Innospec Inc (IOSP) 2011 Q4 法說會逐字稿

Good day and welcome to the Innospec Inc. fourth-quarter results 2011 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 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 2011 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, 2011. 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 everyone 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 include 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 very much, David, and thank you all for joining us today. Before Ian provides deeper detail on our reported numbers of metrics for the fourth quarter and year end, I would like to share some perspective on the operating performance of our three businesses and their markets, and also give you our sense of near and intermediate term.

Overall, we are generally pleased with our strong finish to the year, with particularly notable contributions from both our Fuel Specialties and Octane Additives businesses. We have achieved growth in excess of our underlying markets due to our ongoing commitment to research and development, enabling to supply customers with differentiated and innovative products, as well as our high standards of customer service.

As you know, we have maintained a very close watch on the underlying market conditions that have impacted our margin performance and we are very pleased to report that the important actions we have taken throughout the year have resulted in sequential quarterly margin improvement in our Fuel Specialties business.

Breaking back through the 30% gross margin barrier in this segment is an important milestone and we expect some continued relief in raw materials and crude pricing in 2012. That is assuming no additional political or economic crisis. Another milestone worth highlighting is that our Fuel Specialties business topped $500 million in annual sales for the first time ever, which represents a sustained five-year compound annual growth rate of 11%.

However, we have seen some softening of activity at US refiners and while exports of fuel to both Europe and South America have been at all-time highs, this level of growth is probably not sustainable. Refinery rationalization has already begun to impact the market both in the US and in Europe. Yet, despite continued uncertainty in this business, we remain optimistic.

Meanwhile, staffing our new offices in Moscow and Brazil is essentially complete and we feel that we are now well-positioned to support current customer demand and in fact grow our business in these important markets. We are still mindful of the inherent demand for quality service and expertise in the Oilfield specialty sector, and we have staffed up in this area to provide for future growth. We feel good about the opportunities here, and this is an obvious area of focus for Innospec.

Moving to the Active Chemicals. After several quarters of impressive growth and margin improvement, our Active Chemicals segment had a weaker quarter hampered by some tough downstream environment and continued high raw material cost and exacerbated by extended plant maintenance.

Within the Active Chemicals segment, demand remains reasonably solid for our Fragrance business. Polymer demand and our margins have softened this business as we had expected. Although there has been some slowing to the Personal Care market over the year, we have been pleased with our substantial sales and margin growth in this market and we are confident that we will recover to normal growth levels after the current fourth-quarter loss.

Octane Additives continued to perform above expectations despite the political and economic uncertainties in this market. Our volumes were high coupled with continued healthy margins. Silver particularly buoyant throughout the year and while demand is expected to be lower in 2012, we remain cautiously optimistic about the near-term in our Octane Additives business. Now I will turn the call over to Ian Cleminson, our Chief Financial Officer.

Thanks, Patrick. Turning to slide 7 in the presentation, the Company's total revenues for the fourth quarter were $200.5 million, a 13% increase from $177.3 million a year ago. The overall gross profit percentage of 28.8% was down 1.7 percentage points from last year although Fuel Specialties drove back through the 30% gross margin barrier due to our overall cost improvement strategy.

As Patrick noted, our GAAP earnings were down this quarter. We reported earnings per diluted share of $0.82. The period-over-period differential in reported net income is principally due to a $4.3 million swing in foreign exchange and a tax charge of $0.4 million this quarter compared to a $7.8 million tax credit a year ago.

On an adjusted basis our earnings per diluted share were $0.97 compared to $1.07 a year ago. EBITDA for the quarter was $24.5 million, a 13% increase from $21.6 million reported a year ago and operating income for the quarter was $24.4 million, a 53% increase from the year-ago period.

Moving on to slide 8, revenues in Fuel Specialties rose 14% in the fourth quarter to record levels, exceeding $500 million in annual sales for the first time. Unit volume was up 2% and selling prices and product mix increased sales by approximately 12%. By region, revenues rose 7% in the Americas, 21% in EMEA, and 17% in Asia-Pacific. Although the recovery has been slow, margins have continued to recover in 2011 and breaking back through the 30% barrier is a significant milestone.

