Innospec Inc (IOSP) 2012 Q3 法說會逐字稿

Good day and welcome to the Innospec third-quarter 2012 results conference call. This conference is being recorded. At this time, I would like to turn the conference over to David Williams. Please go ahead.

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 third-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 September 30, 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 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 include a number of risks and uncertainties that could cause actual results to differ materially from the anticipated results implied by those forward-looking statements. These risks and uncertainties are detailed in Innospec's most recent 10-K report as well as other filings we have with the SEC. We refer you to the SEC's website or our site for these and other documents.

In our discussions today, we have also included some non-GAAP financial measures. A reconciliation to the most directly comparable GAAP financial measures is contained in our earnings release and in the presentation that follows, a copy of which is available on the Innospec website.

With us today from Innospec are Patrick Williams, President and Chief Executive Officer, and Ian Cleminson, Executive Vice President and Chief Financial Officer. And with that, I will turn it over to you, Patrick.

Thank you, David, and welcome, everyone, to Innospec's third-quarter 2012 conference call.

We made important strides in our two growth segments during the third quarter, deepening our relationships with customers and generally positioning us very well for the near and immediate terms. This is particularly relevant in the contrast with reported performance metrics for the third quarter. These were materially impacted by timing of order patterns in Octane Additives, as well as continued economic softness in world markets and the weaker euro compared to a year ago. We expect our fourth quarter will show a decided upturn to both top and bottom lines, and market activity across our business segments so far this period is encouraging.

Year-to-date sales in our Fuel Specialties segment are tracking very close to our internal forecast. Sales were up slightly in the third quarter, very much expected in light of softer demand for both fuel in both the US and in Europe, as well as some very stiff competition and the weaker euro. At the same time, Fuel Specialties margins remained strong at 29%, supported by our US and Asia-Pacific operations.

Meanwhile, we have expanded our business relationships with existing customers in terms of new business, contract extensions, and longer-term technology agreements driven by the needs for future fuels, all of which [are rewarding] in quarters to come.

Our Avtel business was close to expectations in the third quarter. The negative year-over-year comparison was due to a very strong comparative quarter in 2011. We achieved good volumes in this business in Q3 and we expect to see a stronger upside for Avtel volume in early 2013.

Our Oilfield Specialties business continues to develop (technical difficulty) and steadily. We continue to believe that we need to add the impetus of an acquisition in this business and our acquisition strategy and activity is unchanged in this respect.

You have seen that we have renamed our Active Chemicals segment as Performance Chemicals, which better reflects the nature of our products to our customers. In Performance Chemicals, our sales growth in third quarter was the result of higher volumes across the board in our Personal Care, Polymers, and Fragrance Ingredients business, despite the weaker euro. This volume growth was geographically centered (technical difficulty) our operations in Americas and Asia-Pacific, which improved sales margins.

Despite continued economic challenges in Europe, our Polymers business has shown good signs of recovery, as we predicted, in both sales volume and revenue terms. However, the recovery has been in lower-margin applications, which have continued to impact the segment's margins. We expect recovery to continue in the fourth quarter and into 2013, with moderate increases in pricing.

Overall, we remain cautiously optimistic about our Performance Chemicals business.

In Octane Additives, sales were impacted significantly by delivery scheduling, particularly affecting one large order, which we expect we'll recognize in the fourth quarter.

I will now turn the call over to Ian Cleminson, and then return for some comments about our business and strategies going forward. And then we will take your questions.

Thanks, Patrick.

Turning to Slide 6 in the presentation, the Company's total revenues for the third quarter were $183.4 million, a 9% decrease from $202.1 million a year ago. The overall gross margin fell by 1 percentage point from last year to 27.6%, due primarily to the lower proportion of Octane Additives sales offset by improved margins in both Fuel Specialties and Performance Chemicals.

Our GAAP earnings were $0.65 per share. On an adjusted basis, our earnings per diluted share were also $0.65, a result of limited special items in the third quarter.

EBITDA for the quarter was $20.2 million, and benefited from minimal special items and stable exchange rates over the quarter.

Net income for the quarter was $15.5 million and after adjustments for special items in both this year and last, was down $7 million, or $0.28 a share, from 2011's third quarter.

Moving on to Slide 7, revenues in Fuel Specialties for the third quarter were $127 million, down 7% from the year-ago period. A richer sales mix and improved pricing of 5% were offset by 6% lower volumes and an unfavorable currency impact of 6%.

