Innospec Inc (IOSP) 2013 Q4 法說會逐字稿

Good day and welcome to the Innospec Q4 2013 Earning 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 and General Counsel and Chief Compliance Officer at Innospec. Thanks for joining our fourth quarter and year-end 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 December 31, 2013. The Press Release is posted on the Company's website, www.innospecinc.com. An audio webcast of the call and the slide presentation on the results are, also, now available and will be archived on the website.

Before we start, I would like to remind everybody that certain comments made during this call might be characterized as forward-looking statements under the Private Securities Litigation Reform Act of 1995. Generally speaking, any comments regarding Management's beliefs, expectations, targets, or other predictions of the future are forward-looking statements. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from the anticipated results implied by those forward-looking statements. These risks and uncertainties are detailed in Innospec's most recent 10-K Report, as well as other filings we have with the SEC. We refer you to the SEC's website, or our site, for these and other documents.

In our discussions today, we've 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 presentations that follow, a copy of which is available on the Innospec website. With us today from Innospec are Patrick Williams, President and Chief Executive Officer; and Ian Cleminson, Executive Vice President and Chief Financial Officer.

With that, I'll turn it over to you, Patrick.

Thank you, David. And welcome all of you to Innospec's fourth quarter and full-year 2013 Conference Call. We are very pleased to report a record fourth quarter with our core businesses performing very much as we had expected, despite a tough economic environment. I'm pleased to note that all four acquisitions that we made during the last twelve months, made an important and positive contributions to both Fuel Specialities and Performance Chemicals, in both revenue and operating income.

We have been reasonably satisfied with the early phases of integration and management of our acquired companies. This has been going to planned, and particularly notable that our headcount has been backed up to near 1,100 people, reflecting the transformation of the Company since the last time we reached this level in 2002. We will continue to watch our manpower and cost closely, to insure that they are a good fit with our requirements and commitments.

We have, also, been able to realize the excellent strengths of our middle Management Team, allowing us to promote within. Where we've had to, we have augmented our Team with a small number of high-quality of experienced individuals to build upon our professional skill base, and we look forward to their contribution to our growth. For the near term, we will continue to concentrate on integrating these operations into our global platform, while maintaining a watchful eye on external growth opportunities for future consideration.

Our Fuel Specialities business enjoyed record sales in the fourth quarter, with solid performance in all regions. Our underlying business met our expectations with a good AvTel performance and additional revenues of $12 million during the quarter from our Bachman and Strata acquisitions. Importantly, we maintain an excellent gross margin of over 31% during the quarter, and close the gear at 31.9%; a 1.8 percentage point improvement to date.

As we move toward critical mass in our Oilfield Specialities, we see good opportunities to leverage the synergies of technology, as well as sales and operating strengths of our Fuel Specialities organization in the oil and gas markets. As part of this focus, we opened up a sales office and support office in Houston, Texas, during the quarter.

Our Performance Chemicals business grew 26% in the fourth quarter, driven by excellent contributions from both Chemsil and Chemtec, two of our acquisitions we made in 2013. We also enjoyed higher volumes in our underlying businesses, primarily in our Personal Care and Fragrance markets. We also recorded good improvement in both gross margins to 25.7%, as well as operating income in our Performance Chemical segment.

Our Personal Care business continues to develop well, and our product pipeline looks particularly strong as we enter the new year. In Octane Additives, we recorded a strong quarter, as we predicted, with good volume carried over from the third quarter. We have one remaining account in Motor Gasoline, and while we do expect business activity from this country in 2014, visibility beyond 2014 is still unclear at this time.

I will now turn the call over to Ian Cleminson, who will review our results in detail, and then I will return with some further comments on the year, as well as the outlooks and strategies moving forward, then we will take your questions.

Thanks, Patrick. Turning to Slide 6 in the presentation, the Company's total revenues for the fourth quarter were a record $241.6 million, a 13% increase from $213.7 million a year ago.

The overall gross margin increased from last year from 30.9%, driven by improved revenues and margins in Performance Chemicals and solid contributions from our recent acquisitions.

