Innospec Q4 2023 Earnings Call Transcript

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February 14, 2024

Key Takeaways

  • Q4 & Full-Year 2023 Results: Innospec delivered strong segment performance with double-digit operating income growth in Performance Chemicals and Fuel Specialties, while Oilfield Services saw full-year operating income nearly double and margins expand above 11%.
  • 2GP Chemigut Acquisition: Completed in December 2023 to strengthen Performance Chemicals and add South American manufacturing, expected to be immediately accretive and add approximately $0.08 to EPS in 2024.
  • Key Financial Metrics: Q4 revenue was $494.7 million (-3% YoY) with gross margin up to 31.5%, net income of $37.8 million and adjusted EPS rising to $1.84 from $1.20; full-year revenue was $1.95 billion with adjusted EPS of $6.09.
  • Strong Cash & Balance Sheet: Generated $72.4 million of cash from operations in Q4, ended 2023 with $203.7 million in cash and no debt, and raised the full-year dividend by 10% to $1.41 per share.
  • 2024 Outlook: Expect flat to modest growth in Oilfield Services, mid-single digit top-line growth and continued margin improvement in Performance Chemicals, Fuel Specialties margins within 32–35%, an effective tax rate of ~25%, and Q1 EPS around $1.60.
AI Generated. May Contain Errors.
Earnings Conference Call
Innospec Q4 2023
00:00 / 00:00

There are 6 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Innospec's 4th Quarter 2023 Earnings Release and Conference Call Webcast. At this time, all participants are in listen only mode. After the speakers' presentation, there will be a question and answer session. Call.

Operator

Please note that today's conference is being recorded. I would now like to turn the conference over to your first speaker, Mr. David Jones, General Counsel and Chief Compliance Officer. Please go ahead, sir.

Speaker 1

Thank you. Welcome to Innospec's 4th quarter earnings call. This is David Jones, and I'm Innospec's General Counsel and Chief Compliance Officer. The earnings release for the quarter and this presentation are and other statements about future events. Call.

Speaker 1

These statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially promotional anticipated results implied by such forward looking statements. The risks and uncertainties are detailed in Innospec's 10 ks, 10 Qs and other filings with the SEC. Please see the SEC site and Innospec site for these and related documents. In today's presentation, we have also included non GAAP financial measures. A reconciliation to the most directly comparable GAAP financial measure is contained in the earnings release.

Speaker 1

The non GAAP financial measure should not be considered as a substitute for those prepared in accordance They are included as additional items to aid investor understanding of such company's performance in addition to the impact that such events had on financial results. With me today from Innospec are Patrick Williams, President and Chief Executive Officer and Heath Cleminson, Executive Vice President and Chief Financial Officer. And with that, I

Speaker 2

turn it over to you, Patrick.

Speaker 3

Thank you, David, and welcome everyone to Innospec's 4th quarter and full year 2023 conference call. I am pleased to present another excellent quarter for Innospec. Performance Chemicals and Field Specialties delivered improved margins and double digit operating income growth over the Q4 last year, while Oilfield Services maintained a strong performance. In December, we completed the acquisition of 2GP Chemigut. This acquisition aligned with our previously stated M and A goals to further strengthen our Performance Chemicals segment and add strategic manufacturing in South America.

Speaker 3

QGP brings meaningful capabilities that complement many of the end markets we serve, including agriculture, Personal Care, Home Care, Industrial, Construction and Mining. In addition, There is significant manufacturing flexibility for future organic expansion. We expect this transaction to be immediately accretive and approximately $0.08 of EPS in 2024. In Performance Chemicals, operating income in the quarter Grew by double digits over the prior year and margins improved. Our focus remains on returning operating income and run rates and margins to levels consistent with the full year 2022.

Speaker 3

While the economic environment remains a challenge, We are making progress against that objective. On a sequential basis, Performance Chemicals delivered its 2nd consecutive quarter of operating income growth and margin improvement. We continue to have strong technology pipeline and organic growth opportunities in all end markets. In Fuel Specialties, operating income grew by double digits over the same quarter last year and gross margins were within our target range of 32% to 35%. Excluding Brazil, inventory charges incurred in the first half of twenty twenty three, full year operating income grew by 3% and operating margins improved to 18%.

