Innospec Inc (IOSP) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Innospec Inc. Q1 2012 results conference call. For your information, today's conference is being recorded.

At this time I would like to turn the call over to your host today, 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 first-quarter 2012 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, 2012. The press release is posted on the Company's website, www.innospecinc.com. An audio webcast of the call and the slide presentation on the results are also now available and will be archived on the website.

Before we start I would like to remind everybody that certain comments made during this call might be characterized as forward-looking statements under the Private Securities Litigation Reform Act of 1995. Generally speaking, any comments regarding management's beliefs, expectations, targets, or other predictions of the future are forward-looking statements. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from the anticipated results implied by those forward-looking statements.

These risks and uncertainties are detailed in Innospec's most recent 10-K report, as well as other filings we have with the SEC. We refer you to the SEC's website or our site for these and other documents.

In our discussions today we have also included some non-GAAP financial 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 will turn it over to you, Patrick.

Thank you, David, and welcome everyone to Innospec's first-quarter 2012 conference call. We have started off the year with good momentum. We had strong contributions across all our business lines, and this is particularly gratifying in light of the continued unsettled economic conditions and geopolitical issues around the world.

Fuel Specialties continues to deliver sales growth in excess of that scene in our underlying markets. This is particularly noteworthy considering the intense competitive pressures and the volatility of raw material pricing we face in this area. It is also notable that we continue to deliver gross margins at the 30% level in our Fuel Specialties business, an important recognition of the quality of products and services Innospec brings to the market.

At the same time, we continue to face an unsettled market in the polymers portion of our Active Chemicals segment, but I am pleased to see the near-term rebound in our core personal care and fragrance ingredients businesses which we had predicted in our last quarterly call. We also recorded very strong sales and margin performance in our Octane Additives segment.

Ian Cleminson will discuss our financial performance in detail, but I did want to point out that we were also very pleased with the results of our cash management and cost containment strategy, which has enabled us to sustain a strong and liquid balance sheet and to position Innospec to invest in its businesses strategically as well as in terms of external growth opportunities.

I will now turn the call over to EN and then return with some comments about our business prospects and strategies before taking your questions.

Thanks, Patrick. Turning to slide six in the presentation, the Company's total revenues for the first quarter were $200.8 million, an 8% increase from $185.3 million a year ago. The overall gross margin rose 3.4 percentage points from last year to 31.9%, driven by the greater proportion of sales from our higher-margin Octane Additives segment and richer pricing and sales mix in our Fuel Specialties business.

Our GAAP earnings increased by 17% from last year's first quarter to $1.03 per share. On an adjusted basis our earnings per diluted share was $1 compared to $0.74 a year ago, which represents a 35% increase. EBITDA for the quarter was $35.2 million, a 5% increase from $33.5 million reported a year ago, and operating income for the quarter was $31.6 million, a 29% increase from the year-ago period.

Moving on to slide seven, revenues in Fuel Specialties Rose 3% in the first quarter to $130.7 million. The increase was primarily driven by a richer sales mix and improved pricing of 7% offset by 3% lower volumes and our diverse currency impact of 1%. By region, revenues rose 4% in the Americas, 7% in EMEA, and 20% in Asia-Pacific, and were down 52% in our Avtel business as a result of the timing of shipments.

Excluding our Avtel business, underlying sales growth in Fuel Specialties was 7%.

Margins in the segments increased slightly from last year and sequentially continued at the 30% level. Gross profit dollars increased by $2.3 million to $38.7 million from a year ago. Despite the improvements in gross margin, Fuel Specialties operating income for the quarter of $21.7 million was down 3% from a year ago, reflecting $2.9 million higher SAR expenses, primarily due to the benefit from the release last year of an accrual no longer deemed necessary.

Turning to slide a revenues in the first quarter were on par with the year ago at $46.5 million, as stronger pricing and improved sales mix of 6% was offset by 4% lower volumes. And currency effects reduced reported sales by 2%. By region in Active Chemicals revenues increased by 16% in the Americas to a new record and by 17% in Asia-Pacific, with a decline of 16% in EMEA driven by the polymers business.

