Innospec Inc (IOSP) 2010 Q4 法說會逐字稿

Good day and welcome to today's Innospec Q4 and full-year 2010 results conference call. For your information, today's call is being recorded. At this time, I would like to turn the conference over to your host, Mr. David Williams, Vice President and General Counsel. Please go ahead, sir.

Thank you and good day, everyone. My name is David Williams, and I am Vice President, General Counsel and Chief Compliance Officer at Innospec. Thanks for joining our fourth-quarter 2010 financial results conference call. Today's call is being recorded.

As you know, late yesterday we reported our financial results for the quarter and full year ended December 31, 2010. The 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 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 site for these and other documents.

In our discussions today, we have also included some non-GAAP financial measurements. 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.

Thanks, David, and thanks, everyone, for taking the time to join us for today's call. Moving on to slide four in the presentation, I would like to make a few summary comments before Ian digs into the numbers.

First of all, we are very pleased with Innospec's overall performance in the fourth quarter and the full year. On a GAAP basis, we reported earnings of $0.98 per share for the quarter, much stronger than small loss we reported a year ago. There were a number of special items in both periods, which Ian will go through in a few minutes. If you back out these items, our adjusted earnings per share was $1.07 for the quarter, up 57% from $0.68 a year ago. For the full year, adjusted earnings per share was $3.32, a 50% increase from $2.22 in 2009.

In addition, we generated $15.8 million in cash from operations for the quarter and $58.2 million for the full year, even after payments to the government authorities of $19.2 million under the terms of last year's legal agreement. Our two growth business segments, Fuel Specialties and Active Chemicals, reported strong unit volume and sales growth for the quarter despite the bad weather in December in both the US and Europe, which had a significant impact on production.

Unit volumes were up 12% in Fuel Specialties and 14% in Active Chemicals, much stronger than their respective industries. Raw material costs, especially in Fuel Specialties, were up sharply in the fourth quarter, faster than we were able to raise prices. The resulting squeeze on gross margins had a downward impact on Fuel Specialties' operating income.

On the other hand, despite rising raw material costs, gross margins improved significantly in Active Chemicals, and its operating income was up sharply from a year ago, almost offsetting a decline in Fuel Specialties.

Finally, in Octane Additives sales were lower as we expected, but gross margins were very strong, and operating income, excluding special items, was up significantly from a year ago. For the full year, operating income was down slightly in Fuel Specialties, but much stronger in both Active Chemicals and Octane Additives.

Overall 2010 was a great year for Innospec. We settled our legal issues with the government authorities, we made excellent strategic progress across our businesses, strengthened our balance sheet, made progress toward resolving our historic tax and pension liabilities while delivering outstanding financial results.

And with that, I'm going to turn the call over to Ian Cleminson, our Chief Financial Officer, who will go through the results in greater detail.

Thanks, Patrick. Turning to slide six in the presentation, the Company's total revenues for the fourth quarter were $177.3 million, an 8% increase from $164.2 million a year ago. The overall gross profit percentage of 31% was broadly in line with last year with low margins at Fuel Specialties essentially offset by higher margins at Active Chemicals and Octane Additives.

As Patrick noted, our GAAP results were dramatically improved from a year ago. We reported earnings per diluted share of $0.98, while that included a $0.12 benefit from the settlements of historic tax positions, $0.12 in legal and professional expenses related to new market civil complaints filed last summer, $0.08 in foreign exchange gains, an $0.08 pension charge, $0.08 in employee retention bonuses, and a $0.01 restructuring charge. Overall the net effect of these items was to decrease our fourth-quarter earnings by $0.09 a share.

A year ago, on a GAAP basis, we reported a small loss of $0.01 per share. But that included the net negative impact of $0.69 in special items. Excluding the special items in both years, our adjusted EPS was $1.07 or 57% from $0.68 in last year's fourth quarter, reflecting the strong momentum in our underlying business and assisted by tax credits in the quarter.

Moving on to slide seven, revenues in Fuel Specialties rose 9% and unit volumes up 12%. Volume prices and product mix increased sales by approximately 3%, while foreign currency translation, mainly in EMEA, subtracted 6%. By regions, revenues rose 15% in the Americas, 9% in Asia-Pacific, and were broadly flat in EMEA. Our AvTel aviation fuel business sales were up 35%, mainly due to the timing of certain shipments.

