Innospec Inc (IOSP) 2011 Q3 法說會逐字稿

Good day, and welcome to the Innospec Third 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 Counsel and Chief Compliance Officer at Innospec. Thanks for joining our Third 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 September 30, 2011. The press release is posted on the Company's website, www.innospecinc.com. An audio webcast of the call and 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've 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. With that, I turn it over to you, Patrick.

Thanks David, and thanks everyone for joining us today. Moving on to slide 4 in the presentation, I'd like to make a few summary comments before Ian gets into the detail behind the numbers. Overall, our continued strong operating performance and cost management programs have enabled us to weather a challenging economic environment and I'm delighted with the results. Ian will talk in detail about the special items that resulted in reported GAAP losses for the period, but I believe it's particularly important to note that excluding those items, earnings per share increased by 19% year-over-year to $0.93.

During the quarter, we made the decision to settle our civil complaint with NewMarket. This negotiated settlement was agreed at $45 million, and we now feel able to move forward without further distractions and with the certainty of an agreed settlement.

In Fuel Specialties, our sales growth continues and as you know, we have taken significant action to improve margin performance in this business. While we have seen some sequential improvement over the second quarter, more recently signals have been stronger especially with raw materials pricing stabilizing.

All elements of our Active Chemicals business have performed well with the EMEA and Asia-Pacific markets particularly strong year-over-year. Octane Additives produced another very good quarter with results on par with the strong results seen a year ago.

Looking ahead, we feel comfortable with the actions we've taken to strengthen our business units, position them well for future opportunities and challenges. We feel good about our positive momentum yet maintain a sense of cautious optimism for the near term.

Now, 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 third quarter were $202.1 million, a 16% increase from $174 million in last year's third quarter. Our overall gross profit percentage of 28.6% was down 2.8 percentage points reflecting a lower gross margin in Fuel Specialties, partially offset by higher gross margins in Active Chemicals and Octane Additives.

Patrick noted our GAAP earnings were down from last year, principally as a result of our decision to settle the NewMarket civil complaint which allows repayment of $45 million, with $25 million in cash and $5 million in Innospec shares already delivered in Quarter 3, with the remaining $15 million to be paid evenly in annual installments over the next three years.

Our reported loss per share of $0.71 included $1.19 for the NewMarket settlement, $0.14 in foreign exchange losses, and $0.10 in acquisition-related costs.

Overall, the net effect of these and other special items was to decrease our third quarter earnings by $1.61 a share. A year ago, we reported GAAP diluted earnings per share of $1.20, but that included the net positive impact from special items of $0.42.

Including special items in both years, our adjusted EPS was $0.93, a 19% increase from $0.78 a year ago. Excluding the $45 million NewMarket settlement, operating income for the quarter was $25.4 million and EBITDA was $24.6 million.

Moving on to slide 7, total revenues in the Fuel Specialties segment were $136.1 million, a 19% increase from a year ago, driven by strong performances across all regions and product lines. Overall, unit volume was 3% higher with selling prices and product mix adding 11% and positive currency translation contributing a further 5% to sales.

By region, Fuel Specialties sales were up 6% in the Americas, 35% in EMEA, and 14% in Asia-Pacific. In AvTel, our aviation fuel business, sales increased 21%. The segment's gross margin for the third quarter was 28%, down 4.5 percentage points from last year, primarily driven by the impact of the weaker sales mix and higher raw material costs. As we have previously noted, the recovery in our gross margins has been slower than anticipated, however, we've seen a small sequential improvement from the 27.4% in the second quarter.

With the continued decline in crude oil prices and price increases we have already implemented, the segment is on track for improved margins in the fourth quarter.

Fuel Specialties operating income for the third quarter was $19.9 million, up 6% from a year ago.

Turning to slide 8, Active Chemicals had another solid quarter driven by growth across our core markets in personal care, fragrances and polymers. Revenues increased 15% to $43.9 million despite unit volume falling 8%. High prices and a more favorable product mix added 16 percentage points to sales while currency effects added another 7 percentage points. By region, revenues increased 4% in the Americas, 24% in EMEA, and 20% in Asia-Pacific.

In addition, the segment's gross margin for the quarter at 21.9% was a slight improvement from a year ago. The increase primarily reflects the continued improved pricing and a richer sales mix. Operating income for the quarter was $5 million, a 16% increase from the $4.3 million reported a year ago.

Moving on to slide 9, in Octane Additives, revenues for the third quarter were $22.1 million, a slight increase over reported revenues a year ago. Unit volume increased 8 percentage points with pricing and customer mix subtracting 7% to reported sales. The segment's gross margin was also relatively strong at 45.2%, 2.3 percentage points increase over last year's third quarter mainly reflecting the continued sale of lower price inventory which generated a gross profit of $10 million.

