Innospec Inc (IOSP) 2009 Q2 法說會逐字稿

Good day and welcome to the Innospec second quarter 2009 results conference call. For your information, today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Andrew Hartley.

Thank you and good morning everyone. My name is Andrew Hartley. I'm Vice President and General Counsel at Innospec.

Thanks for joining our second quarter 2009 financial results conference call. Today's call is being recorded.

As you know, last night we reported our financial results for the quarter ended June 30, 2009. The press release is posted on the Company's website at www.InnospecInc.com. An audio webcast of the call and the slide presentation on the results are also now available and will be archived on the website.

If you turn to slide two, before I start, 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 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 for these and other documents.

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

Overall, we remain pleased with the performance of our core businesses in this global recessionary environment. In Fuel Specialties, our largest business, revenues and operating income were down slightly reflecting pricing pressures and the impact of currency translation. But the segment delivered a remarkable 6% increase in volume for the quarter even though the primary drivers of the business, diesel fuel consumption, is down anywhere from 8 to 30% depending on the market.

So we are clearly continuing to grow our market share in Fuel Specialties. In Active Chemicals, we have built on the momentum established in the first quarter and achieved a significant further improvement in the segment's profitability.

Sales in the Active Chemicals remain weak, but thanks to manufacturing efficiencies, pricing adjustments we've negotiated and reduced raw material cost; our margins were dramatically improved from year ago and the first quarter. We've achieved these results without any significant improvement in our non-core polymers business.

Octane Additives delivered a significant sales rebound from its slow first-quarter level as we expected. However, the longer-term outlook for this legacy business has not changed. We expect to continue its gradual decline but to remain cash generator for at least several more years.

As you know, we reported GAAP EPS for the quarter of $0.12 versus $0.03 a year ago. However, both periods include a number of special items that we have detailed in the press release in the appendices in the presentation.

The most significant of these were additional expenses and accruals related to the Oil for Food and related investigations. Ian will have the details but if you exclude all of these items from both periods, our adjusted earnings per share for the quarter were up 30% from a year ago which we believe is a remarkable performance in the current environment. And with that, I will turn the call over to Ian Cleminson, our Chief Financial Officer.

Thank you Patrick. Moving to slide six in the presentation, on a consolidated basis, revenues for the quarter were down 6% primarily due to the currency translation of the relatively stronger US dollar. Our overall gross profit percentage was 29.8%, up 1.5 percentage points from a year ago. Mainly reflecting the substantial improvements in gross margins at Active Chemicals.

Margins were lower in both Fuel Specialties and Octane Additives. Our GAAP earnings per share of $0.12 for the quarter included $0.16 in additional legal and professional expenses and accruals for the United Nations Oil for Food and related investigations, $0.02 in Octane Additives goodwill impairments and a $0.01 restructuring charge partially offset by a $0.01 foreign exchange gain.

On a net basis, these special items reduced our second-quarter earnings by $0.18 per share while a year ago we had special items totaling $0.20. So on an adjusted basis, diluted earnings-per-share were $0.30, up 30% from $0.23 in last year's second quarter.

Turning to slide seven in our Fuel Specialties business, revenues were only down 2% despite a 4% negative impact from currency translation and another 4% from lower prices. Volumes were up 6%, an exceptional performance in view of the environment we are facing around the world for fuel consumption. These results clearly indicate that we're continuing to gain market share with our [elective] product offerings and our ability to meet customers needs with customized programs.

Fuel Specialties gross profit percentage of 32.4% was down 1.9 points from a year ago but most of the decline is due to a higher cost of goods at [alftel], our TEL additive for the aviation markets, reflecting increased unit production costs. In the remainder of our Fuel Specialties business, we were able to hold gross margins very close to the year ago level.

By region, revenues increased 5% in the Americas with solid growth in lubricity improvers, [cethane] improvers and static dissipators. Sales in the EMEA region were down 7%, primarily due to the strength of the dollar against the euro.

In the smaller Asia-Pacific business, sales declined 7% while our [alftel] margins were under pressure but it's sales increased 13% from a year ago, rebounding from usually low shipment levels in the first quarter. Overall, the segment's operating income for the quarter was $14.1 million, down 7% from last year's second quarter.

