Q4 2019 Earnings Call
Tapas style and fun.
I must advise you that this conference is being recorded today 90 into February Twentytwenty without any further delay I would now like turn the conference over to present to David Jones General Counsel. Please go ahead.
Thank you good day, everyone. My name is David Jones, and General Counsel and Chief compliance officer. Thank you for joining our fourth quarter 29 chain and year end 20, <unk> Chief Financial results Conference call today's call is being recorded.
As you know yesterday, we reported our financial results for the full year quarter ended December 30 129.
The press release is posted on the company's website <unk> Dot com.
The slide presentation on the results is now available on our website as well and both an audio webcast and slide presentation will be archived on the site for six months.
Before we start I would like to remind everybody that certain comments made during this call. Let me characterize as forward looking statements under the private Securities Litigation Reform Act at 1995.
Generally speaking any comments regarding management's beliefs expectations targets or other predictions that future are forward looking statements.
These statements involve a number of risk and uncertainties that could cause actual results to differ materially from anticipated results implied by those forward looking statements.
These risks and uncertainties are detailed in a sex most recent Sanjay report.
10, she reports for the quarter ended March 30, 120, you know I've seen the quarter ended June 30, 29 team and the quarter ended September 30 29.
That's all those other filings we have the FCC.
We refer you to that she sees website and our site for these and other documents.
And our discussions today. We've also included a non-GAAP financial measures.
A reconciliation to the most directly comparable GAAP financial measures is contained in our earnings release, a copy of which is available on the on spec website.
With us today for metastatic or Patrick Williams, President and Chief Executive Officer at Ian Cleminson, Executive Vice President and Chief Financial Officer, and with that tried or to Patrick. Thank you, David and welcome everyone to aspect fourth quarter and full year 2019 conference call.
I am delighted to be able to report another very good quarters results, which further underlines the resilience of our strategy and the valuable operating with a balanced portfolio and uncertain times.
In sharp contrast to me in the industry.
Good services as again delivered an outstanding performance.
Both in terms of sales revenue and operating income.
Performance chemicals has substantially improved its margin profile.
Slide battling the headwinds of raw materials and exchange rates.
Which resulted in a 42% improvement in operating income.
And then fuel specialties, despite the negative impact of short term supply issues, we still increased full year sales and operating income over 2018.
During our Q2 results call in August.
Indicated that we had experienced some supplier disruption in fuel specialties, which was impacting a number of companies not just Dennis back.
We thought that the impact would be minimal and then normal service would be restored in a reasonable timeframe.
This proved not to be the case and the issues have been more complicated to saw.
Than we anticipated.
However.
We have developed alternative and sustainable supply solutions for all our products impacted and will return to normal business operations at the end of the first quarter of 2020.
We've been working with our insurance providers to cover the financial impact of this disruption.
We are extremely pleased with the recent performance of our share price, which benefits all our shareholders.
This has resulted in a higher accrual for our share based compensation plans in the fourth quarter.
Which was equivalent to 19 cents.
Yes.
Without this accrual we would have delivered EPS of $1.66 for the quarter.
Even these challenges 2019 was a fantastic year for Innospec.
Once again, we delivered excellent cash flow and finished the year in a net cash position eliminating the debt that we took on for our largest acquisition just three years ago.
We also increased sales revenue gross profit operating income and EBITDA produce improvements right across the board.
Despite negative market conditions impacting minit Mart competitors.
Our oil field services business again performed well in the fourth quarter.
Capping off an excellent full year performance.
2019 sales up 20% over 2018, we have outperformed the market by continually to develop new innovative chemistries combined with excellent customer service.
As indicated we've also continued to invest in advanced technologies and geographical expansion to reduce the impacts of the cyclical nature of this business.
We believe that we have a strong foundation for further growth.
As previously indicated performance chemicals has been dealing with lower raw material cost translating into lower revenue.
Despite this we delivered excellent operating income.
The projects that we initiated two years ago.
Helped drive gross margins up two and a half percentage points for the year and operating income up 9%.
The business remains ahead of our strategic targets and is well placed for further organic and acquisitive expansion.
Our team in fuel specialties been focusing on minimizing the impact.
Put supply disruption to our customers.
