Innospec Inc (IOSP) 2015 Q3 法說會逐字稿

Good day and welcome to the Q3 2015 Innospec earnings conference call. This conference is being recorded. At this time I'd like to turn the conference over to Mr. David Williams, General Counsel. Please go ahead.

Thank you and good day, everyone. My name is David Williams. I'm Vice President, General Counsel and Chief Compliance Officer at Innospec. Thanks for joining our third-quarter 2015 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, 2015. 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 have also included some non-GAAP financial measures. A reconciliation to the most directly comparable GAAP financial measures is contained in our earnings release and in the presentation that follows, a copy of which is available on the Innospec website.

With us today from Innospec are Patrick Williams, President and Chief Executive Officer, and Ian Cleminson, Executive Vice President and Chief Financial Officer. And with that, I will turn it over to you, Patrick.

Thank you, David, and welcome, everyone, to Innospec's third-quarter 2015 conference call.

We are pleased to report yet another strong quarter for Innospec, particularly impressive when you consider prevailing economic conditions, geopolitical issues, and the [business] environment around the world. Our strategy continues to be robust in the face of these challenges and we believe we have performed better than many of our peers.

While we are optimistic that we will meet our objectives for the year, the outlook for 2016 remains very uncertain in some of our businesses, as the direction of crude oil and gas prices has yet to be established.

That said, we believe we are well positioned, both financially and operationally, for the market upturn when it comes.

We delivered to our own expectations in the third quarter, with continued gains in sales, margins, and profitability across the board.

In fuel specialties, the Americas delivered continued strong results in our core fuels business, with new business closures alongside continued gross margin improvements, driven by lower raw material prices and a generally richer sales mix. At the same time, the business in EMEA performed well, but sales gains were offset by adverse currency impacts. In Asia-Pacific, sales were down slightly due to market conditions, with margins again strengthening due to a richer sales mix.

AvTel sales were strong, but a weaker customer mix resulted in slightly lower margins. We see no fundamental shift in demand in this product line in the near or medium term.

Needless to say, the oilfield market remains extremely challenging, with low crude oil prices prevailing throughout the quarter. Despite this, we posted a strong third quarter in oilfield specialties, with sequential sales holding steady, including some market share gains.

Gross margins showed good growth, driven by a strong performance in our frac/stim business and a richer sales mix in our production business. Considering general market conditions, we believe that this is a very credible performance. Nevertheless, we continue to be diligent regarding both customer service and cost containment measures, so that we remain aligned with our customers.

We believe that we will reach our goals in oilfield specialties for the full year, and we are well positioned in the market. However, the low price of crude and gas continues to have a huge impact on our customers' investment plans and we remain very cautious regarding prospects in the next quarter and in 2016.

In performance chemicals we completed the disposal of the aroma chemicals business during the third quarter. Adjusting for this, third-quarter sales were about the same as last year. Our personal care business continues to deliver its strategy, with good volume growth and stronger margins, but this was offset by a weaker performance in the polymers business.

We remain optimistic about our personal care business and continue to invest substantially to underpin further growth. Our new product launches in personal care have laid a strong foundation for the future and have already delivered additional sales.

In octane additives we completed a Q3 order. We have now received an additional order of similar value, which we will expect to fulfill over the coming months.

Now I will turn the call over to Ian Cleminson, who will review our financial results in more detail. Then I will return with some concluding remarks. After that we will take your questions. Ian?

Thanks, Patrick.

Turning to slide 6 in the presentation, the Company's total revenues for the third quarter were $254.2 million, an 11% increase from $228.2 million a year ago. The overall gross margin increased from last year to 35.6%, driven by improvements across all our businesses. EBITDA for the quarter was $42.1 million, a 29% increase over last year.

Net income for the quarter was $35.6 million. Our GAAP earnings per share of $1.45, included special items, the net effect of which increased our third-quarter earnings by $0.27 per share. A year ago we reported GAAP earnings per share of $0.83, but that included a negative impact from special items of $0.03. Excluding special items in both years, our adjusted EPS was $1.18, a 37% increase from $0.86 a year ago.

