Q3 2021 Innospec Inc Earnings Call

November 3, 2021

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Advice you that this conference is being recorded today and I would now like to hand, the comprehensive it you'll say speaker, David Jones General Counsel and Chief Compliance Officer. These go ahead Sir.

Hello. This is David Jones, and I am aspects General Counsel and Chief compliance Officer yesterday, we reported our financial results for the quarter ended September 32021.

Earnings release in this presentation are posted on the company side agnostic Dot com.

During this call we will be making forward looking statements, which are predictions and projections.

Statements are based on current expectations and assumptions that are subject to risks and uncertainties.

Could cause actual results to differ materially from the anticipated results implied by forward looking statements.

These risks and uncertainties are detailed aspects 10-K, 10, Qs and other filings with the SEC.

Please see the FCC side or aspect site for these and other documents.

In our discussions today. 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, which is also posted on our site.

The non-GAAP financial measures should not be considered as substitute for superior to those prepared in accordance with GAAP.

They are included as additional clarification items to help investors further understand the Companys performance. In addition to the impact that these items and events have on financial results.

With us today from <unk> are Patrick Williams, President and Chief Executive Officer, and <unk>, <unk> Executive Vice President and Chief Financial Officer, and with that I'll turn it over to you Matt. Thank you David and welcome everyone to <unk> third quarter 2021 conference call.

This was another very good quarter parentis back on <unk>.

Global business teams did an excellent job managing through a difficult supply chain an inflationary environment.

All businesses delivered strong sales growth.

And overall gross margins in line with historic levels.

The outlook is for ongoing tightness in logistics and raw materials as we move through the coming quarters.

We will continue to prioritize close communication and coordination with our suppliers and customers to limit the impact of any future price actions, which may be required to offset inflation.

Our balance sheet remains strong and I am delighted that the board has approved another increase to our semi annual dividend to <unk> 59.

Bringing our full year dividend to $1 16, a 12% increase.

Performance chemicals delivered another excellent quarter with record sales improved margins and a 44% increase in operating income over 2020.

Our technologies directly address growing long term consumer trends like clean beauty sustainable packaging and low carbon formulations.

To keep pace with the demand associated with these trends, we expect to materially step up our organic growth investments in 2022.

These investments are targeted for our existing U S and European sites and will add incremental capacity economies of scale and flexibility to these operations.

The majority of this growth Capex will support our premium industry, leading personal and home care ingredients and formulations.

Accordingly.

We recently raised our medium term organic volume growth outlook from mid single digits to high single digits.

<unk> chemicals.

In fuel specialties sales and operating income were up significantly over last year as global fuel demand continues its recovery towards pre COVID-19 2019 levels.

In the coming quarters, both volume and mix are expected to improve in parallel with the further lifting of the global COVID-19 restrictions and the acceleration of jet travel.

And particularly international jet travel.

Over the medium term, we fully expect global demand for diesel jet and renewable fuel to exceed 2019 levels.

Our technologies will continue to play a critical an increasing role in reducing fossil fuel consumption and emissions. While also supporting renewable fuel adoption in the global commercial trucking marine and aviation fleets.

In parallel supported by our technical and R&D leadership, we are actively extending these technologies outside of fuel applications into areas, such as coatings and petrochemical industries with our business is constantly and consistently delivered double digit annual growth over the past four years.

And oil field services sequential sales and operating income grew and operating margin expanded for the fifth consecutive quarter.

The recovery in this business is progressing but the rate of progress is below our internal expectations.

The overall market environment in terms of commodity prices completion and production activity is healthy and expected to continue to improve sequentially.

With this backdrop, we continue to see significant potential for operating income growth and margin expansion in the coming quarters.

Now I will 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 Ian.

Thanks, Patrick.

Turning to slide seven in the presentation. The Companys total revenues for the third quarter with.

$376 1 million or 42% increase from $265 1 million a year ago, driven by recovering demand all our businesses.

With COVID-19 impacted prior year.

Overall gross margin increased by three percentage points from last year to 30%.

EBITDA for the quarter was $41 4 million compared to $31 5 million last year.

Our GAAP earnings per share with 94 <unk>.

Including special items, the net effect of which decreased our third quarter earnings by 21 per share.

A year ago, we reported GAAP earnings per share of <unk> 51, which included the negative impact from special items of <unk> 20 per share.

Excluding special items in both years, our adjusted EPS for the quarter was $1 15.

Compared to 71 a.

A year ago.

Turning to slide eight.

Revenues in performance chemicals for the third quarter with $132 8 million booked 30% from last years 107.

Volumes grew 10% with a positive price mix of 19% and a favorable currency impact of 1%.

Gross margins of 24, 5% one percentage points.

23, 5% in the same quarter in 2020.

Operating income increased 44% from last year to $17 8 million.

