Innospec Inc (IOSP) 2020 Q4 法說會逐字稿

Thank you all for standing by, ladies and gentlemen. Welcome to today's Innospec's Fourth Quarter 2020 Earnings Release and Conference Call. (Operator Instructions) Please be advised that the call is being recorded.

And I would now like to hand the call over to your speaker, Mr. David Jones. Thank you.

Hello. This is David Jones, and I'm Innospec's General Counsel and Chief Compliance Officer. Late yesterday, we reported our financial results for the fourth quarter and full year 2020. The earnings release and this presentation are posted on the company's site at innospecinc.com and will be available on the site for at least 6 months.

During this call, we will be making forward-looking statements, which are predictions, projections and other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. These statements involve a number of risks, uncertainties and assumptions, including the effects of the COVID-19 pandemic, such as its duration, its long-term economic impact, measures taken by government authorities to address it in a manner which pandemic may precipitate or exacerbate other risks and uncertainties that could cause actual results to differ materially from anticipated results implied by forward-looking statements. These risks and uncertainties are detailed in Innospec's 10-K, 10-Qs and other filings with the SEC. Please see the SEC site or Innospec's 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. A copy of that is available on Innospec's site.

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'll turn it over to you, Patrick.

Thank you, David. And welcome, everyone, to Innospec's Fourth Quarter and Full Year 2020 Conference Call. Throughout the incredible challenges of 2020, the Innospec team has done a phenomenal job of maintaining the health and safety of our operations, while staying focused on consistently meeting our customers' requirements. Our continued focus on growth, margins, cost control and cash flow has underpinned a significant turnaround in our results since the second quarter.

The Performance Chemicals team performed well throughout 2020, delivering its third consecutive year of operating income growth, margin expansion and increased cash flow from operations. Full year operating income was up an impressive 13% over 2019. We are investing in additional global R&D capabilities, such as our new state-of-the-art technology center in North Carolina, which will advance customer collaboration in key growth markets, including Personal Care, Home Care, agriculture and Construction.

In addition, this quarter we added manufacturing capacity and new railcar handling facilities in North Carolina to support growing demand for our innovative industry-leading mild surfactants. We will continue investing to support the long-term growth of this business and bring to market the large pipeline of technology-focused organic growth opportunities.

In Fuel Specialties, global fuel consumption grew for the second consecutive quarter, resulting in a 15% sequential increase in sales and operating income. Exiting 2020, average fuel demand in our key markets that we serve was still below 2019 levels. And as expected, the recovery in aviation has lagged that of road fuel. As the vaccine rollout advances and barring any further sustained economic lockdowns, demand for our fuel should improve along with fuel consumption.

Fuel economy and emissions reduction have never been more important. Our products boost the performance of cleaner fuels, such as low-sulfur marine and renewable diesel, improves miles per gallon and reduces emissions. Our industry-leading technology will remain fundamental in enabling the world's transportation fleets to keep pace with increased regulatory, performance and sustainability standards.

In our most impacted business, Oilfield Specialties, we reacted quickly to reset the cost structure following the unprecedented second quarter drop in global oil demand. Sequential sales improved 34%, and we delivered positive operating income in line with the upper end of the expectations noted on our third quarter earnings call. This marks a substantial improvement from the $12.4 million loss in the second quarter.

Oil prices have settled above $50 recently as OPEC+ supply actions and an improving global oil demand outlook have been supportive of customer activity levels. Our expectation in our completions business in the U.S. E&P companies will continue to increase activity in a disciplined fashion in 2021, as they look to balance production with cash flow. In other oilfield segments, including production, DRA and the Middle East, assuming stable oil prices at current levels, our outlook is for continued sequential growth throughout 2021.

Our leading technology and exceptional service positions us to grow faster than the broader market as the recovery accelerates. In addition, the actions that we took in 2020 to restructure our cost base will continue to deliver operating leverage improvements as the recovery continues.

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 comments. After that, we will take your questions.

Thanks, Patrick. Turning to Slide 8 in the presentation. The company's total revenues for the fourth quarter were $310.8 million, a 20% decrease from the $390.7 million a year ago, driven by reduced customer activity in Oilfield Services and lower demand due to the pandemic in Fuel Specialties. Overall, gross margin decreased slightly by 1 percentage point from last year to 29.3%. EBITDA for the quarter was $40.2 million compared to $55.2 million last year, and net income for the quarter was $22.6 million compared to $31.1 million last year.