Speaker 3

We will continue to focus on operating margin improvement. In Oilfield Services, as expected, activity levels in the quarter moderated compared to last year, but remained strong. For the full year, operating income approximately doubled and operating margin expanded above 11%. While we expect production chemicals activity to remain at moderate levels in the coming quarters, we continue to see opportunities for sales growth and margin improvement in all segments and geographies for 2024. Now, I will turn the call over to Ian Clemiston, who will review our financial results in more detail.

Speaker 3

Then I will return with some concluding comments. After that, Ian and I will take

Speaker 4

your questions. Ian? Thanks, Patrick. Turning to Slide 7 in the presentation. The company's total revenues for the 4th quarter were $494,700,000 a 3% decrease of $510,700,000 a year ago.

Speaker 4

Overall gross margin increased by 1.8 percentage points from last year to 31.5%. EBITDA for the quarter was $54,000,000 compared to $54,300,000 last year, and net income for the quarter was $37,800,000 compared to $25,500,000 a year ago. Our GAAP earnings per share were $1.51 including special items, the net effect of which decreased our 4th quarter earnings by $0.33 per share. A year ago, we reported GAAP earnings per share of $1.02 Which included a negative impact from special items of $0.18 per share. Excluding special items in both years, Our adjusted EPS for the quarter was $1.84 compared to $1.20 a year ago.

Speaker 4

For the full year, total revenues of $1,950,000,000 decreased 1% from $1,960,000,000 in 2022. EBITDA for the year was $210,600,000 compared to $225,400,000 in 2022, Our net income was $139,100,000 compared to $133,000,000 a year ago. Our full year GAAP earnings per share were $5.56 including special items, which decreased our full year earnings by $0.53 per share. In 2022, we reported GAAP earnings of $5.32 per share, which includes the negative impact from special items of $0.02 Excluding special items in both years, our adjusted EPS for the year was $6.09 compared to $6.04 a year ago. Turning to Slide 8.

Speaker 4

Revenues in Performance Chemicals for the 4th quarter were $137,200,000 down 5% from last year's $143,900,000 A negative price mix of 14% was offset by higher volumes of 6% and a positive currency impact of 3%. Gross margins of 21.3 percent were up 2.9 percentage points from last year. Operating income increased 14% from last year to $18,000,000 For the full year, revenues of $561,600,000 were down 12% from last year's 639 $700,000 and operating income decreased by 43% to 54,500,000 Moving on to Slide 9. Revenues in fuel specialties for the Q4 were 182,100,000 1% lower than the $183,300,000 reported a year ago. Volumes were flat and a negative price mix of 4% Was offset by a positive currency impact of 3%.

Speaker 4

Fuel Specialties gross margins of 32.9% Improved by 5.1 percentage points from 27.8 percent last year. Operating income increased 22% from last year to $32,600,000 For the full year, revenues were down 5% to $695,900,000 And operating income declined 10% to $109,700,000 Adjusting to the impact of nonrecurring Brazil inventory charges In the first half of twenty twenty three, operating income grew by 3% to 125,100,000 Moving on to Slide 10. Revenues in Oilfield Services for the quarter were 175,400,000 Down 4% from $183,500,000 in the 4th quarter last year. Gross margins of 38% We're down 2.4 percentage points from last year's 40.4 percent. And operating income of $18,300,000 Was down 11% from $20,500,000 a year ago.

Speaker 4

For the full year, revenues of $691,300,000 We're up 16% from last year's $593,800,000 and operating income increased 88% $78,600,000 Turning to Slide 11. Corporate costs of $24,400,000 Increased by $7,900,000 from last year, driven mainly by additional remediation charges and acquisition related costs. The full year adjusted effective tax rate was 23% compared to 27% last year. The decrease is primarily a consequence of having operations outside of the U. S.

Speaker 4

Where they are exposed to foreign currency fluctuations, together with the changing profile of our taxable profits by territory year on year. For 2024, We expect the full year effective tax rate to be around 25%. Moving on to Slide 12. This was an excellent quarter for cash with cash generated from operations of $72,400,000 before capital expenditures of 21,100,000 In the quarter, we paid the previously announced semiannual dividend of $0.72 per common share. This brought the total dividend for the full year to $1.41 per share, a 10% increase over 2022.

Speaker 4

For the full year, cash from operations after capital expenditures was $130,200,000 compared to $39,600,000 in 2022. As of December 31, EnnoSpic had $203,700,000 in cash and cash equivalents and no debt. And now I'll turn it back over to Patrick for some final comments.

