Innospec Inc (IOSP) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Innospec Q2, 2013 earnings 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, General Council. Please go ahead, sir.

Thank you, and good day, everyone. My name is David Williams, and I'm Vice-President, General Counsel in Chief Compliance Officer at Innospec Inc. Thanks for joining our second quarter 2013 financial results conference call. Today's call is being recorded.

As you know, late yesterday we reported our financial results for the quarter ended June 30, 2013. The press release is posted on the Company's website at 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'swebsite or our site for these and or 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 second quarter 2013 conference call. We are pleased to report that Innospec performed very well during the second quarter, maintaining first quarter momentum despite continuing challenging economic conditions and strong competition in key markets worldwide. We have delivered on our expectations and grown our businesses while maintaining margins in our core business areas.

Our close attention to working capital management, coupled with our strong cash generation capacity has resulted in a very strong balance sheet providing us with good financial capability. This allows us to remain well positioned to take advantage of growth opportunities and invest strategically in new technologies. We continue to build out our compliance programs and evaluate our policy on share buybacks and dividends.

Our fuel specialties business, once again, delivered an excellent quarter, and we are very pleased with our consistent performance in this group. We have developed momentum in our oil fields specialty business, and the integration of our recent strata controls acquisition is going well. Strata provides a state-of-the-art solutions to the oil and gas drilling operations for mud and fluid losses, and is a higher margin contributor to this business.

Fuel specialties AvTel business, as we anticipated in the call last quarter, did normalize in Q2. Overall, fuel specialty sales and margins improved, particularly in the Americas, where sales increased 10%. At the same time, our EMEA markets showed 13% sales growth, particularly important considering the continued sluggish fuel demand in the region.

Our business in the Asia Pacific region showed similar good top and bottom line performance during the quarter, with a 27% increase in sales. Performance chemicals results, as expected, were essentially unchanged year-over-year. Sales were a little softer than in the first quarter of 2013, but our key personal care business showed good progress with good underlying growth momentum, particularly in the Americas.

This has essentially been driven by our expanding new product pipeline. Fragrance ingredients also had a good quarter, but we remain watchful of market conditions. Meanwhile, our polymers and industrial business continues to be negatively impacted by the sluggish European economies, stopping demand and excess supply.

Our management group continues to monitor this market very closely, and discuss various product additions and other asset alternatives. Octane additives, as we have indicated regularly, is an industry that is inevitably winding down as remaining countries work towards the phase out of leaded gasoline. Our revenues were down 25% on prior year; however, visibility for the second half of the year has improved somewhat, with the expected confirmation of one contract.

Beyond that into 2014, the situation remains unclear. All in all, we had a fairly strong comparable quarter, both year on year and on a sequential basis. Our core operations moved forward in line with our plans.

Strong working capital management reduced our working capital by $6 million from Q1, and good positive cash inflows of $19.7 millionenabled a $4 million reduction in our debt. This provides flexibility for future growth and expansion opportunities. We remain in excellent financial health.

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

Thanks, Patrick. Turning to slide 6 in the presentation, the Company's total revenues for the second quarter were $185 million, a 4% increase from $178.5 million a year ago.

The overall gross margin increased slightly from last year, to 32.1%, driven by continued strong growth in fuel specialties on solid performance in personal care and fragrance ingredients within our performance chemicals segment. Our GAAP earnings were $0.71 per share, up from the $0.65 per share reported in last year's second quarter.

On an adjusted basis, our earnings per diluted share was $0.75, whichexceeded consensus analyst expectations for the quarter. EBITDA was $25.8 million, and net income, up $17.1 million, up $1.6 million from the second quarter of 2012.

Moving on to slide 7, revenues and fuel specialties for the second quarter were $126.2 million,10% higher than the $114.5 millionreported in last year's second quarter. The increase was primarily driven by 6% higher volumes and a 3% uplift from the inclusion of the Strata business, with a richer sales mix of adding one third of 1%.

By region, revenues increased 10% in the Americas, 13% in EMEA and 27% in Asia Pacific. As previously predicted, AvTel in the second quarter sales normalized. Margins in the segments increased by 1.8 percentage points last year, to 32.1%. Gross profit was $40.5 millionand operating income was $19.2 million,up from last year's $16.9 million.