Our GAAP earnings per share were $0.91, including special items, the net effect of which decreased our fourth quarter earnings by $0.36 per share. A year ago, we reported GAAP earnings of $1.26 per share, which included a negative impact from special items of $0.21. Excluding special items in both years, our adjusted EPS for the quarter was $1.27 compared to $1.47 a year ago.

For the full year, total revenues of $1.2 billion decreased 21% from $1.5 billion in 2019, again, driven by reduced customer activity in Oilfield Services and a lower demand in Fuel Specialties due to the pandemic. EBITDA for the year was $108.9 million compared to $201.8 million in 2019. And net income was $28.7 million compared to $112.2 million a year ago.

Our full year GAAP earnings per share were $1.16, including special items, which decreased our full year earnings by $2.06 per share. In 2019, we reported GAAP earnings of $4.54 per share, which includes a negative impact from special items of $0.68. Excluding special items in both years, our adjusted EPS for the year was $3.22 compared to $5.22 a year ago.

Moving on to Slide 9. Revenues in Fuel Specialties for the fourth quarter were $138.3 million, 8% lower than the $150.3 million reported a year ago. Volumes were down by 1%, and there was a negative price/mix effect of 8%, offsetting a 1% positive currency impact.

Fuel Specialties gross margin for the quarter was at the lower end of our expected range at 31.4% compared to 33.3% in the same quarter in 2019 due to a weaker sales mix. Operating income for the segment was $25.5 million, down 11% from a year ago. For the full year, Fuel Specialties revenues were down 12% to $512.7 million, and operating income was $84.5 million compared to $116.6 million in 2019.

Fuel demand has continued to improve sequentially from its second quarter low points and, subject to any further sustained economic lockdowns, demand for our fuel additives should improve along with fuel consumption in 2021.

Turning to Slide 10. Revenues in Performance Chemicals for the fourth quarter were $114.6 million, up 8% from last year's $106 million, as an increase in volumes of 10% and a positive currency impact of 4% offset an adverse price/mix of 6%. Gross margins of 23.8% were down 1% -- 1.6 percentage points compared to a strong 25.4% in the same quarter in 2019. Operating income was slightly down by 2% from last year at $14.6 million.

For the full year, revenues of $425.4 million were broadly similar to $428.7 million in 2019, and operating income increased by 13% to $54.8 million. We believe our Performance Chemicals business can sustain mid- to high single-digit revenue growth into 2021, reflecting the strong pipeline of organic growth opportunities we have.

Moving on to Slide 11. Revenues in Oilfield Services for the fourth quarter were $57.9 million, down 52% on the fourth quarter of 2019, driven by low levels of customer activity in U.S. completions. Gross margins of 35.1% were up 2.7 percentage points on last year's 32.4%. Operating income of $0.2 million was down from $11.8 million in the same quarter last year. The business has seen a strong sequential improvement over the third quarter and reached a breakeven operating income with further improvements expected in 2021.

For the full year, revenues were $255 million, down 47% from $479.9 million a year ago, and this translated into an operating loss of $9.5 million compared to an operating income of $39.7 million in 2019.

Turning to Slide 12. Corporate costs of $10.7 million were down $1.9 million from last year, primarily driven by lower personnel-related accruals, partially offset by expenses related to our ongoing M&A efforts.

The full year adjusted effective tax rate was 23.5% compared to 22.6% last year and increased slightly as a greater proportion of our profits are now being earned in higher tax jurisdictions. For 2021, we expect the full year effective tax rate to be approximately 25%.

Moving on to Slide 13. This was another excellent quarter for cash, with net cash generated from operations of $58.2 million before capital expenditures of $8 million. In the quarter, we paid the previously announced semi-annual dividend of $0.52 per common share. This brought the total dividend for the full year to $1.04 per share, a slight increase over 2019.

For the full year, net cash from operations was $145.9 million compared to $161.6 million during 2019. As of December 31, 2020, Innospec had $105.3 million in cash and cash equivalents and finance lease debt of $0.6 million, resulting in a net cash position of $104.7 million compared to a net cash position of $15.6 million a year ago.

And now, I'll turn the call back over to Patrick for some final comments.

