Q2 2021 Innospec Inc Earnings Call
Company site, No spec, Inc. Dot com.
During this call we will be making 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 forward looking statements.
These risks and uncertainties are detailed on <unk> 10-K, 10, Qs and other filings with the SEC.
Please see the SEC site or aspects site for these and other documents.
In our discussion today. We've also included from non-GAAP financial measures.
A reconciliation to the most directly comparable GAAP financial measures is contained in our earnings release posted on our website.
The non-GAAP financial measures provided should not be considered as a substitute for or superior to those prepared in accordance with GAAP.
They are included as additional clarification items to aid investors to further understand the company performance. In addition to the impact that these items and events had on financial results.
With us today from <unk>, Patrick Williams, President and Chief Executive Officer, and <unk>, <unk> Executive Vice President and Chief Financial Officer.
Turn it over to Patrick Thank you, David and welcome everyone to <unk> second quarter 2021 conference call.
This was a strong quarter for Interspec as operating income exceeded the pre Covid 2019 comparative for the first time.
In the absence of any material downturn in economic activity due to the recent surge in global Covid cases.
We're entering the second half of 2021 with an optimistic view of continued recovery and momentum in all of our businesses.
Performance chemicals delivered an excellent quarter with record sales on a 47% increase in operating income over 2020.
Since 2017 and throughout the pandemic. This business has delivered margin expansion and double digit annual operating income growth.
We are in the early stages of a global effort by the home and personal care industry to reformulate entire product runs around consumers, which increasingly prefer a more sustainable natural and mild ingredients without any compromise in performance.
This trend keeps the technical bar high and allows our research sales and operations teams to play to their strengths.
Our industry, leading technology combined with our formulation expertise positions us as a key development partner with our customers to address these long term trends.
We are adding substantial new capacity to meet current and future customer demand and our new R&D facilities are expected to be online by the first quarter of 2022.
In addition, we are fast tracking further growth investment opportunities in the U S and Europe.
In fuel specialties sales and operating income exceeded their pre COVID-19 comparative levels for the first time.
While global fuel demand achieved sequential improvement.
There continues to be a GAAP versus pre pandemic levels, giving us headroom for further growth.
Along with critical safety improvements or fuel additives decreased diesel and distillate consumption resulted in immediate and material customer cost savings as well as significant reductions in associated carbon emissions footprint.
The impact of these cost and greenhouse gas reductions is becoming meaningful in regions like Asia, where fuel demand is expected to grow in the coming decades and were additive use is still relatively limited.
And oil field services sales grew by 12% on a sequential basis and operating income approximately doubled.
We believe that there are several opportunities to improve current operating margins and is a critical that we deliver on them in the second half of 2021.
These include further price actions in certain market segments, where necessary rationalization of equipment and other improvements.
These margin expansion opportunities are in addition to ongoing operating leverage gains that we expect to achieve a sequential activity levels improve in all oilfield markets.
The industry is advancing along its recovery path and we are seeing an increased focus by operators on chemistries that can drive both higher returns on capital and long term sustainability.
Our R&D and field service teams are very well positioned to support our oilfield customers in achieving these goals.
Now I'll turn the call over to Ian <unk>, who will review our financial results in more detail then I will return with some concluding comments after that we will take your questions.
Thanks, Patrick turning to slide 7 in the presentation.
Total revenues for the second quarter with $364.5 million or 45% increase from $244.9 billion a year ago.
Driven by recovering demand all our businesses compared to that in the COVID-19 impacting the prior year.
Overall gross margin increased 6.5 percentage points from last year.
36%.
EBITDA for the quarter was $50.6 million compared to a loss of $19.5 million last year.
On a GAAP earnings per share with 19, including special items, the net effect of which decreased our second quarter earnings by <unk> 40 per share.
A year ago, we reported a GAAP loss of $1.62 per share, which included the negative impact from special items on a $1.44 per share.
Excluding special items in both years on adjusted EPS for the quarter was $1.30.
Compared to a loss of <unk> 18, a year ago.
This quarter benefited from above average order phasing brought on <unk>.
Impacts of these orders was approximately <unk> <unk> of EPS for the quarter.
Turning to slide 8.
Revenues in performance chemicals for the second quarter were $128.3 million.
34% from last year's $95.7 million.
Volumes grew 18% the positive price mix of 9% on a favorable currency impact of 7%.
Gross margins of 24, 6% were down 1.4 percentage points compared to 26% in the same quarter 2020.
Operating income increased 47% from last year to $17.9 million.
We believe on performance chemicals business can sustain high single digit revenue growth, reflecting the strong organic opportunities in the pipeline.
Moving on to slide 9 revenue using fuel specialties for the second quarter were $143.4 million, 33% higher than the 107.4 million reported a year ago.
Volume grew by 20% and there was a positive price mix effect, 6% favorable currency impact on 7%.
Specialties gross margin for the quarter was at the upper end of our expected range at 35% compared to 23, 6% the same quarter in 2020.
Operating income for the segment was $28.5 million of Cigna.