We believe our complex spending coupons and performance chemicals will support the delivery of high single digit volume growth over the medium term.

Our estimated spend on these capital projects is $32 million in 2022 and the.

Same again in 2023.

Business accelerates its growth plans to meet market demand.

Moving onto slide nine revenues in fuel specialties for the third quarter were $166 4 million.

There are 2% higher than the $122 million reported a year ago.

Volumes grew by 17% and that was a positive price mix effect of 12% from the favorable currency impact of 1%.

Fuel specialties gross margin for the quarter was slightly below our expected range.

44% compared to 33, 6% in the same quarter in 2020.

Operating income increased 1% from last year.

<unk> six 6 million.

Moving on to slide 10.

Revenues in oilfield services for the quarter were $86 9 million approximately <unk> $43 1 million to third quarter last year as customer activity continues to increase.

Gross margins of 35, 9% were up two five percentage points on last year's 83, 4%.

Operating income of $2 7 million was a $7 2 million improvement from the loss of $4 5 million a year ago.

Turning to slide 11, corporate cost for the quarter was $15 7 million compared with $33 million a year ago, due mainly to higher share based compensation accruals.

The effective tax rate for the quarter was 24% compared to 37, 1% last year, which included the adverse impact of the change the UK tax rate.

The adjusted effective tax rate with the two 3% compared to 23% CAGR again, due primarily to the geographical distribution of profits.

Moving onto slide 12.

Cash generation for the quarter of $3 8 million before capital expenditures of $7 9 million was adversely impacted by an increase in working capital due to higher levels of trading and inventory growth to offset supply chain disruption.

We've taken the positive decision to hold greater volumes of raw materials and finished goods when it makes commercial sense to do so to ensure continued production plums and supply to our customers.

We will keep this under review as we've moved through the fourth quarter and into 2022.

As of September 30th 2021, and if they had $89 2 million in cash cash equivalents and no debt.

Now I'll turn it back over to Patrick for some final comments.

Thanks Ian.

Tight supply chain and inflationary conditions are expected to persist in the coming quarters.

We will continue to adapt and manage through the environment, while maintaining our excellent standard of customer service.

We will continue to work with our supplier with customers to look for ways to limit the impacts of future price actions, which may be required.

Coming quarters to offset inflation.

These near term challenges will not delay our execution on a significant number of organic growth investments.

Which are planned for 2022.

As we have frequently noted organic growth is our capital allocation priority and in 2022, we expect to complete a record level of these growth investments and performance chemicals.

These investments will primarily support increasing demand for.

For our premium personal and home care technologies.

While the size and quality of our near term organic pipeline as favorite building over buying we continue our disciplined pursuit of M&A opportunities, which would add further scale and complement our performance chemicals business.

In parallel with these market growth opportunities. We believe we are well positioned in all our businesses to benefit from increasing demand as economies continue to recover and move closer to full reopening.

Sure.

While the support of our strong balance sheet, we are continuing our record of returning cash to our shareholders by again, increasing our semiannual dividend to <unk> 59.

Which represents an annual increase of 12%.

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

Thank you ladies and gentlemen, we will now begin the question and answer session.

If you wish to ask a question. Please press star one on your telephone keypad and wait for your name to be announced if you wish to cancel their request. Please press the husky.

And once again, please press star one if you wish to ask a question.

This question comes from the line of John <unk> from J P. J S Securities. Please go ahead.

Hi, Good morning, this is stefanos crist for John.

Hey, good morning.

First can you talk about where you expect margins to go sequentially, just given the <unk> input price environment, how mix mix next trends in Q4.

Yes.

Yes, So let me try that one and I think techniques businesses.

I think performance chemicals will stay around that 24% to 25% gross margin range.

We're in a good place that we're able to pass through inflationary increases.

The important thing is that we're working both suppliers and customers to ensure it is not just a straight pass through equal does lots of innovation and creativity and the supply chain as well.

Field specialties.

We'd expect gross margins to increase a little bit.

Q4 and into Q1, they are at the lower end of our range right now, we'd normally expect them to be broadly between 2% to 36% just below 32.

One of the things that we struggle a little bit in fuel specialties and inflationary environments.

The pass through of raw material increases.

Normally around about three months. So we're at the bottom end of that like right now, we'll catch though as we move through Q4 and into next year.

And then in oilfield, we expect those gross margins to state will be where they are.

Maybe switching to the mid <unk>.

In terms of growth percentage points.

Great. Thank you and I do just want to go a little bit more on the oilfield gross margins around 35% is that level sustainable and then.

How should we think about the impact there on volumes versus price.

So.

Gross margins themselves I said.

They'll stay in that mid to low thirties, there'll be some sales mix issues in that depending on how the quarter volumes go.

This is a business that is although volume driven.

