Innospec Inc (IOSP) 2011 Q2 法說會逐字稿

Please stand by for real time transcript. The Innospec Incorporated conference call will begin momentarily. Welcome to the Innospec, Inc. second quarter 2011 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. David Williams. Please go ahead, sir.

Thank you, and good morning, everyone. My name is David Williams and I am Vice President, General Council, Chief Compliance Officer at Innospec. Thanks for joining our second 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 June 30, 2011. Press release is posted on Company's website at www.innospecinc.com. Audio webcast for the call and slide presentation on the results are also now available under the archives 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 managers 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 Innospecs' most recent 10-K report 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 in non-GAAP financial measures. A reconciliations 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. With that, I'll turn it over to you Patrick.

Thanks, David. Thanks everyone for joining us today. Moving on to slide four of the presentation, I would like to make a few summary comments before Ian gets into detail on the numbers. Overall, considering the continued challenging economic environment and the cost pressures we've experienced, I'm very pleased with Innospec's second quarter financial results.

On a GAAP basis, diluted earnings per share were $1, more than double the $0.48 reported a year ago. There were some special items in both periods which Ian will review in a few minutes. Excluding these items, our adjusted EPS for the second quarter was $0.85, a 29% increase from $0.66 a year ago.

Our ongoing growth businesses has continued well, especially Active Chemicals and our Octane Additive business also made a strong contribution in the second quarter. In Fuel Specialties, sales increased 9%, while margin improvement has been slower than expected, recent price increases and decline in crude oil markets should enable the segment to deliver stronger gross margins in the second half of the year.

Active Chemicals had another great quarter reporting sharp increases across the board in sales, gross margins and operating income. In Octane Additives, our legacy TEL business, sales and income rebounded sharply from the first quarter level and were just slightly below the strong results the segment reported in last year's second quarter.

Looking ahead, all three of our business segments are well positioned for the second half. Like many other observers, we continue to be cautiously optimistic about the ongoing gradual improvement in the global economy, but also remain concerned that one of many political trouble spots could deliver a new shock that would dampen the outlook for continued recovery. And with that, I'll turn the call over to Ian Cleminson, our Chief Financial Officer.

Thanks, Patrick. Turning to slide six in the presentation, total revenues for the second quarter were $186.5 million, an 11% increase from $168.4 million in last year's second quarter. Our overall gross profit percentage of 31.2% was down almost 1 percentages point reflecting a lower margin in Fuel Specialties, partially offset by higher margins in Active Chemicals and Octane Additives.

As Patrick noted, our GAAP earnings were up significantly from a year ago. Our reported earnings per diluted share of $1 included $0.25 in foreign exchange gains which were partially offset $0.10 in legal and professional expenses related to the new markets.

Overall, the net effect of these actions were to increase our second quarter earnings by $0.15 per share. A year ago we reported GAAP diluted earnings per share of $0.48. That included $0.31 in foreign exchange losses, $0.06 in charges related to our United Kingdom pension plan, and a $0.01 restructuring charge. Partially offsets are the settlement of tax matters that added $0.20 to our earnings. Overall, the net negative impact from special actions was $0.18 per share in last year's second quarter.

Excluding these actions in both years, our adjusted EPS was $0.85, a 29% increase from $0.66 a year ago. For the first half of 2011, our adjusted earnings per share were $1.59, up 20% from $1.33 a year ago.

Moving on to slide 7, total revenues in the fuel specialty segments were $113.3 million, a 9% increase from a year ago. Overall, unit volume is down 4%. (Inaudible) prices in products mix increased the segments sales by 9%, while foreign currency translation added 4%.

(Inaudible) Fuel Specialty sales were up 14% in the Americas and 16% in EAME, but down 20% in Asia Pacific. Both the decline in Asia Pacific and the segments overall unit volume decline were primarily due to the timing of shipments and supply constraints of the product line in that region. Sales remains relatively strong across our other product lines in geographical markets.

In our (inaudible) aviation fuel business, sales increased 27%. The segments gross margin for the quarter was 27.4% compared with 30.8% a year ago. Although crude oil prices have declined significantly from their peak levels earlier this year, it takes time for the lower cost to flow through to our income statements. In addition, we experienced another favorable shift in our sales mix that put additional downward pressure on our gross margins.

As a result, fuel specialties did not achieve the margin improvement we expected in the second quarter. However, with the declining crude oil prices, and price increases we have already implemented, the segment is on track for improved margins in the second half.

Fuel specialties operating income for the second quarter was $12.3 million, down 28% from a year ago, primarily reflecting the early softness in gross margins increased selling costs.

Turning to slide 8. Active chemicals again delivered record results in the second quarter. Revenues increased 28% to $48.7 million, a new all time quarterly high for the segments. Volume rose 3%. Higher prices and a more favorable product mix added 17% to sales while currency effects another 8%.