As part of the Independence acquisition we are required under GAAP to fair value the contingent consideration that we expect to pay in 2015 and 2016 on a quarterly basis. Any adjustment to the fair value is charged to the income statement, is noncash and adjusted out for EPS purposes. In this quarter, primarily as a result of our expected lower contingent payment in 2015 and 2016, the adjustment resulted in a net $8.5 million credit to the income statement and a $0.20 adjustment to EPS.

Moving on to slide 7, revenues in fuel specialties for the third quarter were $190.3 million, 22% higher than the $156.1 million reported a year ago. The increase was boosted by a strong contribution from the recent acquisition in oilfield specialties, which added 32% to revenues. Excluding the acquisition, volumes were up slightly, by 1%, offset by an adverse currency impact of 5% and a 6% weaker sales mix in the quarter.

By region, excluding oilfield specialties, revenues in the Americas were up 10% year over year, driven by volume growth, but fell by 13% in EMEA and 17% in Asia-Pacific due to adverse exchange impact and a weaker sales mix. Sequentially, revenues in oilfield specialties remained steady from the second quarter and AvTel delivered to plan.

As expected, gross margins in the segment softened from the strong second quarter to 36.3%, but continued to benefit from a richer sales mix and lower raw material prices compared to a year ago. As a result, gross profit was $69 million, up 30% from last year's $53.2 million, and operating income was $27 million.

Turning to slide 8, adjusting prior-year comparatives for the disposal of aroma chemicals, revenues in performance chemicals for the third quarter were about the same as last year at $43.6 million. Volume growth of 13% was offset by lower pricing of 6% and an adverse currency impact of 7%.

By region, sales in the Americas were broadly similar to last year, but fell by 4% in EMEA, driven mainly by currency impact. Sales in Asia-Pacific were up 21%, driven by volume.

Gross margins were 28.4% in the third quarter, benefiting from a richer sales mix with increased sales of higher-margin personal care business. Performance chemicals operating income for the quarter was $5.4 million, broadly flat compared to last year's third quarter on a like-for-like basis.

Moving on to slide 9, net sales in octane additives for the quarter were $20.3 million, in line with expectations. The segment's gross margin was 44.3% and operating income for the quarter was $8 million.

As Patrick noted earlier, we have recently secured an additional order and expect to deliver $19 million of revenues over the coming months. Beyond this we have no further visibility.

Turning to slide 10, corporate costs for the quarter were $9.3 million, slightly lower than a year ago and just below our expected range of $10 million to $11 million for the quarter. There was negligible pension impact for the quarter compared to a charge of $0.8 million a year ago.

The effective tax rate for the quarter was 14%, lower than previously expected due to the change in geographic mix of taxable earnings. The full-year adjusted effective tax rate is now anticipated to be around 21%.

Moving on to slide 11, we closed the quarter with net debt of $4.9 million, a significant improvement from $71.1 million at the end of the second quarter of 2015, with a $41.5 million contribution from the sale of our aroma chemicals business in the quarter.

The Company retired 84,633 shares for $4 million, which completed the current $20 million Board-authorized share repurchase program.

Net cash generated from operations was very strong at $35.5 million. As of September 30, we had cash and cash equivalents of $132.8 million and total debt of $137.7 million.

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

Thanks, Ian.

In conclusion, we have delivered to our expectations in third quarter and we are pleased with our performance, particularly considering the state of the markets worldwide. Innospec continues to be in an excellent financial position and, consequentially, the Board feels very comfortable to continue its commitment to return value to shareholders.

We will deliver this by continuing our policy of increasing our semiannual dividend, which we raised to $0.31 per share for the second half of 2015. This brings our full-year dividend to $0.61 per share, which is an increase of approximately 11% on 2014.

The Board of Directors has also considered that our balance sheet is sufficiently strong to authorize a new share repurchase program, which will buy back up to $90 million of common stock over the next three years. We are confident that our strategy will continue to deliver results by providing innovative products and services to our customers. We appreciate the loyalty and efforts of our employees, and the continued support of our customers and shareholders worldwide.

Now I will turn the call over to the Operator and Ian and I will take all of your questions.

