Innospec Inc (IOSP) 2014 Q4 法說會逐字稿

Good day and welcome to the Innospec Q4 2014 earnings conference call. 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. Good day, everyone. My name is David Williams and I am Vice President General Council and Chief Compliance Officer at Innospec. Thanks for joining our fourth quarter and year-end 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 December 31, 2014. The press release is posted on the Company's website, www.InnospecInc.com.

An audio web cast of the call and a 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 can 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 website 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 in 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 will turn it over to you, Patrick.

Thank you, David, and welcome all of you to Innospec's fourth quarter and full year 2014 conference call. We are very pleased with our strong fourth quarter performance which represents a sales record for Innospec. This concluded a very good year for the Company as we delivered full year sales of more than $960 million which gives us a run rate above $1 billion, a significant milestone. Ian Cleminson will get deeper into the numbers shortly but I would like to highlight that our gross margins improved in the quarter and for the full year closing at 31.4%, and our operating income was up very significantly, 20% year-over-year enabling us to enter 2015 well positioned financially and with excellent momentum.

We have accomplished this despite some continued market difficulties around the world including the decline in crude prices, a lack of growth and some key economies and political instability and others. Positive contributions from our more recent acquisitions have played an important role in our success. Supporting a solid performance from our established businesses while paying close attention to the management of our cash and balance sheet.

Our fuel specialties business finished the year with great momentum most notably in the Americas which has shown a consistently good performance throughout the year. We also had a positive contributions from our recent acquisitions. In the EMEA region we faced a continuous sluggish economy and tough conditions in a refining market combined with unsettling political unrest and sanctions affecting Russia and the Ukraine. Consequently, sales were off in EMEA compared to prior periods. Importantly, however, we managed to maintain fairly healthy margins in this region.

In Asia Pacific, I am pleased to report good progress throughout the year given the previous reported loss of contract and the clear signals that this region is on track for future growth. Meanwhile, our AvTel sales were up significantly in the fourth quarter principally attributed to buying patterns (inaudible) fundamental change in demand. Our oilfield specialties business had a good fourth quarter and performed well for the year. Joint specialties is showing continued improvement while production specialties had another excellent quarter with a strong margin contribution.

Independence oilfield chemicals, our most recent acquisition, exceeded our expectations during the first two months with Innospec. Importantly, we made very good progress at integrating our new oilfield sites into our safety, health environment standards, structure and processes. While we are pleased with our oilfield specialties business performance we, nonetheless, are mindful of the potential impact of oil price movements on rig count and our strategy. We believe that we are well positioned to exploit our technology and service to expand our market position while remaining opportunistic to distressed assets and over-leveraged companies.

Following an excellent nine months of our performance chemicals business had a softer final quarter. We believe that is the result of aggressive year-end de-stocking and holiday plant shutdowns as well as tighter working capital management rather than a lack of future demand in the market. In fact, our order book going into 2015 is robust. We expect near term rebound in performance chemicals. At Octane Additives, sales to our remaining customer under contract were completed in the fourth quarter.

We now have a firm contract for supply in the first half of 2015, but no clear visibility beyond this. I will now turn the call over to Ian Cleminson who will review our results in detail and then I will return with further comments on the year and outlook and strategies moving forward. Then we will take your questions.

Thanks, Patrick. Turn to slide six in the presentation. The Company's total revenues for the fourth quarter were a record $290.7 million, a 20% increase from $241.6 million a year ago. The overall gross margin increased last year to 32.4% driven by fuel specialties with important contributions from our recent acquisitions. Our GAAP earnings were $1.11 per share compared to $1.17 per share reported in last year's fourth quarter.

On an adjusted basis our earnings per share were $1.16 up from $1.06 per share reported a year ago. EBITDA for the quarter was $49.5 million, a 28% increase over last year, and net income for the quarter was $27.9 million. Moving on to slide 7, revenue and fuel specialties for the fourth quarter $216.8 million.

