Innospec Inc (IOSP) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Innospec Inc. Quarter 1 2009 earnings presentation. For your information, today's conference is being recorded.

At this time I would like to turn the call over to your host today, Mr. Andrew Hartley. Please go ahead sir.

Thank you and good morning everyone. My name's Andrew Hartley and I'm Vice President and General Counsel at Innospec. Thanks for joining our first quarter 2009 financial results conference call. Today's call is being recorded.

As you know, last night we reported our first quarter financial results. The press release is posted on the Company's website at www.innospecinc.com. An audio web cast of the call and the slide presentation on the results are also now available and will be archived on the website.

Before we start, turning to slide number two, I would like to remind everybody that certain comments made during this call might be characterized as forward-looking statements under the Private Securities Litigation Reform Act of 1995. Generally speaking, any comments regarding Management's belief, 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 own site for these and other documents.

Moving to slide three. In our discussions 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 Patrick Williams, President and Chief Executive Officer, and Ian Cleminson, Executive Vice President and Chief Financial Officer. And with that I'll turn it over to you, Patrick.

Thank you, Andrew, and thanks for everyone on the call for taking the time to join us today. Turning to slide four in the presentation I have a few summary comments before Ian takes us through the numbers in greater detail.

We are pleased with the solid operating results our core businesses are generating in this extremely challenging economic environment. Fuel Specialties, which is by far our largest and most profitable business, turned in another excellent performance with a 15% increase in operating income for the quarter.

In Active Chemicals our results improved significantly in Q1 as the pricing adjustments we made in the second half of last year took hold and gross margins were up dramatically from the Q4 level. However, the segment's business results again were weighed down by the performance of our polymers business, which we consider non-core, and in general there's plenty of room for further improvement in Active Chemicals.

Octane Additives, our legacy TEL business, performed roughly in line with our expectations. As we mentioned in the Q4 call, shipments were strong in the fourth quarter so our customers had plenty of inventory so shipments were down quite a bit in Q1. Although this business continues its gradual long-term decline, it remains an excellent cash generator.

As you know, we reported GAAP EPS for the quarter of $0.26 versus $0.30 a year ago. However, both periods include a number of special items that we have detailed in the press release in the appendices to this presentation.

The most significant of these were additional expenses related to the Oil for Food investigations, and a large non-cash foreign exchange loss primarily reflecting the volatile exchange rates in the first quarter. Ian will have the details. But if you exclude all these items from both periods, our adjusted earnings per share for the quarter were up 5% from a year ago, which we believe is very respectable in this economic environment.

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

Thank you Patrick. Turning to slide six. On a consolidated basis, revenues for the quarter were down 12%. However, $11.5 million, or 7 percentage points of the decline, is due to currency translation and to the relatively strong US dollar.

Our overall gross profit percentage was 33.9%, up 3.3 percentage points from a year ago, as all three business segments reported higher margins, in part reflecting significantly lower raw material costs. However, given the weak global market conditions we would expect margins to come under additional pressure in the quarters ahead.

Our GAAP earnings per share of $0.26 for the quarter included $0.20 per share in non-cash foreign exchange losses, $0.20 in additional expenses and accruals relating to the Oil for Food investigation, and $0.02 in Octane Additives' goodwill impairments.

We also incurred a restructuring charge equal to about $0.04 per share for separation costs related to the departure of our former CEO, offset by a $0.07 gain due to the forfeit of his Innospec stock options.

Also, on a net basis we have $0.30 per share -- $0.39 per share in special items that reduced our first quarter earnings, while a year ago we had special items totaling $0.32.

So on an adjusted basis, diluted earnings per share were $0.65, up 5% from last year's first quarter.

Turning to slide seven. In our key Fuel Specialties business, revenues were down only 1% despite a 6% negative impact from currency exchange rates. This is an outstanding performance in view of the global market conditions we are facing and clearly indicates that we are gaining market share with our innovative new products and our continued focus on exceptional customer service.

In addition, Fuel Specialties improved its gross profit percentage by three full percentage points to 37.4%. The improvement reflects continued declines in raw material costs and our ability, especially early in the quarter, to hold pricing relatively firm. In addition we benefited from a mix shift towards higher margin products both in the Americas and in the EMEA. However, with demand continuing to soften and pricing under pressure we would not expect gross margins to remain at this level in the quarters ahead.