In light of this the fourth quarter performance was very credible with volumes down just three percentage points on a very strong comparative quarter.
Sales in the aviation were also down slightly driven by phasing of orders in Q3, as we indicated in our last call.
Octane additive sales rental line with expectations.
Full year operating income down over $10 million on 2018.
We do not have any orders or indication to further demand from our final customer.
We will keep you informed on each quarterly call.
Now I'll turn the call over to in Clemson Who'll review, our financial results in more detail.
Then our return with some concluding comments after that we will take your questions. It.
Thanks, Patrick.
Turning to slide seven in the presentation. The company's total revenues for the full quarter with 390.7 million, a 1% decrease from 395 million a year ago.
Overall gross margin increased from last year to 30.3% driven by improved margins in performance chemicals on fuel specialties.
EBITDA for the quarter was 55.2 million broadly the same as to 55.1 million generated in the fourth quarter of 2018.
The decline in octane additives was offset by the growth in our strategic businesses.
Net income for the quarter was 31.1 billion compared to a 20.4 million last year, which was adversely impacted by us tax reform adjustments.
GAAP earnings per share were $1.26 cents, including special items, that's effective which decreased our fourth quarter earnings by 21 cents per share.
A year ago, we reported GAAP earnings of 83 cents per share, which included the negative impact from special items of 79 cents.
Excluding special items in both years, our adjusted EPS for the quarter was $1.47 cents.
9% decrease from $1.62 cents per share a year ago due to the decline in alternatives on the 19 cents impact of increased share based compensation.
For the full year circle revenues of 1.51 billion increased 2% 1.48 billion in 2018.
Net income for 2019 was 112.2 million or $4.54 per diluted share compared to 85 million or $3.45 per diluted share a year ago.
Special items decreased net income for the full year by 16.8 million or 68 cents per diluted share.
2018, similar items decreased next income by 33.9 million a $1.38 cents per diluted share.
Excluding special items in both years, our adjusted EPS for the year was $5.22, an 8% increase from $4.83 a year ago.
EBITDA for the year was 201.8 million compared to 187.4 million in 2018, an increase of 8%.
Moving on to slide eight.
Revenues in fuel specialties for the fourth quarter were 150.3 million, 7% lower than the 162 million reported a year ago.
James fell by 3% with some impacts from the supply disruption and phasing of sales into aviation.
There was an adverse currency impact of 2% on a negative price mix impact also 2%.
Specialties gross margin for the quarter.
Within our expected range, 33.3% compared to 32.8 presents in the same quarter in 2019.
Operating income for this segment was 28.5 million down 20% from a year ago.
For the full year fuel specialties revenues were up 2% to 583.7 million an operating income was broadly flat at 116.6 million.
Turning to slide nine revenues in performance chemicals for the fourth quarter decreased to 106 million from last year is 110.4 million due to the negative impact from lower raw materials.
Sourcing of two contracts by customers both of which we indicated earlier in the.
Sales fell by 4% as volume growth of 1% was offset by a price mix effects of 3% and a negative currency impact up 2%.
Gross margin for the segments with 25.4% up 4.6 percentage points compared to the same quarter in 2018.
Operating income for the quarter was 14.9 million over 42% compared to 10.5 million last year.
For the full year revenues decreased 8% from last year to 428.7 million. However, operating income increased 9% to 48.7 million.
Moving on to slide 10.
Wholesale services business continued to grow strongly in the fourth quarter.
Revenues were 100 were 121.8 million up 12% on the fourth quarter of 2018, driven by sustained customer activity.
Gross margins of 33.4% were down 1.6 percentage points on last year.
Operating income increased 48 cents to 11.8 million compared to 8 million in the same quarter of 2018.
For the full year revenues were up 20% to 479.9 million an operating income was $39.7 million an increase of 80% on 2018.
Moving on to slide 11 revenues not seen outages for the quarter were in line with expectations at $12.6 million as we delivered the latest OTA put down from the 14.1 million in last year's fourth quarter.
The segment's gross margin was 14.3% due to lower production volumes.
Operating income for the quarter was 1.2 million compared to 3.4 million a year ago.
For the full year as we expected octane additives revenues, which went to 1 million down 38 cents on the same period last year and operating income was a loss of north point 7 million compared to an operating profits 9.9 million in 2018.