A record high and no less than 32% higher than the $163.8 million reported a year ago. An increase was primarily driven by sales growth in the Americas and substantial contributions from the recent acquisitions. Excluding the acquisitions, we have 26% to revenues and volumes increased by 3% and a 6% richer sales mix offset an adverse currency impact of 3% in the quarter. By region, excluding the acquisition growth, revenues in the Americas grew by 13% due to improved volumes on a richer sales mix compared to a year ago.

Sales fell 9% in EMEA from a strong performance last year driven lower volumes impacted by on going trading constraints in Russia and Ukraine while sales in Asia Pacific remain relatively unchanged from last years fourth quarter showing recovery from the previous contract losses. Margins in this segment improved to 32.2% during the fourth quarter and on a full year basis improved to 32.1%. Gross profits were $69.9 million in the fourth quarter, up 37% from last year's $51 million, and operating income was $36.6 million.

For the full year, sales in fuel specialties increased 20%, to $682.3 million, and operating income increased 13% to $104.4 million. Turning to slide eight revenues in performance chemicals for the fourth quarter fell 2% to $51 million. Impacted by large year-end destocking, holiday season plant slow downs and working capital management than in prior years. However, all of the books going into 2015 are strong and we expect the sales to rebound. Volume growth of 1% was offset by a 1% of weaker sales mix and 2% adverse currency impact.

By region sales fell by 9% in the Americas and 11% in Asia Pacific, but rose by 13% in EMEA. Gross margins were 23.1% in the fourth quarter. Performance chemicals operating income for the quarter was $4.7 million down from $6.5 million in last year's fourth quarter. However, overall sales for the full year rose by 16% to $223.5 million and the segment's full year operating income was $25.6 million.

Moving on to slide nine, net sales in Octane Additives for the quarter were $22.9 million compared to $25.6 million a year ago. The segments gross margin 54.1%, a significant increase from the 39.8% in last year's fourth quarter. Gross profits were $12.4 million and the segment's operating income was $10.6 million, 25% higher than the $8.5 million last year. For the full year, the segment recorded net sales of $55.2 million, a 6% decrease from 2013. Operating income increased by 5% compared to last year, to $22.6 million. In the first half of 2015 we expect sales of $17 million in this segment split equally between the first and second quarters.

As you are aware visibility with our one remaining customer remains limited, but we do expect to see a full year decline in revenues and operating profits of 2014. We will, of course, update you on our next call. Turning to slide 10, corporate costs for the quarter $9 million down significantly from $14.2 million a year ago. The decrease was primarily due to reduced legal and compliance costs. In 2015 we expect our corporate costs to normalize at approximately $10 million to $11 million dollars per quarter.

As expected, the pension charge was $0.8 million for the quarter. In 2015 we expect there will be a minimal pension impact and the full year cash contributions for pensions will remain at $10.8 million. The full year adjusted effective tax rate of 24.9% was higher than we predicted throughout the year principally due to the fourth quarter increase in taxable income in the US. For 2015 we expect a full year effective tax rate to be broadly in the range of 27% to 29%.

Moving on to slide 11 we closed the quarter in a net debt position of $95.3 million of the independent acquisitions closed requiring an initial payment of $99 million. In the quarter we also spent $6 million under the previously announced share repurchase program and paid $6.8 million semiannual dividend of $0.28 cents per common share. This brought the total dividend for the full year to $0.55 per share, a 10% increase year-over-year. For the full year net cash generated from operations was $106.3 million. As of December 31, we had cash and cash equivalence of $46.3 million, and total debt of $141.6 million.

We have indicated consistently our strategy is to leverage our balance sheet strength to improve shareholder returns. As a result our net debt is significantly below 1 times EBITDA leaving us with further capability for growth. And now, I will turn it back over to Patrick for concluding comments.

Thanks, Ian. To sum up we are very pleased with our performance for the year particularly if the fourth quarter which provided an excellent spring board for the business entering 2015. Both our core businesses and our acquisitions met or exceeded our expectations and importantly provided exceptional cash in flows. Once again, we deliver on our commitments, an important attribute of Innospec, and a tribute to our management team and all of our Innospec employees.