Significantly compared to the $4.7 million a year ago.
Fuel demand has continued to improve on.
Subject to any further sustained economic lockdowns demand for a few odyssey's technology should continue to recover over the remainder of 2021 and beyond.
Moving onto slide 10 revenues in oilfield services for the quarter were $83.2 billion from.
<unk> totaling $41.8 million the second quarter last year.
Customer activity continues to increase.
Gross margins of 32% 8.3 percentage points on last year's $23.7 percentage.
Operating income of $2.2 million was a full simple 6 million improvement from the loss of $12.4 million a year ago.
We expect further sequential improvements driven by a combination of increasing customer activity on internal actions, both of which will deliver higher profitability.
Turning to slide 11, corporate costs for the quarter were $11.6 million compared with $54 million a year ago, due mainly to lower personnel related expenses.
The effective tax rate for the quarter was 44, 1% compared to 26, 3% last year, primarily due to change U K tax rate impacting deferred tax.
The adjusted effective tax rate for the quarter was 24, 2% in line with expectations.
Moving on to slide 12 cash generation for the quarter was impacted by an increase in working capital due to sales growth.
This resulted in an operating cash outflow of $1.1 billion before capital expenditures of $9.2 million.
As of June 30th and spec have $94 million in cash and cash equivalents and finance lease debt of $12.3 million, resulting in a net cash position of $94.2 million.
And now I'll turn it back over to Patrick for some final comments.
Thanks Ian.
This was an excellent quarter for on a spec and the general outlook is positive in our end markets heading to the second half of 2021.
Our company is built on a combination of innovative technology and highly responsive customer collaboration and support.
This is a culture that is shared by all our employees.
Demand is accelerating for our advanced technologies, which enable higher operational efficiency reduce carbon footprint and more natural and mild products.
We will continue to leverage and deliver on a strong pipeline of growth opportunities that these trends present in all our businesses.
With respect to cost inflation and supply chain tightness. These.
These conditions will likely to continue in the coming quarters.
We are taking additional price action where require.
In close communication with our suppliers and customers remain will remain a focus as we manage through this environment.
We expect to announce further growth investment projects in the coming quarters, which support our specialized technologies.
And product formulation expertise.
In addition, our strong balance sheet gives us flexibility to support strategic acquisition opportunities and continue our record of returning value to our shareholders through our balance capital management program.
Now I will turn the call over to the operator, and Ian and I will take your questions.
Thank you, Sir ladies and gentlemen, as a reminder, if you wish to ask a question. Please press star 1 on your telephone Keypad Whitestone, Inc.
Our first question today is from John <unk> from CJS Securities Inc. Please go ahead.
Hi, Good morning, it's Pete Lucas for Jon.
Guys covered a lot just a couple of quick questions should we expect cash flow to turn positive again in Q3 or will there be more working capital investment going forward.
Yes, good morning, Pete I'll take that 1 and yet we've had a big outflow of working capital driven by the sales growth.
And as you would imagine with optical knockoffs, good working capital on the balance sheet.
Q3, and Q4, we expect to return to positive free cash flow.
Very helpful. Thanks, and then is the overall inflation supply chain and logistics situation improving at all into Q3 getting stable getting worse, and what where do you see your biggest headaches there.
I think it's Patrick I think it's getting stable there is still some tightness there are still some issues and quite frankly, there's still a hangover from the free is down the Gulf.
But with the tight inflation cost and overall market conditions, we've been able to manage through it.
And we do not see that affecting us in Q3 and Q4.
Great and last 1 from me just a technical 1 how should we think of the tax rate down a go forward basis. After the changes in the U K.
Yes, we're still in that sort of 24% to 25% range.
UK changes oil and pass it on on deferred tax so the adjusted rate.
F 'twenty 4 to 'twenty 5.
Pretty good stick with.
Very helpful. Congrats again on the quarter. Thanks.
Thank you appreciate it.
As a reminder to ask questions you need to press star 1.
On on your telephone. The next question is from David Silver from CLK. Please go ahead.
Yes.
Yes, hi, thank you very much from that.
Hey.
So there were a lot of kind of teasers and the press release at this time and I was hoping just to see if we could get a little bit more color but.
The first 1 I would say it would be about the incremental growth opportunities that you.
Mentioned.
In performance chemicals, so above and beyond.
So the project that you accelerated some.
Development spending on.
You did talk about.
Kind of what sounded like discrete growth opportunities and I was just wondering if you might be able to kind of detail on like what what makes these opportunities.
Where the year justifying of from discretionary capital down the road I mean do you have the.
Customer on a long term agreement kind of in place or envisioned maybe just talk about what comes after the current.
Growth opportunity that you accelerated your development spending for yes, David it's across the board.
As you know when you put a strategy in place sometimes it takes takes years for that strategy to really take off.
As we've discussed in previous calls we've been working on this strategy quite some time on sustainability mild products natural products.
And that's where our focus has been and that's where the growth is coming from hence that's why we have the capital projects.
But it's really across the board quite frankly, it's in it's in home care, it's in agriculture and mining we've had growth in all sectors in our performance chemicals.