Sales growth was broad based with solid increases across our poliner, fragrance, and personal care markets. By region, revenues increased 11% in the Americas, 38% in EMEA, and 48% in Asia Pacific.

In addition, the segments gross margin for the quarter was very strong at 28.1%, also a new high, and up 6.8%from a year ago. The increase primarily reflects improved pricing and a more favorable sales mix in several products areas.

Operating income for the quarter was $9.1 million, more than double the $3.6 million reported a year ago.

Moving on to slide 9. In Octane Additives, the results for the second quarter were $24.5 million more than double the first quarter levelsof $11.7 million, and down only 6% from a very strong quarter a year ago when sales were $26.1 million.

Unit volume declined 5% (inaudible) in customer mix subtracting 1% of reported sales. The segment's gross margin also was relatively strong at 54.3% compared to 52.9% a year ago, mainly reflecting the flow through of lower cost inventory.

Operating income for the quarter was $8.1 million, that includes $3 million in legal and professional expenses related to new the market civil complaints.

Back in the (inaudible), our adjusted operating income at $11.1 million was only slightly below $11.6 million reported a year ago.

Turning to slide 10. Corporate costs for the quarter was $6.5 million compared to $4.8 million a year ago.

Increase is primarily due to higher share base compensation expense which was up $1.5 million reflecting the strong performance of Innospec's share prices during the quarter, for the year-to-date. As expected, the charge related to our United Kingdom pension plan was down sharply from $0.1 million from $3.1 million a year ago. As many of you know, the big drop reflects changes we made to the plan last year including (inaudible) to accrual, and taking other measures to reduce our risk which significantly reduce the projections of our future liability.

Our reflective tax rate for the second quarter was 16.6% compared to 7% a year ago. Based on forecast geographical shifts in the business mix, we now expect our tax rate for the full year to be lower than we previously thought, at around 20%, and so we've adjusted our positions as appropriate in the second quarter.

Moving on to slide 11. Cash flow from operations was ($5.5) million in the second quarter, even after $17.6 million increase in working capital retirements, which is primarily driven by increased inventories across our growth businesses, as well as higher receivables in (inaudible) following the strong shipments during the quarter.

Capital expenditures for the second quarter were $3.5 million, bringing the year-to-date total to $4 million.

We continue to project capital expenditures for the full year at approximately $10 million to $14 million. As of June 30th, we had cash from cash equivalents at $103.4 million or $70.4 million more than our total debt of $33 million. And now I'll turn it back over to Patrick for some concluding comments.

Thank you, Ian. Moving on to slide 13, I have a few follow up comments and then we'll be happy to take your questions. I want to reiterate that we're very pleased with our results for the second quarter.

I'm particularly pleased with the strong top line growth and significantly improved profitability in active chemicals. Our fuel specialties had a challenge in the first half and sales momentum basically remains intact and the segment is posed to deliver stronger margins and operating income in the second half. In fact, the outlook for all three of our businesses, including octane additives, is good for the second half barring a sudden unexpected change in the overall economic environment.

Looking further out, we remain well positioned to deliver strong organic growth over the years ahead in our two ongoing businesses; fuel specialties and active chemicals. Within both segments we have a leading position in many attractive markets. We also have tremendous opportunities to drive future growth by delivering on our commitment to provide the best technology, outstanding service, and value for our customers through our continued dedication to innovation and research.

In addition to organic growth, we're still aggressively pursuing several potential acquisition opportunities as we've mentioned on previous calls. We've identified a number of businesses that appear to fit well from a strategic standpoint and could accelerate our growth and/or achieve cost synergies.

Since we obviously haven't announced anything, you can infer that we still have not found the right combination of financial terms and strategic fits that would make sense for our shareholders. While we're still looking for opportunities to put our cash reserves to work in a way that will reward our shareholders over the longer term.

At the same time, remain cognizant of the need for a sound capital allocation strategy, including share repurchases and possible dividend, as well as acquisitions. We have an active (inaudible) share repurchase program as authorized by the board last year, and in the first quarter we repurchased approximately 117,000 Innospec shares under that program.

While the board may revisit the specifics of that program, it's probably fair to say that our preference at this point is to use up cash for one or more acquisitions. However, if we do not make any acquisitions by year-end, we will review our options for returning cash more aggressively to our shareholders. As Ian noted, we took a provision in the quarter for an additional $3 million in legal and professional expenses related to the new market civil settlement.

We remain determined to aggressively pursue our defense in this case. However, it's an ongoing legal matter so there's not much more we can say about it beyond the disclosures in our SEC filings.

Finally, we were very pleased that Innospec was added to the Russell 2000 index in June. Our inclusion in the index reflects the Company's continued development and strong financial performance as well as the success of our aggressive investors relations program over the past year. We're optimistic that our inclusion in the Russell indexes will further enhance investor awareness and interest in our stock over the months and years ahead.