Turning to slide 8, performance chemicals revenues in the second quarter were essentially unchanged at $44.5 million. Volumes increased by 3%, primarily driven by personal care and fragrance ingredients, as these sectors delivered strong sales momentum across all regions, which was offset by 3% lower pricing, and a weaker sales mix. Currency effects reduced reported sales by 1%.

By region, revenues increased by 3% in the Americas. Asia Pacific sales were on par with last year, and revenues decreased 6% in EMEA, primarily due to lower industrial demand. Gross margins fell slightly to 25.4%, a result of lower selling prices and a weaker polymer sales mix. Performance chemicals operating income for the quarter was $6.5 millioncompared to the $7.3 millionreported in last year's second quarter.

Moving on to slide 9, net sales in octane additives for the quarter were $14.3 million,compared with the strong comparative quarter of $19.1 million,a year ago. This represents a 25% decline, and is in line with expectations. The segment's gross margin improved to 53.1%, up from last year's 51.8%.

Gross profit was $7.6 million in the quarter. The segment's operating income for the quarter was $6.1 million,compared to $8 million last year. Based on the limited visibility we have, we now expect second half revenues will be similar to the first half year revenues subject to customer order patterns.

At this point, we have no visibility for 2014. Turning to slide 10, corporate costs were $8.5 millioncompared to $7.8 million a year ago. The increase was primarily due to higher legal and Hunts compliance and acquisition related costs, partially offset by lower share-based compensation accruals.

As expected, the costly pension charge was $0.7 million,compared to $0.1 million pension credits a year ago. Our effective tax rate for the quarter was 18.2%, compared to 20.5% in 2012 second quarter, and for the full year, we expect it to be approximately 20%.

Moving on to slide 11, cash flow from operations remains strong in the second quarter as we generated $19.7 millionin operating cash flow, a 60% increase from the $12.3 millionrecorded a year ago, reflecting good control of working capital. As of June 30th, we had cash and cash equivalents of $59 million, and debt of $33 million, providing us with a healthy net cash position of $26 million. And 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 half of 2013, and we continue to view the second half of the year with cautious optimism. We are well positioned, both financially and operationally, for continued growth for the remainder of the year, although we continue to closely monitor markets around the world.

I continue to be very proud to lead a dynamic organization, which focuses on its customers and stakeholder needs, in a safe and efficient manner. Our success in bringing innovative technology to the market combined with our expanding global footprint makes me confident that our strategy is robust. Fuel specialties continues to perform exceptionally well, and we have every confidence in our business prospects and capabilities here.

Having said that, we should once again note that this is a highly competitive market, particularly with respect to tender offers. We have a good track record in tenders and we continue to feel confident in our prospects, especially with our quality of products and high level of customer service. We are satisfied with the continued evolution and accretive contribution of our Strata Controls business, and we are still actively pursuing acquisitions in both the oil field specialties and personal care sectors.

We remain confident in the resilience and continued growth prospects of our personal care business, and are taking a close look at business strategies and alternatives in the weaker polymers and industrial business sectors of our performance chemicals group. Finally, and mindful of our continuing financial strength and balance sheet position, our board continues to evaluate its alternatives in returning value to our investors, including share repurchases and dividends.

We also continue to invest in our business in R&D for new products and technologies that deliver to our customers' needs, and in maintaining world-class compliance systems. 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 pause for just a moment to allow everyone to signal. We will now take our first question from Jon Tanwanteng of CJS Securities. Please, go ahead.

Good morning, guys. Nice quarter, and thank you for taking my questions.

Good morning, John. (Inaudible).

You had great gross margins, especially in a difficult macro environment. I'm just wondering how sustainable they are by segment, and particularly for fuel specialties if you are planning to break out oil field into its own segment later.

Sure. We have no information, right now, that suggests any change in margins up or down. I think we are, obviously, looking at raw materials, continuing to evaluate our position there. As of right now, and under the current conditions and contracts that we have, we feel that those margins are sustainable throughout the rest of the year.

Okay. Great. And then can you talk a little bit more about the timing and the scope of the two potential acquisitions that you mentioned? And if you are planning (inaudible) cash and/or debt?

Yes. Sure, John, we will talk about both. If you recall the last couple of quarters, we have been looking at acquisitions, one particularly in oil field and just as of recently, one in the personal care sector, as well. Our view is that both will close, and I hope will close in Q3. As you are all very well aware, we are very stringent on our acquisitions, and we are not afraid to walk away from a deal if it's not fit for purpose for our organization. But I do think that the two we have in the queue, right now, have a very good probability of closing sometime here in the next 60 days.