And we see that moving forward.
We've moved our growth rates up we used to say middle mid digit growth now read high single digit growth and it wouldn't surprise me to see us in double digit growth consistently over the next few years in that business.
Got a strong pipeline of products.
Across all across all our businesses, but primarily in performance chemicals chemicals that you're asking about it's really in all sectors of that business. So the guys have done a really good job positioning our company to take advantage of the consumer markets and really take off and you can see on our results.
Okay. Thank you for that.
I guess I did want to ask a question about the M&A pipeline.
So Patrick.
Discuss the.
On the M&A.
Market funnel on gas with potential opportunities and I.
I guess your company was associated with 1 very large opportunity.
But.
I'm just wondering.
You highlighted both performance chemicals, and I think oilfield services areas, where bolt on or incremental.
Complementary technologies or products might be.
A reasonable target.
As you look at the.
Chris could you just give us some perspective on how you view the.
M&A opportunity set.
Thanks.
Might be able to get done.
Kind of maybe the medium term.
Sure David.
Yes, our primary focus in M&A over the last few years has always been on the performance chemical sector.
And technology, driven and you would have a few outliers that sit there, but our focus is still sits performance chemicals.
We've seen a lot of deals in the market multiples are extremely high.
There's a lot of cheap cash out in the marketplace right now and as you know, we're not going to buy just to buy and I don't want to be 1 of those companies that.
Slide 16, multiple and 2 years later, you sit back and say why did I do that.
So we're going to be a smart stewards of our shareholders' cash.
And our employees cash.
And where we see a great fit for our company, where we see long term value not a short term hit the long term value.
We will make that move and we're continuously looking at acquisitions, we won't stop looking at them.
And when we find the right 1 youll see us jump on it again.
I think we're in a great position with a balance sheet, where on a great position with our strategy all of our businesses are coming back strong.
We see.
Really really good good.
Room to move forward in the next 2 years and I think debt a nice strategic acquisition is going to fit well. So we're going to continue on the road that we promised.
We've stuck to our guns to be disciplined and we're going to still do that.
Okay, Great and then I did.
1 last question and again.
Kind of a teaser in your in your prepared.
On your prepared remarks, but in the oilfield services.
You talked about some incremental from opportunity to drive near term incremental margin improvement.
I'm just wondering if you might be able to provide a little more color on.
On those initiatives that you expect to execute on back half of the year.
Yes, the first part of it is operating leverage.
And we're starting to see that due to revenue increase.
Just as important as simple blocking and tackling it's.
Getting a handle on equipment.
Getting an handle on price increases where needed.
It's moving to more sustainable products for our customers its technology innovation and its controlling cost and.
And all of those combined which we expect to see in Q3, and Q4 should really move us forward to moving net operating income line to a much higher number and thats, our expectations and I think we're going to see it.
I'm going to just throw in a quick 1 additional 1 on the oil field service.
But.
The oil price has risen but the.
The regulatory environment, and maybe the risk appetite among capital providers.
It's probably shifted.
Pre pandemic.
At year $83 million quarterly level here, you would have to go up I don't know roughly 50%.
Again.
To the revenue level debt.
Prevalent during much of 2019 and I'm just wondering.
Patrick I mean since your territory from way back.
Could you share your thoughts on how you expect.
Production activity or E&P activity in our major shale basin to develop let's say over the next 6 to 9 months. Thank you sure David.
It's interesting because typically when you see <unk>.
First oil price.
On that market in a depressed oil price turns you see activity turn at the same level, we really haven't seen that this is for the first time in many many years, where it's been a much more disciplined approach.
I think shareholders from E&P companies are expecting.
Companies to pay down debt return value to shareholders and not throw it in the ground.
So it's been a more disciplined approach to the market, which quite frankly long term.
Behooves, well for everybody because youll have sustainability in pricing.
So you might not have that short term jumped, but I think youll have that long term gain and thats what were starting to see in the marketplace.
For us to get to those levels that youre talking about Youre correct.
We will see those but it's going to take some time and I think as DRA expanse.
Its horizons I think as we as we get more business in the middle East and on other parts of that in Saudi and other areas of the world.
And in the shale basins come back as we're starting to see them Youll see that jump, it's just not going to be as fast as we expected it's going to be a lot more control and thats. What we want to see you don't want to see a big jump Big Spike up and then 2 years later, a big spike down you'd rather see in this market a nice controlled increase in.
I think youll see that run right along with our numbers as well.
Okay, Great and I would just say im happy to get back in queue.
Is there is there another call.
Waiting.
The free call my net.
It is.
You'd have to ask the operator that we don't see it on our end.
Okay, Alright, im going to get back in queue. Thank you very much sounds good. Thank you.
Okay.
Our next question is from the line of Chris Shaw from Monex. Please go ahead.
Good morning, everyone.
Good morning, Chris David did assets moving my questions.
But just to clarify so following up on oilfield, there and thanks for what you.
You just answered but.