Our GAAP earnings were $1.17 per share, compared to the $0.47 per share reported in last year's fourth quarter. On an adjusted basis, our earnings per diluted share were $1.06, up from the $0.83 per share reported a year ago. EBITDA for the quarter was $38.7 million, a 35% increase over last year. Net income for the quarter was $28.7 million.

Moving onto Slide 7, revenues in Fuel Specialities for the fourth quarter were $163.8 million, a record high, and 6% higher than the $155 million reported a year ago. The increase was primarily driven by 2% higher volumes, a 2% favorable currency impact as the Euro strengthened, and an 8% uplift from the acquisition of Strata and Bachman, offsetting a weaker sales mix of 6%.

By region, revenues increased 19% in the Americas, driven by the acquisitions. Sales fell 4% in EMEA, and 7% in Asia-Pacific during the quarter. But performances have improved over the full year.

The AvTel business delivered a very good performance during the quarter. Margins in the segment held strong during the fourth quarter, and on a full-year basis, improved to 31.9%. Gross profit was $51 million, up from last year's $48.5 million, and operating income was $26.3 million. For the full year, sales in Fuel Specialities increased 8% to $567.4 million; and operating income increased 6% to $92.7 million.

Turning to Slide 8, revenues in Performance Chemicals for the fourth quarter increased 26% to $52.2 million. With the acquisitions of Chemsil and Chemtec contributing 21% to revenues. Excluding the acquisitions, underlying sales across Performance Chemicals grew by 5%, driven by improved volumes of 4% and a 2% favorable currency impact, as the Euro strengthened, offsetting the lower pricing of 1%.

By region, sales increased by 34% in the Americas, driven by the acquisitions, and grew 2% in EMEA, and 52% in Asia-Pacific. Gross margins improved to 25.7%, and operating income for the quarter was $6.5 million, up from $5.5 million reported a year ago. Sales for the full year rose by 7% t0 $192.4 million, and the segment's full year operating income was $23.6 million.

Moving on to Slide 9. Net sales for Octane Additives for the quarter were $25.6 million, up significantly from $17.3 million a year ago. That's heavy volume carried over from the third quarter, as we predicted.

The segment's gross margin was 39.8%, an increase from the 36.4% in last year's fourth quarter. Gross profit was $10.2 million in the quarter; and operating income was $8.5 million, more than double the $4.1 million last year.

For the full year, the segment recorded net sales of $59 million, a 15% decrease from 2012; and its operating income was $21.5 million, a 17% decrease compared to last year. For 2014, we expect to see a further decline in the Octane Additives revenues while the remaining country continues to transition to unleaded gasoline. As you are aware, visibility in this segment is often limited and we will continue to update you each quarter.

Turning to Slide 10, Corporate costs for the quarter were $14 million, compared with $13 million a year ago. The increase was primarily due to high legal and enhanced compliance expenses, partially offset by a lower acquisition-related costs. In the quarter, as expected, the pension charge was $0.7 million; however, there was a noncash pension adjustment credit of $0.5 million. In 2014, we expect the pension charge to be, broadly, $0.8 million per quarter, and the full-year cash contribution to be $11.4 million. The current year, full-year effective tax rate is 16.2%, slightly lower than we had anticipated throughout the year, and lower than last year's 28.3%. We expect the full-year effective tax rates for 2014 to be, broadly, 23%.

Moving onto Slide 11, we closed the quarter in a net-debt position of $61.2 million, and an additional $54 million of revolving credit facility was drawn down in order to form the acquisition of Bachman. The annual dividend payment $0.50 per common share and capital expenditures. As of December 31, we had cash and cash equivalents of $86.8 million, and debt of $148 million.

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

In summary, although this has been a year of transition for Innospec, we are very proud of our performance in the fourth quarter, and positive improvements being made throughout the year. We have come a long way since our Management Team took over in 2009, and we have delivered on virtually every commitment we made at that time.

