Innospec Inc (IOSP) 2013 Q3 法說會逐字稿

Good day, and welcome to the Innospec Q3 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 Counsel. 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, Inc. Thanks for joining our third 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 September 30, 2013. The press release is posted on the Company's website, www.innospecinc.com. An audio webcast of the call and 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 statement. 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.

And with that, I will turn it over to you, Patrick.

Thank you David. Welcome everyone to Innospec's third quarter 2013 conference call. This was a very active and positive quarter for Innospec, highlighted by our core business increases in both sales and gross margins year-over-year. We have also had successful completion of two related acquisitions for our personal care business, and a more recent one in oilfield specialties. In addition the Board's institution of a new cash dividend policy and the declaration of our initial payout of $0.50 per common share, which combines two semi-annual payments for 2013.

Overall we are pleased with our operating performance in the third quarter. We have met or exceeded our expectations in our two core businesses, fuel specialties and performance chemicals in the face of continued strong competitive and economic pressures. We have good momentum moving forward in the fourth quarter, positioning us well for the year end and into 2014. Once again and despite a prevailing tough trading environment, Field specialties delivered impressive performance recording 8% top line improvement over last year. The drivers of this performance include the integration and expansion of Strata Control, and our long time focus on superior customer service and technology.

Continued attention to working capital management and cost control has supported the financial and sales performance. We expanded our fuel detergents product line, which we feel is amongst the best in the world, and our fuel specialties new product pipeline remains extremely strong. As you know, we entered the oilfield specialties business recently on a low key basis, with the intention of growing sales organically with our existing technologies, and looking for suitable acquisition targets that complimented our business model, our metrics, and our culture. We have made good and steady progress in building out this business.

A few days ago and after quarter end, we announced that we had concluded the acquisition of Bachman Services Inc., and its affiliated companies from its private owners. This is a very important deal for Innospec. We have said for some time that we needed transformational transaction to move us towards critical mass in the oilfield specialties business. Bachman has a similar customer service culture, and brings a strong technology base and market position. The Bachman acquisition has been funded through Innospec's existing revolving credit agreement with its banking consortium, after successfully negotiating an amendment to that facility during the quarter, increasing our line from $100 million to $200 million. We expect Bachman to be immediately accretive to Innospec, and are looking forward with confidence to broadening our presence in the oil and gas segment of the chemicals market.

Performance chemicals continues to offer good growth prospects, but sales in this particular quarter were a little disappointing. Fragrance ingredients performed well during the quarter, despite weak demand in the polymers market, overcapacity and pricing pressures continue to undermine margins. However our strategic core personal care continues to perform well, and most importantly, we concluded the acquisition of the Chemsil and Chemtec during the quarter to enhance our global platform for this business. Our sales performance benefited immediately from the positive contributions, and we plan to invest further in expanding both businesses. Chemsil develops and markets silicon based formulations for personal care, and Chemtec distributes a broad line of personal care ingredients, which have already been recognized by our customers as a natural and welcome extension of our product portfolio.

We are very happy with the additions of Chemsil and Chemtec to the Innospec family. The integration of these businesses and their key people into the Innospec management team is going very well. As anticipated both businesses have been immediately accretive. This also expands our technology and our customer base in this key market. Our performance chemicals new product pipeline particularly in personal care is very strong, and our focus on customer service remains our principle priority. Our octane additives business as you know continues to wind down, with virtually no visibility in this business beyond year end. Third quarter octane additive results were below expectations, principally due to the phasing of orders, and there will be some catch-up in the fourth quarter.

Now I will turn the call over to Ian Cleminson who will provide some detail on the financial performance, after which I will return with some final comments prior to taking your questions.

Thanks Patrick. Turn to slide six in the presentation. The Company's total revenues for the third quarter were $192.8 million, a 5% increase from $183.4 million a year ago. The overall gross margin increased from last year to 29.8% driven by continued strong growth in fuel specialties, and a solid performance in the personal care markets within our personal chemical segments. Our GAAP earnings were $0.58 per share, compared to the $0.65 per share reported in last year's third quarter. On an adjusted basis, our earnings per diluted share were $0.65 on a par for the year ago period. EBITDA for the quarter was $23.6 million, an increase of $3.4 million over last year. Net income for the quarter was $14 million.