Getting back to that revenue level, and obviously would take some time, but can you get to the income levels that you've seen in the past.
Sooner or much sooner than you had that much sooner than getting back to the revenue levels.
Have you taken costs down or improve margin in any way that that would be feasible.
Yes, Chris it's going to take time, I think if we do the things that.
On the managers have enacted in oilfield.
You should see Oi improvement.
As you see our our expansion of our global business you should see improvement. So I think we can get there as we start creeping up to that top line revenue number.
We could get there faster with <unk> and we could revenue, but it's going to take some time to get there.
Got it and then just.
Back on performance chemicals.
I was always under the impression that was a more European business for you is that not right because I'm just impressed again like David Presto, how much it's been growing and how quickly. So I thought Europe was coming sort of rebounding slowly, but maybe I'm wrong.
It's very well balanced between the Americas, and Europe, and probably a little higher in the Americas.
And then <unk> is a very small proportionate share of it but it's pretty balanced between EMEA.
In the Americas, and then a very small portion in Asia.
Was it was the Hudson acquisition was that mostly U S.
I remember that correctly on Europe that wasn't it wasn't Europe, maybe that's an article on <unk>. This is growing extremely well in non <unk> business is growing well along with it.
Got it thanks for the clarification.
Sure.
As a reminder, at star 1 if you wish to ask a question. We can go back to David Silva from CLK. Please go ahead.
Okay. Thanks very much.
Patrick I was going to ask maybe if you could add some color to some of your newer.
<unk> introductions and how they seem to be developing so I mean, if I was just going to and I'm sorry. These would be in the fuel additives area, primarily but.
Well a couple of years ago, you launched with pretty high hopes.
Things like Youre DRA business you're on.
I am on 2020 suites of additives and.
The additive potential from.
The shift to <unk> engine designs.
And you know I.
I think in my opinion, I mean, everything kind of got delayed.
And those areas by the pandemic, but we are starting to reopen and I was just wondering if you might be able to.
Speak to let's say, how the DRA business is responding to higher crude oil and whether.
The testing in the back and forth between the major shipping the vessel operators than yourselves have kind of kicked off maybe some IMO 2020 related.
Business. Thank you sure the DRA business right now sits in the oilfield sector and.
And right now, we're just treating oil and the DRA. We will eventually sometime here in the near future have a DRA for fuels and that will sit the revenue line will sit probably a net fuels specialties business, but thats, where we sit on DRA its moving.
To our expectations.
It's excellent technology, we've expanded our site, we have more volume coming online and we have more customers coming on line. So that's going to enhance oilfield as well on.
On the <unk>, we're definitely starting to see an increase in business.
We definitely see it said that the.
In the marine sector, and Gd is getting a lot a lot more visibility as people come back to work. We are definitely seeing technical teams take a harder look at our products.
And as we see that their value on our products more on its performance.
And so.
I think as these next calls come along.
As long as we don't the Delta variant doesn't shut down the globe again and any other issues, we should start seeing fuel specialties get the benefit of the <unk> and <unk> products.
And theres more products than just that we're doing a lot more different things in that sector that should enhance ourselves over the upcoming years.
Okay. Thanks, and maybe just last 1 but I was hoping to maybe just get a little bit of color.
On the gas.
But your <unk> business and not so much the.
Unusual nature or the the order phasing issue this quarter, but.
I'm just wondering you know that business.
Has been kind of static or.
Don't know in limbo for a little while as the regulatory authorities ponder.
Potential alternatives and I'm, just wondering I mean have you has that business grown.
Your opinion on the total addressable market lets say and.
Have has the market changed in a way that might.
<unk> some additional market share.
Just how you see your <unk> gas business overall, maybe developing over a couple year period would be helpful. Thank you.
On the market really hasnt gone up or down 5%.
There is no other players in the market bought us.
And there is nothing from the FAA debt sits there right now on the next few years tells us that it's going to change at all.
So.
Same market share might go up or down 5%.
No changes whatsoever on the gas market.
Yes.
Alright, and then just.
If you don't mind could.
Could you.
Maybe positive why do you think the.
Order phasing was so heavily frontloaded or concentrated in this quarter I mean, what what was unusual.
The <unk>.
Business environment that led to that unusually concentrated order for for the Afghan.
Sure.
Let me touch on it and I'll add to it.
Yes.
So what we saw was a number of customers pulling orders forward.
On the main reason for that was because of the supply chain disruption that we've seen.
Difficulty in shipping availability shipping and they want to make sure that.
They weren't sure products when they need a day say that just pulled orders forward into the second quarter quarters, 3 and 4.
Okay, Great Patrick did you want to add something or no no I think income to well. Thank you.
Okay very good that's all from me. Thank you both.
Thanks, David.
Thank you everyone for your questions I will now hand back to Patrick Williams for any closing comments.
Thank you all for joining us today, and thanks to all our shareholders customers and <unk> employees for your interest and support.
If you have any further questions about <unk> or matters discussed today, please give us a call.
We look forward to meeting up with you again to discuss our third quarter 2021 results in November have a great day.
