Q1 2022 Innospec Inc Earnings Call
Thank you.
Yesterday, we reported our financial results for the quarter ended March 31, 2022 of the earnings release in this presentation are posted on the company's site. During this call, we'll be making forward looking statements, which are predictions projections or 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 anticipated results implied by forward looking statements.
Risks and uncertainties are detailed in <unk> 10-K, 10, Qs and other products with the SEC. Please see the SEC site or FX type of 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 posted on our site.
The non-GAAP financial measures should not be considered as a substitute for those prepared in accordance with GAAP. They are included as additional clarification items to help investors further understand the company's performance. In addition to the impact these events items and.
And events had on financial results with US today from <unk> are Patrick Williams, President and Chief Executive Officer, and equipments, and executive Vice President and Chief Financial Officer with that I'll turn it over to you Patrick.
Thank you David and welcome everyone to inspect first quarter 2022 conference call.
I am very pleased to report another set of strong results Porretto spec.
Improvements in all businesses drove a 39% increase in revenues and a 50 per 7% increase in operating income over last year.
Gross margins improved significantly over the sequential quarter and were in line with the prior year and our expectations.
Despite continued inflationary pressure in market demand remains strong.
<unk> of our products are increasingly important in the current high cost supply constrained environment that we expect will persist through the year.
We will continue to work closely with our customers to responsibly manage any additional required price actions.
Yeah.
Performance chemicals delivered a 38% increase in operating income over a very strong comparative quarter last year.
We are moving quickly to increase capacity in order to keep up with strong demand across all our product lines.
The additional capacity can be used for multiple products and is supported by multiyear contracts.
Personal care now represents over 75% of performance chemicals operating income.
Complementing personal care, we have a diverse pipeline of growth opportunities in our other end markets, which include homecare mining agriculture and construction.
Fuel specialties delivered a 49% increase in operating income over the prior year as additional pricing actions took effect and volumes increased.
Sequential gross margins recover significantly however, we expect gross margins to remain on the lower antibody target range until inflation moderates.
As inflation slows, we expect lagging price action to catch up to cost and drive further gross margin improvement.
Our outlook is for slow long term growth in global consumption of diesel jet and marine fuel both at fossil and renewable forms.
We see increasing opportunities for our technologies to lower emissions, while enhancing performance in these end markets.
In oilfield services operating income was approximately double that of last year and sales continued to grow sequentially in the quarter.
However, shipment delays led to a sequential quarter decline in operating income.
As we move through 2022, we believe markets will further improve as oil prices remain high and activity rates increase.
Our expectations for gradual improvement in the profitability of our oilfield business.
Now I will turn the call over to Ian Clements and who will review our financial results in more detail.
Then I'll return with some concluding comments after that Peter and I will take your questions.
Thanks, Patrick.
On to slide seven in the presentation. The Companys total revenues for the first quarter with $472 4 million.
39% increase from $339 6 million a year ago.
Overall gross margin decreased slightly by <unk>, two percentage points from last year to 29, 5%.
EBITDA for the quarter was $59 million compared to $41 4 million last year.
Net income for the quarter was $36 5 million compared to $23 4 million a year ago.
Our GAAP earnings per share were $1 46, including special items.
Its effect of which decreased our first quarter earnings by seven cents per share.
A year ago, we reported GAAP earnings per share of 94.
Which included the negative impact from special items of 12 cents per share.
Excluding special items in both years, our adjusted EPS for the quarter was $1 53.
Compared to a $1.06 a year ago.
Turning to slide eight revenues in performance chemicals for the first quarter with $167 1 million up 33% from last year's $125 9 million.
Volumes grew 7% with a positive price mix of 32% offsetting and adverse currency impact of 6%.
Gross margins of 24, 4%, but down slightly by <unk> five percentage points compared to 24, 9% in the same quarter in 2020.
Operating income increased 38% from last year to $25 3 million.
Moving onto slide nine revenues in fuel specialties for the first quarter were $191 8 million.
8% higher than the $139 3 million reported a year ago.
Volumes grew by 23% and that was a positive price mix effect of 21% offsetting a negative currency impact of <unk>.
