Innospec Inc (IOSP) 2012 Q4 法說會逐字稿

Good day and welcome to the Innospec Q4 2012 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 day, everyone. My name is David Williams, and I'm Vice President, General Counsel and Chief Compliance Officer for Innospec Inc. Thank you for joining our fourth quarter and year end 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 December 31, 2012. The press release is posted on the Company's website at www.innospecinc.com. An audio webcast of the call and the slide preparation 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 our 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, acopy 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, andwelcome everyone to Innospec's fourth quarter and year end 2012 conference call. Overall we had a very good fourth quarter, particularly in our core businesses where we closed the year in a very solid position, poised for continued growth in 2013 and beyond.

Our Fuel Specialty segment performed especially well in the quarter, given the mild start to the winter season in all regions. Fuel Specialties delivered record sales revenue driven by strong performances in EMEA and the Americas, and we created good momentum going into 2013. Principally due to the richer sales mix, Fuel Specialties gross margin improved 1.1 percentage points to 31.3% for the quarter, allowing for a full year gross margin above our 30% target.

Market demand in the Oilfield Specialty sector remained reasonably strong during the fourth quarter, creating a stable base for our continued buildout of this business. Late in the fourth quarter we closed on an acquisition of Strata Control Services, Inc., an important step in growing Oilfield Specialties, and we will continue a controlled pursuit of other attractive acquisitions in this market.

Recognizing the importance of opportunities in the oil and gas and fuel sectors, we added Lawrence Padfield to the Board of Directors during the quarter. Larryhas more than 30 years of oil and gas experience and will lend important experience and perspective as we pursue business development in these areas.

Performance Chemicals showed continued good growth during the quarter in personal care, fragrance ingredients and polymers, driven by higher volumes across all markets and, importantly, strong margin improvement. We are pleased with our performance and strategy in Performance Chemicals, and we remain optimistic about our sales prospects despite sluggish underlying growth in the industry as a whole.

Our Octane Additives business had a strong quarter as we predicted, including the completion of a large order held over from the third quarter, as we indicated in our Q3 results. In line with our policy of full compliance, we booked our mediation charge in the quarter to bring the environmental liabilities in line with the latest waste disposal requirements, which softened our margin in this business.

As you know, the TEL market is a sunset industry, and we have been deeply moved in the phase-out of TEL for motor gasoline usage and the conversion to unleaded gasoline for a number of years now works. We will continue to work responsibly with the few you remaining TEL countries, helping in the orderly transition to unleaded gasoline without undue disruption to transport and economic growth.

I will turn the call over to Ian Cleminson, who will review the detailed results, and then return for some comments about our business and strategies going forward. Then we will take your questions.

Thanks, Patrick. Turning to slide six in the presentation, the Company's total revenues for the fourth quarter were $213.7 million, a 7% increase from a year ago. The overall gross margin rose by 1.6 percentage points from last year to 30.4%, driven by record sales within Fuel Specialties and higher volumes across all Performance Chemicals markets.

Our GAAP earnings per share were $0.53. On an adjusted basis our earnings per diluted share were $0.89, in line with our expectations. EBITDA for the quarter was $30.5 million, a 24% increase from the $24.5 million reported a year ago. Net income for the quarter was $12.7 million and, after adjustments of special items both this year and last, was down $1.2 million from 2011's fourth quarter.

Moving on to slide seven. Revenues in Fuel Specialties for the quart quarter were a record $155 million, up 7% from the year-ago period. A richer mix of sales and improved pricing of 9% offset by flat volumes and an unfavorable currency impact of 2% due to a weaker euro. By region, revenues increased 10% in the Americas and 9% in EMEA, but fell but you 4% in Asia Pacific due to reduced volumes.

The AvTel business performed to plan in the quarter. Margins in this segment increased to 31.3%, returning above the 30% target, resulting in a full year gross margin of 30.1%. Gross profit was $48.5 million, and operating income was $29.4 million an 8% increase from a year ago. For the full year the segment sales [rose] 1% to $527.3 million, and operating income increased 7% to $87.6 million.