Thank you everyone for your participation you may now disconnect your lines.
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Thank you late yesterday, we reported our financial results for the quarter ended June 32021, the earnings release and presentation are posted on the company's site non spec Inc. Dot com.
During this call we will be making 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 forward looking statements.
These risks and uncertainties are detailed on <unk> 10-K, 10, Qs and other filings with the SEC.
Please see the SEC site or aspect site from these and other documents.
In our discussion today, we've also equally from non-GAAP financial measures.
A reconciliation to the most directly comparable GAAP financial measures is contained in our earnings release posted on our website.
The non-GAAP financial measures provided should not be considered as a substitute for or superior to those prepared in accordance with GAAP.
They are included as additional clarification items to aid investors to further understand the company's performance. In addition to the impact that these items and events had on financial results.
With us today from an iceberg are Patrick Williams, President and Chief Executive Officer, and income <unk> Executive Vice President and Chief Financial Officer.
Ill turn it over to you Patrick Thank you, David and welcome everyone to <unk> second quarter 2021 conference call.
This was a strong quarter furnace spec as operating income exceeded the pre Covid 2019 comparative for the first time.
In the absence of any material downturn in economic activity due to the recent surge in global Covid cases.
We're entering the second half of 2021 with an optimistic view of continued recovery and momentum in all of our businesses.
Performance chemicals delivered an excellent quarter with record sales on a 47% increase in operating income over 2020.
Since 2017 and throughout the pandemic. This business has delivered margin expansion and double digit annual operating income growth.
We are in the early stages of a global effort by the home and personal care industry to reformulate entire product lines around consumers, which increasingly prefer a more sustainable natural and mild ingredients without any compromise in performance.
This trend keeps the technical bar high and allows our research sales and operations teams deployed on their strengths.
Our industry, leading technology combined with our formulation expertise positions us as a key development partner with our customers to address these long term trends.
We are adding substantial new capacity to meet current and future customer demand and our new R&D facilities are expected to be online by the first quarter of 2022.
In addition, we are fast tracking further growth investment opportunities in the U S and Europe.
In fuel specialties sales and operating income exceeded their pre COVID-19 comparative levels for the first time.
While global fuel demand achieved sequential improvement.
There continues to be a GAAP versus pre pandemic levels, giving us headroom for further growth.
Along with critical safety improvements I feel out of decreased diesel and distillate consumption resulted in immediate and material customer cost savings as well as significant reductions in associated carbon emissions footprint.
The impact of these cost and greenhouse gas reductions is becoming meaningful in regions like Asia, where field demand is expected to grow in the coming decades and were additive use is still relatively limited.
And oil field services sales grew by 12% on a sequential basis and operating income approximately doubled.
We believe that there are several opportunities to improve current operating margins and is a critical that we deliver on them in the second half of 2021.
These include further price actions in certain market segments, where necessary rationalization of equipment and other improvements.
These margin expansion opportunities are in addition to ongoing operating leverage gains that we expect to achieve a sequential activity levels improve in all oilfield markets.
The industry is advancing along its recovery path and we are seeing an increased focus by operators on chemistries that can drive both higher returns on capital and long term sustainability.
Our R&D and field service teams are very well positioned to support our oilfield customers in achieving these goals.
Now I will turn the call over to Ian Clemenson, who will review our 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 7 in the presentation. The Companys total revenues for the second quarter with $364.5 million, a 45 percentage increase from $244.9 billion a year ago.
Driven by recovering demand all our businesses compared to that in the COVID-19 impacted prior year.
Overall gross margin increased 6.5 percentage points from last year.
36%.
EBITDA for the quarter was $50.6 million compared to a loss of $19.5 million last year.
Our GAAP earnings per share with 19, including special items, the net effect of which decreased our second quarter earnings by <unk> 40 per share.
A year ago, we reported a GAAP loss of $1.62 per share, which included a negative impact from special items of $1.44 per share.
Excluding special items in both years on adjusted EPS for the quarter was $1.30.
Compared to a loss of <unk> 18, a year ago.
This quarter benefited from above average order phasing brought on have guests feel out of it.
The impacts of these orders was approximately 60 cents of EPS for the quarter.
Turning to slide 8 revenues in performance chemicals for the second quarter were $122 million.
34% from last year's $95.7 million.
Volumes grew 18% the positive price mix of 9% on a favorable currency impact of 7%.
Gross margins of 24, 6% were down 1.4 percentage points compared to 26% in the second quarter 2020.
Operating income increased 47% from last year to $17.9 million.
We believe on performance chemicals business can sustain high single digit revenue growth, reflecting the strong organic opportunities in the pipeline.
Moving on to slide 9 revenues in fuel specialties for the second quarter were $143.1 million, 33% higher than the $107.4 million reported a year ago.
Volumes grew by 20% and there was a positive price mix effect, 6% net favorable currency impact of 7%.
Specialties gross margin for the quarter.
<unk> of our expected range at 35% compared to 23, 6% in the same quarter in 2020.
Operating income for the segment was $28.5 million.