6%.
Fuel fuel specialties gross margins of 31, 6% with no six percentage points below the same quarter last year.
Operating income increased 49% from last year to $35 5 million.
Moving on to slide 10.
Revenues in oilfield services for the quarter were $113 5 million or <unk>.
63% from $74 4 million in the first quarter last year.
Margins of 33, 3% were up north of four percentage points on last year's 32, 9%.
Operating income of <unk> 5 million was a $1 3 million improvements from $1 2 million a year ago.
Turning to slide 11, corporate costs for the quarter with $19 million compared with $15 1 billion a year ago due mainly to higher personnel related expenses driven by increased share based compensation accruals.
The effective tax rate for the quarter was 24, 3% compared to 24% a year ago.
Moving onto slide 12, due to a strong sequential sales growth cash generation for the quarter was impacted by an increase in working capital, which resulted in an operating cash outflow of $29 million before capital expenditures of $8 4 million.
As of March 31, 2022, and <unk> had $105 6 million in cash and cash equivalents and no debt.
And now I'll turn it back over to Patrick for some final comments. Thanks.
Thanks Ian.
We're mindful of the uncertainty around continued inflation rising interest rates, the Ukraine War, China, Lockdowns and other factors that could impact global economic growth.
We are cautiously optimistic that as inflation moderates.
Margins will benefit further.
Regardless of any near term economic volatility, we believe the sustainability trends that many of our technologies directly address provide us with a strong platform for sustained growth over the medium to long term.
With the support of our strong balance sheet, we continued to deliver on our record of returning value to shareholders, while maintaining flexibility to pursue M&A.
This quarter, we commenced share repurchases under our previously announced $50 million share buyback facility and.
And our board has approved a 11% increase in our semiannual dividend to <unk> 63 per share.
Now I will turn the call over to the operator, and Ian and I will take your questions.
Ladies and gentleman, we now begin the question and answer session.
If you wish to ask a question. Please press star and one on your telephone.
Our first question from my Gosh, some from Seaport Research Bob. Please go ahead your line.
These open.
Hi, good morning.
Good morning, Mike.
Congrats on a nice start to the year. Thank you Juan I wanted to start out with a question on the fuel specialties volume growth. There was was fairly impressive.
Can you give us some numbers around what happened with volumes sequentially and maybe provide some color on how much of that volume strength was related to further recovery in diesel how much was better jet fuel demand and I guess, where there any new products or non fuel applications that help to.
Drive some of that growth.
Yes, Mike let me take the.
The first part of that yes, we've seen some nice growth.
Certainly year over year volume growth is something like 23% higher from Q1 last year and sequentially from Q4.
We have seen a little bit more expansion, our diesel additives are pretty much back to pre COVID-19 levels.
And particularly in the Americas, we've seen very strong growth in the first quarter.
Again around these lattices and cold flow as you know the <unk>.
Our Q1 numbers are impacted by the colder weather and we've had a good cold season that were about to come out as of now.
It's really across the board the only part of our business that has yet to fully recover as the aviation piece.
In terms of jet travel and that's still probably round about 20% to 25% down year.
Year over year from where it was but we've got nice momentum from Q4 into Q1, and we've got good demand going into the second quarter as well, albeit that the winter season is about to come to an end.
Okay.
Alright, thanks for that and then over on the performance chemicals side.
We're definitely seeing a lot of inflation everywhere and there are some concerns that inflation could.
Could be creating some pressure on consumer demand potentially leading to some trading down in the personal care space can you breakdown your performance chemicals business and how much of that goes into mainstream or more value oriented products as opposed to higher and more expensive.
And are you currently seeing any change in consumer demand within that personal care space or hearing about potential changes from your customers.
Yeah, Mike, It's Patrick it's pretty well balanced you know we are in the high end with our sulfate free product lines and our natural product lines.
But as well in some of our areas like home care and personal care. We are also in the mid markets.
We are seeing a slight slowdown mostly in home care in the European markets, but for the most for the.
For the most part personal care globally is still remains strong.
And our further outlook through Q2 still remains strong from the order patterns that we've seen so far it's just going to be something that we're going to have to really watch carefully and work with our customers on either a new technologies product technology and pricing models that are.