Significant movement in crude prices is both an opportunity and a challenge for Innospec. We will benefit from lower raw material prices in fuel specialties and performance chemicals, but we are mindful of the pressure on many of our customers, notably at oilfield specialties. Our focus will be to continue to work with our customers, bring the best available technology and the most cost effective manner and support them through this volatile period.

Thanks to our close attention to cash and working capital management we ended the year with net debt of $95.3 million, a strong balance sheet by any measure. It is important to note that this excellent financial position was achieved after a capital spend of $21.9 million for the year and after absorbing the cash impact of a sizable acquisition, the buy back of some 138,000 shares under our share repurchase plan, and a dividend returned our shareholders $13.4 million.

We are well positioned in 2015 to face our future with continued optimism, mindful of the uncertainties of our markets. We intend to continue with our successful capital management program which may include continued buy backs and increasing dividend. We will focus on complementary acquisitions and personal care while being opportunistic of distressed assets in the energy market.

We appreciate the continued interest and support of our investors, the dedication of our employees and the loyalty of our customers. We are very confident about the future for Innospec. Now, I will 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 from KeyBanc Capital markets. Please go ahead.

Great, thanks for taking my questions. The first one that I had was in terms of your fuel specialties you had a strong quarter. How much of the EBITDA contribution came from the IOC acquisition? And then also, the AvTel. You mentioned AvTel had a strong quarter in your press release. I am just trying to get an idea of the quantification.

This is Ian. Starting with AvTel, the demand is broadly flat or slightly declining over the longer term. We occasionally see quarter to quarter spikes. This quarter, in Q4, we saw an increase. There is no change in our longer term demand or view of that business. We don't actually break out what AvTel is as a part of fuel specialties, but it is a pretty small partner in the overall number. When we look at the independence acquisition we are really delighted with the way the business has started. It certainly hit all of the numbers we expected. It is around about $35 million to the sales number. It is about $3 million of operating income as well.

And if it is exceeding our expectations even in the current environment do you expect this business to show some growth in 2015? And do you still remain confident, I think you laid out $0.03 cents of accretion?

This is Patrick. Hello, Ivan. We are confident moving into 2015 even under the circumstances that ran with low crude prices. One of the strategies we partaked in and looked at acquiring was being the lowest cost lift basins in what we consider North America. With the IOC acquisition we have done that as well as it has a very solid top five customer base that puts us in a position to continue on growth.

There is that doubt there will be some head winds in this business with crude being under where it is today either at 50 to 53 or (inaudible) trading at the time. But I do believe with the production side balancing out the drilling (inaudible) side, we are in a good position to, A, not go backwards, and B, to potentially have growth over 2014.

Great. And my last question and I will jump back into the queue. You mentioned raw materials being favorable. Did you see a favorable impact in the fourth quarter in fuel specialties and performance, and by how much is your year-over-year improvement and your variable margin, if you will?

We really didn't see it much in the forth quarter. I think we will see a little bit of benefit. You will start to see it in the first quarter.

So is raw materials flat on a year-over-year basis in the fourth quarter in the two segments?

They were, but more importantly it takes time to filter lower cost raw materials through your system. You are in a lag like you typically are up or down in raw materials.

So you expect to see an up tick in the first quarter of both segments?

That's correct.

Great. Thanks.

You are welcome.

We will take our next question from John Tanwanteng of CJS Securities. Please go ahead.

Good morning, guys, very nice quarter.

Good morning, John, thank you.

Regarding the strength in AvTel again, was there a pull in from future quarters or more of a catch up? Just trying to quantify what we can expect going forward.

It was a pull in from Q1 2015.

Got it. And on oilfield again I think the previous caller mentioned IOC, but is the overall business expected to grow and are margins in that business still above the core fuel specialties margins?