Asia-Pacific growth was driven by improved volumes across the personal care and fragrance ingredients market. We had expected a near-term rebound in the segment's personal care and fragrance ingredients businesses which happened during the first quarter. Excluding sales in our polymers business, underlying sales growth was 9% in this segment.

Gross margins were down slightly from a strong comparative last year primarily due to softer demand in the polymers market, but rebounded sharply from the fourth quarter as it returned to more normal activity levels.

Active Chemicals operating income for the quarter was $6 million, down from $7.6 million in last year's first quarter but up sharply from $0.9 million in the fourth quarter last year, primarily due to the expected recovery in both sales and margins.

Moving on to slide nine, our Octane Additives business started the year strongly with $23.6 million in revenues, more than double the year-ago quarter, primarily as a result of increased demand. The segment's gross margin of 60.2% was 20 percentage points higher than last year's 40.2% as we sell through lower-cost inventory.

Gross profit of $14.2 million was triple last year's first quarter. The segment's operating income was $12.4 million, up sharply from $2.2 million in last year's first quarter, which included $1 million pretax civil complaint-related legal and professional expenses.

While this segment significantly exceeded our expectations in the first quarter, there is no change in the current year and longer-term outlook for a gradual decline in the TEL business.

Turning to slide 10, corporate costs for the quarter were $8.6 million compared with $7.5 million a year ago. The increase is primarily due to increased performance-related and share-based compensation accruals. Our effective tax rate for the quarter was 23.1% compared to 24% a year ago. Our tax rate may well come down further during the course of the year.

Moving on to slide 11, cash flow from operations was strong again in the first quarter as we generated $18 million in operating cash flow, partially offset by $2.5 million spent on implementation of a new ERP system and $1.8 million spent on capital projects. There have been no share repurchases to date in 2012. As of March 31, we have cash and cash equivalents of $96 million which exceeded our total debt of $36 million by $60 million.

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

Thanks, Ian. In summary, we are pleased with our performance in the first quarter. While we feel good about our strong financial position and the strength and resilience of our business model, we look forward to the remainder of the year with cautious optimism, particularly in light of the unpredictability of the world economics, including the geopolitical issues, and we remain vigilant in this respect.

At the same time, we are pleased that we were able to focus our time and efforts on the core strategy of the company. We have cleaned up most of the legacy items that have complicated our reporting, taking up an undue amount of management time, and to some extent clouded our intrinsic value. We are well on our way to normalizing our business, which will magnify our value proposition and the growth opportunities we see for the Company.

We should also recognize that during the quarter we announced the planned retirement of Dr. Bob Bew, who has served as Chairman over the last 13 years, and we welcomed Milton 'Bud' Blackmore to this position. Having been on the Board for two years, Bud will take up his responsibility as the Chairman at our annual meeting in May.

His extensive experience in the oil refining and fuel marketing industry has already made an important contribution to the Board's discussions, and I am sure will be invaluable to us as we take Innospec into its next growth phase. We will be adding a further board member in due course to bring the Board back to full strength.

Looking ahead we will continue to invest and push for innovation in research and development and maintain an active acquisition policy, mindful that it's most important that we make the right acquisitions at fair valuations in order to maintain the rate of growth we would like to see, particularly in the oilfields specialties and personal care areas.

Finally, we continue to be pleased with the strong interest in Innospec shown by an increasing number of investors around the globe. We intend to maintain open and transparent communications and an active investor relations strategy to encourage this interest.

Now I will turn the call over to the operator and Ian and I will take any of your questions.

(Operator Instructions) Christopher Butler, Sidoti.

Good morning, guys. If we are looking at your Fuel Specialties business, you had mentioned that you had some shipments that got pushed. If not for that do think your gross margin in this segment would have been up over that 30% threshold for the quarter? And how much of a boost do we look at there for the second quarter?