Thanks, Ian. Despite current virus case levels and regional lockdowns, which are adding some uncertainty to the exact timing and the trajectory of the continued recovery, Innospec exits the year with strong momentum as demand in many of our end markets continues to improve from the low point of the second quarter.

In Performance Chemicals, the pandemic has accelerated customer focus on the secular trends that our technologies address, including less packaging and more mild natural ingredients. This has created opportunities to pull forward organic growth investments aligned with customer demand. While activity is still below pre-pandemic levels in Fuel Specialties and Oilfield Services, both are well positioned for further improvement as the global economy progresses along the path to full reopening.

We continue to generate excellent cash flow and further strengthen our balance sheet. We are seeing the potential to pull forward and increase new organic growth investments in all our businesses.

In parallel, we continue to evaluate acquisitions, which would add meaningful shareholder value. This quarter, we have incurred some significant deal costs as we have been appraising some interesting opportunities. We have nothing further to report and remain hopeful we can make progress, but we'll remain disciplined in our approach.

We are looking forward to 2021 with renewed optimism. Since March last year, we've been dealing with exceptional and unprecedented challenges. And I've been very proud in the which way the Innospec team has responded. We've entered 2021 with improved market conditions, a very strong balance sheet and an exciting portfolio of both organic and acquisitive growth opportunities.

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

(Operator Instructions) First question, it is from the line of Jon Tanwanteng from CJS Securities.

A very nice quarter. Maybe my first one is just what was the mix headwind in fuels? And how do you expect that to trend as we go forward? Is it mostly aviation? Or is there something else that we should be thinking about there?

Yes, Jon, a lot of it was aviation. AvTel had a decent quarter because, obviously, it's private aircraft and crop dusting, et cetera. So that had a decent quarter, but it was mostly commercial aviation. And still, you still have a slow but steady progress in an improving economy, which obviously is going to be burning more fuel. So it's a little bit of everything that really constitute a little bit of headwind, but we're starting to see that demand definitely come back.

Got it. Okay. And then, Patrick, could you talk about the outlook for oilfield demand and profitability heading into the year? It looks like you had a much better Q4. Obviously, prices keep rising. I assume the demand for fuels rises with vaccinations. At what revenue levels do you think you can hit maybe 2019 levels of profitability? Or if you're not going to get there, what's the picture as you head into the year? And then kind of what you're expecting from rising fuel demand?

Yes. I mean, we're extremely optimistic in Oilfield. I think it's going to be a little slower recovery than years in the past. I think that you're not having a lot of private equity chase E&P companies. I think there's more focus on cash flow and paying down debt. So there's not a lot of new working capital coming back in the market. So to me, it's -- that's beneficial to this market globally. And I think it's going to be a slower, more controlled recovery. We're starting to see it. We feel extremely positive about the year.

Ian, you might want to comment on where you think the numbers are going, but from a positivity standpoint and from looking at the global markets and what we're seeing in the U.S. shale markets as well, we're extremely excited about 2021. And I think you'll see a positive operating income moving forward throughout the year. Ian, you got any additional comments?

Yes. I just had a couple of points, Patrick. We are way off, Jon, on the $418 million of revenue that we generated in 2019. And the way we feel about 2021 is that we're in a good spot. We've got great technology. We're in all the right fields. Our people are primed and ready to go and we just need that customer activity to start moving and oil prices to stay high. That's going to evolve over the year as vaccination rolls out, as economic lockdowns are lifted. That's all going to help. But we are running towards that run rate, but we're not going to hit that in 2021. We see that much more as a 2022 target.

Okay. Great. And then just from a seasonal perspective, Q4 is usually a high point for you was cold flow sales. Should we be expecting the same level of seasonal step-down as we head into Q1? Or is there a reason to think that there could be sequential improvement just given how demand has improved?

I think you'll start seeing a little bit of improvement, being that, you just said, as demand has started to come back. And I think as well, you're starting to see the cold snaps come and that will benefit definitely Q1. So we should have a higher-margin product balanced throughout that portfolio in Fuel Specialties, which should help Q1.

Okay. Great. And then just last one from me. Any update on the newer products that maybe got a little bit delayed by the pandemic? The IMO 2020 stuff, the GDI efforts, just any update on those as we head into the year.

