Innospec Inc (IOSP) 2009 Q4 法說會逐字稿

Good day and welcome to the Innospec Q4 and full-year 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. Please go ahead.

Thank you, and good day everyone. My name is Andrew Hartley, and I am Vice President and General Counsel of Innospec. Thanks for joining our fourth quarter 2009 financial results conference call. Today's call is being recorded.

As you know, this morning we reported our financial results for the quarter and year ended December 31, 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.

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 those forward-looking statements.

These risks and uncertainties are detailed at 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.

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 also Ian Cleminson, Executive Vice President and Chief Financial Officer.

And with that, I will turn it over to you, Patrick.

Thank you Andrew, and thanks 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, considering the challenging economic environment, our operating results before special items for the fourth quarter were remarkably strong. In Fuel Specialties, our largest business, revenues were down slightly, but operating income increased 10% despite a continued weak fuel demand across many of our markets as well as a tough comparison with last year's fourth quarter. Our core operations within Fuel Specialties reported a 1% increase in unit volume for the quarter, an excellent performance in this economy, which highlights our ability to continue growing our market share in this key business.

In Active Chemicals we sustained the momentum established earlier in the year. The segment sales were up 16% for the quarter, and its gross margin again was significantly improved on a year-over-year basis.

In Octane Additives we reported lower revenues and operating income, as expected, particularly given a difficult comparison with the relatively strong results in last year's fourth quarter, reflecting the timing of certain shipments.

We have made substantial progress but not yet completed negotiations of final settlements for the Oil for Food Program and FCPA investigations, either in the US or United Kingdom. However, we have charged a further $21.9 million in Octane Additives in the quarter based on the status of ongoing discussions to bring the total amount accrued to $40.2 million. The company will make no further comments on the ongoing proceedings.

Our GAAP net loss for the fourth quarter of $0.01 includes a charge for the anticipated Oil for Food Program and FCPA settlement, which is partially offset by other items.

Our earnings of $0.20 a year ago also included several special items.

Ian will have the details, but if you exclude all of the items from both periods, our adjusted earnings per share for the quarter were up 2% from a year ago, which we consider a very solid performance under the circumstances.

And with that, I'll 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 of $164.2 million were down 2%.

Our overall gross profit percentage was 31.1%, up 1.3 percentage points from a year ago, reflecting significantly improved gross margins in both Fuel Specialties and Active Chemicals partially offset by a lower gross margin in Octane Additives.

As Patrick noted, our GAAP loss per share of $0.01 for the quarter includes the anticipated settlement accrual of $0.88 per share as well as a $0.10 foreign exchange gain, a $0.09 gain from adjustments of income tax provisions, and an $0.08 net gain from our United Kingdom sales tax settlement.

The quarter also included a $0.03 restructuring charge as well as a charge of $0.02 for Octane Additives' goodwill impairment.

A year ago our earnings of $0.20 per share included $0.41 in foreign exchange losses, $0.02 in goodwill impairment, and a $0.01 restructuring charge.

Excluding these items from both periods, our diluted earnings per share on an adjusted basis were $0.65 in the fourth quarter of 2009, up 2% from $0.64 a year ago.

On the same basis, our adjusted earnings per share of $2.11 for the full year was up 13% from an adjusted earnings per share of $1.86 in 2008.

Turning to slide seven, in our Fuel Specialties business revenues were down 1%. Pressure on selling prices in the EMEA region and the Americas reduced sales by 8 percentage points, which was mostly offset by a 7 percentage point positive impact from currency effects, mainly in EMEA.

Unit volume in our core Fuel Specialties business was up 1% from a year ago, which was essentially offset by lower volumes in Avtel, which sells our TEL additive into the aviation market.

In addition, we were facing a difficult comparison in Fuel Specialties, which a year ago reported sales and operating income of 8% and 18%, respectfully, and we continue to see very weak fuel demand around the world, with demand for diesel in particular continuing to run 15% to 20% below a year-ago levels in some markets.

Fuel Specialties' gross profit percentage for the quarter of 36% was up 3.5 points from a year ago, which primarily reflects lower raw material costs and our ability to carefully manage our corresponding price reductions.

By region, revenues declined 9% in the Americas and 2% in the Asia-Pacific region but were up 11% in the EMEA region, primarily reflecting the weaker dollar.

Overall, the segment's operating income for the quarter was $24.1 million, up 10% from last year's fourth quarter.

