these areas and get pricing up where we could. And I think that we've done a good job of that across the business; and that's certainly something that we look at quite aggressively for the future to try and make sure we are aware of what's happening in the raw material market and that we look to - where we can - cover those price increases externally.

I think that the performance within Performance Chemicals, within Fuel Specialties has actually been quite robust in the last quarter; and that's something I expect to continue.

Could you talk a little bit about your diesel product and how that fits in with the runaway market in some of the other additive companies in the ethanol? Or if you have anything in the ethanol area also?

Thank you for the question. Let me cover the two areas really. First of all on diesel as I've mentioned, we are the leading supplier of diesel additives in the world and we're the only company and the first company to have the full range of low sulfur diesel additives to support the move toward low sulfur, which starts in June of this year. And then finally it comes into action in October actually at the pump.

So we see that as being a major opportunity for us in North America and obviously in Europe, we're close to 50% or just over 50% of the passenger fleet, already operates in diesel fuels. We are well-positioned there as well. That was why the reasons why we acquired the business of (indiscernible) Polymer because that gave us a further additive in terms of coal [flow] improvers that we believe can provide us with good strength in the future.

I think on ethanol, ethanol is quite interesting because, as you know, it's replacing MTB in gasoline at various levels and we actually are extremely well-positioned in terms of ethanol. There's only a couple of other companies in this particular market and none of those companies are the ones that you are probably thinking of; but we actually supply about 95% of the corrosion inhibitor that's used in the ethanol fuel market. Because as you know if you add ethanol it forms (indiscernible), it provides the bacteria and as a result you have to add a corrosion inhibitor. And our product is extremely well-positioned in that market; and so we are a key player in the biofuels application.

If you move onto ethanol and diesel, that's going to have probably a slightly lower growth opportunity and is a bit more different in terms of the overall marketplace. But there in terms of the additives we are looking to try to use there, again, we are well-positioned with our antioxidants and also with our coal flows. So I think the dynamics of the diesel market and the ethanol market actually play very nicely to Innospec. And we are well-positioned with our products and our market position.

Thank you very much.

At this time there are no questions. I'd like to turn the call over to Mr. Jennings for any closing remarks.

Thank you for your questions and comments.

I would now like to summarize the first quarter call. I believe that Innospec is now very clearly positioned as a true specialty chemical company and has a bright future. We're on track to deliver our expectations for the performance of the business. We have made significant inroads into providing a firm foundation from which to build, by aggressively implementing our plans to have a fit for purpose cost structure in the Company.

Our exciting future markets are showing growth with improved margin performance; and our key goal to delivering improved shareholder value is on track. Thank you for your attention and your continued support.

This concludes today's Innospec Inc. first quarter 2006 results conference call.