Innospec Inc
NASDAQ:IOSP
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Innospec Inc
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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. [Operator Instructions]. 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 finance 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 the 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, hand it over to you, Patrick.
Thanks 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 focussed on consistently meeting our customer’s requirement.
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 average fuel demand and 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 lockdown, 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 improves miles per gallon and reduces emissions.
Our industry leading technology will remain fundamental in enabling the world 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 and 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 to 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 infield 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 include 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 effects 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 and 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 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 improvements over the third quarter, and reached the 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 on-going 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 tax 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 lock downs 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 Chemical, 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 and fuel specialties in oilfield services, both are well positioned for further improvement as the global economy progresses along the path to full re-opening. 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 cost 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 new optimism. Since March last year, we've been dealing with exceptional and unprecedented challenges. And I've been very proud in 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 then I will take your questions.
[Operator Instructions] The first question is from the line of Jon Tanwanteng from CJS Securities.
Everyone thank you for taking my questions, and very nice quarter.
Thanks, Jon.
Maybe my first my first one 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, and crop dusting, etcetera. 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 constitute 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 you can hit maybe 2019 levels of profitability, or if you're not going to get there, what, 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 oil field. 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 P [ph] 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 the looking at the global market and what we're seeing in the U.S. yet shale markets as well, we're extremely excited about 2021. I think you'll see, a positive operating income moving forward throughout the year. Ian…
Yes, I just had a couple of points, Patrick. We are a way of Jon, the $480 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 in oil prices to stay high. That's going to evolve over the year, as vaccination rolls around as economic lock downs are lifted. That's all going to help. But we know we are running towards that run rate. But, we're not going to hit that in 2021. We see that as much more of a 2023 targets.
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 common that will benefit definitely Q1. So we should have a higher margin product, balanced throughout that portfolio and 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, as we see some of these lock downs and the vaccine get out to the map market. We should start seeing some of these more product movement in that area.
Okay, great. So mostly no change, right?
No change as of right now. That's correct.
Okay. Thanks, Patrick. Appreciate it.
Thank you.
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 except exceptional items, this quarter special items. The first one was 4.2 million of I think it's 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, what we said in the earlier remarks was that, these are the costs of our on-going 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 on-going cost.
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 its touch 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 than what the inflection point is.
Right.
And their lift costs are -- so they all have a variable through them. And I think every company has a little variable through 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 as a pandemic is still out there. So full on demand is not on board. No, I think not a lot of people are chasing it. They want to make sure that there is still sustainability at least 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 a consistently improved throughout the year. And I think you'll see our Oilfield Services business consistently improved right along with it. And we should outgrow that improvement, just due to the fact that we've 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 three months ago regarding Oilfield Services demand. What's 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, la carte or individual products and services. Do you think, has that noticeably changed? I mean, is the fourth quarter -- was the fourth quarter kind of for lack of a better term more of a la carte kind of pickup? And could we see maybe a stronger pickup as profitability returns and people seek your full suite of services? Just so characterizing the appetite for your portfolio? Thank you.
Sure. It's a little bit of the opposite. We're actually the 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 of 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. 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 benefits our customers and we're going to stay on that track.
Okay. Thank you. And then maybe one more here. And this would be referring to maybe the near to medium term outlook, let's say one to three 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 a 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 weeks thinking about the recovery -- the trajectory of the recovery in your fuel specialties, whether it's the top line or maybe there was some of the mix effects that seemed 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? 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. 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 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 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 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 tempered 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.
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 is, 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, 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. But 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 and specific we can point to with the exception that we think there was a big draw down 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. Thanks. Then in oilfield being -- showing profits at the level of sales you had in the quarter, I think, is a great achievement. So, the question was, how much of the -- you definitely took a lot of costs. And how much is that is variable? How much does it could come back when volumes come back? Can you give any insight to 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 and that we've got the right people in place tactfully a full advantage of that. So the real variability then the cost of goods line, 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 volume to 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 sound like a price mix issue or a mix issue that was different. What products we talked about were more prevalent last year and less prevalent this year, the impact that mix 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 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 of 2020 against a really strong quarter of Q4 2019. 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 has impacted on the cost side of the 4Q?
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 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 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, it was 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 out quite nicely. And no doubt within our businesses. And within Performance Chemicals fields 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 your 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 feelings 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 SAR was about $268 million. We would expect to be higher than that. Probably closest to sort of 285 maybe even to 290, if things go well. But that will also grow with the business as we move through the year and the economy's open up and lockdowns 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, you know, 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 looking interesting and attractive from an end market perspective? And what valuations are you looking like out there?
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 Chemical sector. Around our tech -- based around our technology that could give it 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 -- you 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 side segments.
So, valuations are pretty high. And as you know, we're very cautious and with our balance sheet, 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 de-leverage, 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 team like we've seen in the past. 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 just got to stay disciplined, and something will happen.
Understood. Thank you. And just remind us what your leverage limits are if you do find something big out there.
We've always talk 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 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 and long term. Short term, we can de-leverage fast and long term, we can grow it fast.
Got it. Understood. Thank you.
Thank you. We'll take Mr. David Silver 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 its 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.
So, David, in terms of CapEx spend, we spent just short of $30 million in 2020, and our expectations right now is that we'll probably be somewhere between $40 million to $45 million in 2021. And 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 the five-year strategy there and seeing if that -- we see 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 has been expressed in the content and expressing some of the questions today. But we've also have 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 products 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 an 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 that to me, there's potentially another source of liquidity. And that would be, your over funded 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 are willing to expand to you I mean, in terms of, your strategic war chest or your ability to, to go out and get something done in organically. 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 haven'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 to explain a little bit about it, it's not actually assets of the business. It's a separate legal entities from by 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 [ph] 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 have been 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 in support. If you have any further questions about Innospec on matters discussed today, please give us a call. We look forward to meeting up 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.