Speaker 3

Thanks, Ian. I am pleased with our operating results business teams achieved in the quarter and the full year. The foundation of success is innovation, customer service and teamwork across all our global businesses. Our technologies and customer partnerships are 1st in class and the end markets that we serve. We will continue to leverage and invest those strengths as we target growth and further margin improvement in 2024.

Speaker 3

Cash flow continued to be extremely strong in the quarter full year. After funding the upfront portion of the Cube GP acquisition and a 10% dividend increase, our net cash position remained over $200,000,000 We continue to have significant flexibility and balance sheet strength for further M and A, dividend growth and organic investment. Now I will turn the call over to the operator and Ian and I will take your questions.

Operator

Thank you, Thank you. We are now going to proceed with our first question. And the questions come from the line of Jon Tanwanteng from CJS. Please ask your question. Your line is open.

Speaker 5

Hi, good morning. Thank you for taking my questions. A nice quarter guys.

Speaker 3

Thanks, John. Good morning.

Speaker 5

Good morning. My first one is, again, what's driving the strength in oilfield After I think you tried to level set expectations a little bit last quarter and what are your run rate expectations heading into 24?

Speaker 3

Yes, I mean, I leveled off a little bit when you look over year over year. It's still we're still driving a lot of strength in Our global business, whether it's in Saudi, whether it's in other parts of the country. So it's balancing out that portfolio, Which has still helped us improve and grow in that business. And as we've stated, you will see some moderation In the production side of the business. But I think the diversification, John, within the portfolio has helped us to still maintain A pretty good growth in that business with good OpInc and good margins.

Speaker 3

You will see a little slowdown again in 2024, But it's still a very strong business right now. The guys have done a really good job in that area.

Speaker 5

Okay. Just to be clear, do you see growth in that business on an overall basis for the year or is that something that's going to decline?

Speaker 3

I think it's probably going to be a little flat. You might get a little growth, but I would probably say flat to Just a little tiny bit of growth for 2024.

Speaker 5

Okay, great. No, that's great to hear. And then I expect that the tax rate guidance for 25%, that's reflecting where you expect the revenues to come from just on a geographic basis?

Speaker 4

That's correct, John. Yes.

Speaker 5

Okay, great. And jumping over to QGP, I was wondering if you could tell us what the revenue and EBITDA for that business volume contribution you expect in 'twenty four.

Speaker 4

Yes, it's pretty small at the moment. It's a nice tuck in. We've said that we're going to deliver about We've not disclosed what the revenue and EBITDA is, John, but it's you can sort of reengineer it back from 0 point 0 $8 We're really excited by actually the we've now completed the acquisition in Q4 and the teams Working really well together. We have lots of folks down there. And we're very confident that the synergies that we can drive From a revenue perspective and the opportunities we've got both from sales of their products and our products and the technology crossover, It's going to drive a really nice acquisition.

Speaker 4

So we're super excited by it.

Speaker 5

Okay, great. And then just any updates on the trends in Performance Chemicals. Obviously, you've lapped, I guess, inventory issues coming from last year, but what's the organic trend in both demand and mix as you see it going forward?

Speaker 3

I think it's that mid single digit growth that we've been talking about. We've seen pretty much the inventory issues go away in most of the product lines. There is still some, what I would say, demand destruction in the marketplace, We are definitely starting to see that come back. So we're pretty excited about the year. Again, I think you're probably talking low

Speaker 5

Okay, great. Thanks Patrick. I'll jump back in queue.

Operator

Thank you. Thank you. Innoisex. We are now going to proceed with our next question.

Speaker 4

Then.

Operator

And the questions come from the line of Mike Harrison from Seaport Research Partners. Please ask your question.

Speaker 2

Maybe just kind of continuing on the question on Performance Chemicals, you mentioned that you expect to see I assume you were talking top line growth in terms of low to mid single digit growth. But I'm just curious if maybe you can talk a little bit more about We've seen a lot of, kind of, I believe, what's mostly mix erosion rather than pricing erosion. But talk about what you're seeing in terms mix. And then I guess we've seen pretty dramatic change in the operating margin in that business kind of starting the year in the 7 ish percent range finishing the year here at about 13%. Where should we expect to see that margin progress to over time in Performance Chemicals?

Speaker 2

Yes.

Speaker 3

I mean, if you look at, Mike, the general businesses, as you can tell, are starting to come back. The guys have done a really good job of focusing on margin improvement. We're starting to see the top line growth that we anticipated. There are still some difficult situations with raw materials. You still have you saw CPI numbers that came out yesterday.

