Innospec Inc (IOSP) Q4 2020 Earnings Call Transcript

Image source: The Motley Fool.

Innospec Inc (IOSP 0.85%)
Q4 2020 Earnings Call
Feb 17, 2021, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you all for standing by, ladies and gentlemen. Welcome to today's Innospec's Fourth Quarter 2020 Earnings Release and Conference Call. [Operator instructions] Please be advised, the call is being recorded. And I would now like to hand the call over to your speaker, Mr. David Jones. Thank you.

David Jones -- General Counsel and Chief Compliance Officer

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 in this 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, such as its duration, long-term economic impact, measures taken by government authorities to address it, and the manner in which the pandemic may precipitate, 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 site for these and other documents. In our discussions today, we've also included some non-GAAP financial measures. A reconciliation to the most directly comparable GAAP financial measures is contained in our earnings release. A copy of that is available on Innospec's site.

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

Patrick S. Williams -- President and Chief Executive Officer

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 30% over 2019. We are investing in additional global R&D capabilities such as our new state-of-the-art technology center in North Carolina, which will advance customer collaboration in key growth markets, including personal care, home care, agriculture and construction. In addition, this quarter we added manufacturing capacity and new rail car handling facilities in North Carolina to support growing demand for our innovative industry-leading mild surfactants.

We will continue investing to support the long-term growth of this business and bring to market the large pipeline of technology focused organic growth opportunities. In Fuel Specialties, global fuel consumption grew for the second consecutive quarter, resulting in a 15% sequential increase in sales and operating income. Exiting 2020, average fuel demand in our key markets that we serve were 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 our 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 reduce emissions. Our industry-leading technology will remain fundamental and enabling the worlds 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 in our completions business in the U.S. E&P companies will continue to increase activity in a disciplined fashion in 2020 as they look to balance production with cash flow. In other Oilfield segments, including production, DRA and the Middle East, assuming stable oil prices at current levels, our outlook is for continued sequential growth throughout 2021. Our leading technology and exceptional service positions us to grow faster than the broader market as the recovery accelerates. In addition, the actions that we took in 2020 to restructure our cost base will continue to deliver operating leverage improvements as the recovery continues.

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

Ian Cleminson -- Executive Vice President and Chief Financial Officer

Thanks, Patrick. Turning to Slide 8 in the presentation, the Company's total revenues for the fourth quarter with $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 1 percentage point from last year to 29.3%. EBITDA for the quarter was $40.3 million compared to $55.3 million last year. And net income for the quarter was $23.6 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 the negative impact from special items of $0.21. Excluding special items in both years, our adjusted EPS for the quarter was $1.27 compared to $1.47 a year ago. For the full-year, total revenues of $1.2 billion, decreased 21% from $1.5 billion in 2019, again driven by reduced customer activity in Oilfield Services and a lower demand in Fuel Specialties due to the pandemic.

EBITDA for the year was $108.9 million compared to $201.8 million in 2019. And net income was $28.7 million compared to $112.2 million a year ago. Our full year GAAP earnings per share were $1.16, including special items, which decreased our full year earnings by $2.06 per share. In 2019, we reported GAAP earnings of $4.54 per share, which includes 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 9, revenues in Fuel Specialties for the fourth quarter were $138.3 million, 8% lower than the $150.3 million reported a year ago. Volumes were down by 1%, and there was a negative price mix effect of 8%, offsetting a 1% positive currency impact. Fuel Specialties gross margin for the quarter was at the lower end of our expected range of 31.4% compared to 33.3% in the same quarter in 2019 due to a weaker sales mix. Operating income for this 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 the second quarter low points. And subject to any further sustained economic lockdowns, demand for our fuel additives should improve along with fuel consumption in 2021.

Turning to Slide 10, revenues in Performance Chemicals for the fourth quarter were $114.6 million, up 8% from last years $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 achieved [Phonetic] which we have.

Moving on to Slide 11, revenues in Oilfield Services for the fourth quarter were $57.9 million, down 53% on the fourth quarter of 2019, driven by low levels of customer activity in U.S. completions. Gross margins of 35.1% were up 3.7 percentage points from last year's 33.4%. Operating income of f $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 a breakeven operating income with further improvements expected in 2021.

