Q3 2022 Innospec Inc Earnings Call
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With me today from <unk> are Patrick Williams, President and Chief Executive Officer, and Ian Clements and Executive Vice President and Chief Financial Officer, and with that I'll turn it over to you Patrick.
Thank you David and welcome everyone to <unk> third quarter 2022 conference call.
This was an excellent quarter for Interspec vol.
Volume and price mix improvements drove strong sales growth in all businesses.
We delivered a 60% increase in operating income.
And margins expanded.
Over 80% of our gross profit in the quarter K per business outside of Europe , where recessionary pressures are more prevalent.
We believe we are well positioned for both an end market and geographic perspective to navigate continued expected headwinds.
In performance chemicals strong personal care growth continued to offset weaker demand in smaller segments like our European homecare.
Overall volumes and price mix, both improved in the quarter and operating income was up 43%.
We do not see any change in our customers drive towards higher performance and cleaner formulations.
Major customer projects continue to move forward and we remain cautiously optimistic that we can achieve mid single digit volume growth and steady gross margin through the expected recessionary headwinds in 2023.
To support additional contracted demand, we expect to complete the majority of our $70 million capacity expansion over the coming year.
In fuel specialties operating income grew by 5% over last year.
We expect this business to be relatively resilient through any near term economic weakness.
In addition, we continue to see potential for gross margin improvement as inflation normalizes and demand for our higher margin jet fuel that is continues to recover.
Over the medium to long term, we will continue to capitalize on sustainability themes, which are opening doors for new applications with our technologies and clean fuels higher efficiency engine and non engine applications.
We expect momentum to build in these areas as customers continue to look for cost effective technologies that improve productivity and decrease the emissions.
In oilfield services strong orders in our production chemicals business combined with further improvements in our other oilfield segments drove a sharp increase in operating income.
We expect reduced activity in the coming quarters versus this extremely strong third quarter.
However, we continue to make progress towards a return to 2019 full year operating income levels within the next two years.
Now I will turn the call over to Ian who will review our financial results in more detail then I'll return with some concluding comments after that in and I will take your questions.
Thanks, Patrick.
Turning to slide seven in the presentation. The Companys total revenues for the third quarter were $513 million.
36% increase from $376 1 million a year ago.
Overall gross margin increased slightly by <unk> four percentage points from last year to 34%.
EBITDA for the quarter was $59 2 million compared to 40, $41 4 million last year and net income for the quarter was $38 7 million compared to $23 4 million a year ago.
Our GAAP earnings per share were $1 55 events, including special items, the net effect of which decreased our third quarter earnings by <unk> 19 per share.
A year ago, we reported GAAP earnings per share of 94 cents, which included the negative impact from special items of 21 per share.
Excluding special items in both years, our adjusted EPS for the quarter was $1 74.
Compared to $1 15, a year ago.
Turning to slide eight revenues in performance chemicals for the third quarter were $159 7 million up 20% from last year's $132 8 million.
Volumes grew 4% our strong growth in personal care volumes offset volume decline in our other European markets, while a positive price mix of 26% was offset by an adverse currency impact of 10%.
Gross margins of 24, 5% unchanged from last year, and operating income increased 43% from a year ago to $25 4 million.
Moving on to slide nine revenues in fuel specialties for the third quarter were $178 7 million, 14% higher than the $156 4 million reported a year ago.
A favorable price mix of 30% offset a reduction in volumes of 6% and a negative currency impact of 10%.
Fuel specialties gross margins of 29, 9% with one five percentage points below last year and will remain at the lower end of our expected range.
Until inflation moderates.
Operating income increased 5% from last year to $27 9 million.
Moving on to slide 10 revenues in oilfield services for the quarter were $174 6 million approximately double the $86 9 million in the third quarter last year is very strong orders and production chemicals and a continued sequential recovery in other segments drove a sharp improvement.
Gross margins of 36, 4% were up half a percentage points on last year.
And operating income of $114 2 million was an $11 5 million improvement from a year ago.
Turning to slide 11, corporate costs for the quarter was $17 4 million compared with $15 7 million a year ago due mainly to higher performance related remuneration accruals.
The adjusted effective tax rate for the quarter was 21% compared to 22, 3% last year as a consequence of the geographical location of taxable profits.
Moving on to slide 12 cash generation for the quarter was $39 8 million before capital expenditures of $9 7 million.