Gross profit dollars increase by $4.6 million to $43.7 million. [SAR] costs were down $2.9 million from last year, primarily due to lower personnel related costs and tight cost control. Operating income was up $7.5 million to $27.2 million, a 38% increase from a year ago. For the full year, the segment sales were up 14% to $521.2 million, and operating income increased 5% to $81.7 million.

Turning to slide 9, after several quarters of impressive sales growth and growth margin improvements, our Active Chemicals business had a weaker quarter, exacerbated by extended plant shutdowns as we matched production and inventories to demand. Revenues fell 3%, driven by 12% lower volumes, partially offset by stronger pricing and an improved sales mix of 9%.

By region, revenues increased by 35% in Asia-Pacific, despite declines of 2% in the Americas and 13% EMEA. Asia-Pacific growth was driven by improved volumes across the Personal Care and Fragrance markets. EMEA margins fell sharply, primarily as a result of adverse manufacturing efficiencies from plant shutdowns for maintenance, which were extended to balance inventory and demand.

We expect the business to return to normal activity levels in the first quarter. Sales for the full year increased 16% to $177 million. The segment's full-year operating income of $22.6 million was 35% higher than the $16.7 million reported in 2010.

Moving on to slide 10, our Octane Additives business finished the year with the $17.9 million in revenue, a 61% year-over-year increase driven primarily by increased demand. The segment's gross margin of 47.5% was down 6.6 percentage points from a year ago, primarily due to the sell-through of higher cost inventory. Gross profit of $8.5 million was an increase of 43% from last year's fourth quarter.

The segment's operating income for the quarter was up $5.4 million, up sharply from $1.1 million in last year's fourth quarter, which included $3.2 million pre-tax of civil complaint related legal and professional expenses. For the full year, the segment reported sales of $76.2 million, up 5% from 2010. Excluding the $45 million related to civil complaint settlements, operating income for the full year was $22.6 million compared to an operating income of $25.8 million in 2010.

Turning to slide 11, corporate costs for the quarter were $8.9 million compared with $7.1 million a year ago, which included a one-off $1.4 million charge relating to retention bonuses. Excluding this item, corporate costs have increased by $3.2 million, primarily due to higher legal and professional expenses and accruals from share-based compensation expense. In 2012, we expect [no large] corporate cost to be approximately $8 million a quarter.

Our United Kingdom pension plan returned to a surplus position recounting surpluses for the first time since 2007. This movement reflects the recovering of markets in 2011 and benefits from the actions we took in 2010 to reduce our risk. In 2012, we expect our annual cash contributions to be approximately $10 million again and the quarterly pension charges to remain low.

Last year we saw a $7.8 million tax credit in the final quarter as we settled out a number of historic tax positions. This year, we have a small $0.4 million charge in the quarter and a $3.7 million charge for the year, giving us an effective tax rate of 7% for the full year.

Once adjusted for the civil complaint settlements and adjustments of income tax provisions, our full year effective tax rate is 15.8% compared to 13.6% in 2010. The increase of 2.2 percentage points is primarily due to 2010 benefiting to a greater extent from the positive impact of taxable profits in different geographical locations. In 2012, we expect our tax rate to be broadly 24%.

Moving on to slide 12, cash flow from operations remained strong in the fourth quarter. We generated $13.8 million in operating cash flow before $4.2 million of capital expenditure and after $9 million in payments to the government authorities. For the full year, our operating cash flow was $34.7 million.

In the fourth quarter, we successfully secured a five-year $100 million revolving credit facility and repaid the $25 million outstanding term loan. We repurchased approximately 312,000 Innospec shares during the quarter under the Board-approved repurchase plan for a cost of $8.6 million, bringing total repurchases for the year under Board-approved programs to approximately 1 million shares for total cost of $26.2 million.

At year end, our liquidity remained high as we had cash and cash equivalents of $81 million, which exceeded our total debt by $46 million. And now I'll turn it back over to Patrick for some concluding comments.

Thank you, Ian. Taking everything into consideration, including non-operating matters, economic difficulties, and uncertainties around the world, Innospec fared well in 2011. That's principally due to the fact that we are a well-managed business with quality innovative products and services. We are focused on delivering solutions to our customers, and we know how to match our business to the economic conditions in our markets worldwide.