Volume does it really impacts our manufacturing facilities.

Most of the cost has been going with cereal so as long as wait a second price auction passing that through and being very disciplined there and then we should respond to stay within that range.

Great. Thank you and I'll just ask one more.

How should we think about free cash flow.

Are you planning to spend more on working capital going forward.

We've not had the best.

Quarter for free cash flow.

We have a small free cash flow outflow.

And that was mainly driven by a 29 million outflow in working capital now we took a very conscious decision as we said in the script too long and it's a hold higher volumes of raw materials and higher volumes of finished goods.

It's really to say is over the the supply chain disruptions that we are currently experiencing and we think that makes good commercial sense, we'll keep our eyes on that.

As we move into Q4 and start of next year.

And in terms of policy working capital going from here on in our expectation is that it will be fairly flat.

Between now and the ended the year and then we'll take another hard look at it as we enter into 2021, we'll see what the external environment looks like.

Strength of our balance sheet, we think that make good sense for us to protect those options to make sure that our pumps.

Stay operational and our customers all stay supplied.

That's great. Thank you for taking my questions.

Okay.

Once again it is star one if you wish to ask a question and your next question comes from the line of David <unk> from C. L. King. Please go ahead.

Yes, hi, good morning, Thank you very much.

Good morning, Brad I'd like to start with maybe a couple of questions for Ian.

Firstly on the corporate expense line, I guess, when I look sequentially or year over year one of the.

One of the variances.

One of the bigger variances is on the corporate expense line.

And I was just wondering if you could maybe talk about what.

What occurred this quarter to maybe.

Put that number at a somewhat elevated.

Level compared to historical levels, and then what's the outlook for that going going forward, maybe I'll just start with that question for now thank you.

Sure Dave.

So a good question.

Can imagine over the last.

18 months, we have an up and down period.

Both of them.

Okay base, but also from a share price space and that this period last year and our share price had dropped quite a bit because of that we saw.

Some credits coming through from share based compensation.

This quarter.

We're seeing.

That's the performance in the business and we're seeing a bunch of share price performance and Thats rebounded a bit. So this is a little bit of a delta between where we were this time last year, but we all know Bruce.

Broadly.

Costs.

And that sort of $15 million range, most quarters, it could be a little bit higher a little bit lower depending.

And what we're doing about $50 million of course about the range I would expect us to satellite.

Okay, Great and then also to follow up with Ian on the working capital question that you just answered but.

Theres been a working net working capital use I guess each of the first three quarters of the year and the total.

I don't know was $80 million or so I think on a nine month basis.

And I know Theres a number of.

Arms and legs to that to that total but.

Maybe if you could just talk about for.

For the full nine months, how much of that.

Working capital increase is really just.

Recovery from last year.

Versus kind of a net incremental.

Working capital usage to address the issues you raised earlier about <unk>.

<unk> holding more inventory and more finished product goods. Thank you.

Yes, Thats a good question David so.

As you said earlier.

Outflows of about $8 2 million of working capital and cash trends in the nine months so far this year.

All of that I would say round about 60% to $65 million that is because of the increased trading we've seen black across all three of our businesses.

Performance chemicals, obviously is accelerating the way in a very nice fashion fuel specialties recovery.

Its been really solid.

<unk> seen incremental improvements each.

Each quarter in oilfield.

We expected in Q3, we would working capital would stabilize somewhat.

No.

These ratings last quarter is really the core to why we've seen.

A conscious decision by the business to <unk>.

Increases inventory levels of finished goods enrollments areas.

Most of that reduction is focused in our fuel specialties business.

We looked at the individual businesses Q2 to Q3.

Oilfield in performance chemicals have been relatively flat in terms of working capital was in fuel specialties, we've taken the conscious decision to.

<unk> mobile will more more raw materials or finished goods I'm not sure the reflection of the complex and long supply chain is about business update.

Okay very helpful. Thank you.

Switch over to Patrick.

One question on performance chemicals, and then maybe one on oilfield.

You did highlight.

I think Ian highlighted the growth.

Plans for performance chemicals over the next couple of years.

<unk> debt.

It is striking noteworthy.

<unk>.

Maybe I'm a little one familiar with this but can you just kind of discuss.

What happens or what are the commercial terms for when you develop kind of one of your more popular new additives. So in other words when you come up with a sulfate free formulation that's of interest to customer a is the.

Are the commercial terms such that that provided are supplied on an exclusive basis.

Or is it typically the case, where you can sell it to a wide range of customers and thereby.

Spanned your sales beyond that initial.

Customer level, so youre breakthrough products.

Typically are they provided on an exclusive basis, where do you have freedom to sell.

Beyond the initial purchases.

David It's a variety.

Some products, if we develop with that specific customer.

Would be exclusive to that specific customer.