These commitments include our Compliance Program, Management strength and depth, enabling a sustainable growth profile, with strategic market expansion, contributory external growth through acquisitions, and providing real returns to our shareholders. At a time of continued tough economic conditions, we delivered strong revenues in excess of $800 million. We maintained a very healthy gross margin of 31.2% and a 9% growth in EBIDTA to $116 million.

Strategically, we have successfully closed four acquisitions since December 2012 and we instituted a regular dividend. We had a natural increase in working capital, due to increase in sales revenue. Once again, we generated strong cash flows from our businesses. We closed the year with a net-debt position of $61.2 million, continue to enjoy a very strong balance sheet, and positioning Innospec very well for opportunities ahead. We appreciate the fact that the market has recognized our performance.

We celebrated our 75th year anniversary in 2013 and we are very proud to have reached this milestone with the dedication of our employees and the loyalty of our customers. We are delighted that our Board chose to recognize this during the quarter.

We will continue to focus on our customers' needs and invest in R&D that will help us enhance our competitive edge. We will also maintain the utmost vigilance on compliance as we welcome the opportunities ahead.

We enter 2014 in a very optimistic mode, with existing business and acquisitions working well together to provide future growth, and very strong financial position, from which we further expand. Our focus is to drive value through the integration of our acquired companies, but we will remain open to further acquisitions should an attractive opportunity arise.

I will now turn the call over to the Operator and Ian and I will answer any of your questions.

Thank you. (Operator Instructions.)

We will now take our first question from Ivan Marcuse of KeyBanc Capital Markets. Please go ahead.

Hi, guys, thanks for taking my questions. Nice quarter.

Good morning, Ivan.

Good morning, Ivan.

The one question I have to start off, on your Corporate expense line, do the compliance-related costs -- I think I was under the understanding that these would decrease going to 2014, is that still the expectation? Or do you expect corporate expenses to stay at this $14 million level going forward; or how should I think about that looking out to 2014 and on?

You're right, Ivan, we've been plugging this for a couple of quarters now; through the peak of enhanced compliance costs. And our expectation is that will be enough, $10 million to $11 million for the quarter for Corporate costs going into 2014.

Okay, great. Then, if you look at your -- turning over to Fuel Specialties, it looks like -- looks like it, it is -- you had a pretty negative impact on mix. Is this related to the acquisitions coming in, or a product change? How should I think about mix going forward? Or is this sort of just a one-time type of deal?

I think it's a one-time type of deal. It was a general mix, so it wasn't really one thing specific. You know, you are also doing a very hard comparison over a very strong fourth quarter in 2012. If you look at Fuel Specialties, we have always said GDP plus two to three. If you look year-over-year, we are about in line with that, so it really was about up to our expectations. But I do think it was, probably, a little awkward of a quarter in regards to mix.

If you turn to your Oilfield's business, you opened an office in Houston, what's sort of your expectations for growth for this business? And are they acquisitions? How is that proceeding in integration ways? It looks like Strata, maybe, has had some bumps this year. Would you expect to regain those sales that you lost into 2014? And how to think about the growth rates of this business and the profitability?

Sure. Good question. If you look at Strata, we really bought that for the technology. We knew that we would have to professionalize the business to really -- to be able to put it in our global platform and have sustainability. We knew that 2013 would be a somewhat of a bump in the road to position ourselves very strong for 2014. We've done that.

I think if you look at, overall, the Oilfield business, you're looking at low-double digits, in that 10% to 12% range, is kind of what we're predicting with solid margins. Obviously, it's a little higher than Fuel Specialties, but it's a very strong business and I think the integration with of all the acquisitions we've made to date have gone to plan and as expected.

Great. Two quick questions -- more first-quarter type of related. I know the Octane business is, from my perspective, impossible to model, and from your perspective, not much easier. How should I think about the first quarter in terms of EBIT contribution in that business; and, then, the second part of that question, again in Fuel Specialities, from what I understand, the weather has had an impact on a lot of companies. I know trucking has slowed a little bit due to weather. Would you expect any sort of impact, at least in your North American business, as a result of that?

