Q2 2020 Innospec Inc Earnings Call
So I'm all participants are in listen only mode. After the speaker presentation they'll be a question answer session to actually question you to press Star one in your telephone oceans advice. You. This conference is being recorded today. This August 2020.
And you over to your first speakers David Jones.
Hello.
Second quarter earnings call.
Called being recorded I'm, David Jones aspect General Counsel, Chief compliance Officer.
Earnings release in these prison and this presentation are posted on the company's website at end of Specking Dot com.
And it will be available on the side for at least six months.
During this call. We are we making forward looking statements, which are predictions projections and other statements about future that.
These statements are based on current expectations and assumptions that are subject to risks and uncertainties.
These statements involve a number of risk uncertainties and assumptions, including the effects of overnight chain such as its duration. Its long term economic impact measures taken by government authorities to address it and the manner, which depends it makes me exacerbate other risk and uncertainties that could cause actual results to differ materially from anticipated results implied by four.
We're looking statements.
These risks and uncertainties are detailed in respect to 10-Q 10-K and other filings with the FCC.
Please see the website or Innospec site for these and other documents.
And our discussion today, we've also included non-GAAP financial measures.
A reconciliation to the most directly comparable GAAP financial measures is contained in our earnings release, a copy of which is available on innospec side.
They are included as additional clarifying items to eight investors further I understand the company's second quarter performance. In addition to the impact these items and events have on the financial results.
Also with me today for a minute spec, our Patrick Williams, President and Chief Executive Officer, and in Clemmensen Executive Vice President and Chief Financial Officer, and with that ill turn it over to you Patrick.
Thank you David.
Welcome everyone and expect second quarter 2020 conference call.
This has been extraordinary quarter, not just for Innospec, but for most companies in our respective industries.
The combined impact of the cobot 19, pandemic and the demand destruction in their crude oil markets has been well documented.
Against this background.
Forwards chemicals had an excellent quarter.
Our team with Delwyn disruption to production of products early in the quarter.
In a very volatile demand patterns from our consumer goods customers.
Delivering an 11% improvement in operating income as a significant achievement and strengthens our confidence in the future of this business and its rising profitability.
Fuel specialties experienced in very difficult quarter as fuel demand collapsed.
Passenger car miles were impacted by the Lockdowns around the world and the reduction in global trade was reflected directly and reduced freight transport.
With air travel directly affected demand for both jet fuel and aviation gasoline was minimal.
Customers also reduced inventory to conserve cash and therefore demand for additives was off significantly resulted in our fuel specialties revenues being down 19%.
We do expect the business to recover in line with returning to economic growth.
The second quarter of 2020 saw crude oil prices briefly invert for the first time in history.
Our supply exceeded demand and storage was a record levels.
This net effect was the exploration and production companies cut capital projects in drilling and completion, while reducing production and some locations.
In terms, although we have not lost market share.
Revenues have been badly impacted and sales down significantly.
We have responded by cutting cost and right sizing our organization to meet near term conditions.
Our strategy to reduce the cyclicality. This business remains on track as our sales into production and stimulation to the middle East have increased.
Despite the reduction in the pipeline throughput, we're very pleased with our progress in drag reducing agents.
In fact, we have now secured significant active sales to sanctioned the second phase.
Capacity expansion at our Texas plant.
Now I'll turn the call over to in Clemmensen Who'll review, our financial results in more detail then I will return with some good including comments after that we will take your questions Ian.
Thank you Patrick.
Turning to slide eight in the presentation. The company's total revenues for the second quarter with 244.9 million affects 2% decrease from 363.4 million a year ago.
The overall gross margin decreased 6.6 percentage points from last year to 24.1% driven mainly by reductions in both oilfield services and fuel specialties somewhat offset by a further margin improvement in performance chemicals.
It's worth noting the our results also include a restructuring charge of 21.1 billion to reflect the longer expects it to station I will say notice business of which broadly half the charge is noncash.
We also took a noncash impairment charge of 19.8 million relating to intangible drilling assets in oilfield services.
EBITDA for the quarter after the restructuring charge of 21.1 million was a loss of 19.5 million compared to an EBITDA of 43.8 million last year.
Our GAAP loss per share was $1.62 cents, including specialty effects and thats effects, which decreased our second quarter earnings by $1.44 cents per share.
A year ago reported GAAP earnings per share of 90 cents, which included adverse impact from special items of 22 cents.
Excluding special items in both years, our adjusted loss per share for the quarter was 18 cents compared to an adjusted earnings per share a $1.12 cents a year ago.
Moving on to slide nine fuel specialties results for the quarter reflected the low demand for a few.
Revenues were 107.4 million down by 19% from last year, driven by 15% reduction in volumes combined with an adverse price mix of 3% and the negative currency impact of 1%.