They are a tad below the core fuel specialties margins on an overall basis. If you look at this environment and obviously listen to other calls that are people in the oilfield services business, there is an expected large decline in overall business for 2015. I think because we are still a small player in this market, but we have fantastic technology and a good market price to get it to the market, we feel confident we can at least stay flat over 2014, and there is a slight chance we can grow this business. Obviously, depending on what crude prices do in the latter part or middle part of the year as well.

Great. Any updates on either additional M&A or divesting of non-core businesses? What is the strategic plan over the next year or so?

As we mentioned a little in the script we have backed off the oilfield to see what filters out in the market. It has been chased by private equity and chased by venture capital. There are a lot of stressed assets in the market right now and stressed balance sheets. We really want to see what happens over the next six to eight months and we want to make sure we've shored up our own shop. Really, we are focusing on personal care right now. I wouldn't say there is anything in the immediate term, but it is part of our strategy we put together over the many years we have been discussing with you and our shareholders. That's still our focus right now.

Thanks. And then, finally, how should we think about the impact of currency on the top and bottom lines in 2015?

John, as we mentioned on previous calls our trading business is pretty much naturally hedged. When we see gains and losses in the sales line we tend to see compensating gains and losses in the cost lines. At the operating income level we tend to be naturally hedged so there is no impact by currency.

Thanks a lot, guys.

No problem.

Thank you.

We will now take our next question from Christopher butler of Sidoti and Company. Please go ahead.

Hi, good morning, everyone.

Good morning, Chris.

I was hoping you would go into a little more detail on the lower legal and compliance costs. When you began beefing that up a year or so ago, maybe more, I was under the understanding that this was on going and would be supporting the acquisition strategy. Was I under the wrong impression or has something changed here?

No, I think what we have been saying for awhile now is as we went through our enhanced compliance program we have a monitor on board, and a number of external legal firms involved if our business, and we have now positioned ourselves with what we think is a world class compliance system. That's what we needed. Since 2010 we have been working very hard on that. We've also had a number of legal cases we have had to deal with over the past couple years as well.

As you remember the (inaudible) case was successfully concluded in our favor quite recently. We are past all of those costs now. We are now down to a corporate (inaudible) rate of between $9 million and $11 million per quarter depending on what we are doing and where we might be at that particular time. I think we are in great shape right now and that's a number we are pretty happy with.

And as we look at potential M&A and understanding that you are folding some of the prior deals in, you talked about personal care products as being a target. With falling oil and some opportunities there, has that moved oilfield services back on to the radar screen a little bit given a little bit of time?

I think this will take time for assets to be stressed. As I eluded to earlier, we talked about distressed assets and stressed assets and balance sheets in that market. I think it will take about six to eight months for that market with low crude prices to really see what happens and shake out. As I stress to our employees and as I stress in my own private life good companies became great companies in difficult times and upside down markets. I think this is the perfect example of an upside down market. We have a great balance sheet. We will watch and we will see what fits best with our portfolio whether it's technology or assets. In the meantime, we will push forward and bring the best technology and pricing to our customers as well as stay focused on personal care.

Appreciate your time.

Thank you.

No problem.

(Operator Instructions). We will now take our next question from Bill Dezelleum of Tieton Capital Management.

Thank you. Group of questions. First of all, relative to your comments and the opening remarks about the performance chemicals business having a strong order book going into this year, would you please provide more commentary around that?

Yeah, bill, I will answer it real quick for you. We saw a little slow down in the 2014 fourth quarter. That was primarily due, and we know this from our direct conversations with our customer base. There was a lot of cash conservation and there was planned shutdowns and a lot of push into Q1 up 2015 as an order. What we have seen already booked into Q1 2015 is a strong order pattern and it is as we expected. We would be concerned if we didn't see the robust order pattern moving into this January and February time frame. It is exactly as we expected.

So in essence the opposite of aviation additives where that was pulled into the fourth quarter from the Q1. Really, this is just again a shifting of business out of Q4 and into the Q1?

You are exactly right.

Shifting then if we could to the fuel additives business, the lower crude price, what impact if any does that have potentially on the adoption of additional fuel additives by various constituencies around the globe?

