Innospec Inc. Q4 FY2020 Earnings Call

Thank you all for standing by ladies and gentlemen. Welcome to today's Innospec's Fourth Quarter 2020 Earnings Release and Conference Call. Our presentation for today will be followed by a question-and-answer session. Please be advised the call is being recorded. And I would now like to hand the call over to your speaker, Mr. David Jones.

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 its presentation are posted on the company's site at innospecinc.com and will be available on the site for at least six 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, its duration, its long-term economic impact, measures taken by government authorities to address it, and the manner in which the pandemic may precipitate or exacerbate other risks and uncertainties that could cause actual results to differ materially from the anticipated results implied by forward-looking statements. These risks and uncertainties are detailed in Innospec's 10-K, 10-Q, and other filings with the SEC. Please see the SEC site or Innospec's site for these and other documents. In our discussion today, we have also included 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 will hand 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 and key growth markets, including personal care, home care, agriculture, and construction. In addition, this quarter we added manufacturing capacity in 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, the average fuel demand in our key markets 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 fuel additives 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, improve miles per gallon, and reduce 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 plus supply actions and an improving global oil demand outlook have been supportive of customer activity levels. Our expectation is that our completions business in the U.S. EMP companies will continue to increase activity in a disciplined fashion in 2021 as they look to balance production with cash flow. In other oil field segments, including production DRA in 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 eight in the presentation. The company's total revenues for the fourth quarter were $310.8 million, a 20% decrease from $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 one 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 on 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 included the 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 nine, 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 of 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 or 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 1.6 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 strong sequential improvements over the third quarter, and reached 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 being earned in higher tax jurisdictions. For 2021, we expect the full year effective tax rates to be approximately 25%. Moving onto 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 trajectory of the continued recovery, Innospec exited 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 will remain disciplined in our approach. We are looking forward to 2021 with new optimism. Since March last year, we've been dealing with exceptional and unprecedented challenges. And I've been very proud in the 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 then I will take your questions.

Everyone thank you for taking my questions, and very nice quarter.

Maybe my first question is just what was the mix headwind in fuels? And how do you expect that to trend as we go forward? Are they mostly aviation? Or was 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 a private aircraft and crop dusting, etc. So that had a decent quarter, but it was mostly commercial aviation. And you still have a slow, but steady progress in improving the economy, which obviously you're going to be burning more fuel. So it's a little bit of everything that really constituted a little bit of headwinds, 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 kind of what you're expecting from rising field demand?

Yes, I mean, we're extremely optimistic in oilfield. No, 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 chasing 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, 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 market and what we're seeing in the U.S. shale markets as well, we're extremely excited about 2021. I think you'll see positive operating income moving forward throughout the year.

Yes, I just had a couple of points, Patrick. We are away from the $480 million of revenue that we generated in 2019. And the way we feel about 2021 is that we are 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 vaccinations roll around and economic lockdowns are lifted. That's all going to help. But we know we are moving toward that run rate. But we're not going to hit that in 2021. We see that as much more of a 2023 target.

Okay, great. And then just from a seasonal perspective, Q4 is usually a high point for you with cold-flow sales. Should we be expecting the same level of seasonal step down as we head into Q1? Or is there reason to think that it 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 coming that will definitely benefit Q1. So we should have a higher margin product balanced throughout that portfolio and in fuel specialties, which should help Q1.

Okay, great. And then just last one from me, any update on the newer product 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?

You know, still slow, still a little delayed due to the pandemic. But we'll start to see activity come back. I would probably say mid-year is when we will see some of these lockdowns and the vaccine get out to the market. We should start seeing some of these more product movements in that area.

Okay, great. So mostly no change, right?

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

Okay. Thanks, Patrick. Appreciate it.

Thanks, Jon.

Thank you. Our next question is from the line of David Silver. You may ask your question.

Yes. Hi. Good morning.

Good morning, David.

Yes, thanks. 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, 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, and 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…

An additional cover to that, David, is that these are not going to be ongoing costs.

Right. Okay. Thank you for that. Patrick, I had a question on oilfield services or even a couple of questions. But three months ago, I think I asked you kind of where do you think that 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 three months ago, the price of crude was maybe in the high 30s. And most recently, it touched 60, I guess WTI. But, 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 than what the inflection point is.