But primarily the majority of our technology is internal and we sell it to the mass markets now you could get in a situation where the formulation of that product is exclusive to that customer, but from a primary component in general we sell it to the mass.

And it's.

It's Myles it's <unk>.

Sulfate free one four dioxane three those are the consumer trends that we really chased four years ago. When we put this project and we put this strategy in place and as we've said in previous calls it.

It's really fit well with what we're doing and that's where all of our plants expect <unk> and our volume expansion is going is for these more mild and more sustainable products.

Okay.

Thank you for that and then I'd like to shift over to the oilfield.

Patrick and I'd appreciate your medium to longer term perspective on this question.

But.

Thanks.

The recovery in the oilfield services top line in my opinion, it's been a little bit more moderate.

I would've expected given the absolute level of crude oil prices.

And I'm just wondering if you could share your like I say, maybe medium to longer term view for how you see that.

Part of your business and I guess by extension the domestic energy production.

Domestic energy industry the production side.

Evolving over the next few years in other words is this the COO.

<unk>.

It's going to take longer to get back to the to the pre COVID-19 business levels in that group or maybe should we be thinking about.

Kind of a lower ceiling for that given the current I don't know political environment or whatever else you might site. So maybe how to think about prospects for continued recovery in that segment given the current level.

And direction of crude oil prices sure David and we've discussed this in the past and I think it's an interesting recovery than it has been in the past.

Typically when you have crude prices going up directionally.

10% to 20%.

You would see volumes go up as well.

It's very different now.

Either because of COVID-19 or be because of regulatory but primarily because of wall Street and the expectations now for some of these oil and gas companies that are public companies are we want to pay down debt, we want to return cash back to shareholders before we put more money in the ground.

And thats been a fiscal responsibility more so from those types of companies.

The running and putting money into the ground in drilling has slowed down quite significantly.

I think youre going to see it it's coming back at a slower pace.

We're well positioned.

It's a very responsible way to bring the market back it will bring some stability to oil prices and Nat gas prices.

The regulatory environment has as additionally, slowed it down due to the current administration, but those are things that we are prepared for.

Internally I would say that we're not as happy with the growth in that business and we expect that to see.

A much better recovery going into next year.

So I think from a position standpoint, we're well positioned it's going to be a slow moderate growth for the next probably couple of quarters before you see that substantial long term growth.

There's a lot of wait and see there's a lot of wait to see what OPEC does.

There is a lot of waiting to see to see what the regular regulatory environment is going to look like longer term, but additionally, and probably just as important the wait and see as to make sure that the supply and demand. The demand is still there longer term. This is not a short term blip on the screen and so I think it's just it's just biding our time and I think that were.

Positioned well to take advantage of the market.

When that market and as that market increases.

Okay.

Yes, I'm just going to squeeze in one incremental question again on oilfield, but.

In the past Patrick you've talked about when conditions are robust and the industry, you've talked about kind of bundling and kind of being a full service provider to your key customers and then when things got a little tougher and costs became more of an issue for the customer side.

Shifted.

Two to more of a la carte.

Smaller narrower menu of service offerings.

Where do you think we are.

Businesses on that on that continuum, I mean, our customers looking to access more of your services and technologies in one fell swoop or do you think.

Cost consciousness is still kind of prevailing and maybe Mike might evolve.

A way from that going forward. Thanks.

It's an interesting question, David I think it filters across to all of our businesses, but it's we're in a market environment because of supply chain inflationary issues were.

Some of the some of the technology that we bring which is great a top technology.

It's potentially put aside for a more commoditized technology.

We just have to adapt to environment doesn't mean, we'd give up margin.

It just means that we have to to really look at technology from a different perspective.

I think thats really specific to oilfield is where you have this transition of market play right now.

So we're in that environment and so we just have to make sure. We continuously look at technology and make sure we provide that to the customer base to limit as much inflationary pressures that they have and supply chain issues that they have as well and we've done a good job of that and I think youll see specific to oilfield.

Return to a.

Probably better Op, Inc. As we move into next year as we do not only that simple blocking and tackling things, but as we maneuver that technology around the customers still looking at us as the expertise and chemicals downhole and we will continuously to provide that because that's what we do it's <expletive>.

And everybody else and for US, it's just remaining intact to make sure that we limit really the effect on on that customer on rising cost.

That's what we're doing.

Excellent okay. Thank you very much appreciate it.

Thank you.

Thank you there are no further question at this time I would now like to turn the conference back to Patrick mediums that closing.

Thank you all for joining us today, and thanks to all our shareholders customers and our spec 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 fourth quarter 2021 results in February have a great day.

Thank you, ladies and gentlemen that does conclude your conference for today. Thank you for participating and you may now disconnect.

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Q3 2021 Innospec Inc Earnings Call

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