Innospec Inc (IOSP) 2009 Q3 法說會逐字稿

Good day, and welcome to the Innospec third-quarter 2009 results conference call. For your information, today's conference is being recorded. At this time, I would like to hand the conference over to Mr. David Williams. Please go ahead, sir.

Thank you. Good morning, everyone. My name is David Williams. I'm Vice President, General Counsel and Chief Compliance Officer at Innospec. Thanks for joining our third-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 September 30, 2009. That press release is posted on the Company's website, 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.

Before we 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 these 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 site for these and other documents.

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 will turn it over to you, Patrick.

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

Turning to slide 4 in the presentation, I have a few summary comments before Ian takes us through the numbers in greater detail. Overall, considering the challenging economic environment and a number of special items, our financial results for the third quarter were quite strong.

In Fuel Specialties, our largest business, revenues and operating income were down in the face of continued weak fuel demand, declining selling prices, and tough comparisons with last year's third quarter when the segment sales were up 22% and operating income was up 18%.

Our core operations within Fuel Specialties had essentially flat unit volume for the quarter, a remarkable achievement in this economy, which underscores our continued ability to expand our market share in this key business.

In Active Chemicals, we sustained the momentum established earlier in the year and achieved further improvement in the segment's gross margin, both sequentially and on a year-over-year basis. While the segment sales are still relatively flat, that's a big improvement from the large declines we reported earlier in the year. And Active Chemicals continues to benefit from manufacturing efficiencies, pricing adjustments and lower raw material costs compared with the year ago.

In Octane Additives, excluding special items, we reported large increases in both sales and operating income from a year ago. But last year's results had been unusually depressed due to timing of shipments to several key customers. While this was a good quarter, nothing has fundamentally changed in our outlook for this business. We continue to expect a gradual decline over the next few years.

As you know, we reported GAAP net loss for the third quarter of $0.11 compared with a net loss of $0.03 per share a year ago. However, both periods include special items that we have outlined in the press release and in the appendices to this presentation. The most significant of these in this year's third quarter was an accrual for both potential settlement of the Oil for Food and related FCPA investigations and a substantial foreign exchange gain compared with a large ForEx loss a year ago. Ian will have the details, but if you exclude all the items from both periods, our adjusted earnings per share for the quarter were up 7% from a year ago, which we consider an excellent performance in today's economy.

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

Thank you, Patrick. Moving to slide 6 in the presentation, on a consolidated basis, revenues for the quarter of $149.2 million were down 6%, primarily due to lower sales in Fuel Specialties. Sales were down just slightly in Active Chemicals and up significantly in Octane Additives.

Our overall gross profit percentage was 31.6% or 4.2 percentage points from a year ago, reflecting improved gross margins in both Fuel Specialties and Active Chemicals. In the quarter, we recorded an operating loss of $1.1 million compared to an operating income of $6.1 million a year ago. However, as Patrick noted, our GAAP loss per share of $0.11 for the quarter included $0.74 for the potential settlements accrual and $0.03 in Octane Additives goodwill impairments, offset by $0.20 in foreign exchange gains.

A year ago, our loss of $0.03 per share was entirely due to special items that reduced earnings by a total of $0.46 per share, which is primarily attributable to a 26% charge for expenses and accruals related to the investigations and $0.15 in foreign exchange losses. Excluding all the items from both periods, our diluted earnings per share on an adjusted basis were $0.46 per share in this year's third quarter, up 7% from $0.43 a year ago.

Turning to slide 7, in our Fuel Specialties business, revenues were down 12%, with 6 points of the decline due to lower selling prices, 1 point due to currency translation and the remaining 5 points due to sharply lower volumes at AvTel, which sells our TEL additive into the aviation market. AvTel sales were down more than 40% from a year ago, mainly due to lower sales to a major US customer, who has since destocked their supply chain to more normalized levels.

So unit volume in our core Fuel Specialties business was unchanged from a year ago, a remarkable performance in the current environment. In addition, we were also facing very tough comparisons in Fuel Specialties, which reported sales of 22% and operating income of 18% a year ago.

Given the very weak fuel demand around the world, these results again demonstrate that Innospec is gaining market share in this key business, which we would attribute to our strong management team, innovative product developments and our ability to meet customers' needs with customized products.

Fuel Specialties gross profit percentage for the quarter of 32.9% was up 1.7 points from a year ago, which primarily reflects lower raw material costs.

By region, revenues declined 8% in the Americas, reflecting the weaker sales mix early in the quarter. Sales in the EMEA region were down 15%, primarily due to price decreases and to a lesser extent, currency translation effects.

In the smaller Asia-Pacific business, sales increased 16%, thanks to a shift towards our higher value products. Overall, the segment's operating income for the quarter was $16 million, down 17% from last year's third quarter.

