Innospec Inc (IOSP) 2011 Q1 法說會逐字稿

Thank you for standing by and welcome to the Innospec Inc. first-quarter 2011 results conference call. At this time all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session, at which time if you wish to ask a question you will need to press star 1 on your telephone. I must advise you this conference is being recorded today on Tuesday, the 10th of May 2011.

I would now like to hand the conference over to your speaker today, David Williams. Please go ahead, Sir.

Thank you and good morning, everyone. My name is David Williams. I'm Vice President, General Counsel and Chief Compliance Officer at Innospec. Thanks for joining our first-quarter 2011 financial results conference call. Today's call is being recorded.

As you know, late yesterday we reported our financial results for the quarter ended March 31, 2011. The press release is posted on the Company's website, www.InnospecInc.com. An audio webcast of the call and a 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 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.

Thanks, David, and thanks everyone for taking the time to join us for today's call. Moving on to slide 4 in the presentation, I would like make a few summary comments before Ian gets into greater detail on the numbers.

Overall, we are very pleased Innospec's results for the first quarter. On a GAAP basis, we reported earnings of $0.88 per share much stronger than the $0.30 we reported in last year's first quarter. There were a number of special items in both periods which Ian will discuss in a few minutes.

Excluding these items, our adjusted EPS was $0.74 for the quarter, up 10% from $0.67 a year ago. Our two core business segments, Fuel Specialties and Active Chemicals, both reported double-digit sales growth for the quarter with Fuel Specialties up 13% and Active Chemicals up 24%. Raw material costs remain a significant challenge across our business, especially in Fuel Specialties. On average our raw material costs were up approximately 25% from a year ago with increases in some cases as much as 40% to 50%, primarily driven by sharply higher prices for crude oil and oleochemicals.

In Fuel Specialties in particular, we are seeing a difficult lag in passing these higher costs. The mechanisms are in place, but it will take time. The squeeze in gross margins of Fuel Specialties resulted in essentially flat operating income for the segment in the first quarter. On the other hand, Active Chemicals was able to increase its prices more aggressively and also benefit from a more favorable sales mix, its gross margin actually improved versus a year ago and Active Chemicals operating income nearly doubled from a year ago.

We are cognizant that our customers are hurting as well from raw materials cost pressure. We remain fully committed to delivering the best technology and customer service at the best price through our customer-focused innovation and research programs.

Finally in Octane Additives, sales were lower as we expected, but gross margins remained relatively strong and operating income, excluding special items, was fairly close to last year's levels.

Looking ahead, we are encouraged that the overall business environment continues to improve and generally we are optimistic about the outlook for our business over the remainder of the year. And with that I will turn the call over to Ian Cleminson, our Chief Financial Officer.

Thanks, Patrick. Turning to slide 6 in the presentation, total revenues for the first quarter were $185.3 million, up 13% from $163.5 million a year ago. The overall gross profit percentage of 28.9% was down 3 percentage points, primarily due to lower margins in Fuel Specialties.

As Patrick noted, our GAAP results were sharply higher than a year ago. We reported earnings per diluted share of $0.88 but that included $0.17 in foreign exchange gains, which were partially offset by $0.03 in legal and professional expenses related to the new markets that were compliant.

Overall, the net effect of these items was to increase our first-quarter earnings by $0.14 per share. A year ago on a GAAP basis, we reported earnings of $0.30 per share, but that included a $0.24 restructuring charge related to our United Kingdom pension plan and a total of $0.13 in other items, resulting in a net negative impact of $0.37 from special items.

Excluding these items in both years, our adjusted EPS was $0.74, a 7% increase from $0.67 in last year's first quarter.

Moving onto slide 7, in the Fuel Specialties segment, total revenues rose 13% and unit volume increased 4%. Selling prices and product mix increased sales by approximately 10% while foreign currency translation subtracted 1%.

By region, sales grew 11% in the Americas, 10% in the EMEA region and 16% in the Asia-Pacific region. In our AvTel Aviation Fuel business, sales increased 33% primarily due to the timing of shipments.

As Patrick noted, raw materials costs were up significantly in the quarter and primarily for contractual reasons we were unable to increase prices fast enough to offset the higher costs. As a result, the segment's gross margin for the quarter was 28.9%, down 4.8 percentage points from a year ago.

