Innospec Q1 2024 Earnings Call Transcript

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May 10, 2024

There are 5 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Innospec's First Quarter 20 24 Earnings Release and Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to turn the conference over to your first speaker today, David Jones, General Counsel and Chief Compliance Officer.

Operator

Please go ahead.

Speaker 1

Thank you. Welcome to Innospec's Q1 earnings call. The earnings release for the quarter and this presentation are posted on the company's website. During this call, we will make forward looking statements, which are predictions and other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from the anticipated results implied by such forward looking statements.

Speaker 1

The risks and uncertainties are detailed in the SEC's 10 ks, 10 Qs and other filings with the SEC. Please see the SEC's site and Innospec's site for these and related documents. In our discussions today, we've also included non GAAP financial measures. A reconciliation to the most directly comparable GAAP financial measure is contained in the earnings release. The non GAAP financial measures should not be considered as a substitute for or superior to those prepared in accordance with GAAP.

Speaker 1

They are included as additional items to aid investor understanding of the company's performance in addition to the impact these items and events had on financial results. With me today in respect are Patrick Williams, President and Chief Executive Officer and Ian Cleminson, Executive Vice President and Chief Financial Officer. And Pat, turn it over to you,

Speaker 2

Patrick. Thank you, David, and welcome, everyone, to Innospec's Q1 2024 conference call. I am pleased to report a strong start to 2024. Excellent performance across all our businesses drove double digit operating income growth and margin improvement. Performance Chemicals delivered on our target for sequential improvement as operating income more than doubled over last year.

Speaker 2

While customers remain disciplined in their order patterns, volumes have improved in our key end markets. Supported by our strong organic growth and technology pipeline, we are cautiously optimistic that we can maintain this improvement in 2024. In addition, our recent QGP acquisition is performing in line with expectations as was immediately accretive. Our focus remains on continued progress returning operating income run rates and margins to levels consistent with full year of 2022. Hills Best achieved another steady set of results.

Speaker 2

Gross and operating margins improved over the prior year and were within our targeted range. Our team has continued to build a strong pipeline of regional product end market growth opportunities in both fuel and non fuel applications. Oilfield Services achieved operating income growth and margin expansion over the prior year. Softer production chemicals activity in the quarter was more than offset by further improvement in our other segments. In the Q2, we expect significant headwinds in production chemicals activity.

Speaker 2

And consequently, operating income will substantially lower than previous quarters. We are cautiously optimistic that operating income run rates will return to our targeted $15,000,000 to $20,000,000 per quarter range in the second half of the year. 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, Ian and I will take your questions.

Speaker 2

Ian?

Speaker 3

Thanks, Patrick, and good morning, everyone. Turning to Slide 7 in the presentation, the company's total revenues for the Q1 were $500,200,000 a 2% decrease from $509,600,000 a year ago. Overall gross margin increased by 2.1 percentage points from last year to 31.1%. Adjusted EBITDA for the quarter was $64,000,000 compared to $52,700,000 last year. And net income for the quarter was $41,400,000 compared to $33,200,000 a year ago.

Speaker 3

Our GAAP earnings per share were $1.65 including special items, the net effect of which decreased our Q1 earnings by $0.10 per share. A year ago, we reported GAAP earnings per share of $1.33 which included a negative impact from special items of $0.05 per share. Excluding special items in both years, our adjusted EPS for the quarter was $1.75 compared to $1.38 a year ago. Turning to Slide 8. Revenues in Performance Chemicals for the Q1 were 160,800,000 up 6% from last year's $151,400,000 growth attributable to the QGP acquisition of 6%, volume growth of 13% and positive currency impact of 1% were offset by an adverse price mix of 14% due mainly to lower raw material costs flowing through to selling prices.

Speaker 3

Gross margins of 23.4% increased 7.5 percentage points compared to 15.9% in the same quarter in 2023, benefiting from increased sales and production volumes. Operating income of $21,100,000 approximately doubled on last year. Moving on to Slide 9. Revenues in fuel specialties for the Q1 were $176,900,000 down 7% from the 190,300,000 dollars reported a year ago. And adverse price mix of 6% and a 2% reduction in volumes were partially offset by a positive currency impact of 1%.

Speaker 3

Gross margins of 34.3 percent were 4.1 percentage points above the same quarter last year. Operating income of $33,400,000 was up 3% from $32,400,000 a year ago. Adjusting for the $7,400,000 inventory write off in Brazil in the prior year, gross margins were 34.1% and operating income was 39.8%. The decrease in adjusted operating income year on year was mostly due to the timing of sales in our Avgas business. Moving on to Slide 10.

Speaker 3

Revenues in Oilfield Services for the quarter were $162,500,000 down 3% from $167,900,000 in the Q1 last year. Gross margins of 35.3% decreased 4.2 percentage points from last year's 39.5% on a weaker sales mix. Operating income of $16,900,000 increased 6% from $15,900,000 1 year ago. In the Q2, we expect operating income to be significantly lower due to a slowdown in our production chemicals business. We expect operating income will be in the $7,000,000 to $10,000,000 range.