Moving on to slide 8, in Active Chemicals, revenues declined 1%, but that was a much stronger performance than the segment's 16% revenue decline in the second quarter. Unit volume was down about 1% as a 7% negative impact from currency translation was essentially offset by favorable shifts in pricing and sales mix.

Active Chemicals reported a $3.7 million operating income an improvement sequentially from $2.8 million in the second quarter and much stronger than its $0.3 million operating loss in last year's third quarter. The segment's gross profit percentage was 23.8%, up 1.8 percentage points from 22% in the second quarter and up 12.7 points from a year ago.

This performance reflects increased production efficiency under a new management team, lower raw material costs and selected price increases.

By region, sales were down 12% in the Americas, primarily due to lower sales in custom manufacturing, where we have purposefully given up some low-volume low-margin business. In the EMEA region, revenues increased 3%, led by better volumes offset by the unfavorable impact of exchange rates. Sales in the Asia-Pacific region were up 26%, led by another strong increase in volume, together with a richer pricing and sales mix.

Turning to slide 9, third-quarter revenues in Octane Additives were $12.5 million, similar to the second-quarter level of $13.1 million, but up sharply from $7.3 million in last year's third quarter. Sales a year ago have been unusually low due to the timing of certain shipments.

The segment's gross profit percentage for the quarter was 44.8%, down 5.9 points from a year ago, which mainly reflects the cycling of higher cost inventory through the cost of goods sold. However, the margin was up significantly from the segment's 30.5% margin in the second quarter, mainly due to a more favorable sales mix.

The reported operating loss of $14.7 million includes an accrual of $18.3 million for the potential settlement of the Oil for Food and related FCPA investigations. While the reported operating loss of $7.3 million a year ago include $8.7 million in investigation expenses.

Excluding these items, Octane Additives operating income of $3.6 million was more than double the $1.4 million a year ago.

Moving on to slide 10, corporate costs for the quarter were $4.4 million, down 10% from $4.9 million a year ago. The decline reflects our continued tight cost controls, as well as currency translation against our predominately sterling corporate cost base.

We recorded a $7 million foreign exchange again in the quarter, a positive swing of $12 million from our $5 million foreign exchange loss in last year's third quarter. The 2008 losses were driven by the requirements under US GAAP to book mark-to-market losses on our foreign currency contracts positions, which we have now unwound during 2009, resulting in some gains.

The non-cash provision related to our United Kingdom defined benefit pension plan was $1.7 million, in line with previous quarters this year, but up significantly from $0.6 million a year ago. As expected, the Octane Additives impairment charge was again down significantly at $0.6 million compared to the $1.4 million a year ago. And we have no restructuring charges in the quarter compared with $300,000 a year ago.

Turning to slide 11, cash flow slowed in the third quarter, as we generated $9.8 million in free cash flow net of $1.3 million in capital expenditures. Excluding the potential settlements accrual, our strong operating income was partially offset by a $7.9 million increase in working capital, which had reached unusually low levels earlier in the year.

We finished the quarter with $50.3 million in cash on hand and reduced our net debt to $10.8 million compared with $21.5 million at the end of the second quarter and $59.1 million last December.

However, we continue to expect net debt to increase significantly in future quarters based on the need to build working capital from recent low levels and the timing of other cash flows.

We have not repurchased any Innospec stock so far this year. The Board of Directors also deferred a decision on our unusual semiannual dividend at its meeting in August. As we stated previously, the Board has determined that for the time being in the current environment, preserving liquidity and maximizing cash flow is the highest priority.

And now, I will turn it back over to Patrick for some concluding comments.

Thank you, Ian. Moving to slide 13, here, we show our metric called ongoing operating profitability, which we devised several years ago to more clearly demonstrate the progress of our ongoing businesses in Fuel Specialties and Active Chemicals by excluding our legacy Octane Additives business. Combined operating income of the two ongoing segments was up 4% in the third quarter and up 17% for the year to date. With corporate costs lower for both periods, our ongoing operating profitability increased 9% in the third quarter and 41% for the nine-month period. So our core businesses overall continued to make good progress despite economic headwinds.

Turning to slide 14, I would like to make a few more points before we take your questions. I would like to reiterate that overall, we are pleased with the performance of our key businesses in the third quarter and year to date. Both Fuel Specialties and Active Chemicals are significantly outperforming their peers in the chemical industry.

In Fuel Specialties, delivering flat unit volumes in its core business is an exceptional performance at a time when diesel fuel demand is still down anywhere from 8% to 30% in key markets around the world. And in Active Chemicals, the turnaround in gross margins this year has been very impressive given the market environment.

I think these results speak to the strength of our management teams, the continued commitment and hard work demonstrated daily by our employees across all levels of the Company.

