Innospec Inc (IOSP) 2014 Q2 法說會逐字稿

Thank you, and good morning, everyone. My name's David Williams and I'm Vice President, General Counsel and Chief Compliance Officer at Innospec. Thanks for joining our second-quarter 2014 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, 2014. The press release is posted on the Company's website, www.innospecinc.com. An audio webcast of the call and the slide presentation on the results are also now available and will be archived on the website.

Before we start, I would like to remind everyone that certain comments made during this call might be characterized as forward-looking statements under the Private Securities Litigation Reform Act of 1995. Generally speaking, any comments regarding management's beliefs, expectations, targets, or other predictions of the future are forward-looking statements.

These statements 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 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 all of you to Innospec's second-quarter 2014 conference call.

Overall, this was a good second quarter for Innospec, with continued strong showing from fuel specialties, particularly in the Americas, and an impressive 33% year over year gain in performance chemicals. In total, the Company delivered revenue growth of 20% year over year and maintained gross margins within our targeted range.

We delivered adjusted diluted earnings per share of $0.77, and we are particularly pleased to report another quarter of strong EBITDA performance. This indicates that our business and financial strategies are working according to plan. Our core businesses are in excellent shape and we feel positive about the remainder of the year.

Fuel specialties, as I said, has maintained its growth momentum despite economic swings in various parts of the world. And for the quarter advanced 15% over last year. This was principally the result of strong performance in the Americas by both the core fuel business and by Bachman, which continues to expand its footprint in the oilfield specialties market.

Despite a weaker performance in some of our underlying businesses, our gross profit in fuel specialties grew 8% quarter over quarter. In contrast, our EMEA performance in fuel specialties was weakened after a strong run. The European market is being adversely impacted by the geopolitical situation in Russia and the Ukraine.

You will be well aware that we have invested in these territories and we have felt the effect of the US-EU sanctions related to this conflict. The impact so far has been manageable but we are monitoring the situation closely in case it deteriorates further.

Meanwhile, we've made a number of customer advances in our Asia-Pacific operations and we are confident that we'll be back on track in this sector for the second half of the year. Our AvTel business, while relatively small, delivered a strong performance in the quarter.

Our performance chemicals business grew by 33% year over year, driven by our personal care segment, which included promising sales from our new products. We were pleased by the contribution from our Chemsil acquisition, which has been well integrated since we acquired them last year.

Importantly, our underlying volumes in performance chemicals grew by 14% year over year, driven by the personal care business, which also served to deliver an improved product mix in terms of margins.

Our gross profit in this business was very solid, while operating income advanced some 20%. It is important to note that personal care now represents 46% of of our performance chemicals business at Innospec.

Our continued focus on this market is very much progressed in-line with our long-range plan. A key to our successful growth and performance in performance chemicals is our unwavering commitment to customer service and our innovative technology. This delivers a consistent pipeline of new products which are developed either on our own or in partnership with our customers.

In octane additives, as we expected, shipments resumed in the second quarter to our one remaining customer. And we do expect that that remainder of the current contract will be fulfilled in the second half of the year.

With the final wind down of octane additives in 2015, this legacy business of our predecessors will essentially be behind us. We can devote all our energies to our growth businesses, which we are developing products which are significant environmental benefit and are representative of Innospec's future. This is where the current management team and the Board are focusing our energies.

I will now turn the call over to Ian Cleminson, who will review our results in detail. I will return with some further comments on the year as well as outlook and strategies moving ahead. 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 $221.3 million, a 20% increase from $185 million a year ago.

The overall gross margin was 31%, as our recent acquisitions contributed to strong underlying growth in fuel specialties and performance chemicals. Octane additives recovered as expected.

Our GAAP earnings were $0.75 per share, up from the $0.71 per share reported in last year's second quarter. Our adjusted earnings increased to $0.77 per share from $.075 per share reported a year ago. EBITDA for the quarter was $31.6 million, a 22% increase from last year. Net income for the quarter was $18.5 million.