For the full year, revenues were $255 million, down 47% from $479.9 million a year ago, and this translated into an operating loss of $9.5 million compared to an operating income of $39.7 million in 2019. Turning to Slide 12, corporate costs of $10.7 million were down $1.9 million from last year, primarily driven by lower personnel-related accruals, partially offset by expenses related to our ongoing M&A efforts.

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

Moving on to Slide 13, this is 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 $1.4 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 a $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 will turn the call back over to Patrick for some final comments.

Patrick S. Williams -- President and Chief Executive Officer

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 in 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 cost as we have been appraising some interesting opportunities. We have nothing further to report, and remain hopeful we can make progress, but will remain disciplined in our approach. We are looking forward to 2021 with new optimism. Since March last year, we've been doing with exceptional and unprecedented challenges, and I've been very proud in which way the Innospec team has responded. We've been through 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 I will take your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] The first question is from the line of Jon Tanwanteng from CJS Securities.

Jon Tanwanteng -- CJS Securities -- Analyst

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

Patrick S. Williams -- President and Chief Executive Officer

Thanks, Jon.

Jon Tanwanteng -- CJS Securities -- Analyst

Maybe my first one is just -- what was the mix headwind in fuels, and how do you expect that to trend as we go forward? Are they mostly aviation or is there something else that we should be thinking about there?

Patrick S. Williams -- President and Chief Executive Officer

Yeah, Jon. A lot of it was aviation. After [Indecipherable] decent quarter, because obviously, it's private aircraft and and crop dusting, etc. So that had a decent quarter, but it was mostly commercial aviation. And still -- you still have a slow but steady progress in an improving economy, which obviously, 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.

Jon Tanwanteng -- CJS Securities -- Analyst

Got it, OK. 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 fuel is rising with vaccinations, and 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 fuel demand.

Patrick S. Williams -- President and Chief Executive Officer

Yeah, I mean, we're extremely optimistic in the Oilfield. I think it's going to be a little slower recovery then years in the past. I think that you're not having a lot of private equity chase E&P companies. I think there is a more focus on cash flow and paying down debt. So there is 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 from a positivity standpoint, from looking at the global markets and what we're seeing in the U.S. shale markets as well, we're extremely excited about 2021, and I think you'll see a positive operating income moving forward throughout the year. Ian, do you want to add any additional comments.

Ian Cleminson -- Executive Vice President and Chief Financial Officer

Yeah, just sort of a couple of points, Patrick. We are a way off 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 know 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 out, as the economic lockdowns are lifted. That's all going to help. But we know we are running toward that run rate, but we are not going to hit that in 2021. We see that as much more of a 2023 target.

Jon Tanwanteng -- CJS Securities -- Analyst

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 a reason to think that it could be sequential improvement, just giving how demand has improved?

Patrick S. Williams -- President and Chief Executive Officer

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 balance throughout that portfolio in Fuel Specialties, which should help Q1.

Jon Tanwanteng -- CJS Securities -- Analyst

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

Patrick S. Williams -- President and Chief Executive Officer

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 as we see some of these lockdowns and the vaccine gets out to the mass market, we should start seeing some of these more product movement in that area.

Jon Tanwanteng -- CJS Securities -- Analyst

Okay, great. So mostly no change, right.

Patrick S. Williams -- President and Chief Executive Officer

No change as of right now, that's correct.

Jon Tanwanteng -- CJS Securities -- Analyst

Okay. Thanks, Patrick. Appreciate it.

Patrick S. Williams -- President and Chief Executive Officer

Thank you.

Operator

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

David Silver -- C.L. King and Associates -- Analyst

Yeah, hi, good morning.

Patrick S. Williams -- President and Chief Executive Officer

Good morning, David.

David Silver -- C.L. King and Associates -- Analyst

Yeah, thanks. I have kind of a handful of questions. I think maybe just to start, just for Ian. When you were calling out your 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?

Ian Cleminson -- Executive Vice President and Chief Financial Officer

Yes. So, David, what we said in the early remarks was that these are the cost of our ongoing efforts to identify in 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 do you need to think about these cost as the cost of diligence and doing our homework on the targets.