Moving on to slide seven, revenues in fuel specialties for the third quarter were $137.4 million, 8% higher than the $127 million reported a year ago. The increase was primarily driven by 4% higher volumes, a 2% favorable currency impact, as the euro strengthened, and a 2% uplift from the inclusion of the Strata business. By region revenues increased 9% in the Americas, and 13% in EMEA. Sales in Asia Pacific fell 12%, driven by the loss of a gasoline detergent contract. The [Octel] business performed as expected during the quarter. Margins in the segments increased by 2 percentage points from last year to 31%, gross profit was $42.6 million, and operating income was $22.3 million, up from last year's $19.6 million.

Turning to slide eight, revenues in performance chemicals for the third quarter increased 2% to $47.9 million. Performance in the personal care segment was stronger and consistent on the Chemsil and Chemtec acquisitions contributed a 6% sales uplift. Excluding the acquisitions, underlying sales across performance chemicals fell by 4%, as volumes reduced by 4% on lower pricing of 1% was offset by a 1% favorable currency impact as the Euro strengthened. By region revenues increased by 5% in EMEA, while sales in Americas and Asia Pacific were on par with last year. Gross margins improved to 23.2%, performance chemicals operating income for the third quarter was $5.6 million, unchanged from last year's third quarter.

Moving on to slide nine, net sales in octane additives for the third quarter is $7.5 million, compared with $9.6 million a year ago, primarily due to phasing for the shipment carrying over to the fourth quarter. The segment's gross margin was 49.3%, a sharp increase from 36.5% in last year's third quarter, and gross profits was $3.7 million. The segment's operating income for the quarter was $2.1 million, up from $1.5 million last year.

Turning to slide 10, corporate costs for the quarter were $9.4 million compared with $9.1 million a year ago. The increase was primarily due to higher legal, enhanced compliance, and acquisition related costs, offset by lower share based compensation accruals. As expected, the quarterly pension charge was $0.7 million. A portion of these legal costs related to the [Algaiyud] lawsuits which we referred to in our last 10-Q. We reiterate our position that we regard this without merit, and will continue to fight it vigorously. The current year to date tax effective rate is 20.9% compared to 18.8% last year. We have been implementing a new ERP system which went live in the US in the quarter, the system is a significant to the investment through which we expect to improve efficiencies in order processing and collecting.

Moving on to slide 11, we closed the quarter in a net debt position of $32.7 million. As an additional $65 million of revolving credit facility was drawn down in order to fund the acquisitions of Chemsil and Chemtec, manage working capital expansions and the capital expenditures. As Patrick mentioned, we concluded the acquisition of Bachman after quarter end. We financed this acquisition by drawing down further on our banking facility, which we extended from $100 million to $200 million in the quarter. As of September 30th, we had cash and cash equivalents of $60.3 million, and debt of $93 million.

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

Thanks Ian. To conclude, we are pleased with the third quarter operating performance at Innospec, and feel that we are well-positioned both operationally and financially for future growth. We have made key strategic acquisitions in personal care and a further important acquisition since quarter end in oilfield specialties, that we believe will open up new and highly profitable growth channels for the Company. Our immediate objective is to successfully integrate all these businesses into our global platform , and to realize the gross synergies and scale that we have identified. We continue to be in a sound financial position, even after an active acquisition phase, as our business continued to generate strong cash flows supported by our successful refinancing.

Having returned cash to shareholders in 2011 in the form of buybacks, and in 2012 in the form of a special dividend, we have now instituted a new cash dividend policy. We see this as a natural extension of our capital management program, and this policy is a clear expression of our Board and management's confidence in the future of Innospec. At the same time while we are confident about our business prospects in fuel specialties, oilfield specialties and performance chemicals we continue to closely monitor our markets worldwide, as we deal in a highly-fluid economic environment.

I am also pleased with our Annual Sustainability Development Report which was published during the quarter, this shows continued positive trends in the safety of our operations, the energy and waste we produce, and the impact of our operations on the environment. We continue to invest in sustainability at Innospec to bring about further improvements. We continue to invest as well in research and development for new products and technologies, and in the latest IT systems to make us more efficient.

Now I will turn the call over to the operator, and Ian and I will answer any questions you have.

Thank you. (Operator Instructions). We will pause for a moment to allow everyone to signal. We can take our first question which comes from Ivan Marcuse of KeyBanc Capital Markets.

Hi guys, thanks for taking my questions.

Good morning Ivan.

Good morning. Congratulations on the Bachman acquisition. Can you give a little bit more details about this acquisition? How does this add to your overall portfolio, is this more on the drilling side or on the production side and is the profitability of this business in line with your existing oilfield chemicals business, and then lastly, you mentioned in the release about synergies, where are those synergies, are those in terms of putting plans together, or is it more on the corporate side? How do you see this business growing and adding to profitability over time?