Moving onto slide 7, revenues in fuel specialties for the second quarter were $145.1 million, 15% higher than the $126.2 million reported a year ago. The increase was primarily driven by sales growth in the Americas and by a strong contribution from the Bachman acquisition, which added 16% to revenues.

By region, excluding the acquisitions, revenue in the Americas grew by 16%, driven by increased sales volumes compared to a year ago. Sales in EMEA decreased by 13%, primarily as a result of weak refinery sales and the impact of government sanctions on trade and conditions in Russia.

In Asia-Pacific sales were weaker by 17% in the quarter compared to the prior year, primarily as a result of a lost contract as previously noted. Without this loss, underlying sales grew by 10%.

The segment's gross margin was 30.3%, down from 32.1% recorded a year ago, but still within our expected range. Gross profit was $43.9 million, and operating income for the quarter was $17.5 million, compared to last year's $19.2 million.

Turning to slide 8, revenues in performance chemicals for the second quarter improved by 33% to $59.4 million, driven by continued strong underlying growth in our core personal care market, and by 17% contribution from acquisition growth.

By region, sales increased 36% in the Americas, 37% in EMEA, and 17% in Asia-Pacific, driven by increased personal care volumes and a richer sales mix. Gross margins improved to 25.8% as personal care grew to almost 50% of the business. Performance chemicals operating income for the quarter was $7.8 million, 20% higher than the $6.5 million reported a year ago.

Moving onto slide 9, as we predicted, octane additives has recovered in the second quarter as shipments recommenced to the last remaining customer. Net sales for the quarter were $16.8 million, 17% higher than the $14.3 million a year ago.

The segment's gross margin was 56%, up from last year's 53.1%. Operating income for the quarter was $8.3 million, a 36% increase from $6.1 million in last year's second quarter. For the third quarter, we currently expect a slightly reduced sales performance. Beyond that, visibility is limited but as always we'll keep you posted on developments in this segment.

Turning to slide 10, corporate costs for the quarter were $7.4 million, down from $8.5 million a year ago. The decrease was primarily due to a credit of $0.8 million we have taken for restructuring provisions no longer required.

In addition, lower legal and compliance costs were offset by higher amortization related to our new IT system. Broadly, we expect corporate costs to be between $9 million and $11 million for the quarter. The effective tax rate for the quarter was 22.3%, in line with our expectations for the full year.

Moving onto slide 11, we closed the quarter in a net debt position of $42.1 million, reduced from the $43.8 million at the end of the first quarter. Net cash generated from operations was $12.9 million, compared to $19.7 million reported a year ago. As of June 30, we had cash and cash equivalents of $97.4 million, and debts of $139.5 million.

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

Thanks, Ian. In summary, we are pleased with the performance in the second quarter, which showed good progress despite continued economic volatility in some regions, as well as disruptions caused by the sanctions relating to the Russia and Ukraine crisis.

Although we are not heavily exposed in these markets, we will continue to monitor the situation closely. Meanwhile, the fundamentals of our core businesses remain strong and we have confidence in our prospects over the intermediate term.

Our acquisitions overall are starting to contribute and deliver to plan. And we continue to have high expectations for each one of them. We continue to complete the integration of these businesses while aligning them with our standards and our culture.

We see additional opportunities for targeted acquisition growth and we are prudently evaluating these as they arise. At the same time, as we have previously announced, we have expanded our banking group and we feel comfortable with the balance and strength we now have in our banking consortium.

The continued strong liquidity and financial management of our business is important to us as we continue to seek further growth opportunities. Innospec is well positioned in all respects for continued growth and profitability. We very much appreciate the interest and support of our customers, our shareholders, and the hard work and dedication by all of the Innospec employees.

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

Thank you. (Operator Instructions) Ivan Marcuse, KeyBanc Capital Markets.

Real quick, what is your overall sales exposure to Russia and/or total sales that could potentially be impacted by what's going on over there?

Yes, Ivan. We have some exposure to Russia-Ukraine. It's probably annualized round about $20 million. What concerns us just as much as the current exposure that we have is also the opportunities that we've got out in that region both in Ukraine and Russia for future developments of both the fuel specialties and the oilfield chemicals business.