Patrick S. Williams -- President and Chief Executive Officer

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

David Silver -- C.L. King and Associates -- Analyst

Right. Okay, thank you for that. Patrick, I had a question on Oilfield Services, or even a couple of questions. Three months ago I think I asked you kind of where do you think that the inflection point is, 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's touched 60, I guess, WTI. But during the -- something happened or there was a trigger point for the typical shale-based producer during the fourth quarter. Could you just highlight where you think that is? was it low 40s, mid 40s? Where do you think the inflection point was?

Patrick S. Williams -- President and Chief Executive Officer

Yeah, I mean, if you look at all the basins, they're all a little bit different in what the inflection point rate and the [Indecipherable] costs are. So they all have a variable to them, and I think every company has a little variable to them as well. But you're probably right when you start to get into 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 has seen 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 the pandemic is still out there. So full on demand is not on board. I think, not a lot of people are chasing it. They want to make sure there is still sustainability that these prices aren't, and all of a sudden drop down to the low '30s again.

So you're seeing growth, and I think it's a responsible growth right now and sustainable, which we like. So I think you'll see it consistently improve throughout the year, and I think you'll see our Oilfield Services business consistently improve right along with it. And we should outgrow that improvement just due to the fact that we've typically outgrow the market. So we're in a solid spot. And I think with crude prices, as you said, now touching the 60s. As long as this is in a short-term blip, it should be a very healthy year for all Fuel Specialties.

David Silver -- C.L. King and Associates -- Analyst

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, was kind of the distinction you drew between customers seeking your bundle -- a bundle of your products and services relative to maybe due to the price of crude or profitability opportunities, they were may be shopping a little bit more, ala 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 ala carte kind of pick up, and could we see maybe a stronger pickup as profitability returns and people seek your full suite of services? So characterizing the appetite for for your portfolio. Thank you.

Patrick S. Williams -- President and Chief Executive Officer

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 chemical suppliers of technology, we don't supply the horsepower. And so our approach is if you want the best correct 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[Phonetic]. 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 [Indecipherable] And so it's 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's the best service you can give to your customer, is being the the perfection that we provide from a chemical structure standpoint. And so, it's been a benefit to us, has been a benefit to our customers, and we're going to stay on that track.

David Silver -- C.L. King and Associates -- Analyst

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, thinking about the recovery -- the trajectory of the recovery in your Fuel Specialties unit, whether it's top line or maybe there was some of the mix effects that seem to be prevalent in the current quarter. But maybe just a comment on how Fuel Specialties is going to respond if the current pace of European economic recovery post pandemic effects or our business conditions doesn't resume quite as quickly as elsewhere? Thank you.

Patrick S. Williams -- President and Chief Executive Officer

Sure. Yeah. It's all about fuel consumption. And as fuel consumption rises, our Fuel Specialties business will rise right along with it. It's not a business where we have heavy tin [Phonetic] 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 in specific, in parts of Europe, are having to struggle coming back as quickly as the U.S. But I think as the vaccination gets out 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 have been pent up, that haven't been able to travel, whether it's going on vacation, whether it's business travel, whether it's all kinds of different cargo that's been tied up. I think you'll see a lot of that release as the vaccine comes out and you start getting herd immunity.

So our view is it's probably going to come back quicker than a lot of people think, but obviously, we 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 quarter-over-quarter, it's starting to come back, and we're still pretty optimistic.

David Silver -- C.L. King and Associates -- Analyst

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.

Patrick S. Williams -- President and Chief Executive Officer

Thank you.

Operator

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

Chris Shaw -- Monness Crespi Hardt & Co. Inc. -- Analyst

The Fuel Specialties volumes I thought were very good. I guess, to me, they are outpacing the market. Did you guys benefited, and maybe, this is a question for any of your businesses, but hey, was that attributable to -- was there any benefit from sort of Brexit, end of the year, or moving step up our borders? I know you have a decent UK presence. So I was just curious what the sort of the strength and volumes in Fuel Specialties was attributable to?