As at September 32022, and our spec at a $100 million in cash and cash equivalents and no debt.
And now I'll turn it back over to Patrick for some final comments.
Thank you Ian.
Our team delivered another excellent quarter with double digit growth improved margins and strong cash flow.
We expect economic headwinds and volatility to increase however.
We believe that our end market and geographic mix positions us well for the coming quarters.
Our direct and our responsive approach with our customers continues to open new opportunities for our technologies.
As a result, we have an exciting exciting pipeline of technology led organic growth opportunities.
We generated over $30 million of cash and our net cash position returned to over $100 million.
We expect cash generation to continue in the fourth quarter as we remained focused on disciplined working capital management.
This quarter, we returned value to shareholders through our $2 $3 million of share repurchases.
In addition, we increased our semi annual dividend to <unk> 65.
Bringing our full year dividend to $1 28, representing a 10% annual increase.
We remained well positioned to pursue complementary M&A opportunities.
Our significant organic growth projects.
Now I will turn the call over to the operator, and Ian and I will take your questions.
Thank you as a reminder to ask a question you will need to press star one and one on your telephone and wait for your name to be announced once again that is star one and one on your telephone.
We will now take your first question.
While mainland please.
And your first question comes from the line of Mike Harrison Seaport Research Partners. Please go ahead.
Hi, good morning.
Good morning, Mike.
Was hoping that you could give maybe a little bit more color on what was going on in the oilfield services based on their side to drive that strength.
We kind of get the sense from your commentary.
Some of that was more onetime in nature some of it may be a little bit more sustainable but any.
I guess.
Help that you can provide or guidance you can provide on what that means for the outlook.
In Q4 and into 2023 would be appreciated.
Sure Mike This is Patrick.
Most of that growth was in the production business and it was global it was offshore and onshore.
It was a little off take on one off.
Some of it was expansion of the business.
And some of our first order into offshore production business.
We will see some normalization into Q4, and a little bit of normalization going into 2023.
But our expectations are sing.
Single digit upper single digit growth for that business.
Alright, thank you.
Then.
Over on the fuel specialties business.
Volume was down 6% year on year can you breakout.
What you were seeing in different regions in terms of the volume performance in the quarter.
And maybe also talk about some of the trends that you're seeing on volume.
The region.
Sure I'll, let Ian take the first part of that Mike then I'll finish up with his comments.
So it's definitely interesting.
The volume is interesting question Mike.
We compare ourselves against Q3 last year, which is a really strong quarter and that was a period, where we were coming out of the panel.
And we're experiencing some pretty high volume growth.
<unk> seen volume decline and pretty much most of our regions.
So that's as much about the sales mix is about <unk> youll see that the price mix.
30 percentage points is really high and yet the volumes down at six so.
It is definitely a mix element in there, where we're selling less volume that we're selling at higher prices and there is also.
A lot of inflation in the supply chain at the moment as well so it's pretty much.
Cross the REO regions at these no real.
Trend in that it is not considered Ngos.
Overall for the full year to date volumes, where wed expect them to be.
And you can see from outperformance in fuel specialties.
Put together another really strong quarter, yes, just to add to that Mike. If you look historically on the fuel specialties business, it's somewhat recessionary free.
<unk> resistant.
And it's just a it's a strong business that kicks out a lot of cash flow with great technology, and our expectations as travel returns and App tail comes back that we should still be in that single digit growth.
Even moving into 2023 with these with these unpredictable markets.
Maybe just to follow up on fuel specialties, we're hearing that in certain regions. There are.
Shortages of diesel fuel.
Curious if you guys view that as something that is maybe a headwind to growth in some of the additives that you provided to diesel or effect actually driving some increased interest in maybe some of the additives.
Helped to improve fuel economy et cetera.
You just said on the back and it's more of a tailwind and obviously theres a big push from the government.
To up their production of diesel and jet and so as that comes on that will give us more opportunity. So we don't view that as a headwind right now we're more seeing that as a tailwind right now.
Okay.
Alright, and then I guess the last question I have is is.
Maybe more on the outlook and how we should be thinking about Q4 earnings.
Last year, you guys did about $1 30 in EPS.
It seems like you should be on track to be able to exceed that.
I guess, if youre willing to provide any type.
Type of insight into what your expectations are for Q4.
Amid the challenging macro environment.