By region, revenues were down by 2% in the Americas and 12% in EMEA, due to the weaker euro, but increased by 10% in Asia-Pacific due to improved volumes. The Avtel business performed to plan in the quarter.

Margins in this segment increased by 1 percentage point from last year to 29%, Gross profit was $36.8 million and operating income was $19.6 million, a 2% decrease from a year ago.

Turning to Slide 8, revenues in Performance Chemicals for the third quarter increased 7% from last year to $46.8 million. Volumes increased 15% from a year ago, driven mainly by Personal Care, [which] offset by 2% lower price and sales mix and 6% due to unfavorable currency impact. In addition, as we predicted, our Polymers markets have stabilized, showing a slight uptick in volume sequentially over the second quarter, with a focus on lower-margin business.

By region, revenues increased by 30% in the Americas, primarily due to the strong growth in Personal Care and Fragrance Ingredients markets. Sales decreased 8% in EMEA due to the weaker euro and 4% in Asia-Pacific.

Gross margins improved slightly to 22.2%, which, combined with sales growth, resulted in an increased gross profit for the quarter.

Performance Chemicals operating income for the quarter was $5.6 million, up from the $5 million reported in the last year's third quarter.

Moving onto Slide 9, net sales in Octane Additives for the quarter were $9.6 million compared to the strong comparative of $22.1 million a year ago, primarily due to delivery phasing in the quarter with respect to one significant order. We expect this order to be recognized in the fourth quarter.

The segment's gross margin of 36.5% was down from last year's second quarter, which reflects lower production volumes. Gross profit was $3.5 million in the quarter. This segment's operating income for the quarter was $1.5 million, primarily impacted by the timing of shipments, compared to $8.4 million last year after adjusting for the $46.5 million pretax charge related to the civil complaint settlements and associated legal and professional expenses.

Turning to Slide 10, corporate costs for the quarter were $9.1 million compared with $6.3 million a year ago. The increase is primarily due to increased share-based compensation accruals.

Our quarterly effective tax rate was 8.8%. Our current year effective tax rate was 18.8% compared to 10.1% in 2011, which benefited from tax deductions recognized in respect of certain of the special items. We now expect the full-year effective tax rate to be approximately 20%.

Moving on to Slide 11, cash flows from operations were strong again in the third quarter as we generated $33.7 million in operating cash flow, more than triple the $9.4 million recorded a year ago. This includes an $18.1 million (sic -- see press release) decrease in working capital in the quarter. There have been no share repurchases to date in 2012.

As of September 30, we had cash and cash equivalents of $133.6 million and debt of $34 million.

And now I'll turn it back over to Patrick for some concluding comments.

Thanks, Ian.

In summary, while third-quarter trading was lower than we expected due to the phasing of orders and the continued sluggishness in the world economies, we are generally pleased with the progress we have made on several fronts in our key business areas.

Innospec is in an excellent financial position, with a very strong balance sheet and is positioned well for growth in both Fuel Specialties and Performance Chemicals. We have been working hard to achieve sustainable growth for years to come, and we believe we have made a good number of important critical business decisions in that respect.

We have consistently said that our growth is a function of both organic and acquisitive efforts, and we have successively broadened our relationships with customers and delivered key new business wins in our core businesses. Additionally, our acquisition focus continues to be in areas of smaller, compatible businesses, as well as larger, more opportunistic or transformational opportunities.

Our recently announced bid for the TPC Group, an excellent for Innospec, is a good example of the latter. Our current due diligence activities are reinforcing our views of the value of this business and its synergies with Innospec, and we continue to devote time and effort to completing this process. However, I'm afraid that the current status of this proposed acquisition means that we are unable to comment beyond the public information contained in our SEC filings, and I regret that we will be unable to entertain any questions on this matter in the Q&A which follows this presentation.

We are very mindful of our duty to create and enhance shareholder value. Since our management team has been in place, we believe we have done a good job for both the Company and investors as stewards of this trust. Our aim is to continue to consider and optimize the use of cash resources in the Company's best interests, including strategic acquisitions, investments in the business, and share repurchase programs as market conditions suggest.

We very much appreciate the support and interest of our investors, as well as the continued strong relationships we enjoy with our customers and, of course, the good work of Innospec employees around the world. We look forward with confidence to the opportunities ahead.

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

(Operator Instructions) Jon Tanwanteng; CJS Securities.