Yes, I think, Chris, we probably could have gotten another percentage point boost. It was more based around the aviation gasoline, Avtel. It's just timing of shipments and it should be pushed into Q2.

Looking at the Active Chemicals with the weakness that you see in polymers, knowing that some of the plastic producers saw a step down in demand out of Europe in the third quarter last year and no real recovery, is that the best way to think of polymers as this year progresses? That it's kind of flatlining from this step-down change at the end of last year?

Yes, if you look at the quarter Q1 on Q1, we had very strong polymer sales in Q1 and Q2 of 2011. We feel like we hit the bottom in Q4 of 2011 and we started to see an increase in polymer sales in Q1 of this year. So we think we have definitely hit the bottom, Chris, and we are starting to work our way back up.

You had mentioned that on the personal care products and the aroma chemicals that you saw improvement. Are you back up to what you would consider full speed on that business? Was there any lingering difficulties from the maintenance outages in the fourth quarter?

No, we are back up to full speed.

And just finally, before I turn it over to others, Octane Additives fantastic quarter. You seemed cautious with the outlook. It's reasonable, but looking to the second quarter is there any expectation that the solid demand might continue, at least into that short-term horizon?

I think we will have a fairly strong second-quarter outlook for Q3 and Q4. We just wouldn't want to speculate at this time.

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

Thanks, Chris.

Chris Shaw, Monness, Crespi.

Good morning. Just a little more around the Avtel; guessing that is around a $40 million a year business. Do you expect growth in that business this year? It sounds like it's just a function of timing, but I just want to make sure that expectations for the full year are still what they were in the past.

It's a little less than $40 million, won't give the exact number, but it's probably a business that is fairly flat, Chris. If anything, you might get 0.5% or 1% growth on an annualized basis, but otherwise it's pretty flat growth. It was strictly just timing of shipments.

Okay. Then any update on your efforts in the emerging markets? I know you have done some offices in Brazil and Russia. Is there anything new to talk about in those areas?

Yes, I think the strategy we put forth and really the operational aspects of putting offices in South America and Russia have benefited us. We are seeing some very positive signs in not only South America but also Russia a moving forward, as well as I think the general economies in Asia Pacific and Russia are holding up fairly well right now as well.

Are any of those new markets showing up on the top line at this point? Would we notice it as adding to growth at this point?

Yes.

They are?

All three of the markets we just discussed.

Great. Then just a little more on -- I know Chris was getting at this as well, but outside of polymers and the other businesses there is nothing in the first quarter that is seasonal for -- that makes it seasonally strong. This is kind of for the -- for non-polymers you can at least expect this kind of performance the rest of the year?

No, I think the positive is that we had an extremely warm winter and we still posted very positive results in Fuel Specialties. We see that as a positive sign.

Typically, we do have some seasonality to our business and Q1 has a little bump up from cold-flow products but we had an extremely warm winter. There is nothing in there that is one-off and we still showed positive improvement. We are very happy and pleased moving forward, but very cautious.

In Active there is nothing really seasonal for the first quarter, it's --?

Nothing, nothing at all.

Great. I will get back in queue, thanks.

Thank you.

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

Good morning, Patrick and Ian. What is the end use for the polymers?

It goes into car manufacturing businesses, it goes into industrial applications, and it goes in the housing market.

Okay. Then just your dependence on Europe; Ian, what percentage of your sales are in Europe overall for the entire company?

Gregg, we don't actually disclose that broadly. If you look at our business, you would be looking at about 40% in EMEA, about 40% in Americas, and round about 20% in Asia-Pacific.

Okay. So if there was a recession in Europe it would hurt you?

I think it's ironic you can ask if there is a recession in Europe, because I would probably say if you ask a lot of the people there is already a recession in Europe. So I think we have watched a lot of chemical companies in general have had a fairly rough quarter in Europe.

Europe has held a pretty steady for us, because if you look at diesel demand in Europe, and we are primarily diesel in the Fuel Specialties side of the business, we have held up very well. And so we still feel fairly confident moving forward that Europe is going to hold up fairly well for us.