Turning to slide 12.
For cost for the quarter were within our expected range at 12.6 million up from 12.3 million in last year's fourth quarter.
The full year adjusted effective tax rate was 23.6% compared to 23.7% a year ago.
Income tax expense was $12.2 million for the quarter compared to $21.6 million for the fourth quarter of 2018, which included the impact of the U.S. tax reform.
The full year charge was 38.2 million compared to 46.6 million for 2018.
For 2020, we expect the full year effective tax rates to be approximately 27%.
Moving on to slide 13.
This was another strong quarter for cash with net cash generated from operations of 58.4 million before capital expenditures of $7.3 million.
There were no share repurchases during the quarter, but we paid the previously announced semiannual dividend of 52 cents per share.
This brings the total dividends for the full year to one dollar and two cents per share representing a 15% increase over 2018.
For the full year net cash generated from operations was 161.6 million compared to 104.9 million during 2018.
As of December 31st 2019 in the spec have 75.7 million in cash and cash equivalents and total debt 60.1 million.
I was in 2019 with a net cash balance of 15.6 million.
Now I'll turn it back over to Patrick for some final comments.
Thanks, Dan.
We're very pleased via report this impressive fourth quarter and full year performance, especially given the headwinds that we faced.
Our oilfield services business had a fantastic fourth quarter and has outperformed the market throughout the year delivering excellent sales revenue growth and profitability.
We have regularly referred to our strategic intent to focus on margin improvement and profitability in performance chemicals.
The deliver these strategic initiatives has contributed to a great year, which culminated in operating income up 42% for the quarter and 9% for the full year.
Fuel specialties had to overcome a major supply disruption, but we are confident that the solutions. We are implementing we'll have a long term benefit to the stability of this business.
In addition.
We have absorbed higher cost of share based compensation driven by the significant increase in our share price, which benefits each and every shareholder.
Our strategic and focus approach and all our core businesses continues to deliver revenue and profitability growth, which offsets the decline and octane additives.
We have a pipeline of exciting new innovative technologies, which would drive organic growth in 2020 and beyond.
We continue to seek meaningful acquisitions, which will add shareholder value.
But we'll remain disciplined in our approach.
Once again, we have generated excellent cash flow, which has moved us into a net cash position.
We have reached this milestone only three years after the major acquisition and outperforms chemicals business, which had a $200 million of debt.
While market dynamics are still influenced by the uncertainty of slower growth and trade disputes across the globe.
We are confident that the underlying fundamentals of our business are very sound.
And we are well placed to continue to successfully execute our strategy and deliver future financial growth.
Now I will turn call over the operator, and I will take your questions.
Thank you very much ladies and gentlemen, just a reminder, if you wish to ask your question. Please press star and move on.
Keypad and lately name to Vietnam.
If you wish to come to you request.
Okay.
Once again it is and wanted to ask a question. The first question comes from the line from Jon Tanwanteng. Your line is open.
Good morning, gentlemen, really nice quarter. Thanks for taking my questions. Thanks, John Thank you John.
Can we talk about the supply disruption and how that will impact Q1, and if theres going to be an ongoing input cost headwind as you transition to a new supplier.
I'll have insect first part of the question I'll take the second part John Yes, John as Patrick alluded to in the in the script failure.
We we incurred this issue.
In Q2 2019.
The impacts really starts to be felt in the fourth quarter.
As we unwound, our supply chain and our inventories.
We expect it to continue throughout the first quarter now in the background I'll focus has been on supply and our customers keeping them fully informed of where we're out and providing as much.
Inventory on products as we possibly can we bundled with the the cost of that on most of that cost. We expect will be covered by insurance and we've already covered most of it.
In Q2 in Q3 through our insurance company with a some work to do that we expect by the end of Q wall.
Got through this on our cost base will be at least the same.
As it was previous to the incidents so I hope that answers your question.
Yes. It does thank you and passion on getting any more color on exactly what was I think in covered that extremely well I think the key there is that the financial implications being covered by the insurance company in the second key to that as having supply issue.
Corrections moving outside of Q1 into Q2 that probably a better cost position and less risk.
Great. Thank you and then Patrick can you just talk about the.