That's the area which we're looking at in the future where we think we might be hit. But the current exposure will be no more than $20 million, all within the fuel specialties arena.

$20 million total sales. So if those were to go to -- if everything was to go to zero, it would be a $20 million drag? That's the total exposure, to understand?

Right.

Yes, it's $20 million on revenue.

Got it.

That's correct.

If you look within your fuel specialties business, is there -- what was your core total volume down?

I think the core total volume was down by about eight percentage points.

Eight?

Yes.

Got you. And then if you look at -- I guess the question is, so you've been able to grow revenues nicely in your core fuel specialties. However, your profits have declined. So how do you -- was Bachman accretive? And if it wasn't, why not?

And then secondly, what do we have to see happen for sort of the revenues to start falling to the bottom line?

Yes, Bachman was accretive the day we bought it. And the margins are similar in line with the fuel specialties margins. Part of the issue there is it was just literally product mix in the quarter.

I think as you'll see over the next probably two to three quarters, you'll see some of that profit starting to drop to the bottom line. But as you know, we have to make sure we re-invest into that business to make sure that this is long-term growth and not looking at just short-term growth.

And that's been part of the process is making sure the re-investments are for the long-term growth in this business to establish to itself. And then you'll start seeing the windfall from that.

So how long will that be? Is this a 2015 event? Would you expect sort of this top line strength and EBIT maybe flat to down for the next couple of quarters? Or do you think that reverses out?

I think it starts reversing out probably in Q4. And I think you'll see a big jump in 2015.

Great. And then my last question, then I'll jump off here. In your performance business you talked about personal care being 50% of revenues. And you had a nice 14% growth. Was there any sort of -- was it all new product or market share gains? Or was there a shipment timing that you benefitted from?

And then the second part of that question is, of your total EBITDA, how much would be personal care-related?

Sure, I'll take the front portion of the question. It was not just bulk shipments that -- or a one-off shipment that delivered in the quarter. It was consistently market share gain and new product technology.

And to get market share gain, typically in this business you have to new technologies. And our technical group has done a very good job of that. Our sales group have done a very good job of introducing it to the market. So really, Ivan, it's been a combination of both.

On the EBITDA question, Ivan, yes, personal care sales were about half of the segments. The EBITDA is a little bit higher than that because personal care tends to be a more profitable business.

Great, thanks for taking my questions.

No problem.

Thanks, Ivan.

Thank you. (Operator Instructions) John Tanwanteng, CJS Securities.

Nice job on the quarter.

Good morning, John.

Thanks, John.

Just wonder, was there an impact in Q2 from Russia and Ukraine? Or perhaps even Iraq? And can you quantify that?

No, there was no impact in Q2. Possibly a tiny little bit. It's really started to hit us more in Q3.

Okay, great. And then you had a nice decrease in the SG&A expense. What went into that? And is that sustainable on either an absolute or a percent of revenue basis going forward?

Yes, as we said earlier on the call, John, there was a couple of things going on there. We had a credit for a restructuring provision that we no longer require. I think probably more importantly, and we've been saying this on a couple of calls now, is that our legal and compliance costs have started to decline. And we certainly saw that in Q3.

What we are now start -- seeing now as an additional cost is the amortization of the IT system which we've recently launched in the US. So the legal and compliance and the amortization sort of net each other off. That's why we're saying at the corporate cost level it's about a $9 million to $11 million quarter, depending on where we are. But we'll certainly be aiming for the middle of that range.

Okay, got it. And then just focusing on the chemical segment. Your revenues and margins were very healthy. Can you discuss how that business is trending heading into the second half?

That's on the performance chemicals business, was it?

Yes.

I think it's probably going to be a similar type performance in the second half. I think you're still going to see double-digit growth and similar margins that we have today.

And then finally, you recently increased your credit line. Is that a prelude to more M&A activity? Or perhaps a future return of cash to shareholders? And perhaps related to that, can you remind us where you stand with the share repurchase?

We really wanted to bring another bank into the group that was a US bank so that we could have a really global consortium. And that's really what we did. Obviously, we're looking at acquisitions, ramping that back up now that we've got the integration intact and the acquisitions are proving themselves out. But it was not directly related to any acquisition whatsoever that we have in the queue today.