Not only fit us, but the consumer and to date, we've done a really good job as a group and doing that with our customers and our and our end users. So we're still confident in Q2, but as you said just in the call. We're just gonna have to watch it very carefully as we get to the end of Q2.
Alright, Great and then a quick one on the share repurchase.
Any thoughts on the timing of additional share repurchase activity I would think that given your strong balance sheet.
Maybe this is an area of capital allocation, where you can afford to get a little bit more aggressive.
Yes, Mike this is Ian.
We're doing a fairly low level.
Buyback consistently throughout the month Youll see us do a little bit more in Q2, just because we will have completed the full quarter.
Right now, we're just going to sit and watch the share price and if we think there's an opportunity to step in in a larger way and second advantage is a lot more value in the market, we will do that.
For the time being our expectation is that will.
We'll be nice and steady throughout the quarter at a fairly low level and we'll continue that throughout the year.
I think Mike just to add to that Patrick.
When we originally put out the buyback here was to be opportunistic in the market, but number one was to print is to is to prevent dilution.
And so we've done that and we're going to continue to do that and be opportunistic in the market when we see fit.
The other is as you can see we've increased our dividend again, which we've done that between 10% to 12% as a whole.
Throughout the year and we'll continue to do that as we see fit and the others. If you look at the balance sheet, we want to have a lot of dry powder for our $770 million growth that we previously announced in personal care as well as the M&A activity that we've been discussing in the marketplace. So I think we're very well balanced right now and.
Obviously as the markets perceive and as we move forward, we will look at our balance sheet and see what we want to do if anything to change things up but right now we feel very comfortable where we are.
Alright, and then my last question in terms of the strong start to the year.
I was hoping that you could give us a sense of whether we should expect continued sequential improvement in earnings.
Could you perhaps talk about some of the puts and takes that maybe could impact the cadence of earnings as we go through the rest of this year.
Yeah.
First go about Mike.
I don't think we'll see sequential improvement and this is really due to the points that I noted earlier on in our fuel specialties business.
It is seasonal we tend to have a much stronger Q4, and Q1 with our winter products.
Coming out of that.
Seasonality now so Q2, and Q3 do tends to be a little bit more subdued in terms of revenue and operating income.
Our expectations for performance chemicals are that they will continue to perform close to the level. They performed in the first quarter.
There may well be a little bit more pressure on gross margins given some of the comments that Patrick made around homecare.
Oilfields, we expect that business to get back to sequential improvements in Q2 and beyond when you wrap all that together our expectations for Q2s that earnings will be down on the first quarter, but will still be strong.
Compared to the second quarter of last year.
Okay.
Great. Thank you very much. Thank you thanks Mark.
Thank you for your question.
Our next question from John Tom Zhang from <unk> Securities. Please go ahead.
Hi, good morning, Thanks for taking my questions and really nice quarter. There, it's really impressive in this environment. Thanks, Tom Thank you Jim.
My first question is what happened in the oilfield business.
Help me understand what went well what are the logistics of shipment problems you had in where the margins go from here Yeah. It was a product John that was going overseas into the South American market that just got held up at the border.
It should be released in Q2 of this year.
Was really the issue it was just a holdup in.
With all the shipping delays and transportation delays just got caught up in the quarter.
Okay and was that a shipment that of revenue for you or is that something that.
Just only on the cost side.
A little bit of both it held back our revenues Jon but we also had to incur.
Additional costs for those delays, which we've taken in the quarter.
Okay great.
I was wondering if you comment on the jet fuel market, where it is relative to where it was pre pandemic and kind of what your expectations are.
It actually gets back to 80 or 90% of what it used to be and kind of what the impact will be on the field business.
Yes, it's still off a little bit because of international travel.
You've got strong domestic travel in the Americas.
You're starting to pick up domestic travel in Europe , Obviously Asia is still dead.
But I think once you see Asia picked back up and you see domestic we're sorry international travel come back you'll see it probably the same as 2019 levels.
We just don't see it dropping off that much it's come back quite significantly and as you see Asia open back up Youll see it come up even more.
