Innospec Inc (IOSP) 2007 Q3 法說會逐字稿

Good day, and welcome to the Innospec Third Quarter 2007 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the call over to Mr. Andrew Hartley. Please go ahead, sir.

Thank you, Deratta, and good morning, everyone. My name is Andrew Hartley, and I'm Vice President and General Counsel of Innospec. Thanks for joining our third quarter 2007 financial results conference call. Today's call is being recorded. As you know, last night, we reported our third quarter earnings. The press release is posted on the Company's website www.innospecinc.com. An audio webcast of the call and a slide presentation of the results are also now available and will be archived on the website.

Before we start, I would like to remind everybody that certain comments made during this call are to be characterized as forward-looking statements under the Private Securities Litigation Reform Act of 1995. Generally speaking, any comments regarding management's beliefs, expectations, targets, or other predictions of the future, are forward-looking statements.

These statements involve a number of risks and uncertainties that could cause actual results to differ materially from the anticipated results implied by those forward-looking statements. These risks and uncertainties are detailed in Innospec's most recent 10-K report as well as other filings we have with the SEC. We refer you to the SEC's website or our website at innospecinc.com for these and other documents.

In our discussion today, we have also included some non-GAAP financial measures. A reconciliation to the most directly comparable GAAP financial measures is contained in our earnings release and in the presentation that follows, a copy of which is available on the Innospec website.

With us today from Innospec are Paul Jennings, President and Chief Executive Officer, Ian Cleminson, Executive Vice President and Chief Financial Officer, and Patrick Williams, Executive Vice President and President of Fuel Specialties. And with that, I'll turn it over to you, Paul.

Thank you, Andrew, and thanks to everyone on the call for taking the time to join us.

Turning to slide 4, in the presentation, I have a few summary comments about our results before Ian takes us through the numbers in greater detail.

First, as we expected and after we'd been cautioning for some time, our comparisons have become much more challenging in the second half of 2007 for various reasons. Nevertheless, I am very pleased to report that our ongoing business segments, our Fuel Specialties and Active Chemicals, achieved a 13% increase in their combined revenues, and an 11% increase in combined operating income.

On a GAAP basis, diluted earnings per share was $0.23, compared with $0.42 a year ago. While we have a much smaller charge for octane additives goodwill impairment this year, the results a year ago included substantial gains on the sale of real estate. Both fuel specialties and active chemicals reported very strong results a year ago, and the comparison was also difficult due to shifts in the timing of certain shipments in both Active Chemicals and, in particular, octane additives.

We also have an excellent quarter of cash generation, which is a key part of our strategy. Under the circumstances, we think these results are pretty good, and we're optimistic as we look ahead to our fourth quarter. In fact, as we will discuss later, we are actually raising our guidance ranges for 2007 revenues in all three of our business segments.

And with that, I'll turn it over to Ian Cleminson, our Chief Financial Officer.

Thank you, Paul. Turning to slide 6, on a consolidated basis, revenues for the quarter were down less than 1%, despite a 49% drop in revenue in octane additives. We were particularly pleased with the continued strength in Fuel Specialties, our largest business, where revenues were up 17%. The overall gross profit percentage was 4 points lower. With Fuel Specialties margins unchanged, most of the overall margin decline was due to the fact that octane additives, by far, our highest margin business, accounts for a much smaller percentage of revenues than it did a year ago -- 11% this quarter versus 22% in the prior year.

EBITDA was $22.3 million, compared with $38.2 million, but this decline was entirely due to the drop in EBITDA in octane additives, and the absence of $9.6 million in gains in property sales that were bought a year ago. In addition to the real estate gains a year ago, the reported earnings per share included octane additives in goodwill impairment charges, which declined by $8 million this year. We also had a larger restructuring charge in this year's third quarter, as well as another non-cash pension charge on the FAS 158, which is an ongoing item, but was not present a year ago. On an after-tax basis as excluding all these items, diluted EPS was $0.39, compared to $0.58 a year ago.

Turning to the individual business segments starting with slide 7, in Fuel Specialties, we had another solid quarter, with revenue growth at 17%, and operating income up 21%. These results were achieved on top of a 78'% increase in operating income in last year's third quarter. By region, revenues were up 21% in the Americas, up 19% in the Asia Pacific region, and down 5% in the EMEA countries. The decline in EMEA was due mainly to the absence of a $3 million revenues from a one-off contract that we booked a year ago.