By region, revenues increased 9% in the Americas, with good growth in lubricity improvers, cetane improvers and static dissipaters. Sales in the EMEA region were flat, a solid performance given the level of euro-denominated sales. In the smaller Asia-Pacific business, sales were down 17% in part due to destocking by detergent customers.

In addition, Avtel sales, while relatively small, were down about 40% from a year ago, in part reflecting a shift in the timing of certain shipments from Q1 to Q2.

Overall, the segment's operating income for the quarter was $27.2 million, up 15% from last year's first quarter.

Moving on to slide eight. In Active Chemicals revenues declined 17%, but about 12 percentage points of the decline was due to currency translation and the segment's performance actually was much improved from the fourth quarter. We reported a $1.2 million operating profit compared with a $0.1 million profit a year ago. And this is dramatically better than our $2.4 million operating loss in Q4. Our gross profit percentage was 17.4%, up 3.9 points from 13.5% a year ago and up more than 11 points from Q4. Price increases taken in the second half of 2008 flowed through, while raw material costs generally declined across the board.

We also benefited from shifts in the sales mix towards higher margin products. The low margin polymer business again was extremely weak and if you back that out, the segment's revenues were down only 4% and gross margins were up 4.6 percentage points to 19.3%.

By region, sales were down 12% in the Americas, with some growth in personal care and fragrances offset by lower sales in custom manufacturing as we decided to exit some of our low volume, low margin business in that area. In the EMEA region, revenues declined 27% primarily reflecting the sharp drop in polymers. Sales in the Asia-Pacific region were up 14% driven by a strong increase in fragrance sales.

Turning to slide nine. As expected, the Octane Additive segment suffered the after effects of a very strong fourth quarter. We still have certain key customers with high TEL inventories and little need for additional shipments.

Revenues for the quarter were $5.3 million, down 72% from a year ago. But we would expect some pick up sequentially in the quarters ahead. The gross profit percentage for the quarter was excellent at 50.9%, up 10.6 percentage points from a year ago. The reported operating loss of $5.8 million includes $7 million of additional legal expenses and accruals related to the Oil for Food investigations, roughly equal to the $6.8 million in similar expenses incurred a year ago. On an operating basis, however, Octane Additives is still solidly profitable and should remain a significant cash generator for at least the next few years.

Moving onto slide 10. Corporate costs for the quarter were $1 million, down sharply from $6 million a year ago. As I alluded to earlier, about half of the decline is due to a $2.4 million gain reflecting the forfeit of the former CEO's stock options. The remainder of the decline in corporate costs is primarily due to the strength of the US dollar against our predominantly UK sterling corporate cost base, as well as our continued tight controls on general and administrative expenses.

We also booked non-cash foreign exchange losses of $7.1 million before taxes, compared to a $0.5 million gain a year ago. The restructuring charge of $1.3 million before taxes was primarily due to the separation costs related to the departure of the former CEO. As expected, the Octane Additives impairment charge was again down significantly at $0.6 million compared with $1.1 million a year ago.

In addition, we recorded another non-cash charge of $1.5 million related to our United Kingdom defined benefit pension plan; up significantly from $0.6 million a year ago and in line with our comments on the last call that we expected these costs to increase in 2009.

The tax rate for the quarter, adjusted for Octane Additives' goodwill impairments, was 30.7% compared with 34.4% from last year's first quarter.

Turning to slide 11. Cash flow was excellent in the first quarter as we generated $25.2 million of free cash flow, net of $2.1 million in capital expenditures. This reflected our solid operating income as well as significant seasonal reductions in both inventory and receivables.

We reduced our net debt to $37.5 million as of March 31, down $21.6 million since the year end under our new $150 million finance facility, which we successfully negotiated during the quarter.

We did not repurchase any additional Innospec shares during the quarter. As we mentioned on the last two calls, the Board has determined that, for the time being, in the current environment preserving liquidity and maximizing cash flow should take precedence over stock repurchases.