And the repurchase program?

The repurchase program right now, John, is -- we're looking at a lot of the volatility in the marketplace. There will be a time when we start to buy our stock back. Obviously we think it's a good buy back right now. I think you'll start seeing at some point in time over the next few quarters us buying back our shares.

Great. Thanks very much.

Thank you.

Thanks, John.

Thank you. Gregg Hillman, First Wilshire Securities Management.

First of all, on Chemsil, in terms of how they -- you improved the operation since you bought the Company, exactly what are you doing in terms of improving the channel distribution? Bringing the products to other geographies and integrating your R&D activities?

Very good question, Gregg. Really when we bought the business, Gregg, it had a very good management team in place already. And so it wasn't necessarily changing, it was giving them more products for them to add to their queue and to put into the sales process.

As well as, as you know, the silicones can go in in conjunction with our current product line at Innospec. And that's obviously why we bought the business is because there were so many similarities in the bottle that we could do with these product lines.

So I think it was expanding the global footprint. It was giving them more product lines for them to sell as well. And vice versa for our current salespeople in the performance chemicals business.

So it was a very good match. They have a very good management team. They had a very good sales force. And really it was just giving them more availability to more products.

Okay, good. In terms of gas additives, you're coming out -- could you explain to me where you are in the process there? And when could we expect an innovative product in that area coming out?

Yes, as you know, Greg, we're always looking at new product technology, especially in fuel specialties. And you're right, gasoline has not been our number one focus. And I think we made the right focus with our strategy going to diesel and heavy fuel oil.

But there is a -- we are looking at technologies in the gasoline additive arena, especially today with the new technologies that are in the marketplace. We think a standard PIB is probably not where we're headed at this time. And I think it's -- again, it's still in process. And when we have something that we think is ready for market, we will make that announcement publicly.

Okay. And finally, Ian, in terms of the cash flow, were there any working capital changes that kind of muted cash flow growth so far this year? And would that improve on a go-forward basis for the rest of the year?

No, Gregg, there's been a -- it's been a pretty, I would say, pretty normalized first half of the year. We've had a little bit of working capital through inventory as the businesses are expanding, both geographically and through the development of the top line.

We certainly don't have any issues with the receivables or aged debts or aged inventory or anything like that. So we're in pretty good shape. So it's just gentle expansion as we develop the businesses.

Okay. And then, Ian, can you talk about your M&A activity. Do you have an internal due diligence department at the Company? And also do you have investment banks currently engaged?

Yes, Gregg, we typically don't use investment banks. They do bring ideas to the table and we do look at a lot of deals. But a lot of what we have done that's been successful with our company is that we have utilized either our sales force or our business teams to bring ideas to the table. Because the fact that they know the companies that we're looking at better than anybody else.

And we've remained on that target. We remain on that path. I think we've done a very good job in picking what fits our portfolio the best.

Okay. Thanks, Patrick.

Thanks, Gregg.

Mr. Chris Shaw, Monness, Crespi.

Just on the Asian contract you lost. I know you talked about it a little bit last quarter. But you didn't give a lot of details. I know you don't want to tell -- talk about the customer. But what was the size of that? And maybe what sort of product line or whatever information you can give, I'd appreciate it.

Yes, we mentioned it about second quarter of 2013 that we had lost that contract. But we feel we have probably replaced that volume with other businesses and other contracts that we have closed.

So we do think, as we stated in the conference call, that we will start seeing an uptick in [ask back]. If you take that contract out, Asia-Pacific grew eight -- grew 10%. So we're starting to get back into the double-digit growth that we were expected. And I think we will see that that volume will pick up over time.

When does that roll off? When does the negative effect of losing that contract roll off, then?

Q3.

Okay. And then the performance chemicals, the organic growth outside the acquisition looks very strong. Was that all personal care? Or was there any rebound in the sort of fragrance and the polymers businesses?

It was primarily personal care. Everything else was fairly flat.