Great. And then just for Ian, you had a $1 million other expense. I'm just wondering what that was.

Sorry, John, say that again. That was what? $1 million in --

In other expenses in the quarter.

Other expenses. Yes, that would be foreign exchange.

Okay. Got it. And thenone final one for Patrick, maybe. Do you see any potential impact to your fuel specialties business from a potential relaxation of the ethanol mandate in the US?

You know, we have monitored that quite a bit, John, and I think that we are still in that stage. You have to remember, we treat a lot of that ethanol, as well, with corrosion inhibitors. So, we are pretty confident right now that whether it goes -- whether the mandate or not, we are still well positioned in the marketplace.

Okay. Thank you very much, guys.

Thank you.

Thank you, John.

We will now move to our next question from Andrew Dunn of KeyBanc Capital Markets. Please, go ahead.

Good morning, guys. Thanks for taking my questions. It looks like your growth rates across regional markets and fuel specialties was really solid. I was wondering if you could give a little more color on -- it does seem like you are growing faster in the overall markets, and maybe if you are taking some share. You are also, particularly, looking at Asia PAC,, you know, the 27% up that you reported is a pretty big swing from, I think, the down 1% last quarter. Maybe you could comment on that, as well.

Yes. Some of it is timing of orders, Andrew. Some of it is product mix, and some of it is, you are correct, a taking of market share. Albeit, there is some slow demand in some of the countries in Europe. We are still seeing pretty steady demand in the Americas, and fairly steady demand in Asia Pacific. You know, Asia Pacific is always a tricky one. You know, we monitor it very closely. I do think a lot of that was a particularly, probably order pattern, more than anything else, but I think that we are properly positioned in strong positions in all three regions, and I think that we have definitely taken market share in all three regions.

Great. And just one follow-up. You know, with the time you've just laid out for your potential acquisitions, you know, if those didn't get done in 3Q or 4Q, would we expect to see a lot more certainty around actions on a share purchase or dividend, given the discussions you have laid out?

Yes, I do. And quite frankly, with the financial situation we are in, there's no reason why we can't do both acquisitions and potentially buybacks or dividends in the future sometime this year, as well. You know, we are very transparent with our investors, as you guys know. We continuously talk about dividends and buybacks. The board being -- our board is very up to speed on what we want to do as a management team, and I think that we're well positioned to potentially, you know, do some form of dividend and both acquisitions.

Great. That's really helpful.

It's a just a function of timing is all it is.

Okay. Understood. Thank you for taking my questions. I will hop back in queue.

You're welcome.

Our next question comes from Christopher Butler of Sidoti & Company. Please, go ahead.

Hi, good morning, guys.

Good morning, Chris.

Good morning, Chris.

Just coming back to the margins on fuel specialty, could you give us a little bit more detail on what you are seeing on the raw material side of the environment, and, you know, it looks like you've got some price increases here in the quarter. Is pricing environment in decent shape in that regards, as well?

Yes. And if you look at raw materials, Chris, there has been a little rise due to the fact that you have watched crude oil of [rent] come to an equilibrium. So we have seen -- you know, crude was sitting at average of $90 a barrel, give or take a little bit of that in Q1. Now, we're upwards of over $100 a barrel in Q2, but there hasn't been a major swing, Chris. We're not seeing the drastic swings we have in the past where you saw WTI or Brent swinging 20% 30%, and obviously swinging raw materials the same. So, it's been fairly steady. We might see a slight increase in raw materials going into Q3, but I don't think it's anything that's negatively going to affect our margins longer term.

And shifting gear towards corporate costs. Last quarter, you indicated that you were going to see a couple million dollars of increased legal fees this time around. You did mention that you saw some, but did you see the full magnitude of that here in this quarter? And if you did, where did you see savings that kept corporate costs in and around historical averages?

Yes. Chris, if you recall, on the last call we did, on Q1, we did say that we continued to see higher legal and compliance fees in Q2, Q3, and Q4. And that was certainly the case in Q2. We incurred about an extra 2 -- just over $2 million of legal and compliance costs. Where we saw some of that offset was against some of our share base compensation, and some of our longer term incentive plans. So, there was a credit there against some of the legal costs.