The segment reported an operating loss of $38.1 million, which included a $45 million charge relating to the settlement of the NewMarket civil complaint. Excluding the settlement charge, the operating income for the quarter was $6.9 million, an 8% increase over the same period a year ago.

Turning to slide 10, corporate costs for the quarter was $6.3 million compared to $5.4 million a year ago. The increase is primarily due to $2.4 million decrease in share-based compensation accruals due to the decrease in share price at the quarter end, offset by $3 million of acquisition-related costs. As expected, the charge related to our United Kingdom pension plan was down sharply falling to $0.1 million from $2.5 million a year ago. As many of you know, the big drop reflects changes we made to the plan last year including closing it to future service accrual and taking other measures to reduce our risk. We significantly reduced the projections of our future liability.

Our effective tax rate, once adjusted for the NewMarket civil complaint settlement and adjustment of income tax provisions, is 21.2% compared to 19.8% in 2010. The increase of 1.4 percentage points is primarily due to the third quarter of 2010 benefiting to a greater extent from the positive impact of taxable profits in different geographical locations. We now expect the full-year effective tax rate to be approximately 10% including these items.

Moving on to slide 11, cash flow from operations was $9.4 million in the third quarter, driven primarily by the fall in working capital. Capital expenditures for the quarter were $1.9 million, bringing the year-to-date total to $5.9 million. We now expect capital expenditures to be at the lower end of the $10 million to $14 million range we announced last quarter.

As of September 30th we have cash and cash equivalents of $136.9 million, or $46.9 million more than our total debt of $90 million.

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 final comments and then we'll be happy to take your questions. In summary, while we've had a number of significant special charges this quarter, we are pleased with our strong underlying business performance and feel that we are well-positioned for the opportunities that lie ahead. In Fuel Specialties, competition remains tough, but we see good potential from our new operations in Russia and Brazil. We continue to be attuned to the margin performance in this business unit, and are looking towards further improvement in the fourth quarter.

Furthermore, we see obvious need for stronger service and technical application expertise in the oil field specialties arena, as this is a natural area of expansion and focus for us. This market offers both organic and acquisition opportunities. Indeed, our acquisition charges in Q3 relate to a project in this market which would have been a very good fit for our company, but which we did not complete.

Active Chemicals and Octane Additives both performed above expectations, and while we have been watching the signals of change in the global economic environment at this time, we feel cautiously optimistic for the near term. Both our growth businesses, fuel specialties and active chemicals, continue to advance at above market rates, establishing very strong leadership positions in their respective segments. We will continue to invest in organic growth of these businesses, which have significant potential to contribute future shareholder value. At the same time, we continue to prudently pursue an external growth strategy seeking appropriate strategic acquisitions that are complementary and a good fit for Innospec, and our strong capital position enables us to do so.

In light of the value we see in our stock, the Board decided to expand our repurchase program which is now authorized for up to $40 million, and we retired some 594,000 shares during the quarter returning $15.4 million in cash to shareholders. We thank you all and our shareholders and Innospec employees for your continued interest and confidence in the Company. And now, I'll turn the call back over to the operator, and we will take your questions.

(Operator Instructions) We will take our first question today from Chris Shaw from Monness, Crespi and Hardt, please go ahead.

Good morning guys, how are you doing?

Morning Chris, how are you?

Morning, Chris.

First question around gross margins in Fuel Specialties, where do you guys see them I guess maybe heading into the fourth quarter, and how soon do you think you can get back to sort of you know, low to mid-30% margins in that business?

Yes Chris, typically -- it's Patrick, here. Typically in the fourth quarter we have, because of the product mix, we will have margins increasing just naturally, although we put a big effort into overall margins and managing of raw materials, and I think we've seen that sequential improvement from the second quarter, albeit not as big as we anticipated, but we are starting to see carryover on a month-to-month basis and the improvements. Our goal has always been to get to that low-30% range, and we're not going to change our stance on that. That's still our goal.

Have you seen any drop in raw materials yet, are they still increasing, or are they at least flat, or?

They pretty much stabilized to this point. You saw a drop in crude prices, obviously, and then you've seen it come up a little bit, about 10% over the last three weeks, but we have not seen the increase. We've seen more stabilized prices than we have anything else.

Okay, thanks, and then have you -- can you give me an idea of how much, how many shares you've bought back in the fourth quarter so far, if any?

Yes Chris, I think we've probably bought back about 100,000 shares so far in the fourth quarter.

Okay. And then, just finally, I remember last quarter you called out some I guess licensing fees that were starting up in Lat-Am as an impact to EBITDA. Was there anything like that for this quarter, or did those follow through as well, or --?

No, we're clear of that now, we're in startup mode and the business is going well.

Okay, great, thanks.

(Operator Instructions) We will now take our next question from Gregg Hillman from First Wilshire Securities Management, please go ahead.

Yes, good morning, gentlemen. I got on the phone a little bit late. Could you explain the gross margins for Fuel Specialties again, what was going on there?