Turning to slide eight. Revenues in Performance Chemicals for the fourth quarter increased 9% from last year to $41.4 million. Volumes increased by 14%, with strong performances across all markets, but were offset by 3% lower price and sales mix and 2% due to unfavorable currency impacts. By region revenues increased by 19% in the Americas, primarily due to strong volume growth in the about personal care and fragrance ingredient markets, and by 4% in EMEA, but sales decreased 3% in Asia Pacific.

Gross margins improved across the board to 24.6% due primarily to better manufacturing efficiencies on the back of higher volumes, which combined with sales growth, resulted in an increased gross profit for the quarter to $10.2 million. Performance Chemicals operating income for the quarter was $5.5 million, up significantly from the $0.9 million reported in last year's fourth quarter.

Sales for the full year increased 1% to $179.6 million. The segment's full year operating income of $24.3 million was 8% higher than the $22.6 million reported in 2011.

Moving on so slide nine. Net sales in Octane Additives for the quarter was $17.3 million, compared with $17.9 million a year ago. The segment's gross margin was 36.4%, down from the 47.5% last year, primarily due to customer mix, but also due to the cost of booking the remediation charge. Gross profit was $6.3 million in the quarter.

The segment's operating income for the quarter was $4.1 million, compared to $5.4 million last year. For the full year the segment reported sales of $69.6 million, a 9% decrease from 2011. Its operating income was $26 million, compared to an operating loss of $22.4 million in 2011, which included a $45 million pretax charge related to the civil complaint settlements and $5.5 million in associated legal and professional expenses.

For 2013 we expect to see further declines in the Octane Additives revenues as we continue to responsibly transition the remaining countries to unleaded gasoline. We will update you each quarter on how we see this business performing.

Turning to slide 10, corporate costs for the quarter $13 million, compared with $8.9 million a year ago. The increase primarily due to $2.5 million in acquisition related costs on our continuing drive for enhancing our compliance.

The full year tax charge of $26.9 million or 28% was driven higher than our Q3 forecasted charge of $18 million or 19%, primarily due to an internal dividend to fund acquisitions. This added $7 million to the charge, the majority of which is noncash in nature. In 2013 we expect our pension charge to be $0.7 million per quarter, while the cash contributions remain relatively unchanged at between $2.5 million to $3 million for the quarter.

Moving on to slide 11. Despite the $26.5 million increase in working capital to fund the strong business performance, cash flow from operations remained positive in the fourth quarter, as we generated $2.3 million in the operating cash flow. In the fourth quarter Innospec issued a special dividend of $46.7 million at $2 per share and paid $53.1 million in relation to the acquisition of Strata Control.

At year end we $27.5 million of cash and cash equivalents on hand. I will now turn it back over to Patrick for some concluding comments.

Thanks, Ian. In summary, we're pleased with our performance for the year and particularly with the fourth quarter, finishing the year strong with positive momentum. Operating results improved year-over-year in our core businesses.

Most importantly we delivered on our expectations and did what we set out to do;attaining or exceeding our gross margin targets in our core businesses; concluding an important acquisition in the buildout of our Oilfield Specialties business, which we expect to be accretive to earnings this year; enhancing shareholder return with a special dividend of $2 per share; and continuing to deliver on organic growth and customer expansion in our core business units.

Our business model and management are reasonably robust through difficult economic conditions, as we have shown. Our core businesses are cash generative, which is why we were able to finish the fourth quarter broadly cash neutral after outflows of nearly $100 million from the Strata acquisition and our special dividend. Innospec remains in a strong liquidity financial position as we love into 2013.

We positively look to the future, cautiously optimistic about our markets worldwide. We will continue to focus on maintaining our competitive edge, which for us means continuing our investment in R&D in order to develop the new technology which is vital to growth for us and our customers. Two, providing the highest possible levels of customer service, delivering cost-effective products in an efficient and timely manner. And three, recruiting to augment our team of experienced and skilled people who are knowledgeable in our customers' applications.

We will maintain an active acquisition policy supporting our strategic objectives. For the immediate term we will concentrate on smaller acquisition opportunities as we currently find more value you in this approach. While we will never completely rule out consideration of a larger deal, any opportunity would need [be] compelling to our Company and our shareholders. Meantime we will revisit our policy on buybacks and dividends.