Importantly, we have the mechanisms in place to deal with this but it will take time. Despite the squeeze on gross margins, Fuel Specialties operating income for the quarter of $23.3 million was actually up 1% from a year ago reflecting $1.5 million in lower SAR expenses, primarily due to the benefit from the release of an accrual no longer deemed necessary.

Turning to slide 8, Active Chemicals turned in another great quarter. In fact, its best quarter ever. Revenues increased 24% and unit volume rose 10% with broad-based strength across our Personal Care, Fragrance, and polymer markets. Higher prices and a more favorable product mix added 15 percentage points to sales of while currency [FX] reduced reported sales by 1%.

By region, revenues increased 23% in the Americas, 29% in EMEA, and 13% in the Asia-Pacific region. Despite higher raw material costs, the segment's gross margin for the quarter was 25.6%, up 3.7 percentage points from a year ago mainly due to improved pricing and shift in the sales mix. Operating income of $7.6 million was up 85% from $4.1 million a year ago.

Moving on to slide 9, in Octane Additives, revenues for the first quarter were $11.7 million, down 12% from $13.3 million a year ago. Unit volume declined 23% with pricing and customer mix adding about 10% to reported sales.

The segment's gross margin was relatively strong at 42.7% compared with 45.1% a year ago. Reported operating income for the quarter was $[3.2] million including $1 million in legal and professional expenses related to the new markets that were compliant. A year ago, operating income was $6.7 million, but that included a $3 million benefits from adjustments for the settlements accrual related to the Oil for Food and FCPA investigations. Excluding these special items, Octane Additives operating income was $3.3 million compared to $3.7 million a year ago.

Turning to slide 10, corporate costs for the quarter were $7.5 million compared with $9 million a year ago. However, last year's first quarter included a $3.9 million charge for the expected costs of the Company's new compliance monitor. The increase this year excluding that item was primarily due to higher share-based compensation expense, which reflects the outstanding performance in our share price during the first quarter. Overall, share-based compensation expense increased by $3.6 million year-over-year with the bulk of that falling into corporate bookings and the remainder in our business segments.

As we expected, the pension charge was dramatically reduced in the first quarter to $0.1 million from $3.8 million a year ago. The sharp drop was attributable to some of the changes we made to our UK pension plan last year, such as closing it to future service accrual and taking other measures to reduce our risk which had a significant positive impact on our projections of future liabilities.

Our effective tax rate for the first quarter was 24%, down slightly from 26% a year ago. We expect our tax rate for the full year to be broadly within this same range.

Moving on to slide 11, cash flow from operations was strong again in the first quarter as we generated $5.7 million operating cash flow even after a $16.3 million increase in working capital requirements, which was primarily driven by the record sales at Active Chemicals. Capital expenditures for the quarter were $1.5 million. We continue to project CapEx for the full year at approximately $10 million to $14 million.

During the quarter, we repurchased approximately 117,000 Innospec shares under the Rule 10b5-1 repurchase plan. As of March 31, we had cash and cash equivalents of $94.2 million, which exceeded our total debt at $27 million by $67.2 million.

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

Thank you, Ian. Moving on to slide 13, I have a few more comments and then we will take your questions.

I would like to reiterate that we are very pleased with our first-quarter results. Sales in unit volume growth remain strong in both Fuel Specialties and Active Chemicals. And while Active Chemicals clearly delivered the most exciting bottom-line results of the quarter, it's also gratifying that Fuel Specialties was able to deliver essentially flat results considering the pressure on gross margins.

If anything, sales across our business should strengthen further as the economic recovery continues to gather momentum. We continue to see a slow gradual improvement in global fuel demand and refinery utilization rates, although Europe is still lagging behind.

In terms of gross margin, as Ian mentioned earlier, we do expect Fuel Specialties margins to improve gradually over the upcoming quarters, so hopefully the worst is behind us from that standpoint. However, our margins ultimately will depend primarily on the trends in crude oil and oil chemical prices as most of you know.

In addition, we continue to closely watch and manage the geopolitical risk coming out of the Middle East, European credit markets, and Japan. We are continuing to explore potential acquisitions and hope to have more news on that front later this year.