Having said that, we remain concerned about the near-term outlook, especially in Fuel Specialties. There's still no sign of recovery in diesel fuel demand and the forward order book is not as strong as we have seen in previous years. We know we are facing difficult comparisons over the next couple of quarters in Fuel Specialties because our results were particularly strong in last year's fourth quarter and this year's first quarter.

In Active Chemicals, the new management team has sustained the momentum generated earlier this year despite depressed markets by continuing to address production efficiencies and focusing on the markets which continue to add shareholder value. We sustained a strong performance so far thanks to our innovative approach to product development, along with our sharp focus on service and creating customized products to meet our customers' needs and demands. We will continue to monitor and satisfy customers' needs and demands by focusing and refining our product portfolio. This requires us to make substantial essential investments into R&D to keep our pipeline of new products full as we bounce out our portfolio in the immediate, near and longer term. And in that way, we are hoping to ensure future growth while continuing to build long-term shareholder value.

A couple more notes. During the quarter, we announced two strong additions to the Innospec team. David Williams, who was with us this morning, has joined the Company as Vice President, General Counsel and Chief Compliance Officer based here in Denver. He has made an excellent start taking on the role and expanding the legal compliance presence across all our businesses.

Also, Robert Pollard has joined the Innospec Board as a Nonexecutive Director, and with his extensive legal experience, he's already made significant contributions on a number of issues.

Finally, I want to update you on the Oil for Food and related FCPA investigations. We continue to cooperate fully with the government authorities. The new management team has been working to resolve these issues on a global basis and discussions with government authorities are ongoing. Those discussions have resulted in a potential settlement range of $18.3 million to $63.4 million. In connection with the investigations, we accrued a potential settlement of $18.3 million in the quarter. We would like very much to bring these matters to a quick conclusion, and we are doing everything we can to reach an agreement as soon as possible. Outside of this, there is nothing more I can add with regards to this matter, which I'm sure you will all appreciate.

And with that, I'm going to turn it back over to the operator, and we will be happy to take any questions you may have.

(Operator Instructions). Jeff Zekauskas, JPMorgan. We move to a question from Gregg Hillman from First Wilshire Securities.

Could you talk about the status of any new products you've introduced in the market?

Yes, Greg is Patrick here.

(multiple speakers).

Obviously we've spent a lot of time on innovation, and typically in our industry, it's a five-year span from innovation to commercialization as we have preached before on previous calls. We will continue to introduce new products in the market. Primarily I think two significant products will be introduced more in the Active Chemicals range in early 2010. But nothing in the last, in the fourth quarter or last part of third quarter.

Okay. And, also on the pension report, do you know the date that it's due from the (multiple speakers)?

Greg, this is Ian. We are currently in discussions with the trustees, and we expect to conclude those discussions later in this calendar year, and we will have more information on our year-end call in February.

Okay. So the report is in?

We've got a draft report, and we are considering in with the trustees, and we're in negotiations with them right now.

Okay. Thank you.

(Operator Instructions). [Steve Roberts].

I was just wondering what credit lines you have available.

Sorry, can you repeat that question?

Oh, the credit lines. You said you're going to (technical difficulty)

Did you say credit lines? I'm sorry, Steve.

Yes, credit lines.

Steve, this is Ian. We have $150 million facility with our banking group, of which $50 million is a term loan and $100 million is a revolving credit facility.

And can you use that to pay the Oil for Food?

Yes, we can.

And then on the Oil for Food, is it likely to get resolved in 2010?

Steve, we're hoping to get it resolved obviously sooner rather than later. And unfortunately we can't comment any further about length of time during this negotiation period. But it is ongoing. Not only us but the government are wanting to resolve this hopefully by the end of this year.

Are you just down to price now or is there still an investigation going on?

We really can't comment. I think you can appreciate that.

Thank you.

Jeff Zekauskas, JPMorgan.

This is Olga Guteneva sitting in here for Jeff. How are you? Sorry, I got disconnected and probably somebody asked the questions I was going to ask. But just for a second, to Fuel Specialties, so if I remember correctly, you said that volumes were flat, including 14% a decline in AvTel. Is it correct?

That's correct, Olga; yes.

And, in the fourth quarter of last year, what was the AvTel fuel effect? Was it positive to volumes, negative to volumes?

I think it was probably about flat in terms of volume terms in quarter four 2008, Olga.

And, can you comment on the raw material trends in Fuel Specialties? So I assume that it was year over year stayed positive in the third quarter. But going forward, do you see any negative effects on that?

Yes, I think what we're going to most likely see in not only Active Chemicals, but in Fuel Specialties as well is that you will see raw materials start inching back up on a gradual basis over the fourth quarter and the first two quarters of 2010. Obviously, you have seen crude run back up from the $40 range back up into the high $70 range, and some of your basic raw materials will run up on a similar percentage basis.

