Q4 2022 Innospec Inc Earnings Call
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I would now like to hand, the conference over to your first speaker today, David Jones General Counsel. Please go ahead.
Thank you welcome to <unk> fourth quarter earnings call.
David Jones General Counsel, and Chief compliance Officer. The earnings release in this presentation are posted on the company's website.
During this call we will make 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 can cause actual results to differ materially from the anticipated results implied by such forward looking statements the risks and uncertainties are detailed.
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Please see the ICC side and inspect site for these and related documents.
In our discussion today, we've also included non-GAAP financial measures.
A reconciliation to the most directly comparable GAAP financial measure is contained in the earnings.
The non-GAAP financial measures should not be considered a substitute for or superior to those prepared in accordance with GAAP.
They are included as additional items to eight investor understanding of the company's performance. In addition to the impact of these items and events had on financial results.
With me today from <unk> are Patrick <unk>, President and Chief Executive Officer, Annie Clemenson, Executive Vice President and Chief Financial Officer, and what that turned out pretty good Patrick Thank.
Thank you, David and welcome everyone to <unk> fourth quarter and full year 2022 conference call.
I am pleased to present, another very strong set of results Parentis back.
Our balanced portfolio achieved excellent overall operating results in the quarter.
Strong activity in oilfield services and steady results in fuel specialties offset the effect of aggressive aggressive year end destocking in performance chemicals.
Overall operating income was up 31% in the quarter and 42% for the year with margin expansion.
Performance chemicals had an excellent year, despite the impacts of customer destocking in the fourth quarter.
The business delivered strong operating income growth and margin expansion with full year operating income up an impressive 34% over 2021.
Destocking was mostly in our first U S personal care business and lower volumes and higher cost inventory drove a negative product mix and lower margins in the quarter.
We expect this to continue in the first half of 2023.
However, new customer projects are on track and we remain optimistic that volumes will normalize in the coming quarters.
And when we returned to volume growth in the second half of the year.
In addition, we're very excited about our increasing prospects and our agriculture mining construction and other industrial end markets, which collectively registered double digit profit growth in 2022.
In fuel specialties operating income grew by 4% over the same quarter last year.
Quite impressive 16% for the full year.
Gross margins continued to track below our target of 32% to 35% range.
The primary impact on margins has been the lag between price action and <unk>.
Input cost inflation in particular in the EMEA region, where inflation remains very high.
We expect margins to stay below our target range in the coming quarter, but returning to margins back into our target range.
Significant opportunity and priority for the business in 2023.
Over the medium to long term, we remain well positioned to help advance our customers' priorities.
Lower to lower carbon footprint deploy cleaner fuels and drive operating efficiency in both transportation fleets and non fuel applications.
Oilfield services had an excellent quarter and record full year operating income.
Chemicals continue to have a very strong order activity in the fourth quarter, which drove a strong significant sequential increase in operating income.
In the coming quarters, we continue to anticipate that a portion of these production sales will moderate however, we expect further top line and margin improvement and our other oilfield segments and we remain very optimistic that we can deliver sequential full year operating income growth in 2020.
Great.
Now I will turn the call over to Ann Clemenson, who will review our financial results in more detail then I will return with some concluding comments.
After that I will take your questions Ian.
Thanks, Patrick.
Turning to slide seven in the presentation. The Companys total revenues for the fourth quarter were $510 7 million, a 24% increase from $413 2 million a year ago.
Overall gross margin increased by three full percentage points from last year to 29, 7%.
EBITDA for the quarter was $54 3 million compared to $44 8 million last year.
Net income for the quarter was $25 5 million compared to $23 9 million a year ago.
Our GAAP earnings per share were up dollar in <unk>, including special items, the net effect of which decreased our fourth quarter earnings by <unk> 18.
Yeah.
A year ago and reported GAAP earnings per share of <unk> 96, which included a negative impact from special items of 34 cents per share.
