Q1 2021 Innospec Inc Earnings Call
Thank you. This is David Jones, the court of one of the earnings release and this presentation will be available on the company side for at least six months.
During this call we will make forward looking statements, which are predictions projections and other statements about future events.
<unk> of all of the number of risks uncertainties and assumptions, including the effects of the pandemic such as its duration long term economic impact measures taken by government authorities to address it in the manner of which the pandemic may impact the 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 the stack 10-K, 10, Qs and other filings with the SEC.
Please see the SEC site or aspect of site for these and other documents.
In today's presentation that 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.
With us today from Minister for Patrick Williams, President and Chief Executive Officer, and income Medicine, Executive Vice President and Chief Financial Officer, and with that I'll turn it over to you Patrick.
Thank you David and welcome everyone to <unk> first quarter 2021 conference call.
We are pleased with our start to 2021 with all of our businesses reported sequential growth in the quarter.
Performance chemicals had an excellent first quarter and we expect the business to continue to capitalize on the long term shifts in consumer trends that align with our technologies.
The expectation of our fuel specialties in the oilfield services businesses is for oil and refined product demand to continue to improve through the rest of this year and into 2022.
Based on this positive outlook, we continued strong cash flow.
And debt free balance sheet. The board has approved a 10% increase to our semiannual dividend continuing our record of returning value to shareholders.
Performance chemicals delivered excellent results with sales growth in all end markets. Despite the ongoing effects of the pandemic on European demand.
Operating income for the first quarter reached a record up 17% over the prior year.
The medium to long term outlook for our industry, leading technology continues to be very promising and our R&D pipeline is active across all of our end markets.
To meet increased customer demand, we have approved $10 million and organic growth investments, which are incremental to our original 2021 plants.
For the projects are under review as we accelerate our strategy and investments.
During the quarter. We also broke ground on our new state of the Art Global Research and Technology Center in North Carolina.
The scheduled for completion by year end.
The fuel specialties global demand in the quarter was still well below pre COVID-19 levels with aviation lagging behind other transportation fuels.
Customer activity is expected to continue to recover through the balance of 2021.
And renewable fuels, we are seeing more opportunities to leverage our industry, leading additive technology to address operational issues that are unique to the sustainable alternatives.
We're also finding white spinach spread interest in our technologies that were originally developed for fuels and we have been modified to improve safety and process efficiency and global coatings and plastic manufacturing operations.
In oilfield services, we delivered sequential growth in our completions production and DRA businesses, which more than offset the negative impact of the U S. Winter storm event in mid February.
We expect further improvements in activity levels in Q2 and for the rest of the year.
Specifically to our DRA business. We are now in the process of completing our third capacity expansion to meet increased customer demand.
To address sustainability and our oilfield business, we have developed water based chemistries, which allow our customers to decrease petroleum based raw material use without compromising performance.
That's the key technology partner to our customers with the benefit of being at the front of the collaboration on next generation products, driven by our consumer and regulatory trends.
Many of our customers have well documented objectives to sustainability and.
To substantially reduce their carbon footprint over the coming years.
With the formation of our disruptive technologies group, we are continuing to invest resources to identify and develop the new chemistries molecules and formulations that will help enable our customers to reach these important targets.
These new technologies include bio based versions of our industry, leading the additives without any compromise in performance.
Our success has always been built on innovation and strong customer collaboration and the efforts within our disruptive technologies group will deliver tremendous long term growth opportunities for interspec.
Now I'll turn the call over to Ian Clements City, who will review the financial results in more detail then I'll return with some concluding comments after that we will take your questions Ian.
Thanks, Patrick turning to slide eight of the presentation. The Companys total revenues for the first quarter with $339 6 million.
9% decrease from $372 3 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 by less than one percentage points from last year to 29, 7%.
And for the quarter was $41 4 million compared to $56 7 million last year.
Our GAAP earnings per share with 94%, including special items, the net effect of which decreased our first quarter earnings by 12 cents per share.
The year ago, we reported GAAP earnings of a dollar of 34 cents per share, which included the negative impact from special items of <unk>.
Excluding special items in both years out of adjusted EPS for the quarter was $1 six compared to $1 42 sets of year again.
It's worth noting the G to the 13% total lift in our share price over the quarter. Our adjusted EPS was reduced by a 14th charge the highest share based compensation.
Moving onto slide nine revenues in field specialties for the first quarter were $139 $3 million five per cent of lower than the $147 million reported a year ago.