Just to remind everyone, we have $7 million in revenues from that contract in last year's fourth quarter, so that will affect our comparisons in this current period. Our results in the Americas, again, with fuel pump strength up, product offerings under the ultra low sulfur diesel umbrella.

Asia Pacific revenues were also strong but a lower gross margin due to changes in the sales mix. Results for Ethyl our TEL for aviation business benefits from volume growth on a more favorable pricing allowed under Ethyl settlements. The segments gross profit percentage overall was unchanged, which we consider a good performance in view of the increased competition we're facing in our ultra low sulfur diesel products. We are also facing significant increases in our raw material costs, most of which are oil based.

Moving on to slide 8, in active chemicals, previously known as performance chemicals results were unusually strong a year ago, due to the timing of shipments. Reported revenue growth for the quarter slowed to 3%. Sales we made were flat, mainly due to the fragrances business, where (inaudible) volumes were below the high levels of a year ago, with certain technical grade shipments being pushed in the fourth quarter.

Sales were relatively strong in the Americas, up about 10%. This quarter has also been impacted by pumps shut down for maintenance, new product trials, and also lowered production volumes to manage inventory and improve cash flow. Mixed together with an unusually strong quarter a year ago, through the reduction in gross profit percentage. However, despite this, this business was in line with expectations for the quarter.

Turning to slide 9, report results in octane additives were weak, with revenues down 49%, and operating income down 78%. A large shipment to a key customer was pushed back from the third quarter to the fourth quarter. Volumes overall were down 50%, and the gross profit percentage of 50.6% was down 5.1 points from a year ago. The high cost of production due to lower volumes was partially offset, due to the cost savings from the Ethyl settlements. We expect a much stronger fourth quarter, but there has been no change in the longer-term outlook for the TEL business. We still expect revenue and profit declines in 2008 and beyond.

Moving on to slide 10, corporate costs for the quarter were $5.1 million, down 4% from a year ago. A relatively strong performance, considering that most of our corporate costs are delaminated in Sterling. We recorded another non-cash charge of $1.1 million, related to our United Kingdom Pension Plan under FAS 87 and FAS 158, which we adopted at the end of last year. This will be a regular feature now reported in earnings going forward, but was not in our numbers last year. This equates to an after-tax impact of $0.03 per share.

There was another small restructuring charge totaling about $900,000 compared with $400,000 a year ago. The octane additives impairment charge was $2.4 million for the quarter, down significantly from the $10.4 million charge a year ago. As I mentioned earlier, we also have $9.6 million in gains on property sales a year ago, but no similar gains this year. The tax rate for the quarter was 33.3%, compared to 29.9% a year ago. The higher rate primarily reflects the increase in taxable income in the US, due to the strong performance in fuel specialties. Year-to-date, the tax rate is 33.1%, and we expect the full year rate to be broadly in line with this.

Turning to slide 11, our liquidity remains excellent with cash at $28.3 million, and net debt at about $75 million, down about $10 million since June 30. The actual repaid a total of $17 million of the $45 million we borrowed in the second quarter to form the Ethyl settlements. I now expect to repay the balance by the end of the first quarter of 2008. At the end of the third quarter we had approximately $17 million in available borrowing capacity under our current credit facility.

There was a free cash inflow of $16.4 million in the quarter after $3.7 million in capital expenditures. Working capital remains in good shape at $122.1 million, down about $4 million from the second quarter. Inventories are up a bit to support our growth in Fuel Specialties, but we got a good handle on our receivables, which decreased by $3 million.

I'll now turn it back over to Paul for some concluding comments.

Thank you, Ian. Slide 13, illustrates our concept of ongoing operating profitability. This is critical to the future success of Innospec and a good indicator the past strategy is working. The point here is that we need to look at our performance excluding octane additives, which as you all know is in long-term decline.

Two years ago, operating income from our continuing growth businesses in Fuel Specialties and Active Chemicals did not even cover our corporate costs. As you can see, our ongoing operating profitability has continued to improve. For the year-to-date, it was up 36% year-over-year, and if you look to the third quarter, we were up 19% compared to the same period last year.