Still slow. Still a little delayed due to the pandemic. But we'll start to see activity come back, I would probably say, midyear. As we see some of these lockdowns and the vaccine get out to the mass market, we should start seeing some of these newer product movement in that area.

Okay. Great. So mostly no change, right?

No change as of right now. That's correct.

Our next question, it's from the line of David Silver.

I have kind of a handful of questions. I think maybe just to start, just for Ian, but -- when you were calling out your exceptional items this quarter or special items, the first one was $4.2 million of -- I think it was referred to as acquisition-related costs. So I was just curious, I wasn't aware of current acquisition activity. But I'm just wondering, is that a contingent payment from the Huntsman deal? Or what might that refer to?

Yes. So David, what we said in the earlier remarks was that these are the costs of our ongoing efforts to identify and diligence acquisition targets. The expenses for the quarter were fairly material. We're hopeful that will progress further with these targets and these opportunities, but we're going to stay disciplined in our approach. So you need to think about these costs as the cost of diligence and doing our homework on the targets.

Okay.

Right. Additional color to that, David, is that these are not going to be ongoing cost.

Right. Okay. Patrick, I had a question on Oilfield Services or even a couple of questions. But 3 months ago, I think I asked you kind of where do you think the inflection point is or where is the point in the price of crude, let's say, domestically, where the call or the demand for your products and services really starts to respond. And we've had -- I think when we spoke 3 months ago, the price of crude was maybe in the high 30s. And most recently, it's touched $60, I guess, WTI.

But during the -- something happened or there was a trigger point for the typical shale-based producer during the fourth quarter. Could you just highlight where you think that is? Was it low 40s, mid-40s? Where do you think the inflection point was?

Yes. I mean, if you look at all the basins, they're all a little bit different in what the inflection point or even their lift costs are. So they all have a variable through them. And I think every company has a little variable to them as well. But you're probably right. When you start getting to that the 40s mark, mid-40s and beyond, you definitely start seeing more activity and more profitability within the E&P companies. So we have seen the activity levels increase. The general market is seeing activity levels increase.

I think the issue there, David, is that unlike some of the recoveries in the past, where you had a lot of capital flow into the market, it's a little more disciplined approach right now. Because being the pandemic is still out there, so full-on demand is not on board. I think not a lot of people are chasing it. They want to make sure that there's still sustainability, that these prices aren't going to all of a sudden drop down to the low 30s again.

So you're seeing growth. And I think it's a responsible growth right now and sustainable, which we like. So I think you'll see it consistently improve throughout the year. And I think you'll see our Oilfield Services business consistently improve right along with it. And we should outgrow that improvement just due to the fact that we typically outgrow the market. So we're in a solid spot. And I think with crude prices, as you said, touching $60, as long as this isn't a short-term blip, it should be a very healthy year for Oilfield Specialties.

Okay. Great. And I'm just going to follow-up. Another comment or another distinction you called out 3 months ago regarding Oilfield Services demand was kind of the distinction you drew between customers seeking your bundle, a bundle of your products and services, relative to maybe due to the price of crude or profitability opportunities. They were maybe shopping a little bit more, I don't know, a la carte or individual products and services.

Do you think -- has that noticeably changed? I mean is the fourth -- was the fourth quarter kind of, for lack of a better term, more of an à la carte kind of pick up? And could we see maybe a stronger pickup as profitability returns and people seek your full suite of services? Just characterizing the appetite for your portfolio.

Sure. It's a little bit of the opposite. We're actually the debundled approach. Just due to the fact that we are specialty chemical suppliers of technology, we don't supply the horsepower. And so our approach is, if you want the best frac stimulation or if you want the best production out of your wells, or you want the best throughput through your pipeline, our chemicals and our specialty chemicals and our group of technicians are the people to use. We're not the providers of horsepower. That's not who we are as a company. And so I think this approach of giving the customer -- throughout Q4 and throughout 2021, we'll stay on target of giving that customer the best product at the best price for those basins.

And so it's a continued strategy that we've had. We continue to upgrade our technology portfolio. And as you see, we have DRA in the portfolio now as well. And we felt like that that's the best service you can give to your customer, is being the perfection that we provide from a chemical structure standpoint. And so it's been a benefit to us. It's been a benefit to our customers, and we're going to stay on that track.