Volumes were down by 7% and that was a negative price mix effect of 3% offsetting a 5% positive currency impact.
Fuel specialties gross margin for the quarter was at the low end of our expected range of 32, two per cent compared to 34, 8% in the same quarter in 2020.
Operating income for the segment was $23 8 million down 26% from a year ago.
Fuel demand has continued to improve and subject to any further sustained economic lockdowns. The amendment for a few of other tests that should continue to recover over the.
The remainder of 2021 and beyond.
Turning to slide 10 revenue performance chemicals for the first quarter $125 9 billion or.
11% from last year's $113 4 million.
Increasing volumes of 7% and the positive currency impact of 6% of <unk>.
Set an adverse price mix of 2%.
Gross margins of 24, 9%.
Notebook five percentage points compared to $24 four per cent in the same quarter in 2020.
Operating income increased 17% from last year, the $18 3 million.
We believe our performance chemicals business can sustain mid to high single digit revenue growth, reflecting the strong pipeline of organic growth opportunities we have.
Moving on to slide 11.
Using the oilfield services for the first quarter with $74 4 million down 34 per cent of the first quarter of 2020, driven by low levels of customer activity in U S completions.
Gross margins of 32, 9% notebook six percentage points of last year's 32, 3%.
Operating income of $1 2 million was down from $7 2 million in the same quarter last year was the dramatic improvements over the north of $2 million in the fourth quarter of 2020.
Moving into the second quarter. We currently expect to see further improvements in activity levels and demand for our products and services.
Turning to slide 12, corporate costs of 51 million $2 3 million from last year, primarily driven by higher share based compensation and acquisition costs.
The effective tax rate for the quarter was 24 per cent compared to 25, 1% in the same quarter last year.
Moving onto the slide 13. This was another excellent quarter for cash with net cash generated from operations of $22 7 million before capital expenditures of $10 3 million.
As of March 31st and the spec out of $117 million in cash and cash equivalents of five nine finance lease debt of north of $4 million, resulting in the net cash position of $116 6 million.
Now I'll turn it back over to Patrick some final comments.
Thanks, Ian Interspec as start of 2021 with good momentum.
Continued economic recovery will drive further growth throughout the balance of this year and our prospects for 2022 remains strong.
And oilfield services as activity levels increase we will continue our focus on driving operational leverage improvements.
In fuel specialties, we are targeting overall margin improvement as global steel consumption recovers through the rest of 2021.
In performance chemicals, we will execute on organic growth projects to drive incremental revenue, although much of the benefit from these investments will not be realized until 2022.
And then all of our businesses, we will continue to develop and commercialize technologies that support our customers' long term sustainability objectives.
The improving demand in all of our businesses coupled with supply chain tightening his car is driving cost inflation.
The close coordination with our customers our supply chain manufacturing and sales teams have done an excellent job managing through this environment.
In addition to keeping our customer supply we are implementing price increases to counteract cost inflation caused by the current supply chain imbalances.
With respect of our proposed the acquisition of elements. This was consistent with our previously communicated objective to prioritize M&A that aligns with performance chemicals.
We believe that this deal would have been compelling strategic fit and would of substantially expanded both our portfolio of complementary products and our geographic footprint.
Our decision to cease active consideration of this acquisition is also consistent with our disciplined approach to valuation and use of leverage.
We continue to generate excellent cash flow further strengthening our balance sheet, allowing us to increase our semi annual dividend by 10%.
We will remain disciplined in our approach and seeking acquisition opportunities that will expand our performance chemicals business.
In parallel with the acquisition efforts, we will continue to execute on the multitude of organic investment opportunities that exist within all of our businesses.
Now I will turn the call over to the operator, and Ian and I will take your questions.
Thank you, Sir that's all of them.
Reminder, to ask the question you will need the practice of star one on your telephone to withdraw your question. Please press the path for Husky. Please standby, while we compile the Q&A roster.
Okay.
Yeah.
Your first question comes from the line of time of one Tang from <unk> Securities. Please ask your question.
Hey, good morning, guys. Thank you for taking my questions and excellent quarter.
Thanks, John and good morning.
My first question is just on inflation, Patrick I know its getting a lot of companies right. Now I know you of pricing power you can pass them through but as you look at it I'm heading for the second quarter do you see gross margins expanding or staying the same or even contracting just given the level of of price increases we've seen across the board here.
Yes, John it depends on some of the customers of contract customers.
And so you won't see you typically get that three to six month lag, which is very typical in the chemical industry.