In Octane Additives, despite very limited information from the three remaining countries, we continue to work as best as we can to participate in a responsible transition to unleaded gasoline. Finally we are pleased the market has responded well to our performances throughout the year. We have shown our shareholder base -- grown our shareholder base and attracted additional research following, and more recently seen a significant upwards improvement in our share price.

Early in Q1 we met with a large number of institutional investors with positive feedback on our strategy. We look forward to continuing active dialogue with current and potential investors while continuing to be open and transparent regarding our strategy and our actions. Once again, we appreciate your interest and support, ourstrong relationships with customers and efforts of all of our Innospec employees around the world, and 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.

Thank you. (Operator Instructions). We will take your first question fromJon Tanwanteng from CJS Securities. Please go ahead, your line is open.

Hey, guys, how you doing?Nice quarter.

Thanks, Jon.

Can you guys talk about Strata a little bit? They a $20 million run rate in 2012, according to your press release. What can that business look like in 2013 with the added benefit of your global resources and sales network?

Good question, Jon. I think that the whole reason for looking at smaller acquisitions that are somewhat regionally based is that we can expand those in a fairly relative, quick time into our global network. I think looking at Strata and really the importance of our global strategy, we feel like we could probably get low double digit growth in that in 2013, understanding that it is going to take us probably a quarter to get that business established, get it out to the global arms and get it out to the global market. But I think you could look at low double digit growth in 2013 and maintain that throughout.

Got it, thanks. Maybe a little more on the acquisition pipeline. How does that look to you right now, and then given your cash position, do you need to draw down your revolver or lever up to pursue additional transactions?

If you look at the pipeline, we kept the pipeline going through the TPC deal, and I think that was the benefit of being able to close Strata in 2012. We still have a remaining -- some businesses that we are looking at that we have been in negotiations with that, again, stick to our smaller strategy of acquisitions. I think you will look at us looking to add one more, hopefully in the Oilfield sector, and then moving ourselves over to the same strategy for about personal care on our the Performance Chemical side.

In regards to how we leverage, we obviously told you guys from day one we like to stay below three on a leverage point. Do we pay the next one in cash? That remains to be seen. Leveraging and looking at borrowing, cash at this point is very cheap on a borrowing capacity standpoint, so we will look at all of our options.

Got it. And can you remind me what is left on your revolver right now?

We have about $[70] million left on the revolver, Jon.

Got it. And then finally you mentioned Octane transitioning. Is that any different from the commentary you've had in prior quarters? I don't recall specifically that you were working to transition to nonleaded gasolines.

Jon, there is no real difference there. I think we just [strung] out a little more clearly for people, just to remind them that there is a transition plan that the countries have, and we will follow that plan and we'll work with these countries responsibly to execute that plan with them.

Great. Thank you very much, guys.

We will now take our next question from Ivan Marcuse from KeyBanc. Please go ahead, your line is now open.

Hi. Thanks for taking my questions. Real quick, in the Fuel Specialties business you are one of the few companies that have seen growth in kind of year-over-year basis in sales in Europe, so I suspect that points to the resilience of your business, but also you are seeing an uptick in mix and price. So do you think your 30% type of gross margin target could be exceeded in 2013 with the addition of Strata, and would you expect a slow uptick with improving mix? In your gross margin.

Yes, Ivan, the way I would -- sorry, yes, the way I look at it, Ivan, is I think we still should maintain that 30% margin. I think for modeling purposes that fits well for our thoughts moving forward into the first quarter and the second quarter. We will, as always, keep the investment community and yourselves informed if we start to see margin uptick in that business or any of the other businesses that we have.

Somewhat 2013 is an unknown market. We are still feeling positively about both of our core businesses moving forward, and I think that the first quarter, maybe the first three to four months will let us know kind of where we stand going into the remainder of the year.

Okay. And then if you -- sticking with Fuel Specialties, where do you -- what is your best guess on where do you think you could see the Oilfields business in the next two to three years, with -- now that you finally have I guess a food hold with the new acquisition? Where do you think the business could get to in terms of Innospec and your capabilities at this point?