Sure, no problem Ivan, I will take them one at a time. The first question, if you look at the business, it is more on the production side, if you look at the Strata acquisition which we made in 2012, that was more on the drilling side. We are naturally basically hedging against gas and oil, as well as if there is a drop in oil prices, you still have to have production. You still have to have oil wells that are already drilled and fracked, producing. This is more on the production side. There is some in the fracking side. It is stimulation fluids that this business has, but it is primarily production. It has primarily been located in the Midwest, primarily Kansas, Oklahoma, Texas. Our plan is to expand its geographical region, and also take the business platform, the technologies that they have into our global platform.

We have talked about this one for a while. And it really gives us the ability to have a little more girth on that side of the business, and product expansion on that side of the business, to what we think can grow in double-digits and healthy margins. The margins in that business are very similar with the fuel specialties and oilfield margins that we have today. So they are right in line, very healthy margins.

I think the product line and with our technology portfolio, as well as with our synthesis and Ph. D chemists that we can expand that product line, and I think we have naturally hedged ourself against a negative run down on crude prices if it happens, as we have already seen it come down to about $93 in WTI. But we are very confident that this was a very good acquisition. The team is staying on that we currently have, that we bought, and we are just going to expand the business.

So you did Strata which was about $20 million I believe about a year ago. Is this business in whole now like a $150 million business, or whereabouts is it in total (multiple speakers)?

Just north of $100 million.

Just north of $100 million?

Yes, right now that is going to sit still in fuel specialties and we will decide at some point in time, if and when the right time is to pull that out, because obviously we don't want to have added costs to the business. If we can keep those synergies together, we think that we would not add costs, plus we could use some of those synergies in line. This business to answer your last question was not a function of doing it for synergy cost, it was doing it for growth. There are simple synergy cost, but most of this was really for growth, and globalizing the platform that we have in place.

How much debt did you have to add through this acquisition?

Ivan, we drew down an additional $45 million to do this. A portion of it was in stock; the rest was in cash. As you know during the quarter, we expanded our banking facilities up to $200 million, so we still have got a little bit of headroom in there to run our business, and then maybe take the next step in the acquisition trail as well.

Great, and then --?

To further what Ian was saying is that we are always firm believers especially in buying privately held companies, that they should have stock ownership for multiple reasons, and you guys can use that for what you want. Obviously you can pretty much tell what we paid for the business, but 75% of it was cash, 25% was stock, additional to that we believe it is a strong transaction for our Company, and moving forward we want to make sure that we delever pretty quick.

Great. A couple of quick questions. The dividend, just to make sure I heard you clearly, you said $0.50 for our annual, so is that to imply that the regular dividend going forward all else equal will be $0.25 every semi-annually, or is that $0.50?

No, it is $0.25 semi-annually. That will be the same going into 2014. Obviously over time we would like to bump that up, but that is where the start is right now.

Great, last question that I have, and I will come back in the queue. You guys have been very active in the acquisitions. How do we look at the pipeline now going into 2014? Are we going to take a breath here and integrate all these businesses, or do you still remain fairly active in the acquisition arena, trying to add to your core businesses further?

No, I think it's time for us to take a break for multiple reasons. It is one thing to make an acquisition. It is another thing to make the acquisition successful. We have got integrate it appropriately. We have got to put the proper operating procedures in place. We have got to move it into our global platform, and I think to do that it is going to occupy a lot of our time.

As you have just said, we have made quite a few acquisitions. It is time to take a break. It is time to make sure these businesses are appropriately managed, and I think secondarily to that to help pay down the debt, and then we will look at where the future is. Look, we won't shut down the pipeline. As you know when you shut the pipeline down it takes you a year to get back in, but we will definitely slow it down, and really be critical on making any acquisition moving forward. I think I am more worried now about let's make sure the cash flow is there, the CapEx is there, the integration is in place. Pay down our debt, delever a little bit, and be healthy again moving forward for the next phase of Innospec.

Great, thanks.

Thanks, Ivan.

Our next question comes from John Tanwanteng of CJS Securities. Please go ahead.

Good morning, you actually have Arnie Ursaner backing up John this morning. A couple of quick questions. In your prepared remarks you indicated In the octane piece some catch-up in Q4. I appreciate the business is lumpy by quarter, but overall are you expecting the second half of the year to be in line with the first half of the year on octane?

Yes, we are broadly expecting the second half to equal the first half still.

Okay. Next question is a brief one on the financial side, your SG&A and R&D were much higher than we had modeled, and you did indicate that you might have had some unusual or atypical items embedded in that, can you separate those out a little bit for us?