So the hope is that all of those contract customers will at least sustained within the margin range that we always discuss.
There are levels, where we are increasing margins on new technologies that will benefit the company, but for the most part I would say that we kept up with the margin profile that we've put out put forth in the market and with the price increases that should keep us within that same Tennessee.
Kind of same levels.
Okay got it but should we expect to be kind of at the lower end of the of your range is for for the next for ourselves.
I would probably put it in the lower to mid range John It won't be on the high end.
Gotcha, Okay that makes sense.
And then just on the the fuels business two questions. One I believe you pushed out from cold flow from last year number one day did you actually see that happen and to what extent and number two you mentioned that you were down 9% because of.
Our year over year add gas is probably a big portion of that I was wondering ex I've got is how close are you to pre pandemic levels of of consumption.
Yes, we see consumption levels come back quite considerably in the first quarter and we saw that in the fourth quarter as well.
Aviation is starting to crawl back I think that Youll see a normalized.
<unk> gas quarter in Q2.
So you will see consumption brought up and go into Q2.
If you look at the rest of the industry I think in general we've seen it come back across the board.
So the expectation is that we will see continuous growth.
Throughout the remainder of 2021 as we get through this pandemic.
Got it so sequential growth you mean, the or growth year over year.
Yep.
Which one.
Both of both Jon.
Got you okay, great. Thank you.
And then just.
How should we think of the Opex SCR grows this year, just given the demand you're seeing and how returns.
Yeah, well for.
Let me say Johnny as well.
We will maintain the level of in fuel specialties and performance chemicals, we don't expect to see much sort of the growth of that.
Of course, oilfields will be slightly different of the activity levels ramp for you will see.
Some higher levels of the play out in that business.
Our expectation is that we'll be able to control that we'll be able to leverage a little bit both of them. We have to the previous years. So you will see some expansion, but I think of the same time youll see a higher level of operating leverage coming out of that business.
Corporate level.
So when the various share price movements in compensation payments, which we count per day.
We should be at that range that we previously quoted for you Joe.
Okay, Great and then just one more of the to clarify the you said mid single digit growth in performance chemicals, you you did well above that this quarter did you mean that for the whole year of just going forward.
Just clarify out of that what you meant by the mid single.
The mid to high single digit growth.
For the rest of the day job.
Got it thank you the controller.
Your next question comes the line of David <unk> from C. L. King day to answer your question.
Yeah, Hi, Thank you good morning.
Yeah.
Hoping to just the dig in a little bit more to the <unk>.
Our record performance by perform your performance chemicals segment and <unk>.
You know double digit the revenue grows and I don't know 17 or whatever it was higher than that on the operating income line I guess I was wondering if you could maybe if it's possible for you to parse the growth into maybe at least two buckets, but one bucket might be just maybe the pure volume driven.
Elements in other words for washing our hands more of a sham pooling more.
Other words, the current technology, but the volume growth is the driver.
And then contrast that with maybe the the newer AD. It is the more natural of formulations and things like that in which you know you'd say, it's more company specific or secular growth that's driving.
The performance there so just.
Just maybe a little bit of color on incrementally what youre seeing in <unk>.
Where that incremental $10 million of investment might might be directed would be great. Thank you.
Yeah, David you know typically in this industry you don't see this type of organic growth for two to three years. After you put the strategy in place.
And going more natural sustainable was the strategy that we've worked on for the past five years and Fortunately for us.
We are right in that Alley, and we have done a really good job focusing on the consumer trends in this area.
And so it really is the natural sustainable.
Products that have pushed this growth forward and we're seeing that continuous.
Really in every parts of that business, whether it's home care of whether it's personal care and additionally that we've seen improvement in our AG markets in our industrial markets, albeit a little tiny or.
We still are seeing great growth and great margin expansion. So it's really been across the board, but I will say, it's the strategy that we put forth at the business and our global business team and all of the individuals of working that performance chemical business have really done a great job, putting this plan in place and sticking to it and our tender.
Nickel team in our opinion of the second to none.
And so the products that we have our long term the sustainable their patented.
And we believe that we're going to have continued growth moving forward. We're pulling these initiatives forward on our five year growth plan, because the fact that our plants are full and due to the fact that we have other new products that we're going to launch in this market that of right along that natural sustainability pipeline. So we feel like.
We're sitting in a really good position.
Moving forward.
Yeah.
Okay. Thanks, Thank you for that and maybe if I could just build on that you discussed you know the ground breaking for your global research and Technology Center.