Excluding special items in both years, our adjusted EPS for the quarter was $1 20, compared to $1 30, a year ago.
In the quarter. Our EPS also included an adverse impact of 36 cents due to a higher tax charges, primarily arising from operations exposed to foreign currency fluctuations.
For the full year total revenues of $1 96 billion increased 33% from $1 four 8 billion in 2021.
EBITDA for the year was $225 4 million compared to $178 2 million in 2021, and net income was $133 million compared to $93 1 million a year ago.
Our full year GAAP earnings per share were $5.32, including special items, which decreased our full year earnings by <unk> 72 per share.
In 2021, we reported GAAP earnings of $3 75 per share, which included a negative impact from special items of $1 five per share.
Excluding special items in both years, our adjusted EPS for the year was $6.04 compared to $4 80, a year ago.
Turning to slide eight revenues in performance chemicals for the fourth quarter were $143 9 million up 4% from last year's $138 4 million.
A positive price mix at 18% was offset by a 5% volume decline and adverse currency impact of 9%.
Gross margins at 18, 4% were down three percentage points from last year impacted by lower production volumes due to customer Destocking and high raw material costs, primarily in the U S.
Operating income decreased 7% from last year to $15 8 million.
For the full year revenues of $639 7 million were up 23% from last year's $525 3 million.
And operating income increased by 34% to $95 3 million.
We've continued to see the volume impacts of customer Destocking and lower demand in the first quarter.
We currently expect volumes and gross margins in the first half of 2023 significantly below the comparative prior year levels. However, as trading levels normalize our new customer contracts come online. We remain confident that we can deliver comparative period volume growth in the second half of 2012.
Three.
Moving onto slide nine revenues in field specialties for the fourth quarter were 183 3 million, 3% higher than the $179 5 million reported a year ago.
Overall price mix of 25% was offset by a reduction in volumes of 14% and a negative currency impact of 9%.
Fuel specialties gross margins at 27, 8% improved slightly from 27, 4% last year.
We'll remain at the lower end of our expected range until inventory cost moderate and inflation normalizes.
Operating income increased 4% from last year to $26 8 million.
For the full year revenues were up 18% to $730 2 million and operating income increased 16% to $121 7 million.
Moving onto slide 10 revenues in oilfield services for the quarter were $183 5 million or 93% from $95 3 million in the fourth quarter last year.
Strong orders and production chemicals, and the sequential recovery in other segments continued.
Gross margins of 44% were up four five percentage points on last year's 35, 9% and operating income was $25 million was a $16 2 million improvement from a year ago.
For the full year revenues of $593 8 million were up 75% from last year's $339 8 million and operating income of $41 7 million quadrupled from $10 4 million last year.
Turning to slide 11, corporate costs for the quarter was $16 5 million compared to $13 3 million a year ago due mainly to high performance related remuneration accruals.
The full year adjusted effective tax rate was 27% compared to 23, 7% a year ago.
The increase is primarily a concept consequence of having operations outside of the U S where they are exposed to foreign currency fluctuations. This and other items of course, an increase in the tax rates in the year and specifically in the fourth quarter, causing a 36% negative impact on earnings per share.
2023, we expect the full year effective tax rate to remain at 28%.
We began to slide 12. This was an excellent quarter for cash with cash generated from operations of $78 4 million before capital expenditures of $15 1 million.
In the quarter, we paid the previously announced semiannual dividend of <unk> 65 per common share.
This brought the total dividend for the full year to $1 28 per share a 10% increase over 2021.
For the full year cash from operations. After net capital expenditures was $39 6 million compared to $57 million during 2021.
As of December 31, 2022, and <unk> at $147 1 million in cash and cash equivalents and no debt.
Now I'll turn it back over to Patrick for some final comments.
Thanks Ian.
Our business teams delivered excellent operating results in the quarter and the full year.
All businesses contributed contributed meaningfully to our strong double digit growth.