Speaker 3

However, we are cautiously optimistic that operating income run rates will return to our $15,000,000 to $20,000,000 per quarter range in the second half of this year. Turning to Slide 11, Corporate costs for the quarter were $20,200,000 compared with $17,700,000 a year ago, due mainly to the growth and timing of IT expenditure and higher performance related remuneration. The effective tax rate for the quarter was 25.1% compared to 26.2 percent a year ago. Moving on to Slide 12. Free cash generation for the quarter was excellent with an operating cash inflow of $80,600,000 before capital expenditures of $14,300,000 As of March 31, Innospec had $270,100,000 in cash and cash equivalents and no debt.

Speaker 3

And now I'll turn it back over to Patri for some final comments.

Speaker 2

Thanks, Ian. I am very pleased with the strong performance of all our businesses delivered in the quarter, including the new acquisition. In partnership with our customers, we remain well placed for growth through technical innovation and excellent customer service over the medium to long term. This quarter, our Board approved a further 10% increase in our semiannual dividend to $0.76 per share. With net cash of over $270,000,000 we continue to deliver on our record of returning value to shareholders while maintaining flexibility for M and A, dividend growth, organic investment and buybacks.

Speaker 2

Now I will turn the call over to the operator, and Ian and I will take your questions.

Operator

Thank you. We will now go to your first question. One moment please. And your first question comes from the line of Mike Harrison, Seaport Research Partners. Please go ahead.

Speaker 1

Hi, good morning. Congrats on a strong start to the year.

Speaker 3

Thanks, Mike. Thanks, Mike.

Speaker 1

I was hoping that you could provide a little bit of Performance Chemicals business. You mentioned that some customers are remaining disciplined in their orders. Just curious, does that mean there's still some lingering destocking effects going on in some product lines? Maybe help us understand what you've been seeing in terms of order patterns and trends as you look at kind of that February into March into April timeframe?

Speaker 2

Yes, Mike. We're still seeing very positive trends. I think the destocking was by application, by business, for instance, agriculture. But if you look at overall performance chemicals, I. E.

Speaker 2

Personal care, home care, etcetera, globally we're seeing uptick. We're seeing strong order patterns coming into the 2nd quarter. We're feeling like destocking has been put behind us and we're just moving forward. We're finally starting to see the market come back some normalcy. And we believe that throughout the year, we'll see an uptick continue.

Speaker 2

Q2 looks very strong today.

Speaker 1

And maybe just in terms of that price mix number in Performance Chemicals, I believe in the past, you had said that that's mostly mix and if ag is soft, I would understand where that's affecting mix. But it also sounded like you were saying that raw materials are lower and that's weighing on pricing. Maybe just a little more color there and when you might expect to see some stabilization in that price mix number in Performance Chemicals?

Speaker 3

Yes, Mike. That was a year over year comment. So we are seeing much lower raw material costs now starting to flow through to the revenue lines. There's still a little bit of mix in there. AG is not where we'd like it to be.

Speaker 3

But as Patrick alluded to, our main business in Personal Care, Home Care, we're seeing great volume growth year over year. And sequentially, we continue to see the business expand. So we expect raw materials to stabilize. So we expect that price mix to sort of flatten out throughout the rest of the year. But we're in good shape going into Q2 and for the rest of the year.

Speaker 1

All right. And I guess for my last question, understand the commentary that you provided on Q2 in the oilfield business, but I was just hoping that you could give us maybe some broad thoughts on the full year outlook. The consensus number is $6.75 I know I can't just annualize the Q1 given what you said about oilfield, but annualizing Q1 would get you more to a $7 type EPS number. So maybe just help level set us on some of the modeling assumptions that we should be keeping in mind for the rest of the year?

Speaker 3

Yes, Manny, let me take that one. So Oilfield, obviously, we've guided in the comments earlier to a £6,000,000 to £6,000,000 to £10,000,000 operating income quarter. Our expectation is that in Q3 and Q4, we get back into that $15,000,000 to $20,000,000 operating income range. There's no reason that we sit here today why we can't do that. So that broadly puts us in that sort of €60,000,000 to $70,000,000 operating income range for the full year in oilfield.

Speaker 3

Mike, just to

Speaker 2

give an additional color, there is potential we start seeing some orders in the latter part of Q2. But again, I think as Ian said, let's stick to the numbers that he's put forward for Q3, Q4 as well.

Operator

Thank you. We will now go to your next question. And your next question comes from the line of David Silver from C. L. King and Associates.

Operator

Please go ahead.

Speaker 4

Yes. Hi. Good morning.

Speaker 2

Good morning, David.

Speaker 4

Good morning. I'd just like to start out with a clarification, I guess. I'm just curious, but in oilfield, there's kind of a disparity between how the gross margin line performed versus the operating income. Just curious, but you talked about lower margins on the gross profit line, but there was something of an increase year over year on operating income. So just what between the gross profit or how would you kind of characterize that, I don't know, those two lines on the segment financials kind of going in opposite directions?