Uptake on IMO 2020, low sulfur additives may be broken down by product line and how you see that playing out in 2020.
We don't necessarily break it down by product line, but as you as you originally the first couple of quarters. We discussed that there was a lot of business in the tank cleaning.
Area impairment for the IMO 2020.
We are starting to see issues with the new fuel.
Restarting stability issues.
We're starting to see build up.
So I think for us it's a function of what is next.
We know there's going to be issues, we've seen the fuel out there we're hearing there's problems out in the field.
And I think we're starting to see some small sales into the actual IMO performance of 2020 fuels.
We'll probably know John a lot more going into Q Q1 in Q2 as to what the magnitude is going to be as any business thats kind of a new market, which this is and tell you have some catastrophic failure.
You won't see substantial sales and I think that that's probably going to happen here in the near term.
Got it thanks, and then oilfield that had a really great year can you talk about the drivers there and can you build on that momentum.
Even as rig counts and oil prices continue to be uninspiring and.
Maybe if you could have Saudi in Brazil, and DRA they'll figured into that mix.
Yes, I think you're I think you just hit it on the head is that we've always said in our strategic intent to build this business is that hey, we had to get into the low lot low lift cost basins, but more importantly, we had to take cyclicality of this business and the best way to do that was too obviously move into.
Saudi and Middle East.
Build our own DRA plant with our own technology.
And look at how we implement South America in Mexico, and we have strategically have done all of those and that obviously has helped us produce very good results for the year and also for the quarter.
I think thats thats something that we had to do as an organization.
To really be viewed as a company that's got a balanced portfolio and we've done that it's worked out well I think DRA. It's got a ways to go were de bottlenecking DRA as we speak.
Due to the fact that we see contractual volumes start to kick in in Q1 in Q2.
So you'll see us probably double the volume output of that asset going into fourth quarter. This year.
Great. Thanks, and then finally, just an update on the cash United that you're in a net cash position now is it burning a hole in your pocket are you happy to sit on until a good M&A target comes along but what is what the order your protect priorities today I.
I think you'll still see us increasing our dividend, 10% to 15% as we do every year, we think that that's a good.
Solid spin on our side I think you'll see us still sit tight with dry powder.
Looking for the right acquisition.
In these global markets and global uncertainty that we're seeing out there I think you'll probably see some some business has come out in a situation where multiples are more meaningful to us.
And more palatable.
So I think you'll see us put some some money to work I hope. It's this year, but as you know we're very disciplined in our approach to buying something.
And if for some reason John we sit at the middle half of the year, we haven't done anything significant theres, obviously potential for us to do a onetime dividend, which we're not afraid to do that we've done that in the past.
So it's still a pretty balanced outlook on how we want to spend our cash.
Great. Thanks, much guys.
Thank you. Thank you Joe.
Thank you very much. Your next question comes from the line from Chris Shaw.
Your line is open.
Good morning, or high then Chris Good morning, Good morning, Chris.
The following John's questions actually.
In the oilfield services now what what's how much is ex us how much is international business now.
It's probably say, it's still 75% us with 25% outside us, meaning Mexico, South American Middle East.
And southern Europe, obviously.
And then you touched on I think specifically in oilfield some of the.
Growth opportunities in the.
Coming year, but generally you said you feel pretty confident 2020 for did you have a lot of organic growth opportunities across the businesses that can you name a few other ones or just some examples and some of the other segments as well.
Are you talking to outside of oil field.
Yes, exactly yes, I mean, you have to fuels its.
No its its IMO 2020, it's Judy.
Which is starting to catch some hit some tailwinds, which has a good thing.
New technologies that we're bringing into the market for lubricity detergents cold flow.
For instance tour polymers.
If you look performance chemicals really it's the acquisition that we made in the in the adjacent markets that we've gotten into like.
Hard surface homecare, the agriculture markets the construction markets.
The mining markets.
Which are all higher margin markets and so thats helped out our GPS in that area.
Personal care that new technologies were bringing about this is an area where we've set the three business up so well that we don't need to have acquisitive growth to grow we feel very confident that now we are well established with our technologies that we can grow organically and not have to look out and chase multiples.
As for acquisitions. So those are really if you look at the balance of our portfolio those the growth cycles that you're looking at.