For the full year, Fuel Specialties' operating income was $81.4 million, up 2% from 2008 and frankly, well ahead of our expectations for the year.

Moving on to slide eight, in Active Chemicals revenues increased 16%. Unit volume was up 12% and was particularly strong in the EMEA region. Increased prices and changes in the sales mix boosted revenue by 2 percentages points, and currency translation added another 2%.

The segment's operating income was $1.1 million, much stronger than its $2.4 million operating loss in last year's fourth quarter.

Our gross profit percentage in Active Chemicals was 18.5%, up 12.8 points from a year ago. This performance primarily reflects increased production efficiency under a new management team, lower raw material costs, and selective price increases.

By region, revenues were up 3% in the Americas, where volumes were restrained somewhat by the company's decision to give up some of its low-margin custom manufacturing business. Revenues were much stronger in the EMEA and Asia-Pacific regions, up 26% and 32%, respectively, thanks to strong sales volumes and favorable exchange rate effects.

For the full year, Active Chemicals reported operating income of $8.8 million, a significant improvement from its $5.0 million operating loss in 2008.

Turning to slide nine, fourth-quarter revenues in Octane Additives were $14.7 million, down 34% from $22.3 million a year ago. This was actually a solid performance and in line with our expectations, as the segment faced a tough comparison due to unusually high shipment levels a year ago.

The segment's gross profit percentage for the quarter was 20.4%, down 25.8 points from a year ago, which mainly reflects the cycling of higher cost inventory through cost of goods sold as well as a less favorable sales mix.

The reported operating loss of $20.7 million includes the $21.9 million accrual for the anticipated Oil for Food Program and FCPA settlement.

Excluding this item, Octane Additives' operating income was $1.2 million compared with $8.0 million a year ago.

Operating results for this segment remain broadly in line with the long-term decline we expect in our legacy tetra ethyl lead business.

For the full year, excluding the accruals for the Oil for Food Program and FCPA anticipated settlement and legal and professional expenses, the Octane Additives operating income was $8.3 million compared to $16.7 million a year ago.

Moving on to slide 10. Corporate costs for the quarter were $3.1 million, including the $2.5 million benefit related to our recent United Kingdom sales tax settlement. In last year's fourth quarter corporate costs were $4.4 million. Excluding the tax benefit, the increase primarily reflects higher personnel related costs and professional expenses.

We recorded a $3.2 million foreign exchange gain in the quarter, a positive swing of $16.7 million from the $13.5 million foreign exchange loss in last year's fourth quarter.

The noncash charge related to our United Kingdom defined benefit pension plan was $1.7 million, up significantly from $0.5 million a year ago.

As we noted in today's press release, the company has agreed with the plan's trustees that the plan has a substantial funding deficit reflecting a number of actuarial factors including improved mortality. We have taken several steps to limit our exposure to further pension liabilities, including closure of the plan to future service accrual and the replacement of the defined benefit plan with a defined contributions plan.

While we are still negotiating with the trustees regarding a timetable to fund the existing deficits, we expect our income statement accruals for the pension plan to increase to approximately $4 million per quarter in 2010. We also expect to make cash contributions of approximately $20 million this year.

In addition, we have significantly increased the pension liability recorded on the company's balance sheet to $124.2 million as of December 31.

Excluding the impact of the Oil for Food Program and FCPA investigations and anticipated settlements accrual and the adjustment to income tax provisions, the full year effective tax rate was 24.3%, compared to 33.3% in 2008. This decline is driven by the greater proportion of the company's taxable profits falling into the lower tax jurisdictions this year compared to last.

As you may have seen in our 8-K filing last month, we recently reached a settlement with the United Kingdom tax authorities on a number of issues. While this will require us to pay out approximately $6.5 million in cash, we were able to release a large accrual on the balance sheet, and the overall impact of the settlements on our P&L for the quarter was a net gain of $2.3 million.

I would also point out that we still have some remaining tax issues that are yet to be resolved with the United Kingdom authorities.

Turning to slide 11, cash flow was positive in the fourth quarter as we generated $28.1 million in free cash flow, net of $2.6 million in capital expenditures. Our good operating income coupled with the lower-than-expected working capital requirements enabled us to significantly increase our cash balances.

At year end we had cash and cash equivalents of $68.6 million, which exceeded our total debt by $17.6 million. This represents a dramatic improvement from our net debt of $59.1 million at the end of 2008.