Okay. And then maybe one more here. And this would be referring to maybe the near to medium-term outlook, let's say, 1 to 3 quarters. And I'm going to focus on the Fuel Specialties segment. And ultimately, this is a question, Patrick, about Europe versus, let's say, North America or other regions. So my sense is that whether it's the pandemic or just overall economic activity, I mean, Europe is off to a slower start on the recovery path or the trajectory of their recovery relative to North America or the global market as a whole.

And I'm wondering whether that might -- we should kind of temper our optimism a little bit, maybe for the next couple of quarters, thinking about the recovery, the trajectory of the recovery in your Fuel Specialties unit, whether it's top line or maybe there was some of the mix effects that seem to be prevalent in the current quarter. But maybe just a comment on how Fuel Specialties is going to respond if the current pace of European economic recovery, pandemic/post-pandemic effects or business conditions doesn't resume quite as quickly as elsewhere?

Sure. Yes, it's all about fuel consumption. And as fuel consumption rises, our Fuel Specialties business will rise right along with it. It's not a business where we have heavy [tin] in the ground. It's a very flexible business. It's not a business that you're going to take a lot of cost out. As you can see, it kicks out a hell of a lot of free cash flow. And that's the beauty about this business. It is strictly as fuel consumption comes back, this business comes back right along with it.

And you are correct, David, along with the pandemic and the different bearings that are out there, the U.K. in specific and parts of Europe, are having a struggle coming back as quickly as the U.S. is. But I think as the vaccination gets out and -- to more in society and you almost get to a herd immunity, you will see demand come back, and I think you'll see it come back quite significantly.

Now probably not in the first quarter, but we see going in the second and third quarter, there's a lot of people that are -- that have been pent-up that haven't been able to travel, whether it's going on vacation, whether it's business travel, whether it's all kinds of different cargo that's been tied up. I think you'll see a lot of that release as the vaccine comes out and you start getting herd immunity.

So our view is it's probably going to come back quicker than a lot of people think. But obviously, we temper it as well, because we watch the fuel consumption. And until we see that start ticking up quite significantly, we put the brakes on. But it's still -- you've seen it quarter-over-quarter, it's starting to come back, and we're still pretty optimistic.

We'll take our next question. It's from the line of Mr. Chris Shaw.

The Fuel Specialty volumes I thought were very good. I guess to me they were outpacing the market. Did you guys benefit at all -- and maybe this is a question for any of your businesses. But a, what was that attributable to? But B, was there any benefit from sort of Brexit end of the year or moving -- step-up on borders? I know you have a decent U.K. presence, so I was just curious what the sort of the strength in volumes in Fuel Specialty was attributable to.

No, Chris, it was really just -- I think during the pandemic, obviously you saw our volumes drop off quite consistently. And I think what happened is they used up the current inventories that were sitting at their locations at that time. So I think as you started to see consumption come back, the demand for our products came back quite significantly. So it wasn't necessarily one thing. It wasn't Brexit. It wasn't -- the market getting cold across Europe or the U.S. There was not anything we -- in specific we can point to, with the exception that we think there was a big drawdown during the pandemic, and then as soon as the market started coming back, there was a lot of orders that came in. So we think that, that was more so than any one specific product line outpacing the other.

Okay. Got it. And then in Oilfield, being -- showing profits at the level of sales you had in the quarter, I think, is very -- a great achievement. So the question was, how much of the -- you definitely took in a lot of cost. How much of that is variable? How much of -- does it come back when volumes come back? Can you give any insight into that?

Yes. Ian, do you want to pick that up, and then I'll add some color at the end of it?

Yes. So probably the way to think about it, Chris, is that most of our cost down to gross profit in that sort of cost of sales line, most of that is pretty variable. It's mostly raw material costs and people that we have out at the wellhead, and that goes up and down with activity levels.

Beneath that in the SAR line, there's a little bit more fixed cost in there. Because what we've been very keen to do is retain the quality of the staff in this business, so that when they return and the business starts to grow again, that we've got the right people in place to take full advantage of that. So the real variability is in the cost of goods line, not as much in the SAR line. Now that does go up and down depending on activity, but that is probably less variable in the COGS line, if that helps.

Yes. So I guess there's definitely some leverage then, obviously, when volumes do come back. That's I guess what it's getting at ultimately.

No doubt about it.

Yes, definitely. No doubt in Q4.