In 2022.
<unk> made the decision to hold IRS higher inventories in our performance chemicals and fuel specialties businesses.
In order to ensure reliable uninterrupted supply for our customers.
This higher cost inventory impacted margins in the final quarter.
And we expect it to continue to be a short term headwind in the first half of 2023.
In partnership with our customers, we will continue to lead with innovation supply reliability and best in class Technical service.
Our competitive position is strong and the end markets that we serve and.
And the fundamental medium to long term drivers of our strategy is unchanged.
Our balanced portfolio will continue to deliver shareholder value despite any short term headwinds.
Cash flow was extremely strong in the quarter and our net cash.
Net cash position improved to over 147 million.
In 2023, we expect to complete the majority of our $70 million performance chemicals expansion program.
Which is focused on our leading mild and natural personal care technologies.
With our strong balance sheet.
We are well positioned to pursue M&A that complements and expands our competitive position.
And we will continue to deliver value to shareholders through dividend growth and share repurchases.
Now I'll turn the call over to the operator I will take your questions.
Thank you as a reminder to ask a question you need to press star one on your telephone and wait for a name to be announced to withdraw your question. Please press star one again.
And Bob will compile the Q&A roster. These will take a few moments.
Now we're going to take our first question.
And the question comes from the line of Mike Harrison from Seaport Research Partners. Your line is open. Please ask your question.
Hi, good morning.
Thank you Mike Good morning, Mike.
Was hoping for maybe a little bit more color.
The volume.
I guess the cadence in the performance chemicals business.
I guess in the in the fourth quarter, where volumes have been up if not further destocking impact.
And I guess.
What are what are your thoughts on kind of the timing of further destocking because it seems like based on your commentary.
For some additional volume pressure in the first half.
Like Destocking is continuing.
But I guess, what we've been hearing from other people serving.
Personal care.
Portion of the market that that's an unusual dynamic.
That was very pronounced.
End of Q4, and maybe you should run its course, a little bit sooner.
And I guess.
The Destocking impact can you just comment on what youre seeing in underlying markets or what you believe you are seeing in underlying markets within performance chemicals.
Yes, Mike it's Patrick.
We were a little probably delayed and the Destocking and a lot of companies started to see it in the latter part of Q3, we saw a lot of Destocking in the latter part of Q4.
It's still there.
We'll see a lot of the Destocking will probably be finished.
Some time in the first quarter, but what we have seen and you've probably heard the same commentary.
Is that theres been a little of volume destruction along with it.
Got a little bit of market disarray in Europe , you've got a little bubbling out of the recession waters in the U S and we are starting to see and we've heard from multiple people some volume destruction.
That does not concern us as much.
I think that we will get through these first two quarters and having a diversified portfolio is going to help us.
But I think the benefit to us is that expansion that we put forth we will take into effect in the latter part the second half I should say of 2023 and Youll see volumes kicked back up.
So we feel pretty confident I think that we're going to do some things behind the scene, while we're haven't seen destocking and while we're seeing some volume destruction.
We're going to work on.
Our our manufacturing sites are cost basis, multiple things to prepare ourselves for that second round of volume.
So its tap of the brakes, sometimes gives you the ability to fix some things while you are in such fast growth and I think that we are doing that as we speak.
Alright, and within the fuel specialties business.
Maybe just a little bit more color on what's been going on with gross margins there.
And it sounds like Youre still expecting to be below that 32% to 35% target range in Q1.
How should that progress during the year, if everything goes according to plan.
Yes, I'll take that one Mike this is Ian.
In fuel specialties, we've continued to see.
Inflation in raw materials.
Also inflation from energy surcharges and labor increases.
And as you are aware in fuels that we always have that lag.
Number of our pricing mechanisms. So we're always a little bit behind the curve on the way up.
And we're still talking price action.
In fuel specialties, and we'll continue to do that.