Now I'll turn the call over to operator and we'll take your questions.

Thank you. (Operator Instructions). The first question comes from Chris Shaw of Monness Crespi. Please go ahead.

Good morning, guys, how are you doing?

Good morning, Chris.

I guess I'm going to start with the Fuel Specialties segment, just a couple of parts here. I'm interested in the margins there, interested in how quickly you can get back to maybe 30% in the third quarter or for the second half, but also what was the impact of the delayed Asian business, that you mentioned, that you called out? Does that impact the margins in this quarter?

Yes, I'll take that, Chris, it's Patrick here. First off, on the Asia Pacific, we had trouble sourcing a specific product in that region. It should balance itself out the latter part of third quarter and fourth quarter. It more affected type top line than margins for that quarter and for that specific product. I think in regards to original recover margins back into the low 30's and specifically said 30 on the call for the third quarter for Fuel Specialties, I believe that will happen and we're already starting to see that happen moving forward.

Okay. And then speaking on SG&A, you mentioned the call on a share base compensation. Obviously crept up this quarter sequentially. What do you see that looking like in the next couple of quarters? Will it be lower? What do you think?

Chris, this is Ian, I'll take that one. Obviously, given the share price in the first half of this year we've seen a fairly large charge going through our income statement, given where the share price has gone the last few days and if that sustains at that lower level, we expect to see some credits coming through in the back half of the year. It really depends on how the share price moves over the next number of months.

Okay, but there wasn't anything else in this quarter that $31 million was the [buff up] in the share base compensation?

Yes. There was that and obviously, we highlighted the $3 million additional legal fees, that was up from the new market complaints.

And then finally on the Octane business. Is there some sort of seasonality to the second quarter? Pretty strong in the second quarter last year and again this year, or was that the timing of business each year? There's not really a driving season in I guess, I wouldn't think, in North Africa or the Middle East, being that it's warm there all the time?

No, Chris, there's no seasonality for that business. We are subject to quite a great deal of phasing and from quarter-to-quarter we can see some quite big shifts in volumes that we're able to shift and I guess you've seen that this year already. The first quarter was fairly routine. Second quarter was very good. And overall we'd expect our Octane Additives business to be broadly similar to a financial performance in 2010.

Okay, great, thank you.

Our next question comes from Gregg Hillman of First Wilshire Securities. Please go ahead.

Good morning, gentlemen.

Good morning, Greg.

Could you talk about Fuel Specialties a little bit more, in terms of why Asia Pacific was down and the gross margin situation? Explain that one more time, please?

Yes, Greg, it's Patrick. We don't specifically talk about specific products on any conference call due to the nature of who's listening, but we did have a problem getting one component in Asia Pacific for a couple of months which drove some of the revenue do you down in that region. I think otherwise it would have balanced out fairly well. That should balance itself out moving forward in Q3 and Q4. From a margin standpoint, this has been a really unprecedented raw material movement across the board.

We've talked about that in the previous two phone calls, conference calls that we've had, and I think it just took us longer than we anticipated to start seeing the margin increases that we're finally starting to see moving into Q3. So Q2 was still a slight hangover from Q1. And again, like we said, we're finally starting to see prices stabilize if not come down on most raw materials, as well as the increases starting to take a heavy effect on margins, so we see Q3 and Q4, those margins jumping back up in the 30 range.

Okay. And just the overall diesel fuel consumption, domestically or worldwide,what was the trends there versus the prior quarter and a year ago?

If you look at the Americas, responder utilization rates are fairly high, anywhere from the high 80's to low 90's. If you look at EAME they've finally stabilized, so you're seeing good consumption there, finally at least stabilized consumption of the previous two quarters. Asia Pacific, we've all watched what's happened on some of GDP growth countries that were posting double digit, are now not posting double digits, more in the single digit growth, but we really haven't seen consumption from the fuel prospective drop off. We're still fairly optimistic for Q3 and Q4 moving forward in that specific business.

Okay, thanks very much.

(Operator Instructions). The next question comes from Ross Berner, of Weintraub Capital. Please go ahead.

Hi, Patrick, nice job on the quarter. Just a couple of questions. Given what you're seeing in terms of raw materials prices stable to down. How do you think that will have any kind of impact holding on to price increases going forward?

Yes, you know, Ross, it's typically in the chemical business it's a six month lag up and down due to the amounts of inventory that most people are holding. I think that being that the price increases that we are put into effect are starting to really starting to make headway into Q3 and Q4 that we'll be able to hold those on throughout the rest of this year. I think it remains to be seen to see how 2012 will look and we'll reevaluate at that time. I think you'll definitely see the trend upwards on margins for Q3 and Q4, and again, it's tough to pull the crystal ball out to see what 2012 looks like, but we still remain optimistic over at least the next two quarters.