Gross margins were 23.6% down significantly on last year's second quarter. However, this included an inventory adjustments of $8.2 million.
Without this charge you adjusted gross margin would've been 31.3%, which is just on the low side of our normal range.
This resulted in operating income of 4.7 million compared to 24.1 million a year ago.
Our expectation is that demanding fuel specialties, we'll start to improve during the third quarter.
Turning to slide 10 revenues in performance chemicals for the second quarter were 95.7 billion down 9% for 104.7 billion a year ago.
With 4% lower volumes and now the various price mix of 4% on a negative currency impact of 1%.
We continue to improve our gross margins through effective sales mix enrollments generally improvements driving margins over 3.1 percentage points from last year.
Operating income was up an impressive 11% from the second quarter of 2019 to 12.2 million.
Our expectations are that this business will commence can continue to perform at this level in the third quarter.
Moving on to slide 11.
Oilfield services revenues of $4 million to $1.8 million were down by 66% on the same period last year.
Reflecting the reduction in customer activity in the us onshore markets in drilling completion and production.
Gross margins were down significantly to 23.7 percents. However, this included inventory adjustments of 4.7 million without these adjustments gross margins would've been 34.9% one percentage point higher than the same period last year.
In response to the changing market conditions, we've reduced our cost base by 9.1 million year over year as we have rightsize the business.
The operating loss of 12.4 million for the quarter compared to an operating income of 10.1 billion in the same period last year.
And we see Q2 as the low point for this business.
We have recognized the changes in the drilling drilling in the oil and gas business and taken a noncash impairment charge of 19.8 million through the value of intangible assets.
Moving on to slide 12.
At this as expected there were no revenues in the quarter compared to 1.9 billion a year ago.
The operating loss of 1.6 million compared to an operating income of north of 1 million in last year's second quarter.
We have determined that there will be no further orders motor gasoline and therefore, the octane additives business has ceased.
As a result of this we have books, a restructuring charge of 21.1 million.
Turning to slide 13, corporate costs for the quarter were 15.4 million compared to 13.6 million recorded a year ago, driven by driven by higher personnel and IC related costs.
The effective tax rate for the quarter was 26.2% compared to 26.9% last year.
Moving on to slide 14.
The extraordinary trading conditions net cash provided by operating activities in the quarter was excellent at 29.8 million compared to 50 million irrigate.
In the quarter. The company also distributed 12.8 million to shareholders for the semiannual dividend.
As of June Thirtyth, Innospec at 58.2 million cash and cash equivalents and total debt of 39.6 million, resulting in a net cash position of 18.6 million.
We also have substantial liquidity headroom.
And now I'll turn it back over to Patrick some final comments.
Thanks, Dan.
As we move away from covet induced impacts on the second quarter.
Our focus is to execute on the substantial growth opportunities, which exists in all three of our business units.
Performance chemicals has continued to deliver improved margins and has a great future.
The consumer trends emerging from the pandemic will generate additional growth prospects and we have a number of organic and acquisitive opportunities to enhance this business.
As the economy recovers, so we'll feel use and fuel specialties growth will return.
The shape of this recovery is yet to be determined, but we expect more normal demand to return in the near term.
We will continue to drive our diversification strategy and oilfield services.
As previously stated we are delighted with customer response to the performance of our new drag reducing agents and the resulting sales contracts have allowed us to invest in further capacity.
Sales into Europe, the Middle Eastern Africa are still small, but will but we are encouraged by the growth and the technical performance of the products and a number of countries.
We are to net cash position, reflecting a strong balance sheet driven by our conservative cash management policies.
With significant borrowing headroom liquidity is not an issue.
This positions us well for our many organic growth projects and also for strategic acquisition opportunities.
Now ill turn the call over to the operator, and I will take your questions.
Thank you ladies gentlemen will now begin the question answer session.
The remainder if you wish to ask your question. Please press star one Samsung and we seem to be announce please stand by while we can probably Q in the queue. Soon. Thank you few moments if you wish to cancel your request you can present cash.
Once again for questions. Please press star one.
We'll now take your first question, it's coming from the line of David Silver from C.L. King Capital. Please go ahead, Sir your line is now.
Yeah, Hi, thank you.
Good morning for that so good morning, yeah.
Couple of questions I mean first maybe just a clarification on the term inventory adjustment. So and you I think for two to three segments. You stated inventory adjustments that were part of the reduction in operating income this quarter and.
And I apologize, but when you use the term adjustments are you writing off is that to reflect the write off of obsolete inventory or merely to write down the expected value like a lower to lower of cost to market adjustment. So just.
Product is still still commercially viable, but but.