Fundamentally, we are in a great position because we already have two strong businesses in Fuel Specialties and Active Chemicals that are performing extremely well in their respective industries and can continue to drive significant organic growth over the years ahead. At the same time, there are a number of possible acquisitions that we would -- that would be a great strategic fit and could also help accelerate our growth.

We also have substantial cash on hand with strong cash flows and ample debt capacity to support our strategic objectives. But as we said, any deals that we will do have to make sense for our shareholders, fit with our existing businesses, and deliver technology products and alternatives to our customers.

Finally, as you know, we have stepped up our Investor Relations program significantly over the last six months. We are very pleased with the initial results, not just the increase in our share price, but also our sellside coverage from Monness, Crespi, & Hardt with a second brokerage firm likely to add coverage in the near term.

In addition, we have seen a significant increase in interest in Innospec on the buyside. We plan to continue this successful program throughout 2011, focusing on building awareness and active coverage of Innospec across the investment community.

And now, I'll turn the call back over to the Operator and we will take any questions you may have.

(Operator Instructions). Chris Shaw of Monness, Crespi.

Good morning. Just wanted to sort of, maybe I guess drill down into the Active Chemicals growth a little bit more. You broke out, I guess volumes at 10% is a very good price mix. I mean in that 15% price index is that more mixed than pricing? And is that just -- is that being driven by new products? And if so what kind of price are we talking about?

Yes, it's about 50-50 split there between price and mix.

And is the mix being driven by new products? Is that higher-margin new products?

Yes, it is. Driven by new products.

Anything in particular you want to call out? I mean, I am just trying to figure out what -- what I'm looking at.

Yes, I mean a lot of it is obviously the Iselux product that is having new launches in the marketplace that started last year and is carrying over into this year. But I think as well, as you are seeing, we continuously have new product launches, albeit they are not at extremely high rates they are adding to the volume and adding to the price mix for -- from a margin standpoint. So it is an array of products, but I would say it is primarily the Iselux products that they added into the price mix.

And then you called out on a -- when you talked about working capital that some of that was related to Active Chemicals. Is that seasonality? Is that just the sales were so strong you had to replace inventories? Could you just give a little color around the working capital there?

Yes, sure. It's not seasonal. As you've seen, the Active Chemicals business has gone very well in quarter one and sales have been higher than we've expected so we've gone very well there. And we've had to build working capital to feed that growth and also to figure growth that we expect in the future quarters as well.

Okay. That's helpful. And then the Fuel Additives, it looked like the operating margins were up sequentially as well, which I was sort of impressed by, given the raw material pressures. And is there anything -- was that just pricing-related? You got some pricing quarter over quarter or, sorry, sequentially and is that how that happened?

I'm sorry. Could you ask that question again?

In Fuel Specialties it looked like your operating or I guess your EBIT margins were actually up sequentially from the fourth quarter. Was that -- were you just getting pricing from the fourth quarter or was there a mix issue there or --? I was impressed that you guys were able to expand EBIT margins.

Yes. A lot of it is that we are starting to increase obviously our prices in the marketplace as well as controlling expenses, and I think we put a very cognizant effort on -- not only for the management team, but all the way down to our raw material suppliers to really push raw material prices lower, but obviously increase prices to the marketplace. You know, we have contracts in place that let us do that and it is just going to take some time to get the pricing up where we feel comfortable with from a margin standpoint. And we're doing that and I think you're going to see this improve as well over the second quarter and third quarter.

Great. I'm going to get back in queue. Thanks.

Thanks, Chris.

Gregg Hillman of First Wilshire.

Just one -- well, two questions. One, about the price of your inputs. I know the price of oil has been peaking lately and why wouldn't that affect you negatively in the next quarter or two?

Sure. I'll take that, Gregg. A lot of our contracts are based off raw materials' three-month lag forward or backward and as crude oil has gone up, we actually have increased our price in the marketplace. There is a lag, so we are catching up.

The issue is there was a benchmark at about $100 a barrel on whether you are talking [brent] at $108 when it hit $108, obviously it's further north of that now. And raw material prices actually stabilized. And so we have seen a little bit of stability over the first quarter from a raw material standpoint while we are starting to catch up on the price increases. So we think that is going to help affect in a positive manner in the second quarter and, hopefully, the third quarter as well.