However, we continue to expect substantial cash outflows in future quarters as we rebuild working capital to more normal levels, increase our capital expenditures and pension contributions from the recent United Kingdom tax settlement, and begin making cash payments once we reach a final settlement of the Oil for Food Program and FCPA investigations.

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

Moving on to slide 13, here we show our metric called ongoing operating profitability, which we created several years ago to highlight 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 29% in the fourth quarter and 20% for the full year. With corporate costs lower for both periods, our ongoing operating profitability increased 45% in the fourth quarter and 42% for the year.

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

Overall I'd like to reiterate that I am extremely pleased with the performance of our key businesses and our global management teams in 2009. Both Fuel Specialties and Active Chemicals delivered a solid performance in the fourth quarter and the year that significantly exceeded our own expectations, and it's a reflection of the hard work and dedication demonstrated by our employees across every level of the company.

Our adjusted earnings per share for the year were $2.11, up 13% from 2008. Fundamentally, both Fuel Specialties and Active Chemicals are performing extremely well.

Having said that, we know we will face further challenges from the economy this year. In Fuel Specialties we can only defy gravity for so long, and fuel demand across many of our markets remains very weak. Diesel demand continues to run 10% to 20% below last year's levels in many areas. Customer inventory levels are high, and refinery utilization rates remain low. With uncertainty in the market in tandem with competitive pressures, we remain cautious as we enter into 2010.

I would also note that we are facing another particularly difficult year-to-year comparison in Fuel Specialties in the first quarter of 2010.

In Active Chemicals the new management team has done a great job over the last 18 months in stabilizing the business, achieving critical manufacturing efficiencies and pushing through needed price increases in a number of areas. But market conditions also remain challenging in Active Chemicals as underlying consumer demand in the markets we serve still appears to be flat.

Fortunately we have a number of new products in Active Chemicals, primarily in the personal care area, that may begin to contribute to our performance as we move through 2010.

Our positive cash flow in 2009 enabled us to build a substantial net cash position at year end, although as Ian pointed out, we will need to tap into those reserves for various purposes in 2010 and beyond.

The company's cash generation over the last few years has been particularly impressive when you consider that we have spent approximately $34 million on legal and other professional fees related to the Oil for Food Program and the FCPA investigations over the last three years.

Due to the uncertainties related to the investigations, generating and preserving cash has been one of our highest priorities. And as a result, we have under-invested in terms of capital expenditures. That's going to start to change in 2010. Our CapEx budget for the year is approximately $20 million, about $13 million more than we spent in 2009.

We also need to accelerate our spending on research and development for 2010. The cornerstone of our success to date has been our innovative approach to product development and our focus on working with customers to customize key products to meet their specific needs. Above all, we must sustain this hands-on aggressive approach to customer service while making the necessary investments in our product pipeline so we can continue to grow our market share and build value for our shareholders over the years ahead.

Finally, regarding the Oil for Food Program and the FCPA investigations. As I said earlier, we continue to negotiate the conclusion with the government authorities. In addition to the anticipated settlement amount, we've expended significant resources in terms of both legal fees and management time. We do not anticipate making any further accruals at this time. So we remain very eager to bring these matters to a conclusion. But we still cannot predict exactly when that will happen or exactly what provisions will be the final agreement.

And with that, I am going to turn the call back over to the operator, and we will be happy to take any of your questions you may have.

(Operator Instructions). Gregg Hillman, First Wilshire Securities.

Did the report come in? Did the actuarial report actually come in to the trustees?

Yes, it did, Gregg.

When did that come in?

We got that earlier in the quarter. I think you'll probably remember from the last couple of quarters we have been talking about the pension issues that we have with the actuarial valuation.

The company has been in discussions with the trustees as to that amount. It was concluded that the deficit is substantial, and we've put in place a number of plans regarding active members, deferred members, and pensioners to contain and contract the risks of that scheme towards the company on a going-forward basis.

I think you mentioned improved mortality.

That's correct, yes.

What is -- improved from where to where?

Basically what it means is that people are living longer, and because of that the financial risks in this scheme are with us for a longer period, and a greater contribution is required from the company to fund that.

There was a number of other actuarial valuations around discount rates, inflation and the like. But certainly improved mortality was one of the main drivers of the deficit.

Okay. Fine. And also in one other area, Patrick. In terms of the new products and for Specialty Chemicals, could you go into any further detail on that?

Obviously we've got multiple products in not only Active Chemicals but Fuel Specialties as well. But they are primarily -- as we repeated in the last call, Gregg, it is surfactants, primary and secondary surfactants that go primarily into personal care -- shampoos, etc., lotions. New technology, not only some personal technology from our company but also strategic partnership technology with other organizations.