Patrick S. Williams -- President and Chief Executive Officer

No, Chris. It was really just -- I think during the pandemic, obviously you saw our volumes drop off quite consistently, and I think what happened is, they used up the current inventories that were sitting at their locations at that time. So I think as you started to see consumption come back, the demand for our products came about quite significantly. So 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 in 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 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.

Chris Shaw -- Monness Crespi Hardt & Co. Inc. -- Analyst

Okay, got it, thanks. Then in Oilfield -- showing profits at the level of sales you had in the quarter, I think very -- a great achievements. So the question was how much was -- you just like to get a lot of cost, and how much of that is variable, how much of the [Indecipherable] come back when volumes come back. Can you give any insight into that?

Patrick S. Williams -- President and Chief Executive Officer

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

Ian Cleminson -- Executive Vice President and Chief Financial Officer

Yeah. So probably the way to think about it, Chris is that most of our cost downs of gross profit, and that's 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, and they say our line. This a little bit more fixed cost in that, because what we've been very keen to do is retain the quality of the stuff in this business, so that when they return and the business starts to grow again, that we've got the right people in place, thankfully it's full advantage of that. So the real variability in the cost of goods line, not as much in the, say our line. Now that does go up and down, dependent on activity. And that's is probably less variable in the COGS line [Indecipherable].

Chris Shaw -- Monness Crespi Hardt & Co. Inc. -- Analyst

Yeah, so I guess there's definitely leverage then obviously, and when volumes do come back, that's I guess, but it's getting at ultimately.

Ian Cleminson -- Executive Vice President and Chief Financial Officer

Yeah, no doubt about it.

Chris Shaw -- Monness Crespi Hardt & Co. Inc. -- Analyst

In Performance cans, just -- then that margin mix you were talking about. What was it last year? What products are we talking about? I now last year it was very strong margin, this year it sounds like a price mix issue -- a mix issue that was different. What products we're talking that were more prevalent last year and less prevalent this year -- the impact that mixed in that way?

Patrick S. Williams -- President and Chief Executive Officer

Yeah, there was a couple of things really, Chris. I think the first one in Q4 2019, we were building inventory ahead of a launch of a new product. So our manufacturing sites we're 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 mix toward lower margin business as well. Now this is comparing a really strong quarter in Q4 '20 against a really strong quarter of Q4 '19. So there is no longer-term issues. We are really pleased with both quarters. I mean, you look at the margin improvement that we've delivered over the last two to 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.

Chris Shaw -- Monness Crespi Hardt & Co. Inc. -- Analyst

Yeah, and was the -- was the start up this quarter of the new capacity, and also I guess the rail -- the rail loading yard or something. So that has impacted on the cost side for the 4Q?

Patrick S. Williams -- President and Chief Executive Officer

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

Chris Shaw -- Monness Crespi Hardt & Co. Inc. -- Analyst

Got it. Thanks a lot.

Patrick S. Williams -- President and Chief Executive Officer

[Indecipherable], Chris. Thank you.

Chris Shaw -- Monness Crespi Hardt & Co. Inc. -- Analyst

Thanks, bye.

Operator

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

Jon Tanwanteng -- CJS Securities -- Analyst

Thank you. Hi. I just wanted to follow-up on some of the SAR commentary and opex as we go forward. Is Q4 -- the amount you spend 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, any on growth? Or there kind of exceptional items that maybe -- won't be repeated as we get into the next year.

Ian Cleminson -- Executive Vice President and Chief Financial Officer

No Jon, its obviously, a little bit -- few puts and takes in Q4 as we balanced stops in the compensation accruals with some of the acquisition costs at the corporate level, that actually balanced itself out quite nicely. And no doubt, within our businesses, within Performance Chemicals, Fuels and Oilfield, there was a little bit alike the cost in Q4, part because we're not traveling, part because the activity level is just aren't as high in some of that balancing compensation accruals as well. As we look forward into 2021, our hope and expectation is that we start to see a much better activity level, and our feeling is that we will see the activity level, so we will need more SAR into the system. So we would slip into the full year, our SAR was about $268 million. We would expect to be higher than that, probably closer to $2.5 million, maybe even $290 million if things go well. But that will also grow with the business as we move through the year and the economies open up and lockdowns are lifted.