Yes, Ivan, I'll take up the Octane Additives question and then I'll pass it over to Patrick for the Fuel's question. You know it's always been tough to see very far forward in Octane Additives business, and nothing, really, has changed there. We are in discussions right now with our final country to confirm 2014 supply. We're confident that they'll be concluded successfully. But overall, the timing of those deliveries, we don't expect to see much into Q1, but we do expect to see more volume in quarters 2, 3, 4, and possibly into 2015 as well.

So the first quarter, the Octane -- the contribution should be nil or the same as the fourth quarter?

Certainly not going to be like the fourth quarter. It could be nil or a few hundred tons. At this point, we haven't got any more visibility than that, Ivan.

Great, thank you.

Ivan, if you look at the Fuel's side of business, our big month -- there can be some sway in the cold weather months, just due to operability, CFIs, pour point depressants, etc. So we will see a little bit benefit of that going into the first quarter of 2014, so that should give us positive measures moving forward.

Great, thanks.

Our next question comes from Chris Shaw from Monness, Crespi. Please go ahead.

Good morning, guys, how are you doing?

Good morning, Chris.

Good morning, Chris.

If I could ask about the -- dig into the Performance Chemicals. Can you break out -- I know sometimes you do, how did Polymers, and how did the Fragrance perform? I guess that the whole segment was a five, and I'm not sure what to expect out of those slightly weaker businesses, but maybe you could breakdown the growths of within the three pieces of that business?

Yes. I'll just pick up the Polymers and Fragrance picture, Chris, and I'll let Patrick take the Personal Care side. As you know, Polymers is more focused on the industrial markets, particularly in Europe, and that's been a tough business for us. Year-over-year, it's been flat, and this quarter has been no exception to that.

On the Fragrances side, we have actually had quite a strong quarter in terms of volume. Again, over the full year, we expect a fairly flat business there. But the Personal Care business is completely different to that.

Yes. I think, Chris, just adding to what Ian said, if you look at the Personal Care, and with the acquisitions of Chemsil and Chemtec, Personal Care now constitutes just over 50% of our revenue in the Performance Chemicals market, and you can see where we are putting, not only in our R&D dollars, but, also, our focus in growth. It's a higher-margin business. The Silicone technology fits extremely well with our Personal Care technology, as well as, believe it or not, our old Fuel technology.

There is a lot of synergies behind what we do in Personal Care and what we do in the Oilfield, not only from an asset base, but from a technology base. We see a lot of growth coming forward in that Personal Care sector, and obviously, we would like to get it to where it's 75% of that Performance Chemical's market, and then you break out 12.5%, 12.5% on those other two sectors.

Right. I guess just trying to isolate the Personal Care growth. What do you see, I guess, going forward, you're sort of view on the organic growth for that 50% that is Personal Care within that segment?

I think it's very similar to Oilfield. It's right in that range.

Alright. Great. And just curious, you mentioned there is a 52% growth in Asia, was that acquisition-driven? Or is that -- I know you opened an office there not too long ago. I can't remember what the (inaudible) -- up 52%, though.

No, that's all product growth, Chris.

Nice. Good job. And then, just to further -- I have these questions on the Octane Additives. For the full year, should we be thinking of it as -- results being a third of what they were, say maybe, two year ago in 2012, or half of what they were last year? Just because you are down to a third of the customers you had or half the customers you had last year? That a broad way to look at it?

Yes, the way we think about it right now, Chris, is that we expect the operating income to be about half of what it was in 2013, and we've not yet landed on what we think the volume is going to be, exactly; but that's our best expectations right now.

Then one last but final one, you know you still have a pretty low net-debt level, and I know you said you want to take a bit of a pause, maybe, on acquisitions that you can integrate, and you already have the dividend out there, could we see any more action on the buybacks, possibly, in 2014?