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

Nice quarter. The first question I have is on the fuel specialties business here. The gross margin again stayed -- was again strong. And I'm assuming there's a benefit of raw materials in there, price/cost benefit. How big of a benefit was that to your year-over-year improvement in gross margin? What's sort of your expectation going forward in that business? (Multiple speakers) --

Ivan, it's probably -- the expectation was probably about 2 or 3 percentage points higher than we would normally expect. Historically we've always traded around about that 30% to 32% mark. Currently at 36%, that probably sits towards the top end of our expectations in Q3. And as we said on our last call, we did expect it to trend down. It did. And we expect it to trend down a little bit further into Q4 as well. So currently we're expecting Q4 to look more like 33%, 34% (inaudible).

Great. And speaking of Q4, in fuel specialties last year it was a very big quarter. Is there any reason why you wouldn't repeat that? I can't remember if there was something special in there.

Yes. Last quarter in Q4 last year, Ivan, we had a very cold winter. And what that meant, particularly in the US, is that we got a lot of cold flow improver into the system. And that winter went on -- it started early, it was very hard, and it went on a long time. So that really helped us hit the very good number last year.

I think, Ivan, it's going to all be dependent on weather. If you go to core fuel specialties business, if we have a decent winter either, a, in Europe and the Americas, we could have a really nice fourth quarter. But I would probably say it will be an on-average fourth quarter as we sit today.

Great. And then, if I'm looking at this right, it looks like you had a bigger quarter, at least in IOC, on a sequential basis in the third quarter, in the oilfield chemicals. But you're pretty cautious going into the fourth quarter. Why wouldn't that momentum sort of continue? Or did you see a de-acceleration as you moved through the quarter and is your order book fallen off a little bit in looking out through the fourth quarter?

Yes, we didn't see necessarily a full de-acceleration in the later part of Q3. But typically in the oilfield sector, even in good times or bad times, you see a generally slow fourth quarter -- A, wintertime, B, the movability of rigs and products. But I do think, for us, we're always cautious in this market sector with crude prices and natural gas prices where they sit today. And I think we would just rather we give you guys cautious remarks and see where the quarter falls out.

But I do think you'll see some slowdown. What we've always said from Q1 forward is if we hit either flat or even less 10% we've outperformed the market. And so as we've said in our script, we will remain on tact with that. I think we're going to definitely hit our numbers of staying at least even keel, as we stated earlier.

Great. And where you stand today, I guess, Ian, what's sort of the payout expectation in the fourth quarter for IOC out of the cash flow statement?

Yes, we've still got a little bit of work to do on that Ivan. But it's looking round about that $40 million to $45 million, Ivan.

And will you use debt or does that come straight out of cash on hand?

It'll come straight out of cash.

Great. Thanks a lot for taking my questions.

Chris Shaw; Monness, Crespi.

You gave a 1% volume number for the fuel specialties segment, I guess ex the IOC acquisition. Does that reflect the volume growth of just the core fuel additives business? Or is there -- I'm trying to get a sense of how the volumes are in that business -- or is that pretty accurate for that?

There's a little bit of variability between regions, Chris. We've got good volume growth in EMEA in the quarter, pretty flat in As-Pac. We did see a drop-off, as we said, in AvTel in terms of volume, but a lot stronger pricing and sales mix. So there's a little bit of variability in there. But overall we do see positive volume growth in our core fuel specialties business this quarter. And we certainly expect that in future quarters as well.

Okay. And I guess, maybe asking Patrick, having just a more broad sort of outlook, not specifically maybe for your oilfields business, but just in general. I think he's usually fairly opinionated on what he thinks sort of US oil production will look like or what's going to happen in that market. Do you any updated view on where production goes in the US?

Yes. I mean, Chris, I don't think it's changed a lot since my last view. But I do think at some point in time we will start getting relief on pricing. There has to be a northern trend upwards on crude. But we have to take into effect there's a lot of wells behind pipe. Drilling won't pick up anytime soon, in the next six to eight months, just due to the fact that there will be more fracking of wells that have been put behind pipe.