Their lift costs have some variability, and I believe every company has a bit of that as well. However, you're correct that once we reach the mid-40s and beyond, we definitely see increased activity and profitability among E&P companies. We have observed a rise in activity levels, and the overall market is experiencing increased activity as well. The challenge, David, is that unlike past recoveries with significant capital inflow, today's approach is more disciplined due to the ongoing pandemic. Therefore, full demand isn't fully restored, and companies are being cautious, wanting to ensure prices don't drop back down to the low 30s. You can see growth happening, and it's responsible and sustainable, which is something we appreciate. I believe you'll see consistent improvement throughout the year, and our Oilfield Services business will likely see steady improvement alongside it. We expect to outgrow that improvement as we typically surpass market growth. We are in a strong position, and with crude prices reaching around 60, provided this isn't just a short-term fluctuation, it should be a healthy year for oilfield specialties.

Great, I want to follow up on your previous comment from three months ago regarding the demand for Oilfield Services. Could you clarify the distinction you made between customers interested in your bundled offerings compared to those looking at individual products and services, possibly due to fluctuations in crude prices or profitability? Has there been a noticeable change in this behavior? Did the fourth quarter lean more towards individual product purchases? Are we likely to see a stronger increase in demand as profitability improves and customers seek your complete range of services? I’d like to understand the interest in your portfolio better. Thank you.

Sure. It's a little bit the opposite. We're actually in a de-bundled approach. Just due to the fact that we are specialty chemicals 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 will 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's the best service you can give to your customer is being the perfect fit 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.

Thank you. I have one more question regarding the near to medium-term outlook, specifically for the fuel specialties segment. I'm curious about the comparison between Europe and North America or other regions. It seems that Europe is experiencing a slower recovery compared to North America and the global market. Should we be cautious in our optimism for the next few quarters regarding the recovery trajectory in fuel specialties, particularly with respect to revenue and the mix effects observed this quarter? Could you provide some insight into how fuel specialties might fare if the pace of economic recovery in Europe does not accelerate as quickly as in other areas? Thank you.

Sure. Yes. It's all about fuel consumption. And as fuel consumption rises, our fuel specialty 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 and not a business that you're going to take a lot of cost out. As you can see, it kicks out a lot of free cash flow. And that's the beauty of 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 variants that are out there, the UK and specific in 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 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 into the second and third quarter, there's a lot of people that have been pent up that haven't been able to travel, whether it's going on vacation, whether it's business travel, or various cargo that has 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 tempered as well, because we watch 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.

Okay. I do have one or two more. But I think, I'm going to go back in queue. But anyway, I'll just go back in queue. Okay. Thanks a lot, guys.

Thanks.

Thank you. We'll take our next question. It's from the line of Mr. Chris Shaw. You may ask your question.

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 benefits from sort of Brexit end of the year? Or moving step-up or borders? I know you have a decent UK presence. So I was just curious what sort of the strength and volumes Fuel Specialty was attributable to?

No, Chris, during the pandemic, we saw our volumes decline consistently. I believe what happened was that the existing inventories at their locations were depleted. However, as consumption began to recover, the demand for our products also increased significantly. It wasn’t due to any single factor such as Brexit or a cooling market in Europe or the U.S. There was nothing specific we could identify except for a major drawdown during the pandemic. Once the market started to recover, a significant number of orders came in. Therefore, we think that contributed more than any single product line performing better than others.

Okay. Thanks. Achieving profits in the oilfield at the sales level seen this quarter is a significant accomplishment. My question is, considering the costs you incurred, how much of those are variable? How much of it might return when volumes increase? Can you provide any insights on 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 and 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 costs in there. Because what we've been very keen to do is to 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, and not as much in the SAR line. Now that does go up and down, depending on activity. And that is probably less variable than the COGS line if that helps.

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

No doubt about that.

Sorry. Performance Chems, just that margin mix you were talking about. Was it last year? What products are we talking about? I know last year it was very strong margin. This year, it sounded like a price mix issue or a mix issue that was different. What products were we talking about that were more prevalent last year and less prevalent this year, impacting that mix that way?

Yes. There were 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 didn't 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 2019 against a really strong quarter of Q4 2020. 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 two or three 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 startup this quarter of the new capacity, and also, I guess, the rail loading yard or something. Does that impact the cost side of the Q4?