And then -- sorry? Sorry. In Performance Chems, just that margin mix you were talking about. What -- was it last year? What's the -- what products are we talking about? I know last year it was a very strong margin. This year you had something like a price/mix issue or a mix issue that was different. What products are we talking about were more prevalent last year and less prevalent this year that impact that mix in that way?

Yes. There was a couple of things, really, Chris. I think, first of all, in Q4 2019, we were building inventory ahead of a launch of a new product. So our manufacturing sites were running absolutely flat out. So the manufacturing variances were very highly positive. We did have that same demand on our manufacturing facilities this year. And then there was also a little bit of mix towards lower-margin business as well.

Now this is comparing a really strong quarter in Q4 of '20 against a really strong quarter of Q4 '19. So there's no longer-term issues here. We're really pleased with both quarters. And when you look at the margin improvement that we've delivered over the last 2 or 3 years in this business, it's been pretty spectacular. So we're in great shape, and we're not overly concerned by a small dip year-over-year.

Yes. And was the start-up this quarter of the new capacity and also, I guess, the rail-loading yard or something, does that -- was that an impact at all on the cost side on the 4Q?

Not in the fourth quarter, we'll start to see the benefits coming through in the first quarter of 2021 and beyond.

We will take Mr. Jon Tanwanteng's questions again.

I just wanted to follow-up on some of the SAR commentary in OpEx as we go forward. Is Q4 -- the amount you spent in Q4 from an OpEx perspective representative of what we should be thinking and kind of as a baseline for how the year should progress depending on growth? Or were there kind of exceptional items that maybe won't be repeated as we get into the next year?

Jon, there's obviously a little bit -- a few puts and takes in Q4 as we balanced up some of the compensation accruals with some of the acquisition costs at the corporate level. That actually balance itself up quite nicely. And no doubt within our businesses and within Performance Chemicals, Fuels and Oilfield, there was a little bit of lighter cost in Q4, partly because we're not traveling, partly because the activity levels just aren't as high and some of that balancing compensation accruals as well.

As we look forward into 2021, our hope and expectation is that we start to see a much better activity level. And our feeling is that we will see that activity level. So we will need to put more SAR into the system. So we would -- I think for the full year, our SAR was about $268 million. We'd expect to be higher than that, probably closer to sort of $285 million, maybe even $290 million, if things go well. But that will sort of grow with the business as we move through the year and the economies open up and lockdowns are lifted.

Okay. Great. And then just a follow-up on the prior question about the spending on due diligence. I mean if you're spending a significant amount, I assume that you're pretty far down the path. Can you just give us a preview of what's looking interesting and attractive from an end market perspective? And what valuations are looking like out there?

Yes. I mean, as you know, we can't say much about what we're doing, kind of what we've put into the colors is what we can say. But what we can say further is that the businesses that we're looking for M&A activity is in the Performance Chemicals sector, around our tech -- based around our technology that could give adjacent markets or adjacent technologies as well. So it's really -- that's our focus from the M&A side. We're consistently looking at deals. Valuations are fairly high in that market. You've got SPACs chasing it, you've got a lot of private equity money chasing this market. When they chased Oilfield for a long time and it struggled, they went right back into the Performance Chemicals type segments.

So the valuations be pretty high. And as you know, we're very cautious with our balance sheet and very cautious on what kind of multiple we pay. But we're not afraid to go out for something if we know the benefit of that, not only short-term deleverage, but the benefit long-term for our business. We're not afraid to go after a little higher multiple. We're just not going to pay on the teens like we've seen in the past. And we've seen a lot of companies do that. And obviously, when we had this pandemic hit and we had a market slowdown, you had a lot of companies struggle and we're not going to put ourselves in that position.

So we're still going to be very academic. We're still going to be very responsible with our shareholders' cash and it's just an ongoing -- we've talked about M&A for quite some time. We're consistently and constantly looking at it. We've gotten down the path on a few deals where we pulled out at the last minute and it just didn't make sense for us. So we'll continue to do what we're doing because it makes sense and it's a benefit to you, the shareholders, and it's a benefit to our employees. And we've just got to stay disciplined and something will happen.

Understood. Just remind us what your leverage limits are if you do find something big out there that makes sense for you guys?