That's a tough question to answer. What I will tell you on lower crude prices, it does put a little hamper on alternative fuels whether it is LNG, whether it's ethanol based, or whether it is electric based hybrids, it is typical supply and demand. When you have lower prices people tend to take their eye off the ball. For us lower crude prices gives us lower input costs. That benefits fuel specialties. You obviously will have to give some of that back to the customer base as expected and as anticipated. But we feel that long-term this is a very, very good for fuel specialties and for oil field on the oil chemical side and we feel we will see a benefit of that in the business. Short-term it is effect on the oilfield specialty business, but that is only 20% to 25% of the revenue right now. Between 70% and 75% of the revenue it is a positive impact.

Part of where I was going with the question is wondering if because price of crude is lower that would imply the price of diesel is lower and it would mean the price of your additives is lower which might then lead some entities to make the decision they could afford to basically put an additional layer of cost on to the public because it is coming from a lower base. Is there any logic to that thinking at all?

Yeah, there is some logic to that. Not in the more mature countries. There is some logic to that more in the countries that have what you would say is unstable political environment and/or an environmentally unfriendly environment. If you look at the likes of China. If you look at the likes of countries like India where they have extremely bad air quality, being low crude prices, albeit pricing by the government is really dictated, I think with lower crude prices you could see a very big differential over time of them adopting measures sooner rather than later. I don't think you'll see it happen. It will not be a quick response. We've only been down with these low prices for awhile. I think you will have to see a continued couple of quarters of low crude prices for that to happen.

Great, thank you. If I may, a couple other quick ones. Did we hear correctly that the lead additives business was $23 million in the fourth quarter and really what you are looking for in the first and second quarters is $17 million split between the two or $8 to $9 million per quarter?

Yes, it is $8 million to $9 million in quarter one and $8 million to $9 million in quarter two totaling $17 million for the first half of the year.

Great. That is helpful. You had a new line item on your balance sheet and that was a $45 million pension asset. Can you discuss that especially in the light that you also have a $10 million pension liability?

Sure, Bill. I will try to keep this pretty short. But we have a UK pension plan. It's a (inaudible) that has been closed since 2010. Every year-end we have to revalue those assets. It has been a small liability or small asset for a number of years. It bounces between the two. And given the strong investment returns we have had, the assets have grown quite nicely in that business and it's flexing to an asset. We also have a small German pension plan as a small liability, and that's why you've got the two split apart like that.

So those are not allowed to be netted against each other?

Correct.

Thank you both for your time.

Thank you.

We will now take our next question from Chris Shaw of. Please go ahead.

Good morning, guys, how are you doing?

Hello, Chris.

I wanted to clarify an answer from before. When you were talking about you were hoping to be at least flat and possibly grow this year I couldn't figure out if you were talking about specifically IOC, the entire oilfield chemical business or fuel specialties in it's entirety?

If you go back to when we first acquired the independence business we talked about our combined oilfield business being around $260 million revenues at that point. Our intention and desire is that we can continue to hold that $260 million of revenue as we go into 2015. What we don't expect to see is our business going backwards.

That was oilfield. That helps. For the quarter did you say for IOC was $35 million in sales?

That's correct. We had only two months of the IOC business in our results.

When you acquired it, you said it was $150 million run rate annual, that seems like two months at $35 million would be a lot higher than that. Is that what you were referring to when it exceeded expectations?

Yes, they did exceed expectations. We expect the run rate where we talk about to keep in the $260 million for combined entities.

That's helpful. You mentioned $3 million in operating income for the quarter. I assume there were some acquisition costs included in there and if so do any continue in the first quarter?

Yes. The acquisition costs won't be reported in the independence results in the corporate line. There will be some additional amortization and some US GAAP accounting which will flow through fuel specialties. But, yes, the operating income was about $3 million for Q4.

And then someone else asked about raw materials, but where do you see your raw materials plate right now? What impact has raws had? Just on the cost side. Not factoring any adjustments you have to make on your own products in terms of pricing, but how much of raw is down at this point?