And in Octane Additives, it's that a fairly good result. And can you tell was it more like normal volumes in this quarter or it was something unusual?

Olga, I think as you know, and we've said this before on calls, alternatives can be a very lumpy business. And volumes were clearly up significantly this quarter about 57 points. And the sales mix accounted for the remaining 14 points. Just please remember this is due to the timing of the shipments. The fourth quarter last year was extremely strong, and this adversely impacted the third quarter last year and obviously the first quarter of 2009. So we don't really talk about normalized volumes in that business.

Okay. And as for your currency gains, how should we think about it going forward? Do you expect another big item next quarter?

Olga, if I could predict that, I would be a very rich person, I guess. We've seen a lot of volatility in foreign exchange rates, especially in the second half of 2008 and the first and third quarters of 2009. And if you just take a moment and just think about some of the things that we have seen, for example, we have seen the dollar-sterling rates move 27% over a five-month period towards the end of 2008. And early in 2009, the euro-sterling rate moved down 15% in one month and then back up 9% the following month. So against that backdrop, I really can't predict what will happen to exchange rates over the next year.

Well, if maybe I should ask it the other way. If the exchange rate stays at the current level, do you think you will have benefit? Will you have (multiple speakers)?

At the current level, Olga, it will be broadly flat.

And lastly, is there any updates on pension audits?

You might have just missed the question from Steve earlier on I'm sorry, from Jeff earlier, Gregg earlier, I'm sorry about pensions. We are in negotiations with the trustees. We hope to conclude those negotiations by the end of this calendar year. And we'll have more information for you on our year-end call in February.

Okay. Thank you very much.

(Operator Instructions). [Rob Pael], [SVC].

I was just wondering if you could comment on the flat volumes versus the market being down, you said 8% to 30% for diesel fuel. Has that just been entering into new market silos? Or is that penetration of your existing markets? Is it land versus marine? Is the -- even the AvTel volume down 14%, is that actually growing penetration of that addressable markets? And probably volumes were down more than that overall?

Yes, I will try to address as much of the question that you put forth. If you specifically talk about Fuel Specialties and Active Chemicals, I will combine them both in the answer. We've introduced a few new products that were actually introduced in late 2008 and have picked up steam in obviously 2009, which, when volumes have been quite substantially down in depressed markets, we've been able to maintain fairly flat, which I think is exceptional from our team.

It is a very tough environment. You are seeing some things in the marketplace that I haven't seen since I've been in this business, with pricing, with customers, with customers' mothballing refineries, shutting in capacity, shutting out expansion plans, so it's been a very volatile market. And I think what we have done is we've kept very straight with our strategy and haven't deviated from the aspect of going into price wars and sticking with innovation.

So, it is really a combination of picking up some new key customers but additionally, new products into new markets, where we've gotten the majority of our sales to remain flat from a unit basis.

Got it. Thank you.

Gregg Hillman, First Wilshire Securities.

Just, can you go into any further detail on the activity in new products in specialty chemicals?

In the Active Chemicals, Greg?

Yes. In Active Chemicals.

Yes, if you take kind of the strategy in Active Chemicals, the strategy has really been built around expanding our personal care business globally. If you remember the acquisitions that we made were primarily US-based. And we are looking to broaden our horizons and look at the European markets and Asia-Pacific markets. And we've done an extremely good job doing that.

Additionally, we took some of our lower-margin products and basically shelved those for higher-margin capacity. So some of the new products that we have brought out are really in line with what our manufacturing site can make on a very competitive basis. So we've introduced two new products. Both of them are in the Personal Care side of the industry. And we are looking to introduce a minimum of two more in 2010 that will primarily, again, be in the personal care industry, more around surfactants.

Okay. Thanks very much.

Thank you, ladies and gentlemen. As we have no further questions in the queue at this time, I would like to hand back over to Patrick Williams for any additional or closing remarks.

Thank you for your questions. And now I would like to leave with a few final thoughts. We are very proud of our financial performance so far in 2009 and believe it reflects well on our people, our product development, and our customer service approach across all the business.

While our momentum has slowed in our largest and most profitable business, Fuel Specialties, it is continuing to outperform its industry by a wide margin. And the emerging turnaround in Active Chemicals is very promising, especially given the current environment.

Longer term, our growth strategy has remained unchanged. We must continue to invest in innovative new products and maintain our razor-sharp focus on customer and technical service. Fundamentally, we continue to believe that Innospec has an attractive portfolio of specialty chemicals businesses that we can leverage to deliver attractive long-term growth and increased shareholder value over 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 will look forward to sharing our fourth-quarter and full-year results with you in a few months. Thanks again for being with us on the call today. Good bye.

Ladies and gentlemen, that does conclude today's conference call. Thank you for your participation today. You may now disconnect.