And we feel very confident that moving forward over the next three to four quarters that we should see a slight improvement in trading from Active Chemicals from some of the new products coming through the portfolio.

Okay. And will that be material for 2010 for the company?

I think we're going to have to watch the market. Obviously with -- during a recession consumer spending habits change drastically. And so we're going to have to really follow the market. But I do see some of these specific products increasing quite substantially. We just don't have the timing yet dialed in.

As you know, it takes quite a long time. There's a difference between the personal care side and a difference between the Fuel Specialties side, from commercialization to actually out to the market, end usage. So we're just going to have to sit tight and give you further details in the next call.

Okay, thank you.

Lavon Von Redden, Hocky Capital.

I was hoping you could just quantify what the total amount so far has -- that has been set aside for the impairment or accrual for the Oil for Food issue.

So far we've accrued $40.2 million for settlement of the Oil for Food and FCPA investigation.

Okay. From a legal standpoint, how much money has been spent I guess last year or this year on those same precedents? Maybe you can separate maybe this year.

Sorry, Lavon. In terms of the legal and professional fees that we've incurred?

Yes.

Yes, we've spent about $12 million this year in terms of legal and professional fees, and last year we will have spent broadly about $14 million.

I just want to make sure I'm framing this the right way. So if you actually do get a settlement, say if it just were to happen tomorrow, and it came to that actual $40.2 million, you would set up some type of a schedule under which you would pay that. I should think of this $40.2 million or the accrual potentially as another way of looking at a debt obligation, but your legal would, I would assume, decline by a fair amount.

Yes, we would expect the legal and professional fees on a go-forward basis to discontinue. And the terms of how we would pay the $40.2 million remains to be settled with the government authorities.

Okay. And finally, just one other question, which was related to the Octane Additives. I want to think about that on a like-for-like basis or on a pro forma basis. Was there something that happened on the Octane Additives piece of the business? I know that's something that has been in decline over a period of time.

Yes. When we looked at quarter four last year, the Octane Additives business had a very, very strong quarter in 2008 when you compare that to our business in 2009. Although the volumes were relatively strong, we were up against a tough set of comparisons, so in terms of revenues that was the issue that we faced.

In terms of gross margins, we have been saying for a long time now that the gross profit percentages in that business will be declining, and -- along with the higher cost of inventory that we now have to cycle through that business and the sales mix. That's why you saw a much weaker performance in the business at a gross profit level.

If I could sneak in one other, you mentioned a higher need for R&D spend. Could you quantify that please?

Yes. The majority of our products in personal care and Fuel Specialties, 46% of our sales over the last five years have been brought on by new products. And in this market you have to continuously push for new technologies or you get left behind. And so we are upping our game in our R&D and as well as our facility to take on some of the products we are bringing to the marketplace.

Any numbers associated with that additional spend?

I think the numbers that we had, which included actual capital into the manufacturing sites is up -- is $13 million more than last year, is the number.

Thank you.

Gregg Hillman, First Wilshire Securities.

I just wanted to follow up on the point of the prior comment. I take it the $42 million for Food for Fuel, you haven't paid $0.01 of that yet; is that correct?

That's correct.

Okay, fine. And you're just going to accrue that in accordance with any settlement that you'd have to make. So it's a possibility you would have to borrow money to pay that also?

No, we would fund that out of the ongoing business and our debt facilities.

Oh, okay. Okay. Fine. Thank you very much.

As we have no further questions at this time, I would like to turn the call over to Mr. Patrick Williams for any closing or additional remarks.

Thank you for your questions. Now I would like to leave you with a few final thoughts.

As I said, we believe our operating results for the fourth quarter and 2009 were very impressive in the context of an extremely challenging economic environment. While we may face tough year-to-year comparisons in 2010, particularly in the current quarter, we remain highly confident that we have an attractive portfolio of specialty chemicals businesses to drive our long-term growth. We believe we have substantial growth opportunities both internally through our proven product innovation and marketing programs and through potential strategic partnerships.

In short, we have a solid platform that we believe positions Innospec to generate strong earnings growth and significant shareholder returns over the years ahead.

If you have any further questions, please don't hesitate to call us. If we don't hear from you in the meantime, we'll look forward to sharing our first quarter results with you in the few months ahead.

Thanks again for being with us on the call today. Goodbye.

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