Investors would appreciate that thank you.
<unk>, yes.
Yes, we don't give specific guidance, but let me just sort of generally about each of the businesses.
Performance chemicals.
Do expect some slowing down in Q4 sequentially and Thats quite normal.
We do typically see customers Destocking ahead of the year end.
The holiday season does have some impacts so we basically see customers managing their inventory levels continue to year end.
I think right now were seeing customers being a little bit more proactive than previous years. So I'd expect our Q4 performance. This year to be very similar to where we were in Q4 2021 as we move into 2023.
As we've said previously on previous calls we've got major customer projects.
Moving forward.
We remain cautiously optimistic that we can achieve that mid single volume growth.
With steady gross margins. So we feel that we can manage our way through those recessionary headwinds.
Fuel specialties.
We do expect to show a little bit of growth over Q4, 2021 and sequentially I would expect Q4 to be very similar to where we were in Q3.
As Patrick said earlier on the fuels business is pretty.
<unk> to recession, although it's not shockproof. So in 2023 for the full year, we expect from the business to be fairly stable and fairly flat against where it was in 2022.
Europe is going to be a softer environment for us no doubt, but we do feel that we've got opportunities elsewhere globally in.
In different applications in different regions.
We've talked a little bit about oilfield already Q4 will be probably slightly down on where Q3 was and in 2023 as Patrick said, we will be more moderating that business and it will be slightly ahead of where it was this year for the full year, but we won't see the same performance that we're going to see in Q3 and Q4.
Excellent thanks very much.
Okay.
Thank you.
We will now go to your next question.
While mainland please.
And your next question comes from Jon <unk> from CJS Securities. Please go ahead.
Hi, guys good morning, great quarter on jobs.
My first question is.
You mentioned mid single digit volume growth through 2023 with maintaining your gross margins was that across the entire business or is that.
Just one of the segments and then secondly, where are the areas you might expect to see a decline next year as you look at it.
John that was said I mentioned not seeing performance chemicals mid single digit volume.
And gross margins holding around that 24 to 25 range.
Okay, Great and then second piece just are there any business do you expect to be weaker through 'twenty three just given the pressures that are out there.
We don't see that right now, we see a little more moderation.
And as Ian alluded to earlier.
Youll see a little pull down of oilfield from third quarters, obviously was an exceptional third quarter youll see that more normalized.
I think youll see a little more normalized and performance chemicals.
In fuel specialties as we said is fairly resilient, but we still see a nice single digit growth across the business.
Okay, Great and I think you also mentioned high single or mid to high single digit growth in oilfield going forward is that inclusive of the outside revenue that you got in Q3. So if you look at it on an annualized basis. It does it does.
Great.
Okay.
Help us help us with an update on just the inflationary environment your ability to recover gross margin.
Thanks, Dan now has a moderating as the more of the same.
Or are there any other things that we should be thinking about it as you tried it.
Bring up margins in children.
So the pressure to keep the same in other places.
Yes, it's moderating and some of our businesses.
Inflation is still fairly high and others.
I think we can all see trucking starting to come down.
Some of the <unk> are starting to come down.
So we are starting to see some moderation in some of the inflationary pressures that are out there.
So I think the other thing that we've done and we're working really close with our customer base to to work with them and their headwinds.
To either a modification of technology or new technologies to the market and I think we've done a really good job in that area as well so.
I think it's just some John we're going to have to watch.
Do you run into a double dip recession or are we going to see inflationary pressures for another two quarters. These are things that we've kind of looked at internally monitor those very close and obviously, we'll take price actions as needed either way.
Okay great.
What is your expectation for Jets yoga. This holiday season, just because the travel seems to have increased quite a bit.
You're obviously getting the effect of them coming out of cold flow and your Adams being sold in there.
Yes.
It's coming back and we see it coming back in Q3 and Q1.
Obviously, if theres no other COVID-19 shutdown again.
We're not going to see a lot of improvement in Asia Pacific just due to the fact that.
There's a lot of shutdowns still going on in China, and other areas, but we are starting to see our aviation business come back and then and then again as you just said and coal flow Improvers.
The winners hitting and typically it helps to fuel specialties business.
Globally, when you get a cold winter and we're hoping that that's the case.
Great.
Update on just what Youre planning to do with all the cash I know you raised the dividend is there any other priorities as you're thinking about.
No.