Significantly compared to the $4.7 million a year ago.
Fuel demand has continued to improve and subject to any sort of index sustained economic lockdowns demand for a few odyssey's technology should continue to recover over the remainder of 2021 and beyond.
Moving onto slide 10 revenues in oilfield services for the quarter were $83.2 billion.
Approximately doubling the $41.8 million the second quarter last year as customer activity continues to increase.
Gross margins of 52% growth.
<unk> 3 percentage points on last year's 23, 7%.
Operating income of $2.2 million was a $14.6 million improvement from the loss of $12.4 million a year ago.
We expect further sequential improvement driven by a combination of increasing customer activity between civil actions, both of which will deliver higher profitability.
Turning to slide 11, corporate costs for the quarter were $11.6 million compared with $54 million a year ago.
Mainly to lower personnel related expenses.
The effective tax rate for the quarter was 44, 1% compared to 26, 3% last year, primarily due not to change the U K tax rate impacting deferred tax.
Adjusted effective tax rate for the quarter was 24, 2% in line with expectations.
Moving on to slide 12 cash generation for the quarter was impacted by an increase in working capital due to sales growth.
And on operating cash outflow of $1.1 billion before capital expenditures of $9.2 million.
As of June 30, and expect have $94 million cash and cash equivalents and finance lease debt of <unk> $3 million, resulting in a net cash position of $94.2 million.
And now I'll turn it back over to Patrick for some final comments.
Thanks Ian.
This was an excellent quarter for on the spec and the general outlook is positive in our end markets heading to the second half of 2021.
Our company is built on a combination of innovative technology and highly responsive customer collaboration and support.
This is a culture that is shared by all our employees.
Demand is accelerating for our advanced technologies, which enable higher operational efficiency reduce carbon footprint and more natural and mild products.
We will continue to leverage and deliver on a strong pipeline of growth opportunities there.
These trends present in all our businesses.
With respect to cost inflation and supply chain tightness. These conditions will likely to continue in the coming quarters.
We are taking additional price action where required.
In close communication with our suppliers and customers remain will remain a focus as we manage through this environment.
We expect to announce further growth investment projects in the coming quarters, which support our specialized technologies.
And product formulation expertise.
In addition, our strong balance sheet gives us flexibility to support strategic acquisition opportunities and continue our record of returning value to our shareholders through our balance capital management program.
Now I will turn the call over to the operator, and Ian and I will take your questions.
Thank you, Sir ladies and gentlemen, as a reminder, if you wish to ask a question. Please press star 1 on your telephone keypad and wait for your name to be announced.
Our first question today is from John <unk> from CJS Securities. Please go ahead.
Hi, Good morning, it's Pete Lucas for Jon you guys covered a lot just a couple of quick questions should we expect cash flow to turn positive again in Q3 or will there be more working capital investment going forward.
Yes, good morning, I'll start that 1 and yes, we've had a big outflow of working capital driven by the sales growth.
And as you would imagine, but perhaps not as good working capital on the balance sheet cash.
Q3, and Q4, we expect to return to positive free cash flow.
Very helpful. Thanks, and then is the overall inflation supply chain and logistics situation improving at all into Q3 getting stable getting worse, and what where do you see your biggest headaches there.
I think it's Patrick I think it's getting stable on Theres still some tightness there is still some issues and quite frankly, there is still a hangover from the free is down on the Gulf.
But with the tight inflation cost and overall market conditions, we've been able to manage through it.
And we do not see that affecting us in Q3 and Q4.
Great and last 1 from me just a technical 1.
How should we think of the tax rate on a go forward basis. After the changes in the U K.
Yes.
Still on that so 24% to 25% range.
UK changes all impacted on our deferred tax so the adjusted rate.
F 'twenty 4 'twenty 5.
Pretty booked stick with.
Very helpful. Congrats again on the quarter. Thanks.
Thank you appreciate it.
As a reminder to ask questions on each press star 1.
<unk> on your telephone. The next question is from David Silver from CLK. Please go ahead.
Sure.
Yeah, Hi, Thank you very much guys.
Hum.
So there were a lot of kind of teasers and the press release. This time and I was hoping just to see if we could get a little bit more color but.
The first 1 I would say it would be about the incremental growth opportunities that you are.
Mentioned.
In performance chemicals, so above and beyond.
So the project that you accelerated some.
Development spending on.
You did talk about.
Kind of what sounded like discrete growth opportunities and I was just wondering if you might be able to kind of detail like what what makes these are opportunities.
Where the year justifying of from discretionary capital down the road I mean do you have the <unk>.
Customer on a long term agreement kind of in place or envisioned maybe just talk about what comes after the current.
Growth opportunity that you've accelerated your development spending for yes, David it's across the board.
As you know when you put a strategy in place sometimes it takes takes years for that strategy to really take off.
As we've discussed in previous calls we've been working on this strategy quite some time on sustainability mild products natural products.
And that's where our focus has been and that's where the growth is coming from hence that's why we have the capital projects.