Jon Tanwanteng -- CJS Securities -- Analyst

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

Patrick S. Williams -- President and Chief Executive Officer

Yeah, I mean, as you know, we can't say much about what we're doing -- kind of what we put into the color is what we can say. But what we can say further is that the businesses that we're looking for M&A activity is in the Performance Chemicals sector, based around our technology that could give adjacent markets or adjacent technologies as well. So it's really -- that's our focus from the M&A side. We're consistently looking at deals. Valuations are fairly high in that market. You've got [Indecipherable], you've got a lot of private equity money chasing this market. When they chased oilfield for a long time and it's struggled, they went right back to the Performance Chemicals type segments. So the valuations are pretty high. And as you know, we're very cautious with our balance sheet and very cautious on what kind of multiple we pay. But we're not afraid to go out for something if we know the benefit of that, not only short-term deleverage, but the benefit long-term for our business.

We're not afraid to go after a little higher multiple. We're just not going to pay on the teams like we've seen in the past. I mean, 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.

Jon Tanwanteng -- CJS Securities -- Analyst

Understood. Thank you. Just remind us what your leverage limits are if you do find something out there?

Patrick S. Williams -- President and Chief Executive Officer

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

Jon Tanwanteng -- CJS Securities -- Analyst

Got it. Understood. Thank you.

Operator

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

David Silver -- C.L. King and Associates -- Analyst

Okay, thanks. I had a couple of questions. I mean, I think the first one would be on may be the investment or capex outlook for 2021. So I'm guessing that 2020, kind of the sub $30 million level. I mean, I'm thinking 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? Thanks.

Ian Cleminson -- Executive Vice President and Chief Financial Officer

Sure. So, Patrick, I'll talk the first half of that and then you can move Technical Issues].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. There are a couple of projects that we have identified for growth. They 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. So these are all good news stories.

As we look out beyond 2021, we do think that there is 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 -- seeing if we can build 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.

Patrick S. Williams -- President and Chief Executive Officer

Yeah, I think Ian, you've answered the question. I think the additional color to put on that is that. And David, it's been expressed in the content and expressed in 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, because Ian touched on the expansions that we've put in place are all organic 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.

David Silver -- C.L. King and Associates -- Analyst

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?

Patrick S. Williams -- President and Chief Executive Officer

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

David Silver -- C.L. King and Associates -- Analyst

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 is 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 due do banks look at it and consider it when they are thinking about the size of the revolver or the credit facilities they are willing to extend to you. I mean, in terms of your strategic war chest or your ability to go out and get something done inorganically. I mean how should we think about that that pension surplus there? Thank you.

Patrick S. Williams -- President and Chief Executive Officer

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 plant. Just maybe to explain a little bit about it, its not actually assets of the business, it's separate legal entities from by a separate Board of Trustees, because it's a liability that we have in the future to fund that on 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 a position where the bottom -- where the pension plan is actually sold to an insurance company and it no longer appears on our balance sheet. So it's not something that we can tap as a source of cash, its not cash driving us. We've done a lot of work over the last 15 years to put it into a place where it isn't cash driving us, and we are now in the final [Indecipherable] years of being able to deal with legacy issue from our legacy business, and maybe from our balance sheet.

David Silver -- C.L. King and Associates -- Analyst

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

Patrick S. Williams -- President and Chief Executive Officer

Thanks, David.

Operator

And there are no further questions at this time, please continue.

Patrick S. Williams -- President and Chief Executive Officer

Thank you all for joining us today, and thanks to all our shareholders, customers and Innospec employees for your interest and support. If you have any further questions about Innospec or matters discussed today, Please give us call. We look forward to meeting up with you again to discuss our first quarter in 2021 results in May. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 47 minutes

Call participants:

David Jones -- General Counsel and Chief Compliance Officer

Patrick S. Williams -- President and Chief Executive Officer

Ian Cleminson -- Executive Vice President and Chief Financial Officer

Jon Tanwanteng -- CJS Securities -- Analyst

David Silver -- C.L. King and Associates -- Analyst

Chris Shaw -- Monness Crespi Hardt & Co. Inc. -- Analyst

More IOSP analysis

All earnings call transcripts