As Patrick noted, the segment's raw materials costs were up sharply in the quarter, rising an average of 25% from a year ago, and there was the usual WAC for contractual reasons and our ability to raise prices fast enough to offset the higher costs. So the segment's gross margin for the quarter was relatively low at 30.9%.

A year ago the dynamics were exactly the opposite as raw material costs were falling and our prices were slow to follow on the downside. So we had a relatively high margin of 36%.

Overall Fuel Specialties operating income for the quarter of $19.7 million was down 18% from $24.1 million in last year's fourth quarter. For the full year, operating income was $77.6 million, down 5% from the 2009 level.

Turning to slide eight, Active Chemicals had an excellent quarter. Revenues rose 20%, and unit volumes were up 14% with broad-based strength across our personal care, fragrance and polymer markets. Higher prices and a richer product mix added 11% to sales, while currency effects reduced reported sales by about 5%. By region, revenues increased 35% in the Americas, 10% in EMEA, and 12% in the Asia-Pacific region. Despite higher raw material costs, the segment's gross margin for the quarter was 23.8% on 5.3 percentage points from a year ago, mainly due to a more favorable sales mix and improved manufacturing efficiencies.

Operating income of $4.7 million was more than 4 times the $1.1 million reported a year ago. For the full year, the segment posted record operating income of $16.7 million, nearly double the $8.8 million in 2009.

Moving on to slide nine, in Octane Additives, revenues for the fourth quarter were down as we had expected at $11.1 million, a 24% decline from $14.7 million in last year's fourth quarter. Unit volume declined 33% with pricing and sales mix adding about 9% to reported sales. The segment's gross margin of 56.8% was up sharply from 20.4% a year ago, benefiting from sales of lower-cost inventory due to substantially increased production volumes in 2010.

Reported operating income for the quarter was $1.1 million, including $3.3 million in legal and professional expenses in connection with the new market civil complaints filed last July. A year ago the segment reported a $20.7 million operating loss, which included a $21.9 million charge toward the final settlement of the Oil for Food and FCPA investigations.

Excluding the special items in both periods, Octane Additives' operating income of $4.3 million was up significantly from $1.2 million a year ago.

For the full year, the segment reported sales of $72.4 million, up 59% from the previous year, and operating income of $25.8 million compared with a substantial loss in 2009.

Turning to slide 10, corporate cost for the quarter was $7.1 million compared with the $3.1 million a year ago. The latest quarter includes $1.4 million in employee retention bonuses, while corporate costs a year ago included a $2.5 million benefit from a sales tax settlement. Excluding those items, corporate costs were roughly flat year over year, reflecting tight cost control.

Pension charge for the quarter was $2.4 million compared to $1.7 million in last year's fourth quarter. As I will explain in a couple of minutes, we now expect our quarterly pension charge in 2011 to be approximately $100,000, much lower than in 2010.

Overall we had a $7.8 million tax benefit for the quarter, including a $3 million special benefit from the settlement of the historic tax positions compared to a $0.4 million tax charge a year ago.

For the full year, excluding the special items relating to the Oil for Food and FCPA settlement accrual and adjustment to the historic tax provisions, our effective tax rate was 13.6% compared with 24.3% in 2009. The primary drivers behind these lower adjusted tax rates were the greater proportion of taxable profits and in low tax jurisdictions and our ability to now access a greater proportion of foreign tax credits.

In 2011 we expect our effective tax rate to be between 24% and 28%.

Moving on to slide 11, cash flow from operations remains (technical difficulty)-- for the quarter. We generated $15.8 million in operating cash flow after a $6.7 million payment to the government authorities part of our legal settlement. For the full year, our operating cash flow was $58.2 million at a government payment of $19.2 million. Capital expenditures for the quarter were $2.5 million, and the full-year CapEx was $8.8 million.

For 2011, our initial budget for capital expenditures is approximately $15 million.

During the quarter, the Board of Directors authorized a new share repurchase program, and under that program, we bought back approximately 126,000 Innospec shares for $2.5 million.