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

Thank you, Ian. Moving on to slide 13, which shows Innospec's ongoing operating profitability. This is the metric we use to back out the performance of our legacy Octane Additives business and demonstrate the progress in our ongoing Specialty Chemicals business. With the combined operating income of 20% in Fuel Specialties and Active Chemicals, and with corporate cost down significantly, our ongoing operating profitability was up 55% for the first quarter. However, corporate costs were unusually low for the quarter for the reasons we discussed earlier. A more typical level would be $5 million to $6 million per quarter. In any case, the ongoing businesses continue to make excellent progress at the operating level.

Turning to slide 14. I'd like to make a few more points before we take your questions. Regarding the Oil for Food investigations, there is not much more we can say beyond the disclosures we've already made in our public filings. All parties involved are eager to bring these matters to a close and we continue to cooperate fully with the investigations. But we still can't speculate as to how much longer this process will take or what the results ultimately will be.

I wanted to take this opportunity to personally reassure everyone that compliance remains a top priority of the entire senior management team at Innospec. We have long had a detailed code of ethics which is available on our website. In addition, last summer we launched an enhanced compliance program which sets out our rigorous procedures for developing relationships with third parties to help ensure that we are not just complying, but going well beyond the letter of the law. Compliance sits at the very heart of our business and I am personally committed to the highest standards of corporate governance and ethics.

As you know, I was named President and CEO of Innospec in early April. While I'm extremely proud to be given this opportunity, these are obviously challenging times to be taking on this new responsibility. Market conditions are difficult and the world economy is in deep recession. But the fundamentals of our business are strong and we have a number of competitive advantages that should help us emerge from these tough times in better shape.

First, we are innovative. New products continue to account for a significant portion of our sales growth. For example, 45% of Fuel Specialties sales in the first quarter came from products introduced in the last five years. And we have a significant pipeline of new products that we expect to launch later this year and in early 2010.

Second, we have customer-focused programs that enable us to work directly with customers to solve their problems, and are helping us to win new business even in a difficult environment.

And the third factor is our exceptional people. We have great personnel working at all levels of the Company with a very strong management team. In that regard, I would note that I'm planning to make some changes in the Company's management structure to sharpen our focus on operations. It's premature to announce anything along these lines but the changes will be evolutionary, not revolutionary, and will not affect the fundamental direction of the Company.

A couple of other points I'd like to make. As we've mentioned in the past, we continuously look opportunistically at potential acquisitions that could complement our existing businesses, and that will remain a key component of our longer-term growth strategy. But any deal we do will have to bring the right synergies and fit with our existing operations and also make sense economically for our shareholders.

In addition, we have taken the first steps toward developing a green strategy and will begin measuring and analyzing the carbon footprint of all of our operations. This initiative is in its early stages and we will provide more details as it further develops.

Looking ahead, while Q1 was another strong quarter overall for Innospec's sales, margins and earnings, I would caution everyone that the market conditions have deteriorated significantly since the beginning of the year, with demand softening and pricing pressures intensifying across many of our key product lines. So our performance may weaken somewhat sequentially as we move through 2009. With that in mind, and given the many uncertainties in the current environment, we are again refraining this quarter from providing any formal guidance regarding our expected 2009 financial performance.

What I will say is that we continue to believe we're well positioned within our chosen businesses in Fuel Specialties and Active Chemicals to deliver solid long-term growth for our shareholders. And with that I'm going to turn the call back over to the operator and we'll be happy to take any of your questions.

Thank you. (Operator instructions) Jeff Zekauskas with JP Morgan.

Hi, good morning. This is actually Olga sitting here for Jeff.

Morning, Olga.

Morning Olga.

Hello. Yes, I have a couple of questions. In your Fuel Additives or Fuel Specialties division you said that unit volumes were actually flat in the quarter but you gained some market share. So how would you estimate actually market share gain and underlying volume decline?

Yes, good morning Olga. We're obviously delighted with the underlying growth levels in our Fuel Specialties business, especially in such a tough economic environment. And if we -- if you look at our revenue decline of 1% you can break it down as follows. So exchange rates in the first quarter adversely impacted our revenues by 6 percentage points but the additional -- in addition to that, the volumes were 5 percentage points lower. And that was offset by a richer price and product mix which favorably impacted sales by 10 percentage points.

But what I would say, and I think it's worthy of note here, is that if we excluded the Avtel markets within Fuel Specialties, our volumes were actually broadly flat or even slightly up a little bit compared with the corresponding quarter last year.