In North Carolina.
And you know Patrick I think this is part of your vision. So you know maybe if you could just share.
How you expect that asset to be utilized in other and just on a couple of kind of the vectors I guess or elements.
Do you see that as primarily supporting one or two of your segments or is it equally all three is it going to be more collaborative in other words. The directed the customer initiated efforts or will this be more kind of inward basic research and the.
Pursuing.
Things that are in internally generated.
There was a lifetime pack there sorry, but just kind of what is your vision of how.
How do you see that unit being put to the best use maybe over the first couple of years, it's up and running. Thank you. Yes, we have the R&D Chief Technology Center in the U K, we have a lot of labs based out throughout the world to support our customer base the new arm.
The facility in the U S will be specific to home care agriculture personal care and then we have of disruptive technology group that looks at technologies that are five years 10 years down the road debt, what we call will disrupt the market and that's a little bit separate from the R&D Center, that's being built in North Carolina.
So we envision this as new molecule structures, we envisage thats pure support to the current businesses that we're in right now.
We have great lab technicians, we have great Phd chemists down there.
And we believe it's really going to put of footprint moving forward to support our customer base. We do a lot of collaboration projects with our customers and I think that what that does it gives us the envision moving forward of what does the consumer trends looking like three years from now five years from now it gives us the ability really to be on the forefront of.
<unk> and we are a technology based company and that's how we got the growth in all three of our businesses, it's not because we're giving the me too product. It's because we have brought something to the market that's different than everybody else and that's what we're going to continue to do and that's why this research of Technology Center in North Carolina is very very important to us.
Yes.
Okay, great and if I could just ask one more.
Yeah, that'd be focused maybe on the DRA business, but you did indicate the third capacity expansion for that product was completed and I just wanted to clarify if that means that.
Prior to breaking ground on that.
Expansion.
Had a full order book in other words the volumes are already committed or is this going to be.
More speculative in nature, where the volume will ultimately be placed and then if you could just characterize whether the demand is maybe in the traditional.
Petroleum moving oil through pipelines in the U S or.
If maybe the product is being used differently, maybe either geographically or or moving other fluids through pipes the other than the crude oil.
Yes, good question.
We don't put.
Expansion of infection expansion into any of our plants unless we are committed volume.
And so the G R expense.
The expansion is already fully committed volume.
We've been very responsible in bringing this volume to market with.
We have an exceptional technology and therefore, we've had to put this expansion and due to the fact that we've got contracted volume.
It's not just in the U S. We of volume outside the U S and we think our DRA volume in 2022 could be even substantially beyond where we are today.
So we're growing the market we're doing it very responsibly, we're doing it with a great technology and we will have many more avenues to expand this market moving in towards the end of the ended.
The 2021 and moving into 2022.
Okay, great. Thank you I'll get back in queue. Thanks.
Thanks, David.
Once again for any questions. Please press star one on your telephone keypad.
And we have a follow up question from from the line of kind of one Peng the sensor classroom.
Hi, yes, thanks for the follow up just the.
Follow up on the DRA expansion of what was your capacity.
Maybe in dollar terms before the third expansion of mobile I'd be after it's finished.
Andrew you want to take the dollar term.
Yes, Joe we don't actually we don't actually break out the dollar.
As you know when we put the pumps together right we did at the margin.
Mike.
So we've probably now go probably in the region over 120 of 250000 GAAP.
Gallon capacity.
Well probably for about another 50 60000 gallon capacity on top of the.
We don't breakout of the Donaldson company stopped debt.
On the stepping up the first job.
Okay.
John just to add to what Ian was saying is that.
This plant is as you said, it's a modular type plants. So we could move this plant and get up and running in other parts of the world fairly quick and it's not very expensive to do.
And that's the neatness about this technology and so I think for us being controlled in a responsible and the market was number one to us let's bring on smaller volumes on the plant and expand as the market grows with us and that's what we've done.
Okay, Great just trying to think of the ultimate market size for you guys kind of at the share you expect to have all of a little on the medium term.
Yes, it's still fairly small, but I think this year, you'll probably see of double over last year.
Okay great.
On the M&A front and use of cash that you're now seeing elements of ESCO was disappointing, but at the same time. The you know I think people. Appreciate that you guys are staying disciplined in the ER.
He has been overheating M&A market I'm wondering is there anything else out there that youre looking for now that's.
As interesting or even close the size of maybe a number of opportunities that could add up to it.
Or is it more back to organic investing and that the dividend or maybe even looking at share buybacks at this point.