At year-end, we have cash and cash equivalents of $111.3 million, which exceeded our total debt by $64.3 million. After some of the changes we made to our United Kingdom pension plan during the year, such as closing against future sales accruals and taking other measures to reduce our risks, the assumptions behind the projections of our future liability have changed significantly. As a result, the pension liability in our balance sheet as of December 31 was only $11.7 million, down sharply from $124.2 million a year ago.

In addition, we expect our interim statement charge for the pension plan to total about $500,000 for the full-year 2011 or a bit more than $100,000 per quarter.

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

Thank you, Ian. Moving onto slide 13, I would like to make a few more points, and then we will be happy to take your questions. Overall we are very pleased with the Company's operating results for both the fourth quarter and the year 2010. Despite the challenging weather conditions we faced in December and the margin pressure we saw in Fuel Specialties, our fourth-quarter earnings on an adjusted basis were sharply ahead of the earlier quarters.

Looking ahead, we remain optimistic. We continue to see gradual improvement in fuel demand and refinery utilization rates in Fuel Specialties, although both measures remain well below their previous highs prior to recession, especially in Europe which continues to lag.

Our margins may be under pressure in the short-term, depending largely on trends in crude oil and vegetable prices, as many of you may know. In any case, needed price increases should start to offset some of the increased raw material costs as we move through the first quarter.

Regarding Active Chemicals, I would like to comment briefly on our Iselux surfactant for shampoos and other bath products, which we introduced last year. The cycle in personal care is long and notoriously difficult to predict. So, as current sales are a little below our expectations, we are delighted that a number of our product launches continues to increase and that consumer feedback is excellent, which means that we have not changed our medium or long-term view of the product's potential.

I would also point out that our new R8 reactor for increased Iselux production has been completed and is now up and running in North Carolina.

As we have noted, we are particularly pleased with strong unit volume performance in our core businesses in Fuel Specialties and Active Chemicals, which suggests we're clearly outperforming our key competitors in gaining market share. This reflects our aggressive product development programs, as well as our highly effective marketing programs focused on meeting our customers' needs.

The Company's R&D expenditures in 2010 totaled $17.6 million, a 7% increase from 2009, and we are planning to increase it further in 2011. As part of our expansion plans, we are in the process of opening new offices in Brazil and Russia, which will support both Fuel Specialties and Active Chemicals. These projects are both in a phase of extensive due diligence and compliance, and the actual office locations and relevant employees have been identified.

As we have discussed previously on these calls, we have begun searching more actively for potential acquisitions, and we are hoping to make some announcements over the course of this year. While we remain well-positioned to deliver solid organic growth, we believe the right acquisition or acquisitions could help us leverage the strengths in our existing businesses, and we certainly have the financial flexibility and resources to execute this strategy.

But, as we have also said repeatedly, any acquisition we do will have to make sense for our shareholders and complement our current businesses. We also have the financial flexibility to consider other options for enhancing shareholder value, which we regularly do as part of our balanced capital program.

Finally, as we discussed last quarter, we have stepped up our investor relations program in recent months and mailed a number of analysts and investors in New York last November. We plan to continue the program this year with an initial focus on securing some new sell-side analyst coverage, as well as continue to broaden awareness and ownership of Innospec on the buy-side.

And now I will turn the call over to the operator, and we will take any questions you may have.

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

Ian, can you talk about what happened with the pension, why it went down so much for the overall liability, please?

Sure. We set our pensions liability as a priority for 2010 because we recognized the burden that the liability had on the Company, and we took significant steps to close the plant to future accrual earlier in the year. And since then we have also taken some steps to limit the liability of that through structural changes that we have made to it.

I think balancing that out, we have also provided our employees with personal pension funds, which we feel are some of the best in the industry to replace the Company plan. I think with the actions that the Company has taken, combined with an improvement in asset values, the liability gap has closed dramatically. And I think what I would say is that the liability is still there. It can vary, and but the majority of the changes we have made are structural. So we have derisked a fair amount. However, there will be some variations from year to year, but we are very pleased with the results that we have gotten.

Is that because the yield on bonds went up, or why was the big change?

I think if you look at the -- I will not break down how we actually got to the full reduction, but we have made some structural changes, which has completely taken the liabilities away from the Company. We have made some changes to the assumptions around inflation with the agreement of the trustees, which has dramatically reduced the future liability expectations, and we have seen larger asset returns. Some of it is bond rates; some of it is equity returns.