Our view is there's -- if you look at a lot of the OPEC countries, they balance their budget by crude. And they can't sustain these price levels for a long period of time. So I think there will be some responsibility in the marketplace. It's just going to take some time.

There's a lot of banks calling loans out now in a lot of E&P companies. There's a lot of shifting in the market. There's a lot of stressed assets out there. I think it's going to take some time to shake it out. It's very similar to the market crisis in 1999 and 2009.

So, for us, let's just sit tight and see. I think we'll see probably mid-50s of crude probably latter part of next year. And I think that that's a nice price to start generating some upward activity in the oilfield sector.

Okay, thanks. And since you sort of mentioned somewhat distressed assets, have you -- for your business is there anything out there that's getting more appealing, that's in need of capital, that you can acquire that would fit with your portfolio?

Yes, I mean, we look at our portfolio. We'd like to have a nice balance between the three businesses. And if you look at the balance between the fuel sector and the oilfield sector, it's a nice balance there. Where we're really concentrating on right now is the personal care side, and there's not a lot of stressed assets on the personal care side.

But if you look at oilfield as specific, there's a lot of stressed assets, yes, and we are seeing a lot coming on the market. The fact is, a lot of these assets are borderline bankrupt. And do you buy them for the asset and the market share gain, or do you just wait and let them go out of business? Everything that we've seen on the market to date has not been something that we really want to jump in and buy.

I think it's sit tight, let the market shake itself out. If we find something that really fits and makes a lot of sense at the right multiple, obviously we'll have to take a hard look at it. But as of today we really haven't seen anything that's caught our eye.

All right, great. Makes sense. Thanks.

Jon Tanwanteng; CJS Securities.

Fantastic quarter; congratulations. Can you break out the revenue or margin contribution from oilfield at all in the quarter?

We don't do that at the moment, Jon. It sits within our fuel specialties segment. I think what we said on the call is that sequentially it's sort of flattish over Q2. And what we expect to do is in 2016 you'll get a lot more visibility on that. Our intention is, if everything goes to plan, that we'll be able to break that out in more detail for you going forward.

Okay. Maybe just from a ballpark perspective, were the margins there above or below the core fuel business?

They're probably about in line, around that sort of 36%. And what we have said previously, Jon, is that we were aiming for around about $240 million to $250 million revenue in that segment. And as Patrick said earlier, we expect to be broadly in line with that.

Okay, great. The performance chemical margins were also pretty nice in the quarter. How much of that was actually mix versus input costs?

It's probably really all mix. We don't get that much tailwind from input costs in that particular segment. So it's really driven by the fact that we're just producing more personal care sales as a proportion. They tend to be higher margin than the rest of the business in that segment. And it just naturally directs the margins higher.

And I think, Jon, with the disposal of the aroma business you're now seeing the true impact on the gross margins for the personal care business.

Okay, great. And just on the balance sheet here, you're obviously at net zero leverage. You have the buyback, you have the higher dividend. But can we expect more from the M&A side? And are you active there? What does the pipeline look like?

We are active. And I think, as we stated in the last two calls, we're trying to make sure we have a balanced portfolio. So we're really active looking in the personal care sector. I think, as everybody knows, the EBITDA multiples are extremely high in that sector. So we're very cautious in what we pay and where we pay and geographically where we buy.

But we're definitely active in the M&A pipeline. I think it's probably slow a little bit on the oilfield side until we see that market shake out, as we said earlier. But we are looking more so in the personal care than anywhere else. But you never know when something pops up which sector that we will buy in. But that's our focus right now.

Okay. And finally, just on the timing of that new octane order, you said over the next couple of months. But does that all fall into Q4? Or is some of it going to leak into 2016?

I think the majority of that should fall into Q4. We'll know more in the upcoming weeks, but it looks like the majority will come in the Q4, if not all of it.

Okay. And just regarding the customer, have they indicated to you that they're winding down their business there, or is it just open ended?

It's just open ended.

Okay. Thank you very much.

Jeremy Hellman; Singular Research.

Thank you. This is D- --(technical difficulty) your prepared remarks (technical difficulty) wonder if you could elaborate, just on what went into that richer mix? What got over-weighted and is the mix that you recorded in this quarter something that's sustainable or just something that is for one quarter only?