I think, Chris, we're still going to look at the markets. Our focus as we have said in the last two quarterly Conference Calls, are integration, and that's what we're doing, and to make sure we extract the global growth out of these companies that we have purchased. It doesn't mean that we haven't stopped looking, but we have definitely slowed it down and we're not out hunting for acquisitions. If the right one comes along, we'll, obviously, have to take a look at it, but as you know, that would probably put us into the latter part of the year before we did anything.

I would say our focus right now is just to really look at the proper capital structure we have with the new acquisitions that we have; continue to pay a dividend; and we will review buybacks during the quarters, as we always do, with our Capital Management program, and we'll just get back to you guys as we go, as we normally do.

Okay, great. Thanks.

We will now take our next question from Christopher Butler of Sidoti. Please go ahead.

Hi, good morning, guys.

Good morning, Chris.

Good morning, Chris.

Looking at the Fuel Specialties, do you have a sense of what the gross margin would have been in the quarter from just the legacy business, separating out the acquisitions?

Yes. It's still right in that 30% to 31% margin, very steady.

And, therefore, the delta from last year would have been just because of the strong quarter that you had in 2012?

Yes, that's correct.

And in the Press Release, you had mentioned synergies from the acquisitions. I know that we had been looking for sales synergies, do you see any cost synergies available there, now that you have them under the fold?

As we go through the integration, like we have been, we are starting to see some cost synergies. But the reason why we bought these businesses were not necessarily for cost synergies, they were for growth synergies.

But as in anything that you do, Chris, and you combine them with Fuel Specialties, you will have some cost synergies there and I think you'll see some of that come out in 2014.

And on that note, could you give us a sense of what CapEx is going to be in 2014, as you try to grow these businesses out?

Yes, Chris, we're probably aiming for, in terms of the core businesses, around about that $10 million to $15 million of CapEx. But for the full year, we will also be continuing with our AX expansion, so the full-year CapEx spend will be in the $20 million to $25 million range.

Should we be thinking of depreciation sort of in that same range? Maybe a little bit higher, I guess?

You'll probably be having depreciation and amortization around about the $20 million mark.

And then going back to uses of cash, you've mentioned critical mass, and it sounds like you're holding onto cash a little bit for the next round of acquisitions, maybe later this year or 2015, what do you need to get to critical mass? How much of that can you do on your own, organically, and where might you need additional acquisitions down the road?

Yes, I think we're close to getting critical mass, not only from a customer base, but from employees on the ground, in the application and technology to help those employees be successful. I think we'll always look at where we can better improve our weaknesses within our Company in specific regions or specific areas of business. I think we're somewhat there, Chris, on critical mass.

There's, obviously, some areas that we can focus on at a later date; but in regards to cash, I think as we have -- we've instituted a full-time dividend now. You'll see that coming out this year, as well. I think that we want to just sit back and see if there are any other cash uses that we will need to put into play as we go through 2014. We're not sure that there will be.

But I think that -- again, you just said it, later on there will be a point in time where we will start looking at acquiring again. I think it goes right to the realm of still acquiring companies that bring technology, know-how, application, and feet on the ground, in the specific markets we're looking to grow, which are Fuel Specialities, Oilfield, and Personal Care.

I appreciate your time.

Thank you, Chris.

(Operator Instructions). Our next question comes from Gregg Hillman of First Wilshire Securities Management. Please go ahead.

Hi, good morning.

Good morning, Greg.

Could you talk about -- number one, for the work you're doing on gas additives, whether you're coming up with a differentiated product; and do you have any idea when the timing of a product might come onto the market?

Yes, Greg. I think it's a continuing process. We always have a lot of products and processes going on in R&D, Research and Technology to continuously look at engine technology, future regulation, and the benefits of using our technologies. We are still in this process with gasoline detergent. It does take time.

When will that market entry be? I really couldn't tell you at this time, but I can tell you there is a lot of work going on behind the scenes.

Okay. And in Oilfield services, what basins are you in right now? Or what is your geographical footprint now? And what is the geographical footprint you want to have two years from now?