I think as you know in the chemical business and it is traditionally this way there could be a three to six-month lag up or down. I think once we get through the first quarter we will be able to give you a better idea what the percentage is going to be increase. We do think it will go up a little bit, but obviously we are prepared to protect our customer base and make sure we are fair to them as well. After the first quarter we will be able to give you a better answer on where we think GP ought to be calculated in a fuel specialties arena for the year.

That works for me. Thanks a lot.

Thank you.

We will take our next question from Gregg Hillman of First Wilshire Securities Man agent. Please go ahead.

Yes, good morning, gentlemen. Patrick, I wanted to ask you about that press announcement from January with the true clean water service, and could you just explain what it is and what it does? I didn't quite get it and why you think it is important or material to the Company?

As you know, Gregg, you get a lot of water, frack water or frack stimulation or just water coming out of the ground. This is a process that helps not just minimize the amount of water, but gives you a cleaner base water in the product. Where you are in the Permian basin and you go further (inaudible), you have a lot of water issues. You tend to use a lot of water for fracking. That's why this technology was formulated. These guys have done a really good job on the first jobs. We will see how it really develops over the next 12 months.

Is it a filtration thing where you are recycling or reusing water?

It is part filtration and part chemical.

And what do the chemicals do?

I really probably could not give that to you over the phone. I would rather put you with a technical person to give you more detail.

Okay, That's fine. But you think potentially this could be, in the tens of millions this service?

I think it still has some time to prove itself out. I think it has great potential. It is just too early in this stage to put a number on it.

You are saying it is better than the other solutions that are currently on the market for the same problem?

Yes. For the cost, absolutely.

Fine, thanks.

Thank you.

(Operator Instructions). We will take our next question from Ivan Marcuse from KeyBanc Capital Markets. Please go ahead.

Just a quick follow-up on the octane. Since your volumes are going to be in the $7 million to $8 million dollars, is your fixed cost absorption or profitability, in terms of contribution, be dramatically lower as you cover the fixed costs on lower revenue base?

Certainly for the full year. We certainly expect to see a drop in our gross margins in octane and obviously that will feed through to the operating income line as well.

Historically, you talked about raw materials coming down would be a benefit. How quickly does the pricing flow through? I know you are thinking how it will work out today, but historically, have you given it all back eventually or is there a delay or how does it typically work?

It is typically three to six months. Over a period of time the results are consistent. You typically have to give a lot of that back if not all of it over time. I think we should see a benefit in Q1. I think we should see a benefit in Q2. It all depends really on what happens to crude over the next 90 days. If we can see consistently low prices like we believe there will be, we ought to be able to keep some of the benefit.

Great. And in your north American business fuel specialties has shown nice growth rates in volume over the past couple quarters. Within North America, how consistent can that remain? Would you revert it back to the mean or is there something going on in North America where you are seeing a lot more growth than maybe Europe or such?

You are definitely seeing more growth in the Americas versus the EMEA. If you look at our strategy when we said we wanted to put really our stable ford into Canada and put an office in Brazil and focus on Mexico as well, we have done a very good job at doing that. Our guys in the Americas have done a good job managing this business and growing this business and have prepared for it. Obviously, with low crude prices you have consumable more money in your pocket and so people are driving more and it is a good benefit to the whole Americas business. Secondarily, and don't forget this, we have great technology. We really work with our customers to bring them the best technology in the market place and the best cost. They have done a great job doing that really throughout 2014 and coming into 2015.

Americas is primarily diesel, correct?

Yes. Well, if you look at the US, it is primarily gasoline. Over the road is diesel, but it is a big gasoline market but we focus on diesel.

Right, I meant your focus, Innospec's focus is primarily diesel.

That's correct.

Would you describe your growth as still a function of market share growth or is it a function of just general demand? I guess the question is are you taking market share?

Yes we are to both.

Thanks.

Thanks a lot.

There are no further questions in the phone queue. At this time I would like to hand the call back to Patrick 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. We look forward to meeting up with you again later this year. Have a great day.

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