Okay. In terms of just overall given the turmoil in the marketplace in conjunction with raw materials coming down. Have you seen any sign of demand instruction anywhere?

No, we haven't yet and we follow quite a few trends that are different than just typical GDP growth. All of the trends that we follow have actually been fairly stable. I mean, sometimes the effect will take place at a later date, but we haven't seen that as of now, and being that we've had a recent market collapse and you saw where the stock has gone, we're not sure why obviously, but we think from a stability stand standpoint of fuel consumption and also look at our Active Chemicals business, we're still confident we haven't seen the world collapse under our feet whatsoever.

During the fee buying during this quarter, in terms of some of your top line that you saw pick up in advance of most of the price increases taking place more firmly for Q3 and Q4?

No. Not a bit.

Okay. My last question, I appreciate you giving me all this time. In terms of devaluation of the company, obviously it's very cheap now and, when you're trading around three, or three and a half times EBITDA for a business that a large chunk of your EBITDA is coming from end markets that (inaudible) pay nine times EBITDA for when they bought ISP, how does that change your desire for acquisitions? I know acquisitions are a part of your plan and your strategy, but when you're sitting there and you have the $4.00 in cash and you've got a multiple in the three range of EBITDA, how does that change what you're thinking, if at all?

Ross, it's tough just to put a short-term mindset on acquisition. I think if you do that's where you fail as a company. We're really looking at the future growth of our organization, how we properly position ourselves in the marketplace. I agree with you in the sense that we look at where we're trading and it makes you reevaluate, but I think if we find the perfect acquisition for our Company it would be a shame for us not to pursue to it due to the fact that think this is a short-term market that I think we're looking at right now.

But, I think moving forward, and as we said in the call, is that if we come to the end of the year and we haven't found that right acquisition that really fits our portfolio for long-term growth, then we're going to give money back to the shareholders, whether it's in a divided or whether it's in a heavy stock repurchase. I do think we have proven ourselves to fix balance sheets, to put proper strategies on the business. We know if we make an acquisition we're going to make this a very profitable acquisition moving forward and it's for longer term growth, it's just not a short-term strategy. We definitely look at it, we continuously talk about it not only at the executive management level but the board level, and we'll continuously do that moving forward.

Okay, Patrick, thank you for your time.

Thank you.

We have a follow up question from Chris Shaw of Monness CrespiPlease go ahead.

A follow-up on the Asia loss business and specialties. Have you guys sized that at all? I know your sales are down 20% in Asia so it sounds pretty big. Do you know what the actual impact was and can we add that to the second half now?

Yes, Chris, this is Ian. We won't disclose the size of that loss for that particular region. Saying that, Asia Pacific is the smallest of our three regions in Field Specialties and we have seen some carry over into quarter three all ready.

So you think you'll make it up in the second half?

I think we should make it up in the second half.

Okay. Thanks again.

Our next question comes from Bill Garrison who is a Private Investor.

Yes, thank you. I wonder if you can address the working capital situation in terms of anything particular going on in the quarter and any thoughts on the outlook for the second half in terms of your working capital needs? Thank you.

Sure, Bill, I'll take that. We've said for the last probably two or three quarters that we needed to invest more if our working capital position from a trading aspect. We exited 2010 probably too low where we probably run our inventories down a little bit and we needed to invest in that going forward.

What we're seeing in quarters one and quarter two is about a $30 million increase in trading worth in capital and the freezing point there is that most of that got into our growth businesses, so seeing about 20 million increase in inventories across Fuel Specialties and Active Chemicals, and we'll probably see about another 10 million going into our accounts receivable line as well. Our position now where we don't feel that we probably don't need to expand that over the second half. So at the level we're currently trading at, in terms of working capital, we see that stabilizing going forward.

Okay, that's helpful, thank you.

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 to Mr. Patrick Williams for any additional or closing remarks.

Thank you for your questions. Now I'd like to leave you with a few final thoughts. I'm pleased with Innospec's performance for the year-to-date. And particularly given the challenging markets and increased raw material costs that we faced. It's very encouraging that despite all of the headwinds we've been able to deliver 20% increase in EPS, excluding special items, for the first half of 2011. We believe the outlook for the second half is solid across all three of our business segments and we will continue to push hard in the second half of the year to further improve the business' performance.

Longer term we are confident that our two ongoing businesses in Field Specialties and Active Chemicals are well positioned to deliver sustained profitable growth. In addition, we have the opportunity to use our substantial cash reserves to make strategic acquisitions that could accelerate our growth and build even more shareholder value over time. So I remain very optimistic about Innospec long term growth potential. If you have any more questions please give us a call. If we don't hear from you in the meantime, we look forward to sharing our third quarter results with you in early November. Thanks again for joining us today and have a great day.

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