And looking at the polymers business, do I get a sense that there's a change in rhetoric, that this may not be a business that you want to hold long term and might be part of a portfolio shift?

No. Not on the polymer side. What we are really doing there is looking at just alternative markets for some of our polymers if fuels can't take the majority of that polymer. So, no, it's still very strategic to us. So, no. It's still very strategic to us. It's not a situation where we are looking to divest the asset. That's probably all I have to say there, Chris.

And just touching on the octane additives, you said that you had, you know, one contract lined up for the back half of the year. Is that one out of how many? Is it -- you know, one per country that you have, you know, ongoing at this point? And are you less certain looking out to 2014 than you were? It sounds as if you are extra cautious. Am I reading that right?

No. I mean I would say, realistically, there's probably two countries left in Mogas. We've got a contract for one country, which gave us a little more clarity going into 2000, the rest of 2013, and the majority of 2014, which is on the positive side. The other contract is still in the unknown, and that's why we still keep our cautious comments around Mogas.

All right. I appreciate your time.

Thanks, Chris.

Thanks, Chris.

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

Yes, good morning, gentlemen.

Hi, Gregg.

Pat, can you talk about how your oil field chemicals are differentiated from those of the competitors like Multi-Chem, for example?

Sure. Sure. You know, I think it's a fairly small business right now, as we have discussed, and it really is, if you go back in history of the Co., Gregg, it's very similar to how I built this business when we started it in the early '90s. We differentiate ourselves via technology, as much as possible, but more importantly, and just as important, we do it through customer service and being on site, on demand 24/7.

So, I think what you have seen is we are able to compete against the majors due to the fact that we are small enough to do these things, and don't get caught in the corporate gridlock. I think, as well, is that we are really focusing on technology. I think you've got to make a difference in this market, via technology, and if we can treat certain crudes and certain problems at the well head with either new technologies or modification of technologies, that's where we stand out.

The biggest issue from a growth standpoint in that market is that we've really got to get more breadth. We've got to get a little more in one more acquisition to push us to that next level, and, obviously, that's what we are working on today. But I'm very satisfied with where we are and where our margins today, but I want to get there, obviously, a lot faster. And in doing some of these acquisitions and putting the proper strategy in place should enable us to do that.

Okay. And just kind of following up on -- do you have any products in oil field that are more environmentally friendly, maybe that are, I don't know, break down more easily than like acrylic acid or something else that's currently being put down the hole?

Yes. I mean, I think if you look at the industry as a whole, everybody is looking at things that are more environmentally friendly, and that's the focus of our R&T when you start pinpointing oil field specialties. Right now, if you run a lot of the test matrix that have any water interactions down hole, there's a little bit of a misconception in the marketplace that these are bad for the environment.

So, you've got to be very careful in what is perceived in the marketplace as to what is reality. But yes, we are continuously looking at, Gregg, what will be the most environmentally friendly product set that don't necessarily lose a lot of the performance characteristics that you have today, whether you are going vertical or horizontal. And we're looking at that today, either buying into or developing ourselves, and that's going to be a continuous process.

Okay. Thanks.

Thanks, Gregg.

We will now take a follow-up question from Andrew Dunn of KeyBanc Capital Markets. Please, go ahead.

Hi, guys. Just one more follow-up on your oil field business. Can you tell us if you picked up any additional customers or trial projects in the quarter? And just one more part to that, as you are focused on acquisitions in that area, you know, you would say that maybe as you wait to fold in another potential part of that business, you may have held off a little bit on looking for new customers or is that not really how it's playing out right now?

No, that's not how it's playing out. We are continually focusing on new customers. You've got to remember there's a balance, Andrew, of the LCM business that we bought, which is more upstream at the well head for loss circulation, and then the production side, which is after you have completed the well.

So, we are continuously focused on the production side, going after new customers, and on the LCM side, as well, not only fixing and more professionalizing that business for longer term growth, but really looking at global enhancement of that product line. So, it's really a combination of both.

And were you able to pick any up that you can tell us about in the quarter or nothing that you can mention?

Yes, we don't give specifics about customers but, yes, we have definitely been able to pick customers up.

Okay. Great. Thank you. That's helpful.

Thank you.

As there are no further questions at this time, I would like to hand back to Mr. Williams for any additional or closing remarks.

Thank you all for joining us today, and thanks to all of 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 at any time. We look forward to a meeting with you again next time and next quarter. Thanks, and have a good day.

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