Moving on to slide eight, in Active Chemicals revenues declined 16% but about 11 percentage points of the decline was due to currency translation and the segment continued to build on a stronger performance in the first quarter with another significant improvement sequentially especially in the fragrance and personal care businesses. Volumes were down 6% from a year ago but most of the decline was in our low-margin polymer business.

We reported a $2.8 million operating profit, much stronger than our $2.4 million operating loss a year ago and our $1.2 million operating profit in Q1. The segment's gross profit percentage was 22%, up 16.7 percentage points from a year ago and 5.6 points from the first quarter.

This performance reflects increased production efficiency under a new management team, lower raw material costs and price increases especially in fragrance ingredients. The non-core polymer business again was very weak.

Excluding polymers, Active Chemicals revenues were only down 7% with a gross margin of 25.9% compared to 2.1% a year ago. By region, sales were down 9% in the Americas, partly due to lower sales in custom manufacturing where we have purposely given up some low-margin business.

In the EMEA region, revenues declined 27% primarily reflecting the sharp drop in polymers and the significant impact from currency translation. Sales in the Asia-Pacific region were 20% led by a strong increase in fragrance sales.

Turning to slide nine, as you may remember from our last call, first quarter sales in Octane Additives were unusually low due to high TEL inventories at our key customers which affected the timing of shipments. As we expected, sales rebounded significant in the second quarter to $13.1 million from $5.3 million in the previous quarter and were essentially unchanged from a year ago.

The gross profit percentage for the quarter was 30.5%, down sharply from a year ago as we began to float inventory with significantly higher unit production costs [through] the cost of goods sold. The lower margin also reflects a less favorable [custom mix] from a margin standpoint during the quarter.

The reported operating loss of $3.6 million includes $5.9 million of additional Oil for Food legal and professional expenses and accruals. Excluding this item, Octane Additives generated a solid $2.3 million operating profit for the quarter.

Moving on to slide 10, corporate costs for the quarter were $4.8 million down 16% from $5.7 million a year ago. This decline is mainly due to the strength of the US dollar against our UK sterling corporate cost base as well as our continued tight controls on general and administrative expenses. I should point out that we've excluded from the comparison $3.9 million in expenses we incurred a year ago related to potential acquisitions that we ultimately chose not to pursue.

As expected, the Octane Additives impairment charge was again down significantly at $0.5 million compared to $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.

The small restructuring charge of $400,000 before taxes was primarily related to severance expenses in Octane Additives. The effective tax rate for the quarter adjusted for Octane Additives goodwill impairments was 32.7% compared with 35.7% in last year's second quarter.

Turning to slide 11, cash flow again was strong in the second quarter as we generated $17.1 million in free cash flow net of $1.2 million in capital expenditures. We finished the quarter with $44.5 million in cash on hand and reduced our net debt to $21.5 million as of June 30, down $37.6 million for the year-to-date.

However, this is primarily due to a reduction in working capital as our business has slowed and also the timing of all the cash flows. We expect that both of these items will reverse over the second half of the year and our net debt position will not be as strong as it currently is.

We have not repurchased any Innospec stock so far this year. As we stated previously, 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 to slide 13 which shows a metric called ongoing operating profitability which we use to illustrate the progress of our ongoing business in Fuel Specialties and Active Chemicals by backing out the numbers from our legacy Octane Additives business. With combined operating income up 32% in Fuel Specialties and Active Chemicals and the corporate costs down significantly, our ongoing operating profitability was up 70% for the second quarter. So our core growth businesses continued to make excellent progress at the operating level.

Turning to slide 14. I would like to make a few more points before we take your questions.

We made a number of management changes over the last couple of quarters and they have been well received by our customers. Our management teams for both Fuel Specialties and Active Chemicals are now in full force and are fully operational.

And I have to say that given our financial performance in this environment, the management changes clearly are paying off, especially in Active Chemicals. More broadly, I think the results speak to the strength of our people, the breadth and depth of our management across all levels of the Company.

And I would note that we appreciate the hard work and dedication all our employees are demonstrating in pushing the business along day by day, strengthening our platform for future growth. I would like to reiterate how pleased we are with the resilience demonstrated by our Fuel Specialties business in this economy.

Given what's happening with diesel consumption around the world, delivering 6% volume increase in the second quarter is just an exceptional performance. And as Ian noted, our core fuel specialties business has essentially maintained its gross margins which has only been possible through our continued focus on innovation and our ability to create customized programs to meet our customer needs.