For the remainder of 2023.
Were expecting fuel specialties margins to remain at the lower end of the range.
We will check price action, where it's required specifically EMEA is a focus for us and we're on top of that right now.
China reopening will help us.
That will bring in some higher margin jet fuel.
It's really that basic blocking and tackling in fuel specialties that we need to Carryout and our view is is up by the time, we got through that inflation normalizes.
Went through the high cost inventory, we should return to the lower end of the range by the middle of the year and hopefully start to move through that range through the second half of the year.
Okay.
Perfect and then on the.
The oilfield business.
You had initially thought.
Q3 strength wood cutting normalize or roll off in Q4.
What changed.
In Q4.
To be even stronger than Q3, and maybe you can just help us understand why some of this additional business.
Presumably some new customer wins as well.
Might not be sustainable going forward.
Yes, Mike it's Patrick.
Picked up some new accounts based off some technologies that we introduced to the market.
And some of its onshore some of it's offshore.
And so a lot of it was the initial fails.
So you will see a little.
A little bit pull back in Q1, I wouldn't say a lot.
But we still think if you look at it year over year that we will be 2022.
Oil field.
It's a great technologies that we presented it's in it's in the production side of the business and we've improved largely in our other business as well and Thats why were still very confident that moving forward. Even after these initial fills.
That we should still be 2020.
Two numbers.
Alright, and then.
Maybe just kind of putting all of this together.
Hoping that maybe you could provide some thoughts on what the full year could look like in terms of earnings growth.
And I guess in particular should Q1 operating profit would be higher than Q4 or lower or kind of flat.
Yes, Michael let me take that one this is Ian.
I'll just run through each of the businesses.
At a high level.
First of all our biggest business field specialties.
That's going to be a steady Eddie business for us we delivered about $120 million of operating income in 2022, and we see no reason.
With the recessionary headwinds why we shouldnt be able to match that number in 2023.
We've covered off oilfield previously, we expect that business to be slightly ahead.
Where we are where we were in 2022.
And we're confident that there may even be some upside to that business.
We'll know more about that as we move throughout the year.
I'll note I guess is how quickly we recover in future performance.
Performance chemicals.
Our view right now is that we're going to have a weak Q1, we'll start to recover in Q2 and the quarters, three and four will be stronger than back to everywhere in the 2023 levels.
You wrap all that together that doesn't mean that the first half of the year and particularly Q1 is going to be a little bit weaker than we saw in the first half of 2022.
Overall earnings will be slightly down.
Primarily because of the performance chemicals performance, but we do remain confident that both our field specialties and oilfield businesses are positioned for growth as the benefits of having that balanced portfolio and if we can get the performance chemicals business recovering a little bit faster, we may be able to match.
$6 of EPS that.
That we did in 2022, but right now which is pegging people back a little bit against that number.
Excellent. Thank you very much.
Welcome back Thanks, Mike.
You.
Now I'll go and take over next question.
And the next question comes from the line of John <unk> from CJS Securities. Your line is open. Please ask your question.
Good morning. This is stefanos crist, calling in for John Thanks for taking our questions. This morning.
First can you just breakdown the tax impact in Q4.
Maybe how much was just itemize versus geography.
And should we expect anything unusual going forward.
Yes, Q4 was a little bit unusual.
What we've seen is a number of our overseas entities have non U S functional currency books.
And we saw a real strengthening of the dollar particularly against Sterling.
That caused us to have some local gains which is taxable and local books, but we back those out it group. So it just full stop the effective tax rate for the quarter and that was the primary reason our effective tax rate was so high in the fourth quarter.
Along with some geographical distribution of profits.
One or two other smaller items as we look into 2023 step enough. We are under pressure from our tax rates in the United Kingdom that are increasing in some of our other geographical distribution of profits will be a little bit higher. So in the prepared comments you heard me say that we expect the effective tax rate to be 28%.
For 2023.