No. In the fourth quarter, we'll start to see the benefits coming through in the first quarter of 2021 and beyond.

Alright. Got it. Thanks a lot.

Welcome Chris. Thank you.

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

Hi. I just wanted to follow-up on some of the SAR commentary OpEx as we go forward. Is Q4, the amount you spent in Q4 from an OpEx perspective representative of what we should be thinking in Q1? And kind of as a baseline for how the years progress depending on growth over the kind of exceptional items that maybe won't be repeated as we get into the next year?

Sure, Jon. In Q4, we experienced some fluctuations as we balanced compensation accruals with acquisition costs at the corporate level, which turned out to be manageable. Additionally, we observed a slight reduction in costs within our businesses, especially in Performance Chemicals and oilfield, largely due to lower travel and decreased activity levels. Looking ahead to 2021, we anticipate an improvement in activity levels, and we believe they will increase. Consequently, we expect to inject more SAR into the system. For the full year, SAR was approximately $268 million, but we anticipate this will rise, potentially reaching around $285 million to $290 million if conditions improve. This total is also expected to increase as the business grows throughout the year and as economic restrictions are lifted.

Okay, great. Thanks for that color. And then just to 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 is looking interesting and attractive from an end market perspective? And what valuations are you looking like out there?

We can’t share too much about our specific activities, but I can confirm that we are targeting the Performance Chemical sector for potential mergers and acquisitions. We're particularly interested in opportunities that align with our technology and may lead to adjacent markets or technologies. Our team is continuously evaluating deals, although the valuations in this sector are quite high, influenced by SPACs and substantial private equity interest. After past challenges in the oilfield market, there has been a shift back toward Performance Chemicals, resulting in elevated valuations. We are cautious with our balance sheet and the multiples we consider, but we're open to strategic opportunities that could yield both short-term and long-term benefits for our business. While we are willing to accept slightly higher multiples, we are careful not to overextend ourselves, especially after seeing many companies struggle during the pandemic. We will continue to manage our shareholders' funds responsibly, and we have regularly discussed M&A as part of our strategy, always looking for the right fit. Although we have been close to some deals and decided to walk away when they didn't align with our goals, we remain disciplined and believe that meaningful opportunities will arise.

Understood. Thank you. And just remind us what your leverage limits are if you do find something big out there.

We've always said that we would go up to three, maybe even a little over, we could deliver that quite quickly. We're very comfortable with having leverage in the one to one and a half. So if we went that high, we would have to de-leverage 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 three, maybe a little higher, but we know we're not comfortable doing that. It would have to be really a deal that we know, short term we can de-leverage fast and long term we can grow it fast.

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

Okay. Thanks. 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 is kind of the $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? Thank you.

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

Sure.

In 2020, we spent just under $30 million on CapEx, and our current expectation is to spend between $40 million and $45 million in 2021. We have identified several projects for growth, including expansions in our Performance Chemicals capabilities where we see strong organic growth opportunities. Additionally, we are looking to further expand our DRA business as demand continues to increase. These are positive developments. Looking beyond 2021, we believe there is a potential to expedite growth in Performance Chemicals. We are currently reviewing our five-year strategy to see if we can allocate more CapEx to accelerate growth in that area. We may provide further updates later this year, but for now, we expect our CapEx for 2021 to remain between $40 million and $45 million.

Yes. I think, Ian, you've answered the question. I think the additional color to put on that is that, and David has expressed in the content and expressing 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 line. 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 can consider it when they're thinking about the size of the revolver or the credit facilities they're willing to expand 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? That pension surplus there? Thank you.

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 for the expenses of running that plan. Just to maybe explain a little bit about it, it's not actually assets of the business. It's a separate legal entity from a separate Board of Trustees. But because it's a liability that we have in the future, to form 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 two is the position where the balance or where the pension plan is actually sold to an insurance Company and it no longer appears in our balance sheet. So it's not something that we can tap as a source of cash. It's not cash trade 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 trade on us. And we are now in the final couple of years of being able to deal with that legacy issue from our legacy business and remove it from our balance sheet.

Okay, thanks for the clarification, very clear. That's it for me. Thank you.

Thanks, David.

And there are no further questions at this time. Please continue.

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

Thank you. That concludes our call for today. You may all disconnect. Thank you all for participating. Have a great day.