And then if you -- just curious. Could -- would you -- can you handicap maybe what the -- how soon we could see another acquisition? Are you guys -- think you're getting close? Or is it -- you're sort of building up the pipeline again? I know you took a little time off to integrate. But do you have any idea how soon that might be?

We -- as we stated to all of our shareholders and our employees and customers, we want to make sure that we get the integration right first. And being that we made the four acquisitions in a 16-month period, that was the primary focus for our company.

Now that we have done that and we feel very confident and we're starting to see the success from the integration, we have opened the pipeline back up. It is a constant. We've looked at a lot. We've pushed a lot out. But I can't say that we have anything that's going to close either Q3 or Q4. As you can understand, it's a fluid situation and we'll see how things move.

I'm just curious, though, on the -- if you're still looking in the oilfield chemicals area or services. What kind of ultimately [you been thinking] that sector?

It's funny, if you look at the two primary markets that we're in where we're starting to see a lot of margin growth and activity and revenue growth are personal care and oilfield.

And really what we're seeing on EBITDA multiples that are out in the public domain are still into that 10 to 12 times. That's steep for us. We won't pay that. I think they're starting to pull back a little now finally. It's taken a while for that to happen.

So I think you're starting to see multiples come back in the line of where we would be looking, which is in that seven to nine range, making sure that we can deleverage and making sure that we can grow this globally.

Great. Thanks, that's helpful.

Thank you. Mr. Ivan Marcuse, KeyBanc Capital Markets.

The contract they're replacing in Asia, is that -- the volume that you've been replacing with it, is that the same profitability level? Or is it lower profitability?

It's the same profitability if not a little higher.

Okay. And then just as a quick clarifier, I may have misunderstood something. One, if -- you said that Russia, the impact there didn't really have any impact on the second quarter. But in the release it said it sort of was one of the rationales for why your European business was down 13%. Was that because of Russia or not? And if it wasn't, what fell in Europe by 13%?

Yes. No, I -- when you said that I was about to correct Ian on that. There was an impact in Q2. Not as significant as we expected but there was an impact in Q2. I think what Ian was saying is you'll see about a similar if not a tad bit more in Q3, Q4 if the sanctions keep up.

But in whole, it's not a significant market amount. It's $20 million at most. We think we'll obviously keep some of that. That's -- but we will stay within all the sanctions and compliance to make sure that if something happens, we're staying on top of it. But it's at most, again, Ivan, it's $20 million. We did have the effect started in Q2.

Got you. And then if you look at Europe, then, what sort of drove -- is it just the general economy that drove the reduction in sales in that region? Or was it something else? Or time -- shipment timing?

Yes, general economy. A little bit on shipments, general economy. And as you know a lot of refineries in Europe have shut down in Europe because the fact they don't have a direct crude source. And so they're not competitive. And so it's really what happened the year before and a general economy has driven some of that.

Now, I do think that you will see volumes pick back up in Q3 and Q4 in EMEA. I think there was some shipment delays. I know that we closed some new business that will start shipping in Q3, Q4. So I don't think you'll see the quarter that we saw in Q2.

Got you. And then, Ian, real fast, on the corporate costs, I missed this. What was the benefit that you got that allowed it to get down to $7.5 million?

Yes, we had a restructuring provision, Ivan, which we no longer require. So we released that back and that was an $800,000 credit to us.

Got you. And then -- but you expect that that corporate line to be in that $9 million to $11 million range in the back half of the year per quarter?

That's correct.

Why is it going to go -- why would it -- I guess if you back in that $800,000, why would it rise a couple million dollars?

Yes, if you back the $800,000 out, that's actually brought it back to about $9 million, depending what we're doing in the quarter. Depending the sort of things we're up to. The acquisitions bit, a number of other things. It could bounce around between $9 million and $11 million, that's what we're trying to say to you, Ivan, here.

Got it. So in the corporate costs there wasn't any sort of M&A activity versus the back half. You'd expect some M&A costs and a few other inflationary type of things to rise?

That's correct.

Got it. All right, thanks.

No problem.

Thank you. As there is no further questions, I would like to turn back the call to Mr. Patrick Williams.

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 meeting up with you again in Q3. Thank you.

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