The mix of like adjacent to the new technology geographical expansion, all that kind of stuff all.
All combined.
And then I think I've asked this before the task, but when octane additives.
I guess and completely in that segment sort of close is there a cost.
A fixed costs and so because that's associated with that segment now that gets pushed in the fuel specialties to support as well.
Yes, we're just because you've got to this over the years so.
The Optel products has made on the same facility as octane analysis.
When it when we actually finished production.
They will be.
Gross margin impact.
In the outsell products, we sit within feels.
That will bring down the gross margin.
Overall, the the Upto business will still remain nicely profitable.
Both in this year in future years as well.
Outside there will be a few stranded costs, which will take into corporates and obviously there will be a few one off redundancy costs. When we actually closed the facility itself obviously analysis.
Is it possible the size that impact.
Well there.
It's probably about.
One percentage point on the field specialties business in terms of gross margin in total.
All right. That's helpful. Thank you and then finally I do you know from last year, the I think the.
The.
Sure based.
Accrual for the quarter was 29 cents. This year do you know what it was for last year.
Okay, well dancing is 19 cents this quarter, Chris I think though I can say the number if you do another follow up we'll dig that number out fully occupied look go back and look as well so check alright. Thanks, a lot. Thanks, Chris from Chris. Thank you.
Thank you very much ladies and gentlemen, Justin Gentle reminder, if you wish to ask a question T. Smith.
On your telephone keypad.
We have another question from the line from David <unk>. Your line is open.
David We lost you would you mind pressing star one again.
Okay. Hello Your line is open.
Okay.
Hi can you hear a lot here sorry.
I'm, having a little trouble on mining.
Can you hear me, yes, we can David Okay, sorry about that.
Im not of tech and loss so.
I hope to several questions.
First first I'd like to asking about new product sales during the fourth quarter.
So in terms of DRA.
For the last.
In the last quarter, you highlighted sales in the international market and you indicated.
In the fourth quarter would be your initial meaningful sales into the domestic market, which I guess is your largest target market longer term.
I may have missed it but I didnt hear any commentary on that so.
Where the Dior raise marketed in the us.
This quarter and then on the.
In 2020.
Earlier or start in the last couple of quarters, you've noted revenues from.
Tank cleaning or fuel line preparation kind of products.
And I was just wondering if the fourth quarter feature.
I guess additive sales that will go into the marine fuels.
Thank you.
Yes, David let me take the DRA, we don't give revenue sales as a direct number related to DRA, but I could tell you that our first substantial sales.
Did hit in the Q4, and we see a nice balance moving into 2020 as the indication that we're going to be expanding our plan.
In addition to that we finally saw some good sales going into Saudi.
Which benefited Q4 and that should be ongoing in 2020 as well. So it's the balance that we finally have seen even though theres been some somewhat of a depressed market in the U.S. weve balance that out with sales outside the us with multiple technology. So thats a benefit that you will see holding up in htwo.
20 and beyond.
In regards to IMO 2020.
Most of the last four quarters was all as you just said in tank cleaning.
We're really starting to see now what's going to happen in operations now that the fuel is in the end in the field and what kind of effects, causing effects are going to have we're hearing theres effects out there as I said earlier in the call I think a catastrophic event makes everybody do something real fast.
But I think you are starting to see a lot of field issues and and we have the additives and the technology to take care of those field issues and we'll keep pushing those buttons until we see adequate sales.
And just a quick clarification, but the fourth quarter DRA sales if I understand it rate your yes. The revenues there potentially go into one of two segments. If they were in the domestic market would that mean that they were included in fuel specialties in the fourth quarter as deal.
No all the DRA sales right now go through the oilfield Division.
And we'll remain.
One other thank you one other clarification, maybe for again, but the fourth quarter featured.
A negative impact from the supplier disruption.
And then you're indicating that insurance will compensate you in the first quarter and I'm just scratching my head, but does that mean that we will see a.
In effect that transfer a shift of earning from 2019 into 2020 as a result that just kind of the timing of the supplier disruption and if it is in the first quarter. I mean can you maybe ballpark it or how significant will that be as me try to sharpen our model.
Thank you.
Sure David So the the comments about the supply disruption was regarding regarding volume. So we've seen some volume impacts where we've not been able to supply some of our customers or some of those volumes have been deferred.