(Operator Instructions). [Jeffrey Jandon], [Tomtine Associates].

I have two questions, totally different questions. The first one is on Active Chemicals. I don't want to put words in your mouth, but you had a very big up year in the United States. Is that due to Iselux, or is that really an across-the-board improvement in Active Chemicals, and is that going to continue?

Yes, David. It has actually been all of our products within the Personal Care and polymers and fragrances. So it has really been pretty well distributed amongst the growth. In 2011 we really don't see a downturn in the growth today. We are pretty confident that Active Chemicals can retain double-digit growth moving forward in 2011.

And is Iselux going to increase operating income this year or be neutral?

I think it will increase operating income this year. It is notoriously just a completely different business in Fuel Specialties. It takes a little longer to get to market, and obviously you have to have consumer demand and consumer acceptance. And from all the product launches that we have had out there in 2010, we are really excited about all the news we have heard back from the marketplace. So I think you will see an increase in Iselux, and obviously it's going to help the growth in Active Chemicals moving forward, as well as the bottom line profit.

Okay. Now I'm going to put you a little bit more on the spot. As we were sitting around talking about these numbers, we realize octane goes up and down. But this was one of your lower quarters on octane, clearly on deliveries.

As we look at this number, and I know you don't like to put numbers on the year, but you have a very low octane quarter. Your Fuel Specialties and Active Chemicals were pretty good, and now your pension expense is going to zero. As I look at that dollar number, why will it not be a dollar or more every quarter going forward?

You are absolutely right. The optionality has gone on longer and stronger than we anticipated, and we've had a very good year. As you know, we don't give guidance out, but I think we are expecting with lower pension charges, with a growing Active Chemicals business, and a fairly stable Fuel Specialties business to see some good earnings as we go forward.

Yes. You know, I think you always know that we're always fairly cautious as a Company. I think some of the things that we want to look at through first quarter of 2011 is to make sure the demand increase that we have seen over these months really remains stable. And I think, as soon as we see the stability out there, it will give us a better view of if that dollar a quarter is obtainable or not. But obviously we feel pretty confident going into 2011 that we are going to have a good year.

Great. Thanks. And I would be remiss without saying, if you're going to earn $4 and your stock is at $26, we are all for the buyback, as you know.

Thanks, Jeff. I understand that.

Charles Hale, Polar Capital.

I was looking at price release, and there is a small item, and it may be that you had mentioned this. But it seemed to me there was an item entitled Civil Complaint Legal and Professional Expenses, $2.9 million. And is that a complaint that you had commented on before?

Yes, it is, Charles. We actually commented on the previous quarter, and it has actually been filed in the 8-K and 10-Q on the previous quarter as well. And there is really not much to comment on it at this time with the exception that we will defend it vigorously, and that is really about it, Charles.

Yes, and who was it filed by? I mean who was the counterparty on this?

(multiple speakers) That would be NewMarket, Charles.

Yes, okay. And secondly, are you making progress on taking some sponsorship, some brokerage support on the street?

Yes. Obviously we did our -- which we mentioned in the previous conversation about our investor roadshow in New York. We believe we will have analyze coverage for the second quarter, and Ian and myself are going out again in a roadshow in March to meet with analysts and obviously as well some buy-side marketers, too.

(Operator Instructions). As there are no further questions in the queue, that will conclude today's question and answer session. I would now like to turn the call back over to Mr. Patrick Williams for any closing or additional remarks.

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

As we have said, we are very pleased with the Company's finance results for 2010. This strong performance, despite challenging conditions across many of our markets, is a real credit to our understanding management teams around the world. With our focus on product innovation and exceptional customer service, Fuel Specialties and Active Chemicals are both positioned to continue outperforming their respective industries in the quarters and years ahead.

In addition, we are aggressively exploring a number of opportunities to supplement our organic growth with strategic acquisitions, which could take us to a new level and accelerate our growth. So, as we look ahead, we remain very excited about Innospec's potential over the next few years. If you have got any additional questions, please don't hesitate to give us a call, and if we don't hear from you in the meantime, we look forward to sharing our first-quarter results with you in a few months. Again, thanks for joining us, and have a great day.

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