Can you give a little more color on the new orders you've been getting in Q4 in Fuel Specialties? Are they likely to get you better than the seasonal performance you usually get from the switch to winter blends? And also, are you likely to get back above the 30% margin mark in that segment or just overall?

Yes, John, good question. Yes, I think that we should probably get right back up to that 30 percentile. We always float around 29.5 to 30.5, probably the last four to five quarters. The view is, I think, with some of the orders that will be moving from Q3 into Q4 is that we're going to have a very strong Q4 across all business lines, not just Fuel Specialties.

So, in answering your questions I don't want to go over the top and say it's going to be well above Q4 comparison in 2011. But I will say that I think that you're going to see a very confident Q4, and as a company we feel very confident going into 2013 as well.

Okay, great. And then, can you talk a little bit about the technology JVs that you mentioned in the press release? What areas are they in and when will they start to impact the top or bottom line?

Sure. Yes, a lot of these are done in the fuels area and it's really looking at the future of the fuels market. We go out and do a lot of presentations for not only our customers, but as well as it really helps to enhance our strategy as a global business team to look at what the future fuels look like. And in doing so, we've partnered up with some of the majors, whether it's in Asia-Pacific or whether it's in the Americas region, as well as Europe, on a technology platform.

So we share technology, we share fuels, we share future fuels and ideas. And it really behooves us to do this because it gives us a real good outlook on what the future looks like. And, plus, it enhances ourselves and that company to really move forward on a positive manner.

Okay. So no difference between gasoline or diesel, it's just across the board?

I think it's across the board. We've looked at some projects we have on heavy fuel oil, some we have on gasoline and, obviously, a little over 50% on diesel.

Okay, got it. And then, any impact you might be seeing from Hurricane Sandy? Do you have any facilities on the East Coast? Or has the infrastructure damage impacted demand in that area?

Yes, we have two plants in the Carolinas and we have an R&D technical site in Delaware. All plants are up and running; no issues. And the lab in Delaware is up and running; no issues. Obviously, we're concerned about everybody on the East Coast and our thoughts and prayers are to them.

Okay. And then my final one is, do you have any options in case the TPCG bid does not succeed?

Yes. We've always said, Jon, that we're looking at small acquisitions in Personal Care and in Oilfield, and as well as balancing that out with either stock buybacks or dividend. And we have not stopped that strategy moving forward. If the TPC deal does not go through, we still have deals in the queue for Oilfield that we're working on anyway.

Great. Thank you very much.

Gregg Hillman; First Wilshire Securities.

Two things -- in the weakness in the third quarter, what were the macro [sale of the units]? So how did -- like, you were down, whatever, 8%. In Europe and America, what were the actual consumption numbers for diesel fuel in those two markets versus what you did in those markets?

Yes, diesel fuel was down a little bit in Europe, fairly flat in the US. Gasoline was down significantly in all regions. So you're either flat or just a tad down, Gregg.

Okay. And that was consistent with what you did, basically? You didn't --

Very consistent, that's correct.

Okay. And the other thing I wanted to ask you about, I guess carb regulations and I guess EPA -- what with the trucks, a lot of things are just kind of being phased in. How are the regulations you think are going to affect you? And I believe the fleets have a kind of choice in terms of how they comply with the new particulate matter, with the various regs. Will that affect -- what are the fleets electing to do? And how is that going to affect you in the next two years?

Good question, Gregg. Typically in the Fuel Specialties business, unlike Active Chemicals or what we call Performance Chemicals now, in the performance side it's driven by consumer advocacy groups. In the fuel side, it's literally driven by legislation and regulatories -- regulatory approvals. And anytime regulation or legislation comes into play, it's typically a positive for fuel additives. And I think that when you see across the globe, whether it's China, India, where it might be, where they're going to a ULSD standard, it's going to be a positive play for Innospec. I think any tightness in regs for the US market will as well be a very positive step for Innospec and fuel additives overall.

And what does ULSD stand for, that acronym you just used?

Ultra-low-sulfur diesel.

Okay. And then, so basically some regs are coming in. So actually you should see kind of an uptick in sales due to these regs that are coming on at the end of this year and next year?

Yes. I will tell you this; I think over the last 60 days we're feeling very confident going into 2013. Just a lot of things that our company has done, as well as new business closures that we had in the business. And I think, as you just said, there's a lot of legislation coming about, a lot of new engine technology out in the marketplace. And I think we're positioned very well to take market share.