Gregg, if you listen to some of the things we said earlier on in the call you will have seen that our Fuel Specialties business grew by 7% in EMEA. And it was only the polymers business in the Active Chemicals sector, which is predominantly a European business, that has struggled in Europe, so we are very pleased with the efforts that the guys in the business are making.

Okay. In all the businesses?

Yes.

In Europe, okay. Okay, thanks very much.

Thank you.

Christopher Butler, Sidoti.

Thanks for taking my follow-up. Your SG&A in the quarter went up fairly significantly year over year. You had talked to about some incentives and then we have got the new facilities that you have discussed. How should we think of SG&A for the full year?

Chris, this is Ian. We have taken a slightly higher charges for some personnel-related issues and share-based compensation and the like. Also, year over year we have -- took a large credit of $3.7 million in Q1 2011, which didn't recur this time round. For the full year, if you are looking in that $130 million to $140 million range for the SAR number, and that includes our R&D expenses as well, that is a range which we could imagine landing in it for the full year.

And in the quarter you didn't repurchase any shares. Could you talk to that decision and how that may be touching on your acquisition strategy?

Yes, Chris. It's very similar to 2011. We really ascertain the market, looked at what we had in the portfolio from an acquisition standpoint. And if you recall, when we had our conference call in 2011 we said if we don't make an acquisition or don't have something further in the pipeline that we would do some form of either share buybacks or dividend. So we did a large share buyback 2011.

We are still in that balance mode right now. We do have some acquisitions that are in the pipeline that we are looking at. Again, we want to balance buybacks and acquisitions, and I think you should see something out of us forthcoming.

I appreciate your time.

Thank you, Chris.

(Operator Instructions) Chris Shaw, Monness, Crespi.

I guess someone should ask about the cash and the potential for any bolt-on M&A. And if not any M&A upcoming, maybe what the alternative use of the cash going back to the share repurchase or possibly a dividend? Could you just address those issues please?

It's something we will discuss at the Board meetings. There is no doubt we are not going to sit on a lot of cash just to sit on cash. I would rather give it back to shareholders if that is the case.

And so as we look at the proposition and the valuations of the acquisitions that we have in the pipeline we will see if we can balance both, as we said earlier. But you are right; we will look at doing a buyback and/or dividend. We could probably do both if we wanted to, but that is something that will be discussed at the Board meetings when we talk about our further strategy for cash management.

What are potential acquisition targets or how are you finding multiples right now? Are they getting any more reasonable, are they -- deals can get done at these levels, or do you think it's going to be difficult?

I think stuff that is in the public sector, we can all look at all the data out there, they are still at fairly high multiples. Things that are below the public sector, either private or below a certain dollar value, we are starting to see a little more fair value in multiples.

But things are still a little high at this point. There is a lot of money on the sidelines and I think we just have to pick the right company at a fair multiple that we know we can put into our global strategy and grow the business.

Great. Thanks a lot, guys.

Thank you.

Gregg Hillman, First Wilshire Securities Management.

I was wondering if you would be able to improve any of your processes at the plant significantly to reduce costs with a totally novel way of making a substance.

One thing we do, Gregg, is we are constantly working on manufacturing efficiencies and we put a lot of effort in that. I think you have seen the improvement from actually 2011 to 2012, so that is a constant. We are always looking at novel ideas; way to increase manufacturing without having to add volume, increase volume with what we have on the ground versus putting more assets on the ground.

So that is a process that we are always looking at. That is something that our manufacturing people are constantly paying attention to.

Okay, thanks.

(Operator Instructions) If there are no further questions in the queue, this will conclude today's Q&A session. I would now like to turn the call back to Mr. Williams for any closing remarks. Please go ahead.

Thank you all for joining us today and thanks to all our shareholders and Innospec employees for your interest and support. If you have any further questions about Innospec, our discussion here today, please give any of us a call. In the meantime, look forward to visiting with you again next quarter. Have a great day.

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