Yes, you made a good point I think it is an overheated M&A market.
Low interest rates, you've got a lot of money parked on the sidelines.
A lot of people of run from different industries jumping back into the petrochemical and pick chemical industry. So.
We're being very cautious as we always have we've looked at a lot of M&A.
We've passed on a lot. It was unfortunate debt element just didn't play ball with us due to the fact that the synergies that we had in and really the growth that we had in those markets and the growth of the bottle that we could have put forth.
But for US John I think it's we have this five year plan that we mentioned in our in our script, we're going to push that for it because organic growth is your cheapest most profitable growth youre not paying a multiple on it.
So we're very excited about our five year plan moving forward and it's all based off of sustainability and and the easy footprint on the environment, but we'll continue to look at the M&A market.
It's overheated, we're not going to overpay.
But at some point in time, we're going to find the right deal, whether it's small or whether it's mid size.
And.
Hopefully, we'll have an announcement, but we're looking we're not rushing window. We're in the we're not in the need to rush right now.
Okay, great any thoughts on buying back your own share relative to the valuations that you're peers again.
We have of buyback in place, we just increased the dividend, 10%, we expect to see further increases on the dividend we think thats.
Good value to our shareholders and we continue to look at buybacks and I think that we'd like to have some dry powder for M&A.
Obviously like to have dry powder for organic growth projects that we're pushing forward and it's not just in performance chemicals, we've got other projects like DRA et cetera, and other parts of the business and so we continue to look at it the board continues to monitor it.
We'll let you know as soon as we start buying if we do.
Got it thank you guys and good job.
Sure.
We have a follow up question comes from the line of Stephen Colbert. Please ask your question.
Okay. Thank you.
I guess the.
I was wondering if.
If you might if the sorry, let me start over is it too early to get kind of an early read on the progress in your businesses in the month of April in other words has the.
The progress that was made during the first quarter has that been extended.
You know into the quarter to date and maybe if you wouldn't mind just to touch on each of your three segments briefly that would be great. So April thank you sure.
Sure in general, we're still seeing a strong growth trend in all three businesses fuel specialty just coming back just due to consumption levels coming back.
Oil field services is coming back due to diversify not only of the portfolio, but also youre seeing more and more E&P activity coming back. So we're definitely seeing that in the oilfield services side and our performance chemicals, just due to the fact that our strategy has been put forth and these guys have done a great job.
We're still continuing to see the growth there that we had expected to see so we're pretty excited about the remainder of this year.
As long as nothing.
Wild happens in the market and as long as the pandemic days that day, I think that Youll see the strength continuing in the next three quarters.
Yes, just talk a little bit of thought.
Okay.
We've certainly seen the momentum.
Performance chemicals continue into April on the <unk>.
Order books for May and beyond look pretty strong as well.
Our oilfield business, we expect sequential growth over Q1, and we're going to deliver that.
Much more customer activity and completions.
PRA business is going well.
Production business is going well, so you'll see quarter over quarter of drugs.
Fuel specialties toward the Se is traditionally a quest of course for US we come out of the winter season.
So you're probably not going to see a sequential growth.
But again the.
How should demand underlying it the market is improving outside of aviation. So all of our businesses are in better shape than they were.
The main consequence throughout the rest of the Ada.
The need to improve.
Thanks for all of the color and then just last one but could you just give us an update on the progress in the <unk>.
Marine fuel additives, you know for the products designed to meet the IMO 2020 mandates.
Just an update on the progress there. Thank you Yeah. You know we had due to the pandemic, it's slowed down quite significantly and we alerted to that the last three quarters, we've talked about it.
We're starting to see a lot more activity.
With <unk> with our IMO 2020 products as well as GTI.
There was a lot more activity as we expected as we start coming out of the pandemic and as you start getting technical resources back and the companies to start reviewing the products again, so we are starting to see.
Not necessarily demand but activity.
Coming back in both those product lines product lines.
Okay, Great. That's all for me. Thank you.
Thank you for everything.
Thank you once again for any questions. Please press star one on your telephone keypad.
Yeah.
Okay.
There are no further questions for Patrick go ahead now.
Thank you all for joining us today, and thanks to all our shareholders customers and <unk> employees for your interest and support.
If you of any further questions about the spec or matters discussed today. Please give us the call. We look forward to meeting up with you again to discuss our second quarter results for 2021 in August have a great day.
Yes.
Debt to be their call for today. Thank you for participating you may all disconnect.
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