Sure, we're limited in a lot of the basins. We're kind of in that Midwest area right now. We're just starting to expand into the Eagle Ford, the Marcellus Shale, and up in the Bakken, some of that Mississippi line play. We're taking a lot of the Strata technology over to South America, as well as a lot of trials going on right now in Europe and Asia-Pacific. So, there is a lot of trials that we have going on with some of our technologies, well outside of the America's territory.

Okay. And then, just one question about the AvTel, you mentioned the one country going away, but it will still be around for aviation for a while, won't it?

Yes. MO Gas -- You're talking about MO Gas. MO Gas has one country has left; yes, AvTel will be here for a while. There's a lot of people coming out saying they have an alternative product, or they have looked at an alternative fuel. It would be a blend pool fuel. It probably would not be an additive, Gregg. And the likelihood is you're talking 2018 to 2020 at the earliest.

You have got to go through a lot of FAA, you got to go through a lot of the industry tests, and to get valuations done, and that is just going to take time.

So, what will be the remaining annual contribution from AvTel, then, for the next couple of years? Per year?

It stays about as it has been. There is really no downward growth; no upward growth in Avtel. It's pretty flat.

Where has it been?

Yes, Gregg, we don't, actually, separately disclose the Avtel numbers. It's always been a part of Fuel Specialities.

Okay, that's fine. Thanks, guys.

Thanks, Gregg.

Our next question today comes from Jon Tanwanteng from CJS Securities. Please go ahead.

Good morning, guys.

Good morning.

Good morning. Could you give a little bit more color on the Octane segment? It seems like you pulled a bit of business from Q1, but margins were a bit lower than the usual run rate. What went into that?

Yes. What we actually did, Jon, we actually pulled some volume from Q3 of 2013 into Q4. I think, if you recall, back on our last conference call, we talked about how we'd missed some of the Q3 volume and how we expected to have a strong end of the year, and that's exactly what we did. The margins, were just a little bit slower than what we would have liked; various issues in there, but nothing as any major importance, and as we go forward, we still expect to see those low to mid-40s gross margins in that business.

Okay. And then, just again on Octane, I know you're down to one country, but is there a possibility that one of the other countries comes back this year or next?

I would probably say no. Once you go to unleaded fuel, you stay there. But you know the countries we deal in, you just never know.

Okay, fair enough. And then, as you focus on growing the acquired businesses, what kind of SG&A or SAR impact do you expect to see over the course of 2014?

Yes. You have, now, seen all of the impact of the SG&A baked into the fourth quarter now, Jon. We don't need to add a huge amount of additional headcount into those businesses. What we're focused on is integrating them into our global footprint; and second, that technology overseas into new markets. We don't see a big change in our SG&A from where we finished the year.

Okay, great. And then sorry if I missed this, but what went into the low tax rate for Q4?

We got to the final quarter, Jon, and we've taken advantages from prior-year R&D tax credits, and some foreign tax credits as well. We didn't see that in the earlier part of the year. That's what's pushed the overall tax rate down to 16% for the full year. As we look forward, and as we said on the call earlier, we expect that to resurge to a more normalized rate, around about 23% for 2014.

Okay, great. Thank you very much, Guys.

You're welcome.

Thank you.

Our next question today comes from Charles Hale of Polar Capital. Please go ahead.

Congratulations, Patrick and Ian, on an excellent quarter.

Thanks, Charles.

Thanks, Charles.

I want to ask you a very specific question. Do you see any rationale or likelihood that you will break out the Oilfield services revenues and earnings on a separate basis any time in the near future?

Yes, Charles, it's Patrick. We talked about that for a considerable amount of time. We talked about it going into 2012. We talked about it early on in 2013.

And I think, as of right now, we're still seeing some synergy costs between sales, markets, customers, and technology. As Oilfield gets bigger, and I think as a more complex business, that would be appropriate time to break it out, at that time. I think right now, it will stay in Fuels for a period of time now.

Yes, thank you.

You're very welcome.

At this time, there are no further questions in the queue. Therefore, I would like to turn the call back over to Mr. 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 at any time. We look forward to meeting up with you, again, next quarter. Take care, everybody

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