Now with the successful restructuring of our new $100 million credit facility which also reflects our banking group's confidence in Innospec, coupled with our strong, highly liquid financial position, Innospec remains very well-positioned for continued growth and expansion for the immediate term.

We will continue a policy of pursuing organic growth as well as external growth through acquisitions, but on an opportunistic basis. In addition, we will deploy cash through our buyback program when appropriate. Notably, delivered on a commitment to our shareholders, our share buyback program in 2011 repurchased and retired over 1 million shares at a cost of $26.2 million.

We will continue to manage our business mix in accordance with the dictates of the market economies worldwide with compliance paramount through our Organization.

Once again, we thank you and all our shareholders and Innospec employees for your continued interest and support. We look forward to continuing our strategy of growth in 2012. And now I will turn the call back over to the operator and we will take your questions.

Thank you.

(Operator Instructions)

We take our first question from Christopher Butler with Sidoti & Co. Please go ahead.

Hello. Good morning, guys.

Good morning, Chris.

Just wanted to start on the Active Chemical business. It sounds like the outages were at least in part exacerbated by soft demand. Could you give me a little bit more color on that and to what degree that has extended into the first quarter thus far?

Yes. Sure, Chris. It's Patrick here. If you look at Active Chemicals and obviously you follow our Company, you look, it's broken down in three segments -- Aroma Chemicals, Polymers, and Personal Care -- two of which are generally specialty chemicals businesses.

The Polymers business can be an up-and-down business, someone like Octane Additives. In a great market, non-recessionary market, steady financial climate, it has very steady demand and high margins. We saw a little bit of softness in Q4 so it was A) a good time to work on some maintenance on the plant at that time and really take down some of our inventory, as well as bet on the [com] that ethylene prices are going to be moving on the downward trend.

We don't expect to see that, Chris, moving forward into 2012. I think we're starting to see some stabilization in that market right now. So Personal Care did very well, [I'm certain], did very well in the quarter.

And looking at your as SG&A cost here in the quarter, one of the things you pointed out was legal and professional with some of the settlements that have been made. Can we expect that those costs are going to go away as we move into 2012 and to what degree can you quantify those for us?

Yes, Chris. This is Ian. We expect those costs to go away in 2012 and I think you can really expect that to be pretty much zero on a go-forward basis.

Could you give us an idea of what that was for the year?

In terms of the various different items that we were dealing with?

Please.

Yes, well in total we've probably done about across all of legal cases, probably about $10 million.

And just finally, and then I will go back into the queue. With the repurchases that you made in the quarter, I did notice that sequentially the share count increased. Was that just a factor of timing of these repurchases?

Yes, Chris, as you know, it's an [upper ridge] stock we took over the quarter and over the full year. So it's just a matter of timing.

I appreciate your time, I will go back in queue.

Thanks, Chris.

Thank you. We take our next question from Chris Shaw with Monness, Crespi. Please go ahead.

Hello. Good morning, guys. How are you doing?

Good morning, Chris.

Just a follow-up on the Active Chemicals. So it sounds like you're fairly confident that the fourth-quarter issue was somewhat your own doing in taking the plant down. But do you believe -- do you see this business growing at the historic rates, you've always, long-term growth rates, you've said, maybe high-single digits, and getting gross margins back over the 25% level this year?

Yes. I mean, that is the target, Chris. I would look at Active Chemicals business for sales revenue growth in the high-single digits, very low-double digits and again between that 23% to 25% range on a GP basis.

Okay. Great. And then, I look at Fuel Specialties and you alluded a little bit too that you think there might be some additional, maybe, raw material moderation. Where you see gross margins -- is this 30.2% -- is there more upside to that? What was maybe the run rate at the end of the quarter, and is there more pricing to come along with the raw material reductions?

Yes, historically we have run that business in the 33% to 35% range, but we will struggle to get there. I think you're probably looking, Chris, in the low 30%s, that 30%, 31% range, until we get some relief. There's a lot of capacity that was taken out of the market.

Crude prices ran high. You are starting to see crude come down significantly. Hopefully there is some capacity coming on the market, which will obviously drive raw materials down. So if we get those separate issues in play, you could see gross margins come back up a little bit more than where they are right now.