<unk> Creek keep increasing our dividends it's to focus on buybacks wind when we feel opportunistic it's too.
To fund our organic growth I think thats, the cheapest and most controlled growth and most profitable growth because you're not paying a multiple on it.
And then of course last but definitely not least is continue to look at M&A and we are still seeing a lot of deal flow right now.
I think we will be ready to go.
When we find the right deal the LBO market Sir are underwater.
As you see it's expensive debt now.
So we're in a really good position if we find the right deal and that's what we'll continue to look for over the coming months, but work.
We're very academic about this and we're very patient.
And we're going to remain that way.
Got it. Thank you good job as usual guys.
Thanks, Joe.
Thank you.
Yes.
We will now go to our next question.
While mainland please.
And your next question comes from the line of Christopher Shaw <unk> Crespi Hardt. Please go ahead. Your line is open.
Hey, good morning, gentlemen, how are you doing.
Good morning, Chris <unk>, Chris.
If I could ask on the oilfield.
You said get profitability back to 19 levels over the next couple of years yet.
Sales are already ahead of 19 levels and I know, there's a lot of probably pricing in there, but that means margins are less than half.
What they were I mean, what's what's keeping margin is low at this point is it cost is it is the volume not come all the way back and you know how do you get to the.
<unk> 19 profitability levels than it is.
It's a little bit of both Chris and there is and there is also a technology play in there as well.
And we're moving to different technologies over time, which should help us with the margin improvement.
Moving into 2023 and again as you just said its cost its labor cost, it's raw material cost.
It's trucking costs to all the inflationary costs that are out there right now that have had margins too. So it's a little bit of all of the above now as I've said, we're starting to see that improve and.
And we should see further improvement on our margins as we move forward.
And so what we're what we're excited about is we're starting to see nice profits in that business. We have a nice diversified portfolio in all three of our strong businesses and you can see what happens in a quarter when all three businesses do well.
And that's what excites us and I think that our portfolio is so diversified now that we can we can withstand.
Any recessionary Appalachian area headwinds that we're dealing with right now.
As oilfield has been a more difficult market to get pricing to cover costs in some of your other businesses.
It has and.
As I said, we're just starting to see some relief there were changed in some technologies, there as well, which will help to benefit us, but it's definitely had been a bit a little slower than the other businesses have.
And then just to switch the performance.
With $70 million.
Capacity expansion when does that actually come on line, what what part of next year.
Comes on in phases, Youll see a little bit in the first half of 2023, and you will see the remainder coming on as the last half of 2023 into early 2024.
Got it that's partly fuels your view of.
Single mid single digit kind of growth in volumes, that's correct, that's correct, even though youll see some pullback in home care.
Personal care in Europe because of the.
Some of the growth that we already have signed up contractually that's why we see that single digit growth.
Got it thanks.
Thank you.
Thank you.
We will now go to our next question.
While mainland please.
Yes.
And your next question comes from the line of David Silva CK King <unk> Associates. Please go ahead.
Yes, hi, Thank you good morning.
<unk>.
Good morning, Good morning, David.
Yes, good morning.
Wanted to maybe start out with a couple of questions on performance chemicals.
In particular, it was quite a divergence in the price mix was up quite a bit of 26%, but volumes were may be just a touch.
Below where I might have expected them.
I was just wondering if you could maybe.
Ill provide a little more color on the 26% in other words, how much of that was merely.
I don't know cost catch up price versus may.
Maybe the mix effect from new product introductions from <unk>.
Steadily upgrading sales mix.
How should we think about that that 26% and how it might.
Perform.
In a more stable lets say cost environment. Thanks.
Sure David This is Ian.
First thing I would say around the volume we grew volumes, 4% globally in performance chemicals and is a real regional split that.
We've continued to grow volumes really strongly in the Americas region.
<unk> about 23% year over year growth in volume and Thats, because thats, where we are focused on the personal care market and the market's been really strong all those new products coming through.
<unk> extremely well, while we've been weaker on volume is in our European region focused around the homecare.
And we've been flagging that for the last couple of quarters that we've seen some weakness in that market.
When you combine those two regions together, that's why you get blocked.
About 4% volume growth.
I'd just like to highlight that seat now when you're actually dropdown entity the price product mix is really strong.
Vast majority.
As you said.
Flexing towards the higher end, the higher margin personal care and but there's also still a chunk of inflation in that as well David.
