Innospec Inc. (NASDAQ:IOSP) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Good day, ladies and gentlemen, and welcome to Innospec’s First Quarter 2022 Earnings Release and Conference Call. [Operator’s Instruction] I would now like to turn the conference over to your speaker today, David Jones, General Counsel. Please go ahead, sir.

David Jones : Thank you. Welcome to Innospec’s first quarter 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, projections 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. The risks and uncertainties are detailed in Innospec’s 10-K, 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 discussion 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. They are included as additional items to aid in better understanding of the company’s performance in addition to the impact that these items and events had on financial results. With me 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 Williams : Thank you, David, and welcome, everyone, to Innospec’s First Quarter 2023 Conference Call. I am pleased to present another [indiscernible] results for Innospec. Our balance portfolio again delivered strong outlining results this quarter. Sales growth and margin improvement in oilfield services partially offset lower activity in Performance Chemicals and a $7.4 million misappropriation of inventory in Fuel Specialties. As expected, this was a soft quarter for Performance Chemicals. Weaker demand and customer destocking efforts continue to negatively impact volumes and margins in the quarter. In the near term, we believe that economic uncertainty will remain a headwind. However, we see no change in our customers’ medium- to long-term plans to shift to more mild and natural formulations.

Our priorities remain focused on developing technology and margin improvement opportunities that will position us well beyond any short-term recessionary concerns. As new personal care contracts begin the third quarter, our targets for sequential operating income growth and margin improvement. In Fuel Specialties gross margin improved sequentially over the prior quarter. The pace of inflation has slowed in some of our markets, and we have continued to take price action where required. This combined with strong sales mix contributed to a sequential margin improvement. As indicated in our earnings release, Fuel Specialties’ results were impacted by $7.4 million misappropriation of inventory in Brazil. Adjusting for this, Fuel Specialties operating [indiscernible] grew by 12% to $39.8 million and gross margin expanded to 34.1%.

We are aggressively pursuing legal actions related to this matter. Despite this isolated event, margin improvement remains a key focus and opportunity for our Global Fuels business in 2023. We expect these efforts to support gross margins at the lower end of our target range through the end of the year. Oilfield Services had an excellent quarter. Strong orders in Production Chemicals, combined with further sequential growth improvement in our Oilfield segments continued to drive significant growth. Operating income was over six times the prior year and gross margins expanded by 6.2 percentage points. Despite potential for some moderation in Production Chemicals order activity, we feel optimistic that we can deliver full year operating income growth in 2023.

In addition, we continue to pursue margin improvement opportunities across the business. Now I will turn the call over to Ian Cleminson, who will review our financial results in more detail, then I will return us to concluding comments. After that, Ian and I will take your questions. Ian?

Ian Cleminson : Thanks, Patrick. Turning to slide seven in the presentation, the company’s total revenues for the first quarter were $509.6 million, an 8% increase from $472.4 million a year ago. Overall gross margin decreased slightly by 0.5 percentage points from last year to 29%. EBITDA for the quarter was $53.9 million compared to $59 million last year, and net income for the quarter was $33.2 million compared to $36.5 million a year ago. Our GAAP earnings per share were $1.33, including special items, the net effect of which decreased our first quarter earnings by $0.05 per share. A year ago, we reported GAAP earnings per share of $1.46, which included a negative impact from special items of $0.07 per share. Excluding special items in both years, our adjusted EPS for the quarter was $1.38 compared to $1.53 a year ago.

Turning to slide eight, revenues in Performance Chemicals for the first quarter were $151.4 million, down 9% from last year’s $167.1 million. Our positive price mix of 6% was offset by a volume decline of 13% and an adverse currency impact of 2%. Gross margins of 15.9% decreased by 8.5 percentage points compared to the same quarter in 2022 due to a weaker sales mix and adverse manufacturing variances resulting from lower production volumes. Operating income decreased 59% from last year to 10.4 million. Moving on to Slide nine, revenues in Fuel Specialties for the first quarter were $190.3 million, down slightly from the $191.8 million reported a year ago. A positive price mix of 22%, partially offset a 20% reduction in volume and adverse currency impact of 3%.

Fuel Specialties gross margins of 30.2% from 1.4 percentage points below the same quarter last year. Operating income of $32.4 million was down from $35.5 million a year ago. Adjusting for the $7.4 million misappropriation of inventory in Brazil, adjusted gross margins were 34.1%, benefiting from a richer sales mix and stabilizing raw material prices, allowing pricing to catch up. Adjusted operating income was $39.8 million. Moving on to Slide 10. Revenues in Oilfield services for the quarter were $167.9 million, up 48% from $113.5 million in the third quarter last year. Gross margins of 39.5% were up 6.2 percentage points on last year’s 33.3%. Operating income of $15.9 million was a $13.4 million increase over the $2.5 million in the prior year.

Turning to Slide 11. Corporate costs for the quarter was $17.7 million compared to $19 million a year ago, due mainly to lower share-based compensation accruals. The effective tax rate for the quarter was 26.2% compared to 24.3% a year ago. The increase in the effective tax rate was primarily because of the higher proportion of the company’s profits are being generated in higher tax jurisdictions. Moving on to Slide 12, free cash generation for the quarter was broadly neutral with an operating cash inflow of $21.8 million with low capital expenditures and internally developed software costs of $22 million. At March 31st, Innospec had $147.5 million in cash and cash equivalents and no debt. And now I’ll turn it back over to Patrick for some final comments.

Patrick Williams : Thanks, Ian. This was a good start to the year for Innospec. Adjusting for the one-off misappropriation inventory, both our oilfield services and fuel specialty businesses achieved operating income growth and margin expansion. We expect our balanced portfolio to continue supporting our results in the coming quarters. Our focus remains on margin improvement in all businesses, along with potential sequential operating income growth in Performance Chemicals. With net cash of over $147 million, we continue to deliver on our record return value to shareholders while maintaining flexibility to pursue M&A and invest in organic growth. This quarter, our board approved a further 10% increase in our semiannual dividend to $0.69 per share.

Our pristine balance sheet, global footprint and technical leadership, positions us well to navigate any economic volatility. In partnership with our customers, we remain well placed for growth through technical innovation and excellent customer service over the medium to long term. Now I’m going to turn the call over to the operator, Ian and I will take your questions.

Q&A Session

Operator: Ladies and gentlemen, we now begin the question-and-answer session. [Operator’s Instruction] We are now taking the first question, please stand by. The first question from Mike Harrison from Seaport Research Partners. Please go ahead.

Operator: Thank you for your question. We are now taking the next question, please standby. And the next question is from John Tanwanteng from CGS Securities. Please go ahead, your line is open.

Operator: Thank you for your question. We are now taking the next question, please standby. The next question from is David Silver from CL King Associates. Please go ahead. Your line is open.

Operator: Thank you for your question. We are now taking the next question. We are now taking the question from the line of Mike Harrison from Seaport Research Partners. Please go ahead. Your line is open.

Operator: Thank you for your question. There are no further questions at the moment. I will hand back the conference to Patrick Williams for closing remarks. Please go ahead.

Patrick Williams: Thank you all for joining us today. And thanks to our shareholders, customers and Innospec employees for your interest and support. If you have any further question about Innospec or matters discussed today, please give us a call. We look forward to being up with you again to discuss our second quarter 2023 results in August. Have a great day.

Operator: That concludes the conference for today. Thank you for participating.