Moving on to slide 14, which covers our new revenue guidance ranges for 2007. We have raised and tightened our guidance for all three divisions. In Fuel Specialties, we are now looking for revenue growth of 12% to 14%, compared with 8% to 12%, previously. In Active Chemicals, we expect growth of 12% to 14%, up from 10% to 14%, previously, and in Octane Additives, we expect a revenue decline of 8% to 12%, an improvement from the 10% to 15% decline we previously expected. In addition, we have tightened our guidance on gross margin ranges.

Moving on to slide 15, I want to just touch on a few more points before we take your questions. Strategically, the highlight of the quarter was our work to realign our old Performance Chemicals business segment under the new Active Chemicals banner, which was announced on October 1. We did change the name to highlight the dynamic nature of this business, and to bring the companies within it under one umbrella.

The changes, however, were much more fundamental than a mere name change. We reorganized the division along three geographical regions, as we did in fuel specialties-- The Americas, the EMEA, and Asia Pacific, and we are now focused on five key target markets. Fragrance ingredients, household industrial and institutional, personal care, plastics and polymers, and pulp and paper.

Under the new structure, all of Innospec's Active Chemicals products and services will be sold to customers within each region and market. This new approach has already paid off in increased business, with a major global household products company and we see number of other short-term opportunities to build our business. Given the success we've had with the very similar structure in Fuel Specialties, I'm very confident that these changes will enhance the performance of our Active Chemicals businesses.

Like many other companies, Innospec shares were affected by the market turmoil back in August. In our case, as in many others, the stock fell victim to forced selling by certain large institutions. We used the decline as an opportunity to accelerate our share repurchase programs and during the quarter, completed two 10b51 programs, covering the repurchase of an additional 317,000 shares, which brought total repurchases for the year-to-date to 668,000 shares.

While the stock is now down slightly for the year-to-date, I would point out that Innospec share price has still nearly tripled since the beginning of 2006. We continue to look at the number of potential acquisitions, but we're not under any pressure to do a deal, and we won't do one just for the sake of doing it. Any acquisition we consider seriously will have to support long-term value creation for our shareholders.

And now, we'd like to turn over the call back to the operator and to take any questions that you may have.

Thank you, sir. The question and answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). Our first question will come from Jonathan Lichter from Sidoti & Company. Please go ahead.

Morning.

Good morning, Jonathan.

Good morning, Jonathan.

Why was Fuel Specialties still so strong, given that, I guess the law, the ultra low sulfur law had pretty much annualized this quarter?

Jonathan, this is Paul. I think what we're seeing in the Fuel Specialties business is just the--it's more than just the ultra low sulfur diesel that's actually driving the growth. I think that the new product introductions that we've had, which now accounts for close to 40% of the sales in that particular business has driven growth. And we also saw strong growth in other regions in the world, as well, particularly in Asia Pacific.

So, whilst we did have some immediate success with ultra low sulfur diesel, I think the whole package within that business has actually grown significantly as well. Patrick, maybe you'd like to add just a little bit more flavor to it.

No, I think Paul, you covered it fairly well. Obviously Jonathan, we're looking at other markets that's a little bit outside of our segment that we have expertise in, and so, we're introducing new markets, or I should say products into new markets and that has helped the product mix as well and kept the margins up where they are today, but, obviously with the position that we're in, in what we consider a leading position in Fuel Specialties, we need to continuously look outside the box and make sure that we stay with our expertise, but yet bring new products to the marketplace and I think we've done a very good job of doing that to date.

Can you talk about some of the products that contributed to this performance?

Yeah, obviously, we're looking at renewable fuels and we're constantly doing R&T and introducing new products around Ethanol, biodiesel stability additives. We just started phase one of a new business segment for the anti-[phalote], high temperature anti-[phalote], and it's primarily being done in Asia Pacific.

We are also getting ready to a final stage in text lead. I think those are just a few products that I can touch on to-date that we've brought to the marketplace.

Okay, and in terms of acquisitions, are you looking at the--more at the Active Chemicals area to do something?

Jonathan, this is Paul again. I think that if you look through the different market sectors that we're in, the sort of businesses that we've been interested in are ones that's actually going to bring some size and mass to the company, and also some additional earnings and cash generation. We all know who the players are in the Fuel Specialties area, and it's important that we continue to look at those areas, but obviously there could well be other potential businesses that fit neatly with what we're trying to do at Innospec, and whether they come under Active Chemicals or something similar to that, it will be either within the Fuels area, or Active Chemicals, or similar type markets.