Yes, I mean, if you look at the acquisitions and the current business that we have internally from organic growth, we see potentially going into 2014 just north of a $100 million revenue business with extremely good gross profit margins. And I think at that point in time it gives us the girth really to really expand that business quicker than we are today. It's just about everything.

You've got to get momentum. We have got to have the right personnel in place. The technology tree is in place to take the growth to the double digit -- high double digit that we're hoping to expect in the future. But for rightnow I think the outlook for our Company is the view that we want to be north of $100 million by the end of this year, with an extremely strong gross margin, and really with the business to move forward at a faster rate going to 2014 and 2015.

Okay. And then on Strata it's -- you pointed out $2 million in acquisition costs. Was that all Strata, or did also include any costs associated with TPC?

It also includes the TPC deal as well.

Great. And then what is your expectation for tax rate next year?

We expect it to be a little lower than the 2012 full year rate. We think something in the region of 22% to 23% is achievable.

And on your balance sheet I saw an uptick in -- or actually a pretty big uptick in your pension liability. Is that associated with Strata, and will that require any funding over the next year or two?

No, it's nothing to do with strike Strata. It is our UK [plant]. The funding -- the cash funding, as we highlighted earlier in the call, will remain around that $10 million, $11 million mark per year. Slightly higher than it was in 2012 but certainly manageable, and we expect that to be a steady state for about the next three years.

All right. And then -- sorry, last question, and then I will get back in the queue. I know it is probably impossible to project, but what is your expectation for the Octane business in 2013 in terms of sales and gross margin?

I think our view right now, Ivan, is that we are going see another year of a downward momentum in sales revenue and sales volume. And as we said earlier on in the call, we are going to keep you guys appraised each quarter of how we see that. Right now we have not got the best visibility for the full year, but our expectation is certainly a downward trajectory.

Okay, thanks.

No problem.

We will now take our next question from Chris Shaw from Monness, Crespi.

Hey, guys, how you doing?

Good morning, Chris.

Fuel Specialty, obviously a good quarter there. I was just trying to figure out, sales were down 7% in Q3 and then up 7% in Q4. Was there any -- did sales get pushed back into Q4? I mean, you reported really strong sales, both I guess in the US and in Europe and the Middle East. I just -- I wouldn't have I guessed that going into the quarter from what happened last quarter. I'm just trying to figure out what exactly the trends are there. Should we be looking at it on a full year basis or half year basis? Is there a good way to track maybe -- is there anything that correlates? Is it refinery utilization or miles driven? I'm just -- quarter to quarter I'm having a hard time figuring out what goes on in that business?

No problem, Chris. Part of it was an order pattern. I think part of it was as well, if you recall in the two previous quarters, we said we had business closures that were going to be kicking in in Q4 and into part of 2013? That was part of it as well. So that is we you saw the uptick. You have is seen the diesel -- actually, it was [emarket set] -- has been fairly steady if not a small uptick compared to gasoline. But it's more from pattern as well as new business closures.

Okay. That makes some sense, all right, thanks. Then on Strata, if you paid $50 million-odd for it and -- given what the multiple you paid, so it's -- last year's EBITDA was probably $9 million to $10 million? Is that right?

A little bit north of that, Chris. And you are probably trying do the math, and there is some deferred consideration yet to go. And I think once we file the 10-K, have a look at some of the detail in there and that should help you understand the deal a little bit more.

Great. So if you -- I know you maybe hinted in the past, but you pull out the Oilfield chemical business from Fuel Specialties in a separate segment. Would Fuel Specialties still have 30% gross margins do you think?

Yes, they would.

Okay. That's all I have. Thanks.

Thanks, Chris.

We will now take our next question from Christopher Butler from Sidoti & Company. Please go ahead, your line is open.

Hi, good morning, guys.

Good morning, Chris.

Just staying on Strata for just a second. The margins in this business are fairly substantial. Could you talk to the sustainable of those over time?

Yes, Chris, I mean, the Oilfield is a very profitable business, both at the gross margin level and the EBITDA return. We see no reason why we can't maintain those margins, and we hope as we expand our knowledge base and our customer base that we will be able to see some expansion across all of our product range.