Hello?

Yes, we're still here Olga.

Okay, I apologize. So you said that you gained some market share, so I guess that the underlying volume decline was more than 5%. Could you estimate what was the -- sort of the underlying volume decline excluding market share gain?

No, Olga, what I actually said was that the Avtel business actually declined -- the 5 percentage points of decline in volume was actually due to the Avtel business. The remainder of the Fuel Specialties business in volume terms was broadly flat or slightly up. So we just held volumes at a similar level to where they were last year. I hope that's clear.

Okay. And moving to corporate cost, I apologize, I think you mentioned your expected run rate for the rest of the year. I probably missed that. Could you repeat that?

Yes, it's about $5 million to $6 million per quarter, Olga.

Are you expecting any major restructuring initiatives or cost reduction?

No, not at this time, Olga. Changes to the structures that we're going to make is more evolutionary versus revolutionary and it's premature to make those announcements at this time.

And $1.5 million of pension, that's a good run rate for the year?

That's right, yes. Each quarter that'll be the ongoing charge.

Okay, I guess that's all I have for now. Thank you.

Thanks, Olga.

Thank you.

(Operator instructions) Gregg Hillman from First Wilshire Securities Management.

Good morning, gentlemen. Could you talk about the gross profit margin in Active Chemicals and Fuel Specialties, what caused it to increase so much? I think 3 percentage points. Was it due to material costs declines or new product introductions with higher margins? Could you just go into that a little bit more please?

Yes Gregg, I would say it's both. I mean obviously in Q4 and beginning of Q1 raw material prices dropped dramatically. As well, in early 2008 -- in mid 2008, we had to increase prices in the Active Chemicals segment just due to the fact of where market prices and raw materials were headed earlier in 2007 and early 2008. So we've had the benefit in Q1 of 2009 of low raw materials and a higher market price.

Is that sustainable, those gross margins, in either Active Chemicals or Fuel Specialties?

Well, it's sustainable dependent on where raw materials go from here to date. But I think additionally to keep those margins where they are, we're going to need to introduce new products into the market. And during the presentation -- those hopes will be late 2009, early 2010 if we introduce new products to the market. But there is extreme pressure on pricing right now.

And if you could just talk about one product, to what extent you're able to talk about it, is anything for in the power plant area for making coal to burn more slowly and to -- or is that a long term type thing?

I would say it's long term but it is part of our [R&T] program and it has been going on for a significant amount of time now. But we're looking at trials and we can't tell you when there will be any specific launch date, if at all.

Okay. And then finally, your mix of products that go to the refineries themselves to help basically make refineries more efficient, do you have any products like that or is it all of your products are pretty much downstream at the terminal level in additives?

No, we have products that go in the refinery but it's not in the process side. It's more once it hits the pipeline down at the terminals and downstream. It's not on the process side, though.

Okay, thanks very much.

(Operator instructions) Gregg Hillman.

Just for the remainder of the year, are you going to do any more investor relations type stuff? Could you describe what you envision for the Company in terms of as it interacts with Wall Street and its other investors?

Yes, Gregg, it's our intention to do a little bit more and become a little bit more active in the investor relations side and we would imagine that it would be towards the end of this calendar year when Patrick and myself will be in New York and other cities.

Okay great, thank you.

As we have no further questions at this time, I'd like to hand the call back to you, Mr. Williams, for additional remarks.

Thank you for your questions. And now I'd like to leave you with a few final thoughts. Considering the economic environment, we are pleased with Innospec's overall results for the first quarter. Our largest business, Fuel Specialties, continues to perform extremely well. Active Chemicals has significantly improved its performance from the fourth quarter levels. And Octane Additives remains a meaningful cash generator.

While we're looking ahead cautiously to the next few quarters, we remain confident in our long term strategy for driving growth in our core businesses and building shareholder value over time.

We will continue investing in innovation and executing our aggressive service-oriented strategy. We have strong positions in a variety of attractive specialty chemical markets and I know we can leverage these in the years ahead.

If you have any further questions, please don't hesitate to call us. And if we don't hear from you in the meantime, we look forward to sharing our second quarter results with you in a few months time. Thanks again for being with us on the call today and goodbye.

That will conclude today's conference call, ladies and gentlemen. Thank you for your patience and please disconnect.