Okay, thank you.

You're welcome.

Our next question will come from David Wilson from Smith Barney. Please go ahead.

Good morning, guys.

Hi, David.

Hi David.

Good morning.

In the TEL business, you always talked about it being lumpy and it sounds like a shipment was late this quarter, you said, does that mean that the fourth quarter will have a pretty decedent comparison or equal the fourth quarter of last year?

David, I think that the fourth quarter will have a good comparison, which is why we've reduced the decline for the full year to that--a much lower, almost a single digit decline year-over-year, because of the lumpiness of that business. You know that business well, and we aren't expecting a good fourth quarter.

Okay, and how is the volume and the price of the TEL that you sell into the AV gas market doing?

Dave, this is Ian, and obviously following the Ethyl settlements, we've seen increased volumes and increased pricing in that segment, and we're particularly pleased with the additional business that it's brought to us.

Any guidance for us for about how much up those two segments--the volume and the pricing are?

We don't actually go into that level of detail within the Fuel Specialties segment, which Octel's part of it, but others said they are pleased with the increase in volumes, and we're very pleased with the increase in prices that we're getting right now.

I think, David, if I can add to what Ian said, I think that the key here is that these people understanding that we are going to support that market. We want to be in the market for the longer term, so, we're going to continue to support it, whilst ever if we can make money in it, and I think people are reassured by that, which I think helps us in the longer term.

And that pricing also carries over to your Octane Additives business, and the TEL on that part also?

The pricing in the Octane Additives side, which is TEL from (inaudible) gas is very--is different from the pricing within the TEL for AV gas, and a lot of it is sort of contractual based with a few remaining customers in the area. We have increased prices. We continue to look to increase prices in the future, but we just have to get the balance right to make sure that that doesn't unnecessarily force down demand, but I think that overall, I think I'm pretty pleased with the dynamics in that area at the moment.

Thank you very much.

You're welcome, David.

Our next question will come from [Fred Orr] from [Prospectus Partners], please go ahead.

Good morning.

Good morning.

Good morning.

On the subject of the Octane Additives business, are you ready to give any guidance in that business for next year? I know we're in a long-term decline mode. This year's decline was at--within your annual guidance as now those declined rates are moderating. Do you expect continued moderation in the rate of decline in '08?

I think that, I mean, we're at this stage, were trying to give 2008 guidance on our next call, when we've actually gone through that business a bit more detail, but what I would say is that I think it will be difficult to limit the size of the decline to what we've seen in 2007, and what was always said in the medium term, and I recognize that this is a broad range, but you're looking between 10% and 25% decline on an annual basis. I think, however, you will still see this business going on certainly through the end of this decade and maybe a little bit longer as well.

Thank you very much.

You're welcome, Fred.

Appreciate it.

(Operator Instructions). As we have no further questions, I would like to turn the call back over to your host for any additional closing remarks.

Thank you, Deratta, and thank you for your questions. And now, I'd like to leave you with some final thoughts. Our third quarter results reflect a continued strong momentum in our largest business, Fuel Specialties, with our two other divisions being affected by tempered timing issues. We believe they will both show stronger results in the fourth quarter.

We're more optimistic today about our full year results than we were three months ago, as demonstrated by the increase in our revenue guidance ranges across all three business segments. As I've stated many times before, we do not look at individual quarters as a measure of performance due to the effect that significant shipments can have on a particular quarter's performance, and you've seen that in this quarter with Octane Additives.

In our ongoing Fuel Specialties and Active Chemicals businesses, we have strong leadership positions in a number of attractive specialty chemicals markets. We remain well positioned to leverage these strengths going forward, both organically, and through potential acquisitions. Our strategy of running our businesses better, having a fit for purpose cost base, improving the visibility and understanding of Innospec, and managing our capital better has not changed and is being delivered.

If you have any additional questions, please give Ian or myself a call. In any case, we look forward to sharing our fourth quarter results with you early next year. Thanks, again for being with us today. Good-bye.

This will conclude today's conference. Thank you for your participation. Ladies and gentlemen, you may now disconnect.