That's great. Thank you.
And then can you just talk a little bit more about your large oilfield customers.
Particularly in Q3 and Q4, it seems like the surprise to the upside.
Do you have any color on what their plans are going forward.
Yes, it's interesting.
It's not just in the U S. We have the Saudi expansion.
Some of it's over in South America, So it's pretty broad in regards to geographical areas.
And again as I said in my earlier commentary that some of it was first Phil.
And then on a continuing basis, we just have to monitor to see if Q1 and Q2 can match.
Q3, Q4 of last year.
Pulled back a little bit on the commentary just due to the fact that they were such large quarters.
But we still feel very confident in the business as a whole.
We'll lease matched 2022 and probably beat it.
Great. Thanks for taking my questions.
Thank you. Thank you.
Now we're going to take our next question.
Okay.
Our question comes from the line of David <unk> from C. L. King and Associates. Your line is open. Please ask your question.
Hello, I'm, sorry was that I had.
My call blanked out for about five seconds, yes.
Yes, Thanks, David.
Yes, David Okay. You can hear me okay. Thank you sorry about that.
Okay. So.
First I did want to just kind of delve into the oilfield results, just a little bit and in particular, not so much about the fourth quarter, but.
Patrick you sited.
<unk>.
Production chemicals aspects of within your oilfield services that pair.
Paraphrasing, but I think you said that those product lines of those sub segments hasn't really participated.
And it does seem like certainly from the domestic perspective, I mean, there is a.
Change in plans at some of the major oil companies in terms of.
Becoming more aggressive I guess on the production and the E&P side, but.
But what are those if you could just highlight one or two of those other subsectors that you said hadn't really fully participated to date and why wouldnt they join in and lead to some more robust.
Quarterly results, maybe certainly over the next few quarters at least.
Yeah, So David what we were seeing in the commentary is that the production chemical side.
Had massive growth in Q3 Q4.
We see a little bit of pullback because a lot of that was first Phil.
A lot of the other businesses like completion stimulation drilling.
And some of our geographical areas like Saudi are now starting to contribute a lot more than they have in 2022.
Therefore that gives us the.
I guess confidence to say that we will probably in 2023 beat our 2022 numbers.
So we are starting to see the other business and the other regions.
Starting to pick up which is what we anticipated.
And.
We're very happy with the position we're sitting in right now.
And just to follow up on that I mean, thank you for the detail about the first Phil regarding the production chemicals side, but.
No.
I mean, I think wouldnt completions and stimulation activities also.
Kind of have a jumpstart when they when they join in and begin to participate.
Two a general upturn there or is it or is it qualitatively different there, it's a little different but we got to be cautious in saying that the that the majors and even mid majors are coming back and putting a lot more capex in the ground that they originally did in 2022.
Drilling has not gone up that much.
So rig counts has stayed fairly steady.
I think in today's oil prices.
And in today's political environment.
Youre not going to see there are pretty disciplined right now with their capital.
So we don't see a massive rig count Trump.
And at least North America.
We're seeing some increased activity in other areas outside North America, which is where we've benefited.
I think youll continue to see that in 2023 as well.
Okay, great I'd like to maybe ask a couple of financial oriented questions first on capital spend so.
I had penciled in a higher capex number and the total for this year came in about $20 million last time assuming.
Assuming thats pretty much all related to the performance chemicals expansion activity.
Could you just maybe just summarize is this simply the case of <unk>.
Some some 2022 capex.
Being deferred into 2023 or are there some other.
Elements to that going on.
No you're pretty much spot on that David This is Ian yes, we've got some rollover from 2022 going into the early parts of 2023. So that's just a timing thing.
We've got additional capacity coming on in the first half of the year now.
And that will be a little bit more cautious perhaps beyond that.
We may well slow things down, but our intention as we sit here right now is that the business will come back really strong.
We're going to need the additional capacity.
Going to need additional volume.