On the call we talked a little bit about the acquisition costs of completing the Chemsil and Chemtec acquisitions. We identified those on the front of the earnings release that we put out last night. That was just over $1 million. We are also running a little bit higher on legal and compliance costs. We have been talking about this for a number of quarters where we are accelerating our compliance efforts, and also we are running some legal cases as well. Those are temporarily a little bit high. We expect them in 2014 to start coming down, so we expect to see our overall costs come down.

On the R&D side, we have been pushing a lot heavier on the product testing, and expanding some of our R&D functions. We see that as a real positive thing to do, and we have [been getting] a lot of leverage out of those costs. Offsetting some of that, we do have slightly lower stock based compensation than we did last year, but we need to be mindful that the stock price can move down from quarter to quarter, so that can bounce around a little bit. That in a nutshell, Arnie, that is where we are.

You are rolling out your ERP systems, did you have some incremental amortization of that in the quarter?

We have just started to amortize that, just starting in Q4, that will start to come through.

What is the magnitude of that?

On the US side, it will probably be about $1 million to $2 million per annum, but as we roll it out globally that level will increase, and we will keep you abreast of the changes we make there.

I have a question for Patrick. performance chemicals is usually a very steady business. You are designed into products that are stable, you tend to not get replaced very easy for formulation and other reasons. You saw a 4% organic decline. Can you comment a little bit more on the macro-trends you are seeing in performance chemicals, and your outlook for the rest of the year?

Sure, if you look at performance chemicals, broken up into three segments, personal care, fragrance, and polymers, but I think you are more specific around personal care, you are correct, it is a very stable business. Once you are formulated in, it is very tough to formulate you out. We did see some order pattern differential in Q3. It is not alarming to us right now. We think we will pick a little bit of that up in Q4. I think the 4% decline pre-acquisition, to me was more of a phasing situation than it was anything else.

We continue to see uplift in our products and technology. We continue to see ourselves expanding to the customer base. So I think as you just pointed out, we think it is more of a phase order than anything else. It is not alarming to us at this time.

Thank you very much.

Thank you.

(Operator Instructions). Our next question comes from Christopher Butler of Sidoti & Company. Please go ahead.

Good morning guys.

Good morning, Chris.

Can you speak to the competitive and economic pressures in fuel specialties that you cited in your prepared remarks?

Yes, this is a very competitive environment, fuel specialties. You have got six major players. Everybody is fighting for the same business, not necessarily with the same technologies. But it has always been a competitive game. It is fairly responsible players in the marketplace, but it is a competitive environment.

So that competitiveness has not changed whatsoever since we have been in this business. I think where we did see a little pull back as did he lose a gasoline tender in Asia Pacific, which pulled us back a little bit, but I think as you can tell, we are growing the business more than we are losing business. A lot of tenders that we have we have picked up this year, which will carry us extremely well going into 2014. We still see very good growth heading into 2014.

Good, so it sounds like that contract should be replaced at some level here fairly soon then?

That is correct. If it has not already been replaced.

And can you give us some calendar on your raw material environment with oil up during the quarter, but subsequently coming back down again? Is that going to help you, or is that indicative of softening demand for oil and fuels?

I would say it is pretty stagnant right now. Usually it is a $10 differential that will start a swing up or down. We probably went from the quarter from a $105 price on WTI down to a $93, $94 price on WTI right now. We haven't started to see the relief yet. I think if you start getting around that $90 range, we will start seeing some relief on raw materials. But we are not seeing it yet. I think my cue is to always watch crude oil, because that is a very good benchmark for our raw material.

It sounds like you are thinking of this as a supply issue, rather than a demand issue bringing the prices down?

Yes.

And finally, big picture, do you have the platform that you need in oilfield services in order to effectively compete, or as we look forward say three years, are you going to want to make additional acquisitions to fill out a portfolio?

I think if you look at where we are today we definitely have the platform to compete now. And you will see that as the years move forward. But we have intentions to continue to grow this business. Right now organically, and I think at some point in time you will see obviously us looking again at growing this through strategic acquisitions.

There is a lot of growth there for this business. There is a lot of room for technology players like ourselves. We just want to make sure that we integrate the businesses that we have bought, and to make sure that we get them into our global platform. And then obviously we will make sure technology is right on top of that, and then we will strategically look at acquisitions thereafter.

I appreciate your time.

Thank you.

That will conclude today's question and answer session. I would now like to turn the conference back to 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 discussed on this call, please give us a call at any time. We look forward to meeting and talking with you again early next year. Bye-bye.

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