Speaker 4

And is that something that will persist through the year? Or is that kind of just a 1 quarter phenomenon?

Speaker 3

Yes. So, David, what we're looking at here is that we've had a slowdown in our Production Chemicals business in the quarter, but the rest of our business has continued to execute extremely well and off the same cost base. So we've been able to grow the revenues, maintain the costs, and that's what's helped year over year operating income come higher. Our Production Chemicals business does attract a lot of service intensive work, so that is a high cost. So we've just dropped a little bit out of our SAR line.

Speaker 3

And as the Production Chemicals business comes back, you'll see that SAR line rise a little bit as well. So nothing unusual, just the business is doing well outside of Production Chemicals, and we're pleased with the results.

Speaker 4

No, thank you for that. I admit when I read it, I had to look it over a couple of times and think about it. So thank you for clarifying that. On the fuel specialties side, there is kind of the margin pickup is getting back to that targeted, I don't know, 32% to 35% range. Just a couple of questions about that.

Speaker 4

So would you say that the more recent margin improvement, is that related to the return of jet fuel aviation markets kind of returning more to normal or would you say that the margin improvement is maybe the margin improvement this quarter is maybe tied to some different end markets or product lines?

Speaker 2

No, it's different end markets, David. We didn't have a lot of jet fuel in the quarter. It tends to be lumpy. It's consistent blocking and tackling lower raw materials, steady prices in the marketplace, increased volumes. It's a little bit of everything.

Speaker 2

And we set a plan years ago to get these margins up, and the group's done a really good job. So as we see an increase in hapgas, we should see maybe potentially even a low margin uptick there as well.

Speaker 4

Okay. And then also sticking with Fuel Specialties for one more, but the comment in the press release and I'm sorry I'm fumbling with my pages, but it seemed like you did call out a number of growth opportunities in different in multiple end markets across the fuel specialties portfolio. And I mean over the last several years, you've definitely launched a number of new initiatives, ocean going vessel, I'm sorry, additives and stationary power, etcetera, along with some other opportunities. Which of those or what would you call out as kind of the more promising ones right now that led you to kind of call that out during the in the press release? Thank you.

Speaker 2

Yes, David. I think it's a combination really of the IMO products and GDI. If you look at a lot of Eastern European nations, they're starting to use the gasoline direct injection product. And that's been a nice uptick. We've been preaching that for quite some time.

Speaker 2

And the hope was that it would start getting some legs and we're finally starting to see that. So GDI has taken off, IMO has taken off and applications outside of fuels had a good quarter as well. So in general, we see some nice tailwinds in this fuels business that we got to continue to take advantage of.

Speaker 4

Very good. One more, if you don't mind, on Performance Chemicals and in particular on the QGP contribution. So you did call out the sales growth. I was wondering if you could maybe kind of talk about that 6% increase as kind of above trend or right on trend, just kind of how does that relate to your overall expectations, let's say, for the 1st 12 months revenue generation from that asset? And then secondly, you did take a small charge, I guess, for adjustments to the contingent consideration related to that acquisition.

Speaker 4

And if I'm interpreting it correctly, I mean, I that means it's performing at or above original expectations. And if that's the case, I mean, if you wouldn't mind qualitatively talking about what that adjustment to contingent consideration was related to and maybe is there a maximum earn out associated with that that maybe we should think about just kind of framing the contribution from QGP and the implications of the incremental charge you took for contingent consideration?

Speaker 3

Sure, David. So in terms of KGP's performance in the Q1, it's exactly on track from a revenue and operating income perspective. What's really pleasing for us is that the business performed exactly how we expected it. But behind that, there's an awful lot of work going on with the integration across our manufacturing, our sales, our finance, supply chain. And we see lots of opportunity in that business going forward.

Speaker 3

Now it's going to take us a little bit of time to bring all that together and to see some real growth, but we are very confident that we've made a great acquisition. The people are fantastic. The integration is going really well. As As we move through the year into next year, we think we can accelerate that growth. So as we sit here, everything is bang on track, which is great.

Speaker 3

In terms of the contingent consideration, that is the accretion charge going through. That's absolutely expected. There's no changes to our expectations of the earn out right now. But obviously, that will change from quarter to quarter. And as the business transitions over the next 2 to 3 years, we'll keep you updated on what that earn out is going to look like.

Speaker 3

But right here, right now, everything is on track and looking good. Thanks, Barry. Thank you.

Operator

There are no further questions. I will now hand the call back to Patrick Williams.

Speaker 2

Thank you all for joining us today and thanks to all our shareholders, customers and Inno Spec employees for your interest and support. If you have any further questions about Ospec or matters discussed today, please give us a call. We look forward to meeting up with you again to discuss our Q2 2024 results in August. Have a great day.

Operator

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

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Innospec Q1 2024
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