Okay. And then, talking about using your cash. And you have been buying back shares but I believe before you said there might have been -- you're looking at the $30 share price and underneath of which you would buy, and now that we are above $30 -- what you do with your cash then? I mean, is there a chance to increase the buyback and loosen it up even more this year? And I know, you are looking at M&A, but if you could just tell me how you are thinking about that going forward?

Sure. Last year we talked about, the beginning of the year, specifically in the first quarter of 2011 and last quarter of 2010, we discussed the need for acquisitions in our business and to grow this business moving forward, and that we would rather put our cash into growing the business versus buying back shares but we could balance it out if need be.

We've looked at a large acquisition in 2011. It did not happen. Obviously, we returned money back to the shareholders by repurchasing shares. We felt like the shares were undervalued. So we also sit on a lot of cash and we don't believe sitting on cash, we believe in putting it to work.

Whether it is buybacks or acquisitions, that will remain to be seen in 2012 but I think our corporate view is, we can balance out buybacks and acquisitions in 2012 and that is our plan. We have not sat down and looked at a price. We have not valued a price. But I do think you will see us do something, obviously, in 2012.

I assume you still believe the shares are undervalued here, right?

Yes. That's correct.

Okay, great. Thanks guys.

Thank you.

Thanks, Chris.

Thank you. And we take our next question from Gregg Hillman with First Wilshire Securities Management.

Yes. Good morning, gentlemen.

Good morning, Greg.

Good morning, Greg.

Hello. Number one, for diesel fuel consumption in the quarter, what was the diesel fuel consumption like in Europe and the United States year-over-year? Did it increase or go down?

Diesel fuel consumption went up. Gasoline consumption went down.

Okay. And how dependent -- how are your earnings depending upon either of those things going up or--?

We are more of a diesel company. We don't play in the gasoline, we are everything outside of diesel.

What percentage up was it?

I don't have those on me. Gregg, you can probably call me and I will have those handy here within the hour.

Okay. And then on the regulatory front, could you comment upon any regulatory actions, important ones, that happened in 2011 or any ones you expect to happen in 2012? Either in America, Europe, or Asia-Pacific for that matter that will--?

There is constant -- sorry there's regulatories around all countries. The fact is, we won't see anything big until you see some of the growth countries stick to some of the standards that we expect from Europe and the USA.

Okay, need for tighter emission standards from vehicles?

That's correct.

Okay. Do you expect that -- is something pending right there?

I think it's, Greg, I think it's economies of scale. I think we're in some financial uncertainties in a global market. And until those filter out, I think the intent is to keep price appeal as low as you can. And so where countries had the thought process of getting down to a low sulfur number, or some CO2 number or PM number or whatever it might be, they are going to sit tight until basically the financial markets are more stable.

Okay. I noticed something for the Clean Air Act for -- Do you sell anything that goes, that affects utilities, like industrial plants or electric power utilities for PPM?

Well if they are burning fuel, yes. A lot of power plants are burning fuel to run their power plants.

They are burning diesels?

Yes.

Okay.

Diesel, heavy oil, whatever it might be.

Okay. I thought there was a lower PPM that's coming in place right now in the United States. And would that affect you?

There is, but it is not going to be a significant jump in sales, Gregg.

Okay, fine. And then finally, for the states, in California, the state emissions, is there anything going to affect you there? The diesel, I know Texas lead affected you a little--?

Yes, but you have got Tex lead, you got carb diesel, you've obviously CAFE limits now, those typically as we state in our business, that any time the government gets involved and pushes regulatory standards on our market it is good for our business. So we have just been watching the trends and we position ourselves properly in the marketplace.

Okay, that's fine, thanks very much.

Thanks, Greg.

Thanks, Greg.

(Operator Instructions)

And we take our next question from Jay Garrett with Ahab Capital.

Hello. Good morning, guys.

Good morning, Jay.

Good morning, Jay.

Just wondering if there are any start-up costs associated with your plant shut down?

Jay, no, there is not.

Okay thanks, that's it.

Thanks, Jay.

Thank you. And we have a follow-up question from Christopher Butler. Please go ahead.

Hello. Thanks for taking the follow-up. Could you give us the volume growth on Fuel Specialties by geographic region, please?

Chris, we don't give it by geographic region. We never have and we just prefer not to.