Okay. And then just on the strategy going forward, would you go outside of your current, I don't know, verticals? Would you go into like agriculture or possibly oil exploration or do you prefer not to comment on that?

Yes, we can comment briefly. We won't get into the details, but we have opened up a Oilfield Division and it is an offshoot of some of the product that we carry over from Fuel Specialties, and so we are looking at growing that business at a faster rate than what it is today.

And so, if you really look at the business segment breakdown, it is Active Chemicals, primarily Personal Care, it is Fuel Specialties and then we call our Oilfield Chemicals division. And so you should see some enhancement moving forward either be it through acquisitions or be it through organic growth through our current product line in the Oilfield Chemicals sector.

It is just a natural for us to go there. We have a lot of experience from a technical standpoint, from a management standpoint, and our products obviously in the treatment.

Can you talk about some of the chief products, you know, in that same -- in there and their functionality for the customer?

Yes, I mean some of it is actually down in the well bore. Some of it is at the wellhead, so I mean, it is at the pipeline, the crude pipeline. So whether it's enhanced crude delivery through drag reduction, whether it's any kind of corrosion, whatever it might be, there is about five product lines. I had rather not discuss the strategy in an open mic, but we are fairly focused on what we are treating and where we are treating.

We know we can't be all things to all people. But we are very focused on about five product lines in that segment.

Okay. Thanks.

(Operator Instructions). Chris Shaw of Monness, Crespi.

Just a follow-up. I'm just a bit newer to the story and I guess this is the first time actively covering while you report. So my question is on the hedging gains. If I understand correctly, you are only hedging the corporate expense that is based in the UK. Is that right?

Yes. I'll pick up that question.

We do a number of things. We hedge raw materials and we also hedge currency and the purpose of taking both of those items is really to get certainty of costs and certainty of cash flow. One thing we are not about is speculating in any way, shape, or form. So what we tend to do is hedge UK sterling and hedge one or two key raw material items.

So when you -- and in a quarter like this when you report a hedging gain, I guess it was around $9 million, is there an offset of some sort of cost drag or some increased cost somewhere in the P&L that that gain is offsetting and making more of a net net neutral?

Yes, I mean what we try to do with our hedging and currency hedging is try to keep margins as unaffected as we possibly can. What we don't want to see is foreign exchange gains and losses going through cost of goods in sales and expenses and really flipping the business resorts all over the place.

So what we try to do is to push that volatility down into our other income which is mainly our foreign exchange gains and losses. And that is really how we see it and that's how we try to manage it and it makes it a lot easier for guys like yourself, Chris, to actually track the real value in the business.

So the numbers we are seeing coming from whatever, SG&A or the segments themselves, are sort of clean -- sort of currency, somewhat currency-neutral numbers?

Yes. From the trading businesses, the three trading businesses there, the operating income, foreign exchange is basically naturally hedged, so zero. The only exposure we really have is on the corporate costs which tend to be UK-dominated and sterling-based. That's the only exposure we have down to operating income.

Okay. Great. That's helpful. Thanks a lot.

(Operator Instructions). There seems to be no further questions. Please continue.

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

As we've said, we are proud of a 10% increase in our first-quarter earnings per share excluding special items. Given the competitive nature of our markets and the margin pressure we have experienced, these results really reflect the strength of our global management teams as well as our ongoing focus on product innovation and outstanding customer service.

With these principles as our foundation, we continue to believe that both Fuel Specialties and Active Chemicals are in a great position to continue outperforming their industries and to deliver strong long-term growth.

In addition, with our highly liquid balance sheet and solid cash flow, we clearly have the resources to pursue strategic acquisitions that could accelerate our earnings growth and deliver even more value for our shareholders. So we remain very optimistic as we consider Innospec's potential over the next few years.

If you have got any questions, please don't hesitate to call us and if we don't hear from you in the meantime, we look forward to sharing our second-quarter results with you in early August.

Thanks again for the time and thanks for joining us today. Goodbye.

That does conclude our conference for today. Thank you all for participating. You may all disconnect.