But it's really across the board quite frankly, it's in it's in home care, it's in agriculture and mining we've had growth in all sectors on our performance chemicals.
And we see that moving forward.
We've moved our growth rates up we used to say middle mid digit growth now read high single digit growth and it wouldn't surprise me to see us in double digit growth consistently over the next few years in that business.
Got a strong pipeline of products.
Across all across all our businesses, but primarily in performance chemicals chemicals that you're asking about it's really in all sectors of that business. So the guys have done a really good job positioning our company to take advantage of the consumer markets and really take off and you can see on our results.
Okay. Thank you for that.
I guess I did want to ask a question about the M&A pipeline.
So Patrick.
<unk> discussed the.
The problem the M&A.
Market funnel on gas for the potential opportunities and I guess your company was associated with 1 very well.
A large opportunity.
But.
I'm just wondering.
You highlighted both performance chemicals, and I think oilfield services areas, where bolt ons or incremental.
Complementary technologies or products might be.
A reasonable target.
And if you look at the.
Chris could you just give us some perspective on how you view the M&A opportunity set.
The thing might be able to get done over kind of a maybe a medium term time sure David.
Yes, our primary focus in M&A over the last few years has always been on the performance chemical sector.
And technology, driven and you would have a few outliers that sit there, but our focus is still sits performance chemicals.
We've seen a lot of deals in the market multiples are extremely high.
There's a lot of cheap cash out in the marketplace right now and as you know, we're not going to buy just to buy and I don't want to be 1 of those companies that.
Slide 16 multiple on 2 years later, you sit back and say why did I do that.
So we're going to be a smart stewards of our shareholders' cash.
And our employees cash.
And where we see a great fit for our company, where we see long term value not a short term hit for long term value.
We will make that move and we're continuously looking at acquisitions, we won't stop looking at them.
And when we find the right 1 youll see us jump on it again.
I think we're in a great position with a balance sheet, where on a great position with our strategy all of our businesses are coming back strong.
C.
Really really good good.
Room to move forward in the next 2 years and I think debt a nice strategic acquisition is going to fit well. So we're going to continue on the road that we promised.
We've stuck to our guns to be disciplined and we're going to still do that.
Okay, Great and then 1 last question and again.
Kind of a teaser in your in your prepared.
On your prepared remarks, but in oilfield services.
You talked about some incremental from opportunities to drive near term incremental margin improvement.
And just wondering if you might be able to provide a little more color on.
On those initiatives that you expect to execute on the back half of the year.
Yes, the first part of it is operating leverage.
And we're starting to see that due to revenue increase.
Just as important as simple blocking and tackling it's.
It's getting a handle on equipment.
Getting handle on price increases where needed.
It's moving to more sustainable products for our customers its technology innovation and its controlling cost and.
And all of those combined which we expect to see in Q3, and Q4 should really move us forward to moving that operating income line to a much higher number and thats, our expectations and I think we're going to see it.
I'm going to just throw in a quick 1 additional 1 on the oil field services business, but.
The oil price has risen but the.
The regulatory environment, and maybe the risk appetite among capital providers.
It's probably shifted.
Pre pandemic.
At year $83 million quarterly level here, you would have to go up I don't know roughly 50%.
To get to.
To the revenue level debt.
Prevalent during much of 2019 and I'm just wondering.
Patrick I mean, this is your territory from way back.
Could you share your thoughts on how you expect.
Production activity or E&P activity in our major shale basin to develop let's say over the next 6 to 9 months. Thank you sure David.
It's interesting because typically when you see a depressed oil price.
When that market in a depressed oil price turns.
See activity turn at the same level, we really haven't seen that this is for the first time in many many years.
Where it's been a much more disciplined approach.
I think shareholders from E&P companies are expecting.
Companies to pay down debt.
Return value to shareholders and not flowed through it on the ground.
And so it's been a more disciplined approach to the market, which quite frankly long term.
Behooves, well for everybody because youll have sustainability on pricing.
So you might not have that short term jumped, but I think youll have that long term gain and thats what were starting to see in the marketplace.
For us to get to those levels that youre talking about Youre correct.
We will see those but it's going to take some time and I think as DRA expanse.
Its horizons I think as we as we get more business in the middle East and on other parts of that in Saudi and other areas of the world.
And in the shale basins come back as we're starting to see them Youll see that jump, it's just not going to be as fast as we expected it's going to be a lot more control and thats. What we want to see you don't want to see a big jump Big Spike up and then 2 years later, a big spike down you'd rather see in this market a nice controlled increase in.
I think youll see that run right along with our numbers as well.
Okay, Great and I would just say I'm happy to get back in queue.
Is there is there another call.
Waiting.
On the freight the call my bad.
There is.
You'd have to ask the operator that we don't see it on our end.
Okay, Alright, im going to get back in queue. Thank you very much sounds good. Thank you.
Okay.
Our next question is from the line of quick Shaw from flow next question. Please go ahead.
Good morning, everyone.
Good morning, Chris David did ask all my questions.
But just to clarify so following up on oilfield, there and thanks for what you.
You just answered, but I'm getting.