Yes Gregg, this is Ian. Just to sort of let you know, the gross margins for Fuel Specialties in the third quarter was 28%, that's down about 4.5 percentage points from last year, and that's really driven by the weak sales mix and the higher raw material costs. The recovery is a little bit slower than we anticipated. What we are expecting now with the declining crude prices, and also the price increases that we've now implemented, we do expect to see the fourth quarter improve over the third, and we are seeing sequential improvement from month to month, as well. So, it's really raw material price driven and also a weaker sales mix that's caused it to be where it is.

And the mix, it was across the board for products, or was it just for some?

Probably as a generalization, I'd say yes, across the board. There are some particular products which are more effected than others, as you would imagine, but I think generally year-over-year we've seen higher raw material pricing for pretty much everything that we've got out there.

Okay, thank you.

(Operator Instructions) We have now got a follow-up question from Chris Shaw from Monness, Crespi and Hardt, please go ahead.

Yes, thanks. The strength in both Fuel and Active Chems in EMEA, I'm assuming that was probably more Middle Eastern than Europe. Could you just maybe parse out what the sort of trends there, in that region?

Quite frankly, Chris, it was just across the board. And again, it was some transition of product carryover from the second quarter into the third quarter, but generally there wasn't a specific region in Europe that was a cause and effect of the big percentage jump in revenue.

And even in Active, Europe seems pretty strong still in terms of demand?

Yeah, pretty strong in terms of demand, pretty steady, same with Asia-Pacific and the US as well, where we saw a slight turndown in Q2, late Q2 and early Q3. We've actually seen it turn back up in the latter part of Q3 and going strong into Q4.

Okay. And then, just maybe because I have you still, the mix in fuel specialties, I think you alluded a little bit, because the sales were very strongly -- was that, was it mix? Was it pricing? Just maybe a little more detail there, I think you talked a little bit about it, but I'm just trying to figure out the 19% and how that sort of split out?

Yes, it's generally everything. If you go into the third and fourth quarter, and you generally trend our company, in Specialty and Fuel Specialties, you're getting into the colder weather months, and you typically have a better general pricing and product ix in that arena, in all the regions. So, you'll see a benefit from a margin standpoint typically in the fourth quarter as well from a carryover in the third, so it's really -- it's pricing, and it's product mix, and I would say it's probably equal on both sides.

Okay, great. Thanks.

(Operator Instructions) We have a follow-up question from Gregg Hillman from First Wilshire Securities Management. Please go ahead.

Yes Pat, could you explain the rationale for opening the offices in Russia and Brazil, please, in terms of was it just all Fuel Specialties, or was it Active Chemicals at all? So it was just Fuel Specialties, the offices you're opening there, right?

Yes, right now Gregg, it's to support the Fuel Specialties business in both Brazil and Russia. We put a very big strategy around the BRIC countries, and we've started to pick up significant business. In order to do that, you have to physically have offices in country, along with the technical aptitude to support the business that you do have. Now, will that carry over and be able to support Active Chemicals at some point in time? That is what we're trying to do. We don't want to duplicate costs where we have to, and so that generally trend is, as we get Fuel Specialties up and running, and as we can support it technically from the foundation, the technical foundation, we can duplicate, not have to duplicate costs and add the Active Chemicals into that and use the same market sector.

And the [emerging stations] you're working for would be like, oil companies, airlines and chemical companies, or --?

Yes, all of the above.

But primarily the oil companies?

That's correct.

Okay. Okay, and are there any other areas in the world that you would be opening offices in?

You know, we're constantly evaluating that, Gregg, and obviously when the time comes we'll put out a further announcement, but right now we're concentrating on the two offices that we did open to make sure that they're profitable offices and that they've got the proper support to support the business in those markets.

Okay, thank you.

And there are no further questions in the queue. That will conclude today's question-answer session. I would now like to turn the call back to Patrick Williams for any additional or closing remarks.

Thank you for your questions, now I'd like to leave you with a few final comments. I am pleased with Innospec's performance for the year to date, particularly given the challenge in markets and increased raw material costs that we've faced. It's very encouraging that we've been able to deliver 19% increase in earnings per share, excluding special items for the nine-month period. We believe the outlook for the fourth quarter is solid across all three of our business segments, and we'll continue to push hard to further improve the business' performance.

Longer term, we are confident that our growth businesses in Fuel Specialties, including Oilfield Specialties and Active Chemicals are well positioned to deliver sustained profitable growth. As previously stated, we have the opportunity to use our balance sheet to make strategic acquisitions that could accelerate our growth and build even more shareholder value over time, so I remain very optimistic about Innospec's long term growth potential. If you have any more questions, please give one of us a call, and if we don't hear from you in the meantime we'll look forward to sharing our fourth quarter results with you early next year. Thanks again for joining us today, and have a great day. Goodbye.

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