Okay, fine. Thank you.

(Operator Instructions) Chris Shaw; Monness, Crespi.

I guess I'll continue just asking about Fuel Specialties. The volumes, you said they -- I might have missed it, but were they down 6%? Is that what you said?

Yes, down 6%, Chris.

That sounds a little worse than the diesel consumption numbers we're getting for the regions and all. And I guess is that in part because -- was Avtel, the volumes, down that much year over year?

Yes, it's a mixture of things, Chris, to be fair. Our Avtel volumes were down slightly year over year. And as Patrick was alluding to earlier, diesel consumption is down in Europe and North America as well. And that's played its part. But predominantly it's Avtel-related.

Okay.

I would say that sequentially Avtel was actually better in the third quarter than it was in the second quarter. And as we go into the fourth quarter and into '13 we expect it to improve and really start to uptick for us.

And then, do you guys have any color around the new contract wins or the contract extensions? I mean, what is -- are they meaningful, they adding of points to sales next year or is there any information you can give?

Yes. We typically don't give that information, Chris -- A, to respect the customer base that we work within. But I can tell you it's -- any new wins and any new business in this marketplace from organic growth is significant to us. I think it just bodes well going into 2013 and we're very confident with our numbers of the new business that's going to kick in the latter part of Q4 and early 2013.

That's really about all we could say. You know we're very transparent. We love to tell you guys as much as we can. But out of respect to our customer base, we just can't go that much further.

Okay. Then you said you were still active looking at M&A in the oilfield chemicals sector. If you were to complete, hypothetically, the TPCG deal, would that preclude you doing oilfield chemical deals as well, or -- ?

No. As you recall, Chris, those are smaller deals that will either, A, entrench technology or, B, entrench application knowledge in oilfield. And, again, they're smaller deals so it will not stop us from that strategy.

Okay, great. Thank you.

Ivan Marcuse; KeyBanc Capital Markets.

Couple quick ones. On your material cost run per unit, what was your -- what was it down? (multiple speakers) Or was your raw material cost actually up?

Could you just repeat the question, Ivan? Sorry; we lost you a little bit there.

Yes. For your raw material costs on a per-unit basis, was your material cost up or down, and to what degree?

Broadly flat, Ivan, this quarter.

On a year-over-year basis?

And I think we're going to see it broadly flat in Q4 as well, Ivan.

On a year-over-year basis, or sequentially?

Sequentially.

Got you. On a year-over-year basis was it still -- was it flat also?

Yes, you know, I'd say it's fairly flat.

Got you. And then --

[Crude's] jumped around a little bit, but it's always balancing out below that $100 barrier and you see it pretty flat right now.

Got you. And then, is the fourth quarter typically a seasonally stronger quarter than the third quarter for diesel and fuel? With, I guess, Europe you tend to have some vacation time in August. So is there typically a seasonally uptick in the fourth quarter --

You are correct.

-- or is there something --

Yes -- sorry, Ivan. You are correct. You typically have a seasonal uptick in Q4.

Is there going to be more of an upti- -- are you guys looking for more or an uptick than typical? Because you talked about the fourth quarter you're expecting it to be a lot stronger than the third quarter, and exclusive of what's going on in your -- in the Avtel business. So would you expect the fourth quarter to be seasonally stronger more so than in the past, or just more of a typical seasonal uptick?

I think it's a couple of things there, Ivan. I think first of all we're going to see some volume that we didn't get in Q3 roll into Q4. Some of the new business that we've won, as well, is going to start coming through in the back end of Q4. And you're right, we do see more seasonal business in the fuels area. [Cold flow will] improve it, our heating products as well. So we're well set for a good Q4 in that business.

Yes, and I think, just to add to that, Ivan, that we will have a -- the likelihood is an order in Octane Additives, as we said in the presentation, will be moving from Q3 to Q4 as well. And that's a significant order as well.

Got you. So would you -- so Octane, so you'd expect that, I don't know, to be -- as much as it's down this quarter on a year-over-year basis to be up that much on a year-over-year basis in the fourth quarter?

Yes, I'd say you're going to be looking at a revenue number that's going to be similar to Q3 last year, perhaps a little bit less.

Okay. Great. Thank you for taking my questions.

As there are no further questions in the queue, I would like to turn the call back to Patrick Williams for any additional or closing remarks.

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 or matters discussed on this call, please give us a call. In the meantime, we look forward to meeting up again with you early next year. Have a great day.

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