Getting back to that revenue level, obviously will take some time, but can you get to the income levels that you've seen in the past.
Sooner or much sooner than you had that much sooner than getting back to the revenue levels.
Have you taken costs down or improve margin in any way that that would be feasible.
Yes, Chris it's going to take time, I think if we do the things that.
The debt.
The managers have enacted in oilfield.
You should see improvement.
As you see our expansion of our global business you should see improvement. So I think we can get there as we start creeping up to that top line revenue number.
We could get there faster with <unk> and we could revenue, but it's going to take some time to get there.
Got it and then just.
Back on performance chemicals.
I was always under the impression that was a more European business for you is that not right because that's the price again like David impressed how how much it's been growing and how quickly. So I thought Europe was coming sort of rebounding slowly, but maybe I'm wrong.
It's very well balanced between the Americas, and Europe, and probably a little higher in the Americas.
And then asked pack has a very small proportionate share of it but it's pretty balanced between EMEA.
In the Americas, and then a very small portion in Asia.
Was it was the Huntsman acquisition was that mostly U S.
I remember that correctly on Europe.
I think that's an article on <unk>.
This is growing extremely well in non <unk> businesses grow on wells along with it.
Got it thanks for the clarification.
Sure.
As a reminder, at star 1 if you wish to ask a question. We can go back to David Silva from CLK. Please go ahead.
Okay. Thanks very much.
Patrick I was going to ask maybe if you could add some color to some of your newer.
<unk> introductions and how they seem to be developing so I mean, if I was just going on and I'm sorry. These would be in the fuel additives area, primarily but.
Well a couple of years ago, you launched with pretty high hopes.
Things like your DRA business you're on.
I am on 2020 suites of additives and.
The additive potential from the shift to <unk> engine designs.
And you know I.
I think in my opinion, I mean, everything kind of got delayed.
And those areas by the pandemic, but we're starting to reopen and I was just wondering if you might be able to.
Speak to let's say, how the DRA business is responding to higher crude oil and whether.
The testing in the back and forth between the major shipping the vessel operators and yourselves have kind of kicked off.
<unk> 2020 related.
Business. Thank you sure the DRA business right now sits in the oilfield sector and right now, we're just treating oil and the DRA. We will eventually sometime here in the near future have a DRA for fuels and that will sit on the revenue line will sit probably a net fuels specialties business, but.
That's where we sit on DRA.
It's moving.
To our expectations.
It's excellent technology, we've expanded our site, we have more volume coming online and we have more customers coming on line. So that's going to enhance oilfield as well on the <unk>, we're definitely starting to see an increase in business.
We definitely see it said in the.
In the marine sector.
<unk> is getting a lot a lot more visibility as people come back to work, we're definitely seeing technical teams take a harder look at our products.
And as we see that their value in our products more and its performance.
And so.
I think as these next calls come along.
As long as we don't the Delta variant doesn't shut down the globe again and any other issues, we should start seeing in fuel specialties get the benefit of the emo on GTI products.
And theres more products than just that we're doing a lot more different things in that sector that should enhance ourselves over the upcoming years.
Okay.
Yeah.
Okay. Thanks, and maybe just last 1 but I was hoping to maybe just get a little bit of color.
On the gas.
<unk> gas business and not so much the.
Unusual nature or the the order phasing issue this quarter, but.
I'm just wondering you know that business.
Has been kind of static or.
I don't know.
Limbo for a little while as the regulatory authorities ponder.
Potential alternatives and I'm, just wondering I mean have you has that business grown.
On your opinion on the total addressable market, let's say.
You now.
Has has the market changed in a way that might.
Afford you some additional market share.
Just how you see your App gas business overall, maybe developing over a couple year period would be helpful. Thank you.
The market really hasnt gone up or down 5%.
There is no other players in the market bought us.
And there's nothing from the FAA that sits there right now in the next few years tells us that it's going to change at all.
So <unk>.
Same market share might go up or down 5%.
No changes whatsoever on the gas market.
Alright, and then just.
If you don't mind.
Could you.
Maybe positive why do you think the.
The order phasing was so heavily frontloaded or concentrated in this quarter I mean, what what was unusual about the.
Business environment that led to that unusually concentrated order for for the Afghan.
Sure.
Let me touch on it and I'll add to it.
So.
So what we saw was a number of customers pulling orders forward.
On the main reason for that was because of the supply chain disruption that we've seen.
Difficulty in shipping availability of shifting that they want to make sure that.
They would show a product when they need it they said they've just pulled orders forward into the second quarter.
3 and 4.
Okay, Great Patrick did you want to add something or no no I think income to well. Thank you.
Okay very good that's all from me. Thank you both.
Thanks, David.
Thank you everyone for your questions I will now hand back to Patrick Williams for any closing comments.
Thank you all for joining us today, and thanks to all our shareholders customers and <unk> employees for your interest and support.
If you have any further questions about <unk> or matters discussed today, please give us a call.
We look forward to meeting up with you again to discuss our third quarter 2021 results in November have a great day.