And looking at the Fuel Specialties business, you talked about some of the new you business that closed here in the quarter. If we are looking at the December quarter, normally the -- you see gross margin improvement because of increased heating fuel with the mild winter. Is the new business making up that gap, and doesn't that give us a very bullish look as we look at the next year?

Yes, I think what was helpful, Chris, is we did have a late surge of cold weather, some in Europe and a lot of it in the Americas. And that helped out quite a bit. But another portion of that, as you did say, is a little bit of catch-up from the new business that we closed in the prior quarters.

And could you talk to the weakness that you saw in Asia?

We've analyzed Asia quite significantly, and I think most of it is just order pattern.

And then on the personal care side as well?

Yes, personal care side as well.

That is all I have. I appreciate your time.

Thank you.

Thanks, Chris.

We will now take our next question from [Paul Svetz]. Please go ahead, your line is open.

Thank you. Could you tell us what portion of the lead tetra ethyl business that remains is in the -- from the aviation industry.

Paul, we actually don't disclose that. That fits in part of our Fuel Specialities business, but what I can tell you is it's a pretty stable business, both in terms of volume and revenues, but itis only a small part of what we do in the Fuel Specialties area.

Thanks.

Thank you.

(Operator Instructions). We will now take our next question from Gregg Hillman from First Wilshire Securities. Please go ahead your line is open.

Good morning. Patrick, could you talk about -- the number one ethanol in the [engines], I understand it's creating problems with excessive water, and I was wondering whether you could do something to remediate that, or whether that would affect you in any way?

Yes, good morning, Gregg.

Good morning.

For a long standing period of time our product, which is the DCI corrosion inhibitor, has been the brute force behind ethanol in the fuels, and it remains that way. I think of all of the ethanol that's actually treated with the corrosion inhibitor, we've probably got 85% of the market.

You are right. There is more advent of water in the fuels, and we are getting -- and potentially seeing an uptick in business in that ethanol market. So it is a business that we follow very closely, obviously. It is dear to our heart, and it's a very good product for our Company. So it is similar to what -- things have not changed in the way we approach the ethanol market.

Okay. So it is material to your Company right today?

Yes.

Okay. And then the other thing I wanted to ask you, about diesel. I have been reading that more diesel cars are coming into the United States. Is that your take, and do you think that could move the needle any time soon for Innospec?

Yes, I mean, I -- there was a lot of talk early on -- five, ten years ago -- about dieselization of America. I'm not sure we're going to see it to the magnitude that was predicted, but yes, we are seeing more passenger vehicles move to the US with the new general style engines that we refer, when you talk about HPFI. But will it move the needle? I don't think to the magnitude you are talking about or thinking about in regards to dieselization of America.

Just an aside, are the diesel cars more economical for the consume versus like a gas -- natural gas powered engine?

Yes. Look at -- comparethe natural gas car engine, absolutely. And if you look at the longevity of the diesel engine and fuel mileage of the diesel engine, it is very difficult to beat.

Okay. And then, Patrick, can you just kind of talk about the regulatory front around the world? I'm sure you must watch it closely. Whether you anticipate any actions in the United States, Europe or elsewhere that might the affect you? For example, in China with the smog problem they are having, is China going to do something? Would that affect you? Or just anywhere for that matter?

I mean, I think as we always state, that regulatory is our friend in Fuel Specialties business, and we follow the same things that you guys see in the press, and probably even a little closer being that we have hands on the ground in those specific markets. It's just like India, it's just like China. It's a lot of countries who want to go to some Euro standard or US standard, but yet the government has not pushed the issue.

I think it's -- it bears good for us in the future that at some point in time these governments are going to push the standards and stay stable on them. But until then, we will remain in the markets, and obviously we will keep you guys abreast as to what is changing on those markets.

Okay. And then maybe just in a nutshell, exactly what is your presence in China right now?

Well, we have offices in China, and we have a nice business in China right now. Obviously we don't break down revenue by countries.

Do you work with any of the state oil companies in China?

We do.

Okay. Thanks.

That will conclude the question and answer session. I would like to turn the call back over to Mr. Patrick Williams for any closing or additional 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 show caused on discussed on the call, please give us a call. In the mean time we, look forward to meeting up with you in the next quarter. Have is a great day.

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