Okay any sense of what the improvement would be if we get close to that level just in terms of profitability.
Yes, it's certainly going to help our gross margins junk as you say, it's a high value product for us.
It's not a particularly great big revenue change with a higher margin business grows so it's a little bit of Cree.
Cream on top of the cake shall we say.
Okay understood.
And then lastly, just the cash flow expectations going forward and even buyback going on you've got some working capital expansion what should we be thinking throughout the rest of the year.
That kind of normalizes out.
Yeah, I think really a lot of it depends on the inflation environment jump.
If we continue to see inflation, increasing then obviously, we've got to fund that through.
Working capital through inventory receivables and payables so.
We could continue to see a drag on cash there.
If our business continues to expand.
Again that will pull down on our cash flow so.
<unk> been normalized if inflation moderates and flattens out then youll start to see cash assembly and back into the business. So it's a little bit early to say that yes, I think Q2 might see positive cash flow as fuel specialties moderates after wind strong winter period.
We are still growing in performance chemicals, and oilfield, so that aligns with our strong dividend play on buybacks. It might be that we are neutral on cash in the second quarter and as we move into the back half of the year with moderate or moderation in inflation thats when youll start to see a much more positive cash flow yeah, I think John just to add to that you've seen.
Volume growth in the business is in a lot of Thats, because we've had to carry longer inventories due to supply constraints and inventory and shipping constraints.
And because we've done that we've been able to supply our customers and that's enabled us to pick up new customers who've had supply problems from our competition.
And that goes in all three of the other business segments. So we will continue to do that to meet customer expectations and requirements and as Ian said it could it could just pull back some of that cash as well.
As that goes forward.
Understood. Thanks, if I could.
Flip in one more Patrick did you mentioned, the M&A environment, what Youre seeing out there and the likelihood of anything closing in the near term, yes, I mean, it's slowed down a little bit.
We do see some.
Compression in multiples.
I think youre going to see another bps interest rate hike, which we've already seen.
I think that's going to slow things down a little bit as well.
Things are starting to come back into an area that.
It makes us look even a little harder I think that we've expanded our horizons in looking at fuel specialties businesses.
But our primary focus is still personal care home care, and our AG and adjacent markets in the performance chemicals business.
But there is there is a lot out there.
There's a whole lot out there in oilfield, which does not interest us.
But if you go into our core businesses.
That look at M&A growth, we're starting to see a little bit of compression.
And I would hope, we'll get something done sometime this year.
Okay, great. Thanks, guys.
Thank you.
Thank you for your question. The next question is does it sit there for C. L. King. Please go ahead.
Okay.
Yeah, Hi, good morning.
Uh huh.
Thanks, I think the first question I wanted to ask you about broadly would be the impact of currency on your reported results. So I may have missed it but I didn't really pick up.
Too much commentary or detail on that but I mean broadly speaking with your <unk>.
Significant European exposure I mean was this.
Was this the case, where maybe I don't know.
Several.
Your strong sales growth came in the face of you know meaningful.
Foreign currency headwinds, so just maybe on the revenue side.
If there's a way to think about the translation effect on operating income that would be helpful. Thank you.
So John in the.
In the script earlier, we talked about these the volume price mix and exchange impacts on each of the businesses and in fuel specialties and performance chemicals. There was a negative headwind of six percentage points. In Q1. This year versus Q1 last year. So that was a headwind that we overcame with strong volume growth.
Positive price mix impact.
All in both fuel specialties and performance chemicals, there is pretty much a natural hedge to our.
European Euro and Sterling cost base.
The way we've constructed the business is such that we're able to offset that with Roma.
Raw material purchases in local currency.
Overhead costs SG&A costs in local currency as well so what we what we tend to say that our businesses are naturally hedged at the operating income level. So theres very little impact that we tend to see when we get down to operating income. So we call it sales level, but by the time, we get through operating income we're naturally hedged in this pretty much.
Zero impact that.
Okay. Thank you for that.
I had a question I think I'm.
About the diesel fuel markets.
And in particular, I mean, there's a number of headlines just pointing out the unusual tightness in that market, maybe even relative to some other to gasoline or whatnot.