We've always thought that we would go up to 3, maybe even a little over, we could delever that quite quickly. We're very comfortable with having leverage in the 1 to 1.5. So if we went that high, we would have to deleverage quite fast. So obviously, we'd have to have a lot of synergies and a lot of benefit from both sides from a synergistic standpoint from growth. So I think we can go up to 3, maybe a little higher, but you know we're not comfortable doing that. It would have to be really a deal that we know short term and long term. Short term, we can deleverage fast; and long term, we can grow it fast.

We'll take Mr. David Silver's question again.

Okay. I had a couple of questions. I mean, I think the first one would be on maybe the investment or CapEx outlook for 2021. So I'm guessing that 2020 at kind of the sub-$30 million level. I mean I'm thinking that that's really kind of close to sustaining, not too much growth CapEx. I'm wondering if you could just give us a quick outlook on where you see CapEx going in the next year or so? And then more to the point, if you could maybe call out the more important growth or discretionary projects that you're going to be focusing on in 2021?

Sure. So Patrick, if I take the sort of the first half of that and then you come over the top...

Sure. Yes.

So David, in terms of CapEx spend, we spent just short of $30 million in 2020. And our expectations as we sit here right now is that we'll probably be somewhere between $40 million to $45 million in 2021. There are a couple of projects that we have identified for growth. There are some further expansions of our Performance Chemicals capabilities where we've got great opportunities organically to grow the business. And also in our DRA business, we are looking for further expansion of that plant as the demand continues to fill up. So these are all good news stories.

As we look out beyond 2021, we do think that there's an opportunity to accelerate some of the growth in Performance Chemicals. And quite what we're doing at the moment is that we're reviewing sort of the 5-year strategy there and seeing if we can build a greater CapEx spend if we can accelerate the growth in that business. So that's something that we might come back later in the year with. But for now, a good number for 2021 remains at $40 million to $45 million.

Yes. I think, Ian, you've answered the question. I think the additional color to put on that is that -- and David, it's been expressed in the content and expressed some of the questions today. But we've also added rail. We've also kicked off a new technology center in North Carolina for Performance Chemicals. So there are some organic projects, but these aren't large, large amounts of money. And so I think as Ian touched on, the expansions that we've put in place are all organic growth expansions for our current product line and new product lines. So it's really set up well for the future for what we're doing right now.

And just to build, Patrick, on that last comment, maybe I was too narrowly focused on the CapEx line. But with the new technology center and whatnot, might there be a structural increase in your R&D spend along with that?

If there is, it's going to be minimal. Because we've talked about how we do our R&D spend. But yes, we'll have a little bit increase in R&D spend, but it's not going to be a large number.

Okay. Last question and apologies in advance. I'm hoping this isn't too sensitive or whatever. But you have a debt-free balance sheet, you're building cash and you highlight that. But to me, there's potentially another source of liquidity, and that would be your overfunded pension fund. I mean I haven't seen the 10-K, but I'm guessing just based on the way financial markets have gone over the past 12 months, it's probably a bigger surplus than it was 12 months ago.

I'm just wondering if you could characterize whether that is an asset that can be tapped either directly or indirectly. Do banks look at it and consider it when they're thinking about the size of the revolver or the credit facilities they are willing to extend to you? I mean in terms of your strategic war chest or your ability to go out and get something done inorganically, I mean, how should we think about that pension surplus there?

So David, this relates to the United Kingdom pension plan. That's a plan that's been closed to any accrual for probably at least a decade now. The company hasn't made any contributions to that plan in terms of member contributions for a number of years. And we now no longer actually make any contributions to the expenses of running that plan.

Just maybe to explain a little bit about it, it's not actually assets of the business. It's a separate legal entity. It's run by a separate Board of Trustees. But because it's a liability that we have in the future to fund that plan legally, we have to show the assets and liabilities in our balance sheet. What you're likely to see over the next year or 2 is a position where the pension plan is actually sold to an insurance company and it no longer appears on our balance sheet.

So it's not something that we can tap as a source of cash. It's not a cash drain on us. We've done a lot of work over the last 15 years to put it into a place where it isn't a cash drain on us. And we are now in the final couple of years of being able to sort of deal with that legacy issue from our legacy business and remove it from our balance sheet.

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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 today, please give us a call. We look forward to meeting up with you again to discuss our first quarter 2021 results in May. Have a great day.

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