The selling price toward profitability is now what it was in a more robust energy price environment. Thank you.
Yes, a little bit at both David and in field specialties, we took a hard look.
Given the downturn in demand.
There's some obsolescence in from inventory that's no longer required by our customers. There's some raw material adjustments because of raw material pricing has come down.
And this also tonight used inventory as well.
There's very little inventory that we think we won't be able to sell at some points in the future, but we've taken a very prudent gig.
The markets and we've we've been very cautious in what we still in oil field.
Just 4.7 million adjustment that at like a lot of other people demand has.
Last in oilfield and Weve, but it's really hard look to our inventory.
Most of that is inventory that we feel that it's going to be difficult to sell in the future.
We've written it down and we'll see what happens is demand comes back in if we cancel it in the future.
Well.
Okay. Thank you for that and then my next question would be about the oil field services business.
Patrick I think one quarter ago, you spoke at at some detail about kind of managing.
That particular business for an environment, a lower oil prices and.
Im going to Miss quote you, but you kind of talked about it may be more surgically or making cuts where the scalpel two to ensure that.
The business has the capability to respond quickly to to a return of business.
So.
A couple of questions, but I'm just wondering.
In your view has the pace, where your expectations for recovery in that business changed since three months ago and if so I mean is it is it because the industry is not responding to two particular oil price points or.
Is it something to do with the financial capabilities and financial.
Resources in the industry, just maybe how has your view of what rightsizing or aligning the oilfield services business for the current environment. How has that maybe changed from March 31 to two today. Thank you.
Yes, good question David.
We took about 210 individuals' every delayed offer furloughed.
We have about a cost savings of about $9 million.
And we still feel like we're we're okay with where we are today in regards to business. The one thing we don't want to do is.
Dismantle the business for the current customer base that we haven't we haven't lost any business.
This is obviously is a lot of cutback on Capex excedrin and capital spend.
So we're confident the business is going to come back we're already starting to see that into the third quarter.
In the stimulation and production side.
As well as the DRA side.
So I think what we had to see early on through Q1 and early on through Q2 and lasted obviously through Q3 is that theres not been a lot of capital deployed into the oil and gas markets not the flavor of Wall Street is not flavor private equity.
Then obviously for EAP company sit in this market today, they have to figure out where they can cut as well and so a lot more capital projects being delayed.
So we are staring to see some capital being released.
We are starting to see rigs ramp up a little bit stimulation crews coming back.
It's going to be a slow process in a slow recovery.
But we feel that.
Demand will start coming back supply has been cut significantly because all the production shut in and not a lot of wells drilling right now.
So you are starting to see oil prices creep back up I think you're starting to see the proper behavior across the globe in regards to supply demand and pricing.
And so it's it's it's a unhealthy business globally for anybody and I think we're in the best position, if we control our cost and we continue to provide great technical and performing products will be integrate position for the recovery, but we have turned the necessary things to take.
Sure the business short term and I think were properly positioned.
Okay. Thank you for that and then maybe one last one on the DRA expansion.
So if I have this rate I mean your initial plan.
For DRA production unit, you were able to sell out, let's say in less than a year or maybe about a year a little less.
And can you remind me just the.
Maybe as a multiple living how much bigger or how much greater will your capacity be.
Following the current expansion.
Three times two times whatever.
And then what is your expectation for the timetable to completely.
Fill out or reallocate. This next stage of production capacity for DRA. Thank you sure. Good question, Dave the neat thing about this business and almost all of our assets across all of our businesses is that we don't have an enormous amount of large assets that caused a lot of large capex.
So to double capacity in DRA was a fairly insignificant number and so we are doubling capacity and the doubling the capacity is almost sold out as well so in the near term. After we see that Doug double capacity is sold out and markets are starting to come back demands coming back.
We will actually go into another cut capacity expansion.
So we feel pretty confident that our technology is providing us.
A nice avenue future revenue and the ability to expand and the proper way and not put too much volume on the market.
Additionally, what we're doing Dave is we're looking at heavy crude oil right now at a new technology for heavy crude and we're also looking at a technology for fuels in the technology. We have right now as for like crude oil we are expanding into other markets with new technology will have trials going on there. So.
Sometime in the near future and that will help the ability to expand even more as well.
In addition to that just to give you a quick update on DDR acres, you might ask the question.
Here in the near term, we should have a few trials going on in the middle East specifically in Saudi Aramco, which we should hoping from from what we're seeing from the performance of our product should bode well for us.
So we're feeling pretty confident in this business that even in the environment. We're in today.
We're sold out.
And.
You'll start seeing that reflect.
Our numbers, probably sometime in Q3, and you'll see a better reflection in Q4 in Q1 of next year.