And I'm just wondering you know how what youre seeing out there in terms of.
The ability of the diesel market to continue to maybe respond to price.
And whether you see that impacting your of additive volumes going forward.
Yes, what we've seen is that diesel demand has come back to pre COVID-19 levels.
And so the expectations at the refinery level was to not see demand come back as quick as it did so when you say, there's a tightness there is a little bit of a tightness at the refinery level because of the fact that diesel demand came back so fast.
So they'll catch back up it should not be an issue moving forward. So we see no effect on our field additives business whatsoever.
Okay great.
And this is just more of a broader question, but when I look at your fuel specialties, anesthetic and especially performance chemicals.
Sales growth.
And especially if I look at it on a sequential basis I mean, it does seem like there's a step change.
And in volume.
Growth there that.
I I didn't have it in my model, but.
It almost feels like there are some share gains or some some new wins new customers that have been added to the mix maybe starting January one could you comment on maybe have you been able to capture some market share within some of your important product line.
That is showing up showing up starting this quarter yes.
I think it's a little bit of both I mean, it's it's demand from diesel has come back up significantly. So that's helped out.
And Additionally, as you just alluded to in your question.
Is that we have picked up.
Customer demand as well new customers and so it's been a little bit of both that we benefited from and I think we'll continue to see that through the year at least through second quarter.
The third and fourth quarters kind of the unknown for everybody in all of our businesses.
But I think through second quarter, we will still see it.
Nice rebound in fuel specialties as we did in Q1.
Just to add to that David in performance chemicals as you know we've targeted high single digit volume growth.
That's exactly what we delivered in the first quarter and some of that is built around capacity expansions.
Brought more capacity online in the first quarter, we've got more scheduled for middle of the year and then late part of this year and early next year and that's all designed to help us.
Sequential volume growth in that year over year volume growth as well.
And you kind of read my mind there because my next question was just going to be an update on that.
Two year.
$70 million build out so.
I was I was wondering if there were some some tranches or some elements of that that.
Had been completed and put into service and you're saying that was the factor on performance chemicals in the first quarter right. Yes, Yes, we brought volume capacity online early part of the quarter.
We've got some more plants in the middle of the year and then later this year with the backend of this year as well.
<unk>.
It's a difficult environment right now with <unk>.
Steel supply and raw.
<unk> materials supply and availability of Engineering's.
People and all the rest of it but nonetheless, we're on we're on track for those that core personal care volumes to be built out until delivered a high single digit volume growth in performance chemicals.
Okay. Thank you and then the last question I admit this is pretty unfair.
But I was wondering you know Patrick I mean, this has to do with the geopolitics in Europe , right and I think our last night or this morning.
There's another layer of sanctions that are going to be put into place on Russia and as a result.
Russian oil shipments I guess will be reduced dramatically further.
But just in general you know Patrick taking advantage of your broad perspective.
When you see these different you know.
Sanctions going into place and the necessary rerouting or.
New supply lines created I mean do you feel that this is a process that's going to proceed.
Smoothly in other words will the refineries be able to receive the crude inputs.
But in other inputs are kind of on a normal basis or do you see any potential for.
You know meaningful disruptions as as you know as our supply lines adjust to the political realities and it could be global but I mean, I'm thinking, particularly.
In Europe based on the headlines. Thank you yeah, I mean, if you look at it right now and as you just said in the call. There are some continuously changes and the sanctions and regulatory market with Russian the sentiment is across the board globally now is to eventually get away from any hydrocarbons coming out of Russia.
And so that's going to do two things, it's going to still put a lot of emphasis on inflation is going to put a lot of emphasis on oil and natural gas prices.
We don't see any refineries that are going to be affected somewhat by not taking Russian crude.
So I don't think that there's a concern there. The big issue is is that you have the three majors that have pulled out of Russia.
So a lot of that volume that Russia was going to send to China, and India really quite frankly, Russia is going to be a little bit of a push to get volumes out because of the fact that three measures are pulling out. So we see what we do see is probably sustainable prices in oil and Nat gas through the year.
You might have some fluctuations of 10 to $15 a barrel up or down.