It's not a huge amount probably amounts to probably round about $6 million of sales out of Q4, which we'd expect to move into Q1 or into Q2 next year.
As regards the additional costs we've incurred.
Five sourcing high cost raw materials or high across cost products. All of that has been washed through in Q4. So we don't expect any further impact positively or negatively on the cost base going into Q1.
Thank you and the Big picture question.
I know that your company as a whole is not really tied to China in any big way directly but I could imagine for me. The IMO 2020 demand maybe something in your performance chemicals areas.
Yes, there might be an indirect effect. So large companies are starting to report.
Negative effect from that disruption.
Related to the current a virus.
How does your first quarter or your first path.
What has changed let's say budget wise or planning wise over the last several weeks as this.
As the virus effect plays out across maybe your customers or indirectly through transportation markets. Thanks.
Where we see a little bit is potentially is in our performance chemicals, where we do take some raw materials.
From China.
Again, it's a positive negative the positives we don't we don't have manufacturing sites in China. We just have a trading arm in there are alternatives to that raw material that we can we can get.
So it hasn't negatively affected us as of yet and we don't see it necessarily affecting us in Q1.
And in regards to IMO 2020, because the market still so small in additive usage, we have not seen a negative effect.
Now this is an ongoing issue with China.
You could see something moving into Q2 Q3, but we don't see this is going to be an ongoing issue.
So as of right now Dave on it because we don't have a lot of exposure to China, we're pretty confident shouldn't affect Q1 earnings.
Okay and can I, just asking one or two more is that okay or should I get back in Q.
Go ahead, David Okay, I'm going to fire away. Thank you.
I am picking up on Patrick comment during his prepared remarks about the gd opportunity gasoline direct injection engine design and to me that is a very large longer term.
Growth opportunity, but for me, it's a little harder to shake or quantify and.
Okay.
And I was wondering a couple of things, but first of all could you maybe talk about how the shift to a GDP engine design might increase overall fuel additive demand that you see it and then.
How does how do you envision your company being able to best.
Our most directly participate added.
Whether whether there will be significant cannibalization as you roll out new additive formulations does that meaningfully detract from legacy business, Yes, David here, Here's the key we do mostly diesel and jet we're very small in gasoline additive so.
So there won't be any cannibalization on our on our gasoline business, it's all upside.
Typically you're treating a PFS by for what we call lowest additive concentrate.
And we don't run necessarily play MPF I guess, we're not back integrated into raw material, where we make a difference is when the market shifts like the new engines coming out globally, which are shifting to gasoline direct injection.
Common pf by does not work as well in Judy.
And Thats, where our technology comes into play, which potentially opens up a much larger lark at that we have not played in before so thats really the differential it's more market.
Opportunity that it is cannibalization.
Alright, and then I have one more for Patrick.
And this would have to do with oil field service. So.
I look back over the last couple of conference calls and.
I noted that well first of all very impressive growth largely organic and you've talked about your bundled product and services approach you've talked about your direct to operator model.
One point, you talked about what's kind of the as kind of a market share driver.
The unquote technology that you offer.
And I was wondering if you could clarify or or qualitatively discuss where youre differentiating technology and oilfield services comes into play. Thank you sure sure Dave.
Without giving away company secrets, obviously.
Qualitative not to get to ensure our faith.
We do a lot of tech trees, and this industry for quite some time needed technology.
It was usually people blending the same product same components, just applying a differently.
We have done a lot around innovative technology is not only that work today, but what we think is going to happen in the future around the green et cetera.
So it's really been our technology model direct to operator and service the Hell out of the customer and that's really what's differentiate ourselves from our competition.
Take as long as we stay focused on that along with bringing new technologies like DRA et cetera, and moving into other fossett's outside of just North America that business has great potential to still grow even in tough market dynamics.
Alright, Thank you very much thanks, David Thanks, David.
Thank you and ask you have no further questions I will hand back to Patrick for closing remarks. Thank.
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 aspect or matters discussed on this call. Please give us a call. We look forward to meeting up with you again to discuss our Q1 2020 results in May Thanks again.
That does conclude the conference for today. Thank you all for participating.
Right now disconnect.
Wow.
[music].