Thank you and then just one last one just to clarify on the de are one of your DRA comment. So you mentioned, a DRA product to customize I guess for fuels as opposed to crude oil.
Correct.
That is that comment I mean, I'm not so people have talked about that you know as a late next development or later stage development, but.
We would innospec be the first with a.
Our a product for something other than crude oil or from the wellhead type of production no. Other fuels is is a very big market.
And.
No. The same players that are in the light crude oil market artists are also in the fuels market now, it's not as big as crude.
But it is it's a it's a strong market and we Havent technology, we think that fits that market well. So it's it's a mature market.
The other markets, we're looking at our heavy crude oil.
But no. It feels is already there and it's just a function of putting the proper product in that market.
Okay, great. Thanks for thanks for all that I'll.
Up off here My next question.
Thank you. Your next question comes from the line Jon Tanwanteng from TD Securities. Please go ahead your lines now.
Good morning, Thank you for taking my questions.
First one I might've missed what is the can you reclassified inventory charges you took in both fuels in oilfield and kind of what the on the adjusted operating margin would have been without them.
Yes, so John we took 8.2 million.
George and fuel specialties.
Not would have moved our gross margins up to 33%, which is just at the lower end of our normal range agile.
Within.
Oil fields, we would we took 4.7 million of in Brinci charge and that would have moved.
Gross margins just about one percentage point high the new were lost this time last year.
Okay, and as we think of Q3 shoot.
At the right based to use those to adjusted operating margins and I.
I assume there's not going to be not going be charges going forward.
Yes, I think that said Thats, a good point John and.
We certainly believe dealt with in fuel specialties. We've we've taken all the inventory charges that we need and we've set up business on the right path for Q3 and soon as we look at July gross margins are in the right range and box, where we'd normally expect today.
Oil field I think that will very much that will depend on how the recovery comes what we certainly done everything we needed today in the second quarter, but we'll keep an eye on that but again I think you're going to see those gross margins and not so low thirtys, whether it would normally base.
In both those businesses.
Got it that makes sense and then just on the on the oilfield business can you be EBITDA profitable at current energy low price levels in the next two quarters or is there still some ground to make up in terms of both price and volume.
I'll take a little bit of that first need if you want to comment.
I think that we can get EBITDA neutral in Q3.
And I think you will see ally positive in Q4.
Okay got it cleaned up some of the Directionally several hadn't in general.
If we can get some movement on the top line, which was starting to say a little bit off with the cost savings that we've made some other adjustments in the business I think.
That's sitting down vision and with Directionally, that's where we're headed.
Okay.
Got it that makes sense and then finally just on the corporate costs can you give a little bit more color on what drove the higher.
Higher expense sequentially on I think you'd mentioned personnel, but maybe just more detail on that number one and number two how you see say are.
As a run rate given that the restructuring cost reductions you've taken going forward.
Yes, so on the corporate cost as you remember John This time last year, we were in the midst of the aside.
Security incidents and what we've done is that we've actually taken to.
Hard look at the business and we've increased the capabilities in the capacity is about oxy function.
Most of the increases from box at both in spend of I'd say, we've also in head count around I'd say, so thats excellent most of that change.
And then in terms of the SDMA as we said earlier on.
We've made adjustments in oilfield.
We don't think we need to make any further adjustments at the time bidding.
We don't need to make any adjustments in fuels or performance chemicals with time being so I think that 9 million off where we are the courts and maybe even a little bit more the full quarter, you probably see on annualized basis, probably file.
$35 million to $40 million likely than we would have been started yet.
Got it that's helpful and and so I finally yacht.
You are sitting on on a very pristine balance sheet nice job on the cash flow any updates on capital allocation, particularly on buybacks, but also M&A and how you think of dividends at this point, yes, I think it remains the same John is that we're going to follow the share price and I think we're reserving capital right now for.
M&A, because we're starting to see some of the multiples come down in areas of focus.
And so our primary use of capital will be organic growth because after cheapest most profitable growth and we have numerous projects into Q4 that.
Secondly will be to make sure we balance out the dividend with with M&A activity and our view is to keep a dividend we'd like to see the dividend increase.
We just want to be.
Market responsible and make sure that the markets are coming back to some somewhat some face of normality before we increase that dividend going into that going into the final quarter.
But I think the M&A activities as a primary focus for us in some of the areas that we now have a great future bright future for us and we're seeing some fair multiples out there right now and businesses that have made sense for us for quite some time.
Got it thanks for that kinda guys.
Thank you.
We have no further questions coming from the phone lines. Please continue.
Thank you all for joining 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 being up with you again to discuss our Q3 2020 results and November have a great day and stay safe.
Yes.
Ladies and gentlemen that this includes our conference call for today. Thank you for participating you may now disconnect.
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