Once up and inflation moderates.
The business stabilizes in terms of the split between home care and personal care I think we'll just then.
Mid single digit growth, which we expect to round about 4% to 6% in 2023, which will be mainly volume driven.
Okay. Thank you for that.
Just to follow up just a tiny bit so you talked about the volume split by region weakness in Europe .
Certainly that's a region that remains a little bit uncertain here.
And you did I think directionally point to slower kind of fourth quarter trends and your performance chemicals segment. So is this the case, where you may have a quarter or so where the volume growth is flat or slightly negative is that.
<unk>.
On a year over year basis is that possible or is this more.
On a sequential.
As you are discussing maybe a little bit softer trends in the fourth quarter. Thank you.
Yes, David.
Correct.
Earlier on about the sequentially, how Q4 will be softer than Q3.
Went through the reasons behind that the seasonality.
The traditional Destocking ahead of year end. So this is all the things that we normally see in the performance chemicals business.
Pointed to the fact that.
Our expectation is that Q4 this year will be very similar to Q4 last year.
In terms of volumes.
Don't really expect anything, particularly.
That high or low against last year as we move into 2023, our expectations are that will revert more to that of Q2 Q3 style business.
The profitability and we will continue to see that mid single digit volume growth year over year.
Okay, Great and then one more on performance chemicals and this would be in particular regarding your.
Gross plans so.
I believe the way it was framed but when the $70 million kind of a two year program was announced.
I think it was framed as having.
Number of customer orders kind of in hand.
Or very well developed.
I think if anything I mean, the pace of the growth in that.
Particular segment has exceeded your <unk>.
Our expectations, let's say at the beginning of this year so.
Internally I mean is there any thought to either accelerating the completion of the current $70 million program.
Or is it the case may be you're working on kind of stage to the next.
Discretionary spend on building out the.
Capacity and logistics capabilities. So just kind of how are you thinking about it beyond.
At the end of next year.
Given the prospects that youre seeing in hand.
Yes, David.
<unk> actually been trying to escalate getting that first half of the build out done.
Because we do have contractual volume.
The issue with the inflationary times and labor issues was getting their reactors.
Personnel of the technicians.
The engineers and everybody to put to put these reactors in and piping in to get to get the volume that we need.
It's not that we're slowing the first half of this project down it's been more of a market issue than anything else.
So we'll continue to push I think that Youll see us get this $70 million expansion finished.
In 2023 first half should be done first part of the year and we're going to continue to push forward.
As we said, we do have contractual volumes.
We're going to continue to push forward.
Alright, im going to ask one more and I'll stipulate upfront. This question is completely unfair to ask you at this early stage.
I think.
The investment community went into yesterday thinking the.
The elections in the United States, we're going to turn out.
With a wave in one direction and we wake up this morning in my opinion.
It's a different outcome than that.
And I think a number of your businesses either rely on the cost of fuel or hydrocarbons or the.
The willingness of people to invest to produce them.
And.
No.
Patrick I know you have kind of.
Very comprehensive view of the industry.
What would you say has changed for your company or your thinking in terms of capital allocation or where your growth.
Prospects lie.
This morning, maybe as opposed to $24 48 hours earlier has has anything.
Meaning full changed in your mind.
<unk>.
Yes, I don't think it has.
I think that.
Both administrations are starting to realize that you do need hydrocarbons to move forward.
Not in a position as a as a not only United States, but globally to operate just strictly in the Green zone.
So I don't think youre going to see a real change in the capital allocation of E&P companies.
I think it is going to be steady as they go.
I think it's probably good for the industry too.
Not getting to the standpoint, we're where capital is flowing freely.
That industry I think is a very disciplined and we're going to stay disciplined.
I think everyone's probably a little surprised by the results.
I won't comment one way or the other.
David It really does not change anything that we're fundamentally doing as a company.
We didn't put any political expectations.
Two our numbers whatsoever, nor our strategy.
Okay, that's fantastic color, thanks very much.
Thanks, Dave.
Thank you.
I will now hand, the call back to Patrick Williams for closing remarks.
Thank you all for joining us today, and thanks to all our shareholders customers and <unk> employees for all 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 meet up with you again to discuss our fourth quarter 2022 results in February have a great day Bye bye.
Yeah.
Thank you. This concludes today's conference call. Thank you for participation you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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