Speaker 3

We are still seeing some inflationary problems in the marketplace. But overall, I think that we've filtered through most of the high cost inventory. We've really focused on margin improvement, not only from a raw material standpoint, but from a technology point of view to the customer base to make sure that we're obviously keeping them competitive as well. So we've done a really good job in that area and I think that's Obviously, where you saw the margin improvement. I think moving forward, probably the margins that you see today We'll probably carry forward in the 2024, maybe a little higher.

Speaker 3

And that's our anticipation and that's our focus right now.

Speaker 2

All right. Thanks for that. And then switching over to the fuel specialties business, understand that we had A lot of noise going on there with the stuff going on in Brazil. But you talked about kind of sustainably looking to get back I believe 19% to 21% operating margin is what you pointed to there. What are some of the key drivers for the expected margin improvement in that fuel specialties business?

Speaker 3

A lot of it is product differentiation mix, focus on raw materials and expansion of the business. And that continues to happen in that business that we are discussing today. It's It's been a battle. That's a difficult business in this environment. But our group and the one thing about Specialties is when you get into a high inflationary in a recessionary environment, you don't really see the high negativity you do in most consumer This is one of those and all of our folks in that business have done a really good job managing their way through it.

Speaker 3

And we're starting to see some improvement in total volumes as well, which is key to the business.

Speaker 2

All right. And then the last question for me is kind of More on the guidance front. I guess as you roll up your expectations for the different segments, Any thoughts on what that could imply for EPS in Q1? And I guess in 2024 compared to the 609 you did this year, this past year.

Speaker 4

Yes. Mike, let me take that question. So just thinking about Q1, the consensus out there is around about 1 point $0.60 I believe. And we'll be we expect to be around about $1.60 for the Q1. As we move into 2024 in full throttle, our expectation is that our oilfield business Somewhere between $15,000,000 to $20,000,000 of operating income each quarter.

Speaker 4

We're targeting close to $20,000,000 a quarter in Chemicals. And the full year for fuel specialties should be broadly similar to where it was for this year, round about 125 once you take out The Brazil inventory write offs. So you wrap all that up together and I think you basically come out with a number that's pretty close to full year consensus from our analysts. So we'd be guiding people for Q1 and for the full year that the numbers that they have Are about right and we can continue to update you as we move through the year.

Speaker 2

All right. Sounds good. Thanks very much.

Speaker 4

No problem, Brian. Thanks, Mike.

Operator

Thank you. We are now going to proceed with our next question. And the question comes from the line of Jonathan Wengtang from CJS Securities. Please ask your question.

Speaker 5

Hey, guys. Thanks for the follow-up. Just wanted to ask what was the legacy cost that you dealt with in corporate expenses in the quarter and kind of Help me understand the details there.

Speaker 4

Yes, John. That's remediation charges for one of our sites where the operations have closed, And we just had some changes to scope and costs, and it's a legacy item for us. So it's not part of our continuing operations.

Speaker 5

Okay. And was that a TAL business or is that something else?

Speaker 4

Yes, you're correct. It was the old octane ounces business.

Speaker 5

Okay, great. And then going forward, you obviously still have a fantastic cash position despite the acquisition raising the dividend. What are your expectations just in terms of use of cash in prior year to capital allocation?

Speaker 3

John, I don't think it changes. Focus is still to increase the dividend that we as we continue to do, focus on organic growth as the markets rebound and we're starting to see that. And additionally, continue to look at M and A that fit our portfolio. We made a really nice acquisition in South America. We think there's a few of those out there that really fit us from a geographic standpoint or a product portfolio, And we'll continue to look at those acquisitions as we move forward.

Speaker 3

Number one priority right now is to make sure we integrate the acquisition we just made And get the synergies and get the growth out of it that we're expecting. But those are really the 3 core use of cash Remain the same as they have for a period of time.

Speaker 5

Got it. Thanks. Ian, just one housekeeping question. What's the run rate corporate That you're expecting going forward.

Speaker 4

For the full year, I think it's going to be somewhere closer to sort of $55,000,000 this year, John.

Operator

Thank you. We have no further questions at this time. I will now hand back to Mr. Patrick Williams for closing remarks.

Speaker 3

Thank you all for joining us today and thanks to all our shareholders, customers and Innospec employees for your interest and support. If you have any further questions about Innospec or matters discussed today, please give us a call. We look forward to meeting up with you again to discuss our Q1 2024 results in May. Have a great day.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you.

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