In Active Chemicals, we realize that we still have a long way to go to deliver the kind of results we expect long term. But the business really seems to be solidly in a turnaround mode now, building on the momentum we began to see in the first quarter. And again, I think the new management in place there deserves a lot of credit for the superb job they are doing.

Like many other companies, we see mixed signals regarding outlook over the next few months. Some economists are saying that we're at the bottom and the recovery is right around the corner while other experts say we're not close.

So while we are pleased with our performance so far in 2009, we are again refraining this quarter from providing any formal guidance regarding Innospec's financial performance for the full year. In this uncertain environment, one thing that is certain is that we're doing all we can to strengthen our business for the long term growth.

Among other things, we must continue to invest in research and development and in fact we have a significant pipeline of new products developed over the last four years that we expect to launch later this year and in 2010. But sustainable long-term success needs even more investment.

We have a very strong and bond with our customers in all our business units, but we need to build on those relationships to bring our own innovative new technologies to market, thus enabling our customers to develop personal care and fragrance products as well as advanced high performance fuels for the future. As you know, this business is not just about manufacturing chemicals. It's about working closely in partnership with our customers to help solve their problems.

Finally I want to update you on the Oil for Food investigations. We have fully cooperated with the governmental authorities and gone to great expense to investigate all areas of potential noncompliance and remediate where necessary.

We feel we are ready now to bring this matter to a close and it's also our hope and desire that the governmental authorities feel the same. What the settlement will look like and when it will happen, we don't know. But we will do all we can to bring this to a conclusion as soon as possible. And with that, I'm going to turn it back over to the operator and will be happy to answer any of your questions.

(Operator Instructions) Greg Hillman, First Wilshire Securities.

Could you talk about, first of all, a bit about Active Chemicals? What was done to cause the turnaround and kind of your strategy going forward? And then also could you talk about some new products that have already hit the market that they're in the press releases and are you excited about them?

Yes, Greg. It's Patrick here. I'll take the first couple of questions.

Active Chemicals when we inherited the business last year, we had to make significant improvements not only in the contract area but also in the area of tolling manufacture. We toll for their customers.

We were making small volumes for customers. We had inefficient operational facilities. Additionally we were making very little margins as you could tell same quarter in 2008.

But we had to go around and really refocus on raw materials, refocus on our customer base and renegotiate contracts in areas where we felt we couldn't operate under those contract conditions any longer. Additionally we focused on really our core business which is fragrance and personal care, being that the polymers business is really non-core but more core towards the Fuel Specialties side of the business.

I will say it's been a very strong effort by management in the manufacturing efficiency standpoint, from a sales standpoint and really overall, integrating that business into the overall core business of Innospec. So you can't say you can really point to one thing, Greg. It's been a combination of many factors that have really started to benefit and we've kind of have taken the lumpiness out of that business as we like to say.

I think additionally when you look at new products, we have launched a few new products, some surfactants in the Active Chemicals business, more on the personal care side; as well as we have some new products in the Fuel Specialties side, primarily having to relate to [tex] lead as well as we'll have some new core polymers out for coal flow improvers for the winter time which will be coming up here in the next few months.

So again, these are products that have taken us where we call -- it's typically four years from innovation to commercialization and you're seeing these products coming out of those efforts. But as we said in the comments earlier as we discussed is that it's going to take more of an effort and more money into R&D to push those volumes again in 2011 and '12 from a new product innovation standpoint.

(Operator Instructions) There's no further questions at this time. I'd like to hand the call back over to you Mr. Williams.

Thank you for your questions and now I'd like to leave with a few final thoughts. As we said, considering the economic environment, we are pleased with Innospec's performance so far in 2009.

Our largest and most profitable business, Fuel Specialties, continues to grow its business while delivering strong gross margins. The turnaround in Active Chemicals is building momentum with significantly improved margins in the face of a deep global recession.

While we're not sure what the next few quarters have in store for us, we remain confident in our long-term strategies for driving growth in our core ongoing businesses and building shareholder value over time. We will continue investing in our new product pipeline and executing our aggressive service oriented strategy to meet our customer needs.

Fundamentally, Innospec remains well-positioned for long-term growth across a variety of attractive specialty chemical markets. 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 third-quarter results with you in a few months. Thanks again for being with us on the call today and good bye.

Thank you ladies and gentlemen. That concludes today's conference call. You may now disconnect your lines.