Could you comment, then, on the impact of weather in Europe on the quarter? Was there something meaningful there?

I think what we saw in EMEA for the quarter was a 21% rise in sales, and obviously we do get a little bit of an increase due to the colder weather in quarter four and we saw the benefit of the heating market and the cold flow improver market as well. These guys just had a great quarter, knocked it out of the park.

And looking at the Octane Additives business over a longer term, any change to the two-year perspective that you have there?

No, we have been talking about 2 years for probably the last 10 years. So it's still the same old story. We are in an uncertain environment right now in the specific markets that we play in for the Octane Additives business, so I think it's, Chris, probably safe to say I would still keep the two years in as a note.

And the acquisition pipeline, my understanding was that after going through the process last year you're filling the pipeline now? Is that still the case or are you closer to having a number of interesting deals that you're looking at?

Still fill the pipeline. We have some interesting deals that we are looking at. And we will proceed forward with those as long as they make sense to our Company and our strategy and the cost structure that we are looking for.

Thank you again. That is all I have.

Thanks, Chris.

Thanks, Chris.

Thank you, and we have a follow-up question also from Chris Shaw with Monness, Crespi. Please go ahead.

Yes, I think Chris asked most of my follow-ups but just quickly on Brazil and Russia, is that generating revenues at this point? And how much is it? And what's the growth rate, or is there really just a small number and we won't see a real impact in the overall Company's numbers any time soon?

No. It is generating revenues, and really the reason why we put the [opposites] out there is for the future growth the Company. It's there to support the current customers we have in place and grow the Business. So both those countries in areas of regions are generating revenue as we speak.

So those offices are opened? We can expect to see some acceleration from there, hopefully?

That is our expectations, but both offices are open, that is correct.

Okay, great. Thanks.

Thank you.

Thank you. And a follow-up from Gregg Hillman.

Yes, Patrick. I wanted to ask you a question about the weather, it has been an abnormally warm winter in the United States and I was wondering if that would hurt cold flow improver sales or whether the people that have inventory just won't buy it more in subsequent periods?

Yes, Greg. We really have not seen, and we are a little dumbfounded ourselves, we have not seen a pullback in our CFI sales. Now, we monitor that on a constant basis, but typically what you see is you have to use cold flow coming out of terminals. If you get a cold snap you could be caught with a tank that doesn't have cold flow in it and obviously you have the issues that you have with fuel freezing.

So I think it has been more of a responsible market where they're using cold flow whether they need it or not just due to the fact they don't want to get caught in a situation where you have cold air coming from Canada and you cannot get fuel out of your tank because you cannot just run around and put additives in tanks on a constant basis. So they're treating it on a more normalized basis than they ever have.

You mean the tanks that leave the tankers and go to the gasoline stations? Is that what you're talking about?

I'm sorry?

You mean the tanks of the trucks that go around and leave refineries to go to the individual gasoline stations?

If you take the infrastructure for diesel, it goes all over the place. It goes from a refinery to a pipeline to a terminal. From a terminal, it goes out to filling stations, truck stops, farmers, agriculture markets, over-the-road trucks, it's a wide array of really market that it hits. So in certain markets you have a lot of turnover, in certain markets you don't. I mean, you just have to have cold flow in those products.

Okay fine, thank you.

Thanks, Greg.

Thank you.

(Operator Instructions)

And as we have no further questions at this time, I would now like to turn the call back over to you, Mr. Williams, for any additional or closing remarks.

Thanks again for joining us today. We are committed to transparency and to maintaining an open dialogue with our shareholders and prospective investors. On this note, I am pleased with many inquiries we have received from investors seeking to learn more about the Company and our prospects. We have participated in a number of worthwhile investor conferences throughout the year and intend to continue this practice.

Our share price closed on December 31 at $28.07 with a market capitalization of $651 million. This is up 16% over the quarter, and represents a 38% increase in value since the end of 2010. Our stock has continued to outperform the market in these early weeks of 2012.

We are very conscious of the difficult trading conditions facing our customers in the current economic climate. We will continue our strategy of supporting our customers with innovative new products and the high levels of customer service they have come to expect from Innospec.

If you have any further questions about Innospec or our discussion here today, please give us a call. In the meantime, we look forward to visiting with you again next quarter. Have a great day.

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