Your first half of your question was coming in and out, so we really didn't catch it. But I think we understand the gist of your question.

Yes. I think what you were talking about, [Deborah,] was the mix within fuel specialties and --

Production [business] was I think what you said.

Say that again? Sorry, [Deborah,] you have a really poor line.

(Technical difficulty)

I think, Deborah, the best thing to do is you dial off and dial back in and get in the queue. And the operator can take -- if we can take the next call, please.

Thank you so much.

Gregg Hillman; First Wilshire Securities Management.

First of all, Patrick, in oilfields, have you come out with any new classes of products lately in oilfield that you haven't put on the market before, that could be material?

Yes, that's a continued process within our R&D program. And I think if you look at the oilfield business, whether it's frac/stim, drilling, or production, we're continuously coming out with new products. Obviously that's how we've gotten share gains and have stayed steady. So that's a continued process.

Is there anything new and earth-shattering that's on the market yet? Not yet.

Okay. And then, finally, in regulation, is there anything new on the regulatory front for diesel or carb or anything that you could speak of, like in China, for example?

I think you're starting to see a little more headwind with the Chinese government getting a lot of pressure, a lot of pressure from a lot of other countries, in regards to cleaning up their fuel. It goes the same with India. I think it's just a matter of timing. Do we have a crystal ball to say when that timing is? We do not. But we're obviously well prepared within those two specific countries we just discussed to really enjoy the fruits of them going to an ultra-low-sulfur diesel fuel.

Okay. And do you have relationships with the state oil companies in both those countries or the major oil companies already?

We do.

Okay. And what would be the potential market if those countries did change regulations, do you think?

You know, it's hard to say. Until they actually take that fuel down to a less-than-15-ppm sulfur, it's really hard to say, due to the fact that we don't know -- is there going to be a lubricity spec, is there going to be a cetane spec, what's the sulfur spec going to be? So until they actually come out with the true regs and we can read off the regs, we'll be able to dial in what kind of numbers that will look like.

Okay. Thank you.

Ivan Marcuse; KeyBanc Capital Markets.

Are you expecting to break out the oilfield chemical business? Or it's going to be its own separate segment when you report next quarter? Or still (multiple speakers) --

Not next quarter. The likelihood is we'll break it out for the first quarter.

Great. And then, within your cash flow, even with the $40 million payout or whatever maybe for IOC at the quarter, you're still going to probably end barely any sort of net debt. And historically every once in a while you do a special dividend or something like that. Would that be something you could consider? Or for the time being would you expect to sort of build cash and hopefully an acquisition comes your way?

You know, I think you just said, it's probably the latter, Ivan. But of course we always look at special situations. But for right now, you can see we're trying to increase our dividend significantly every year. And the likelihood is that's what we'll continue to do. Will we do a one-time? I'd say probably stick with the latter for now, but it could happen.

Great. And then, corporate expense? I don't know if you mentioned this. It's still sort of staying at that $9 million to $10 million range?

Yes, I'd say probably $10 million to $11 million is probably a better number.

Okay, great. Thanks.

Matt Dhane; Tieton Capital Management.

You touched on this to an extent, but wanted to probe a little deeper. Obviously as you both called out, you've been gaining great market share within the oilfields space. I know you touched on new products being a dynamic. I was curious if you could go a little deeper. Is the bulk of your market share gains really driven by the new products? Or is there other dynamics, too, to help me understand what's allowed you to be so successful in such a tough environment there?

I think two things. I think we've got a very good management team that's very seasoned and they've been in this market for quite some time. And I think secondly it's our approach to the market. It's very easy to look at the upheaval that's going on in the oilfield sector with a lot of the acquisitions going on, a lot of consolidation going on. There's a lot of unknowns in the market. And I think for us, bring stability, good products, good management, and a good model has really helped us gain market share.

Great. Thank you.

There are currently no more questions at this time. I'd like to hand the call back over to Mr. Patrick Williams.

Thank you all for joining us today, and thanks to all our shareholders, customers, 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 early next year. Take care.

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