There is a lot of uncertainty in that market, but when it comes to the refineries there won't be.
Any broad effects, they can take heavy or if they can take light.
There will be a natural cause and effect both ways.
If one refineries.
Used to taken a heavy they'll get a heavy from somebody just to what prices that is the issue, but I don't I think as time goes on and as this gets further and further down the road the world is going to learn how to live with it.
And I think that Thats exactly what the fundings are going to do and I think that's exactly what the consumer is going to do as well.
Yeah.
Okay, Great and then maybe one last one and it has to do with the buildup in working capital this quarter.
And I guess I was just wondering if.
If you would categorize that buildup is more reactive in other words.
Just from I guess customers not being able to accept your.
Finished goods or is it more maybe strategic or proactive where you're purposefully, adding some raw materials or inputs, where you can too.
As maybe an insurance policy against an unexpected.
Outage or short shortfall down the road. So you know maybe you know.
The offensive and defensive or strategic and reactive elements within that.
Significant.
Inventory, sorry, working capital builds would be helpful. Thank you, yes sure David.
I mean part of the building working capital on the back of a really strong quarter.
You've seen that the volume growth and you've seen the price inflation working itself through.
As a large element is that our demand diesel.
You saw pricing at a higher level, so there's that and.
And Thats, great working capital to have what we are also doing like we did in Q4, when we spoke about it then and we spoke about earlier is that we've also taken some strategic decisions to hold more finished goods inventory in some more raw materials given all the disruption.
We've seen the tightness in the supply chain and also in the transportation globally, so a little bit as defensive.
A little bit is because of our strong.
Performance in the quarter.
Okay, Great. That's it for me. Thank you very much thanks, David Thanks, David.
Thank you for your question.
Our next question from Chris Shaw from one ask Christy Let's go ahead.
Good morning, gentlemen, how are you doing good morning, Chris.
Alright.
I'll turn the course congratulating you guys a great quarter. Thank you well done.
Was there any pull forward do you think or.
Some companies call that that you know customers, who are eager to get build up their inventories as well. So it's really maybe like extra ordering you know to just sort of safety stock or people worried about supplies later on in the year, where they ordering ahead of time that he noticed any that any of your businesses.
Really haven't seen that.
It is a little bit more difficult to do a pull forward due to the fact that the tightness in the raw material market anyway.
So we really have not seen that.
It's been a fairly normal pattern to us due to the fact that we've got a pretty good.
Look at what the contracts are in the volumes are over a pre and post COVID-19 year. So we haven't seen it and I think a lot of companies. Even if you did it pull forward would be difficult just due to the supply tightness.
Got it.
And then.
Obviously, youre youre, achieving a lot of pricing, which has done well, but obviously stay margin or grow margins.
<unk>.
But you have a longer history, I think of the fuel specialties business, but.
You can look at that and performance chemicals, what what do you think the odds are you know how sticky those pricing beat a hasty, but it might be different for each segment.
It's more of a terrific part yeah typically in our contracts you have that three to six month lag going up and down.
And so when youre in a year when youre in a flying inflationary market like we are now where prices are literally changing by the hour by the day.
You can get cut you can get contracted margins real quick, especially in your longer term contracts.
The opposite is if we do see some.
Some flattening of raw materials.
And inflation starting to pull back a little bit.
We could see a boost in margins on the way back down.
And Thats typically historically, how it has been and will just have to watch that and monitor it closely but it historically within our company. That's really what we've seen now we haven't seen this big of a ride. This drastic this quick.
But we've done a really good job as you can see managing that and it's just again managed in those expectations on the way down as well.
Is it the same for performance chemicals in the personal care specifically you know absolutely you are your contracts have a three to six month kind of thing.
Go up and down they're not just absolutely that's out there.
Okay, Okay got it.
All I have thanks a lot.
Thank you Chris I appreciate it.
Thank you for your question there are no further question at the moment.
If you have any further questions about and a spec or matters discussed today. Please give us call. We look forward to meeting up with you again to discuss our second quarter 2022 results in August have a great day.
That concludes the conference for today. Thank you for participating you may now disconnect.
Okay.
Sure.
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