We are expecting by the middle of the year fundamentally have completed our original $70 million program in performance chemicals. So.
You've just really got a little bit of delay a little bit of timing delay.
Fundamentally our programs and our thoughts are unchanged.
Great. Thank you for that and then maybe just one other question regarding working capital so.
By my measures I mean, there was a release of working capital in the fourth quarter.
But I think for the full year I think this is still a year of pretty pretty sizeable buildup.
And use net use overall over the course of the year in working capital and I think that follows on to a use of working capital in 2021 as well.
Can you just talk about the current level of working capital regarding kind of.
Run rate for that is this something that should continue to be maybe a.
Full source of funds in 2023, so just.
The current level of working capital in regards to your business planning for 2023. Thank you.
Yes, David so.
One of the things we've been talking about throughout the year is that we took a very conscious decision to hold high levels of inventory and raw materials. So that we could keep customers supplied and that was across all three of our businesses.
And we did that.
Part of the reason we were so successful.
Across the patch.
We did see somewhat of an unwinding in Q4 as the performance chemicals business slowed a little bit, but certainly oilfield in fuel specialties kept growing really nicely.
Probably with inflation in the system, probably at the higher end of that working capital.
But we do expect a small increase in working capital as we increase the volumes in performance chemicals towards the end of 2023.
And as we continue to steadily grow both fuel specialties and oilfield. So you will not see as they can expansion.
I think a use of cash.
Working capital in the next 12 months, but you will see a little bit.
With a stronger EBITDA.
And a lower level of expansion of working capital, we fully expect our cash flow.
Quite nicely above where we were this year.
Okay. No. That's very helpful. Thank you and then just last question for Patrick on the M&A.
Outlook.
Has anything more.
Meaningfully shifted in your thinking about either your project funnel or the level of valuations over the last few quarters is this current environment.
A little more.
One characterized by elevated uncertainty and maybe that translates into.
Improved valuation.
From your perspective just.
How comfortable are you may be pulling the trigger in the current environment on a particular deal maybe relative to a year or so ago.
Yeah, Thanks, Steve I don't think it changes necessarily our strategic thinking.
I'm an opportunist.
And with high interest rates.
It's dried up.
So I do think at some point in time, where you have.
Companies, who have leveraged balance sheets.
There's going to be a negative effect, there and obviously, there's a rollover into multiples.
So we are starting to see some extraction multiples we are starting to see.
I would say.
More interesting deals coming to the market.
We are remaining very active.
It's not going to scare me to buy with our balance sheet.
In a down market with high interest rates, if I can get the right deal at the right multiple and that quite frankly, that's when you do very very well.
And so the hope is that we will find a few things this year, whether they are tuck ins smaller ones or whether we do trans something transformational.
We don't know that yet, but we're looking at everything we're very disciplined buyers and we will remain that way.
We're very disciplined with our balance sheet. Our view David is to continue to increase the dividend and take advantage of share repurchases when we can and.
More poorly to prevent dilution.
But we're actively in the market and we will continue to be active in the market and we hope at some point in time, we will be able to announce a deal to our shareholders.
Okay.
Great I appreciate all the color. Thank you.
Thanks, Jeff.
Yes.
Thank you.
Now I will go and take our next question.
Sure.
Please standby.
And the next question comes from the line of Christopher Shaw from <unk> Crespi Hardt. Your line is open. Please ask your question.
Hey, good morning, guys, Hey, Dan.
Chris Good morning, Chris are.
You guys covered most everything but I was just going to ask.
Given the warm winter both.
North America Europe is it gonna be like an air pocket in fuel specialties in the first quarter from.
Cold flow products or was it bad last year as well.
No. It was about the same as last year.
We had a decent.
Fourth quarter there.
Have a decent first quarter as well.
It Hasnt really affected us one way or the other.
Got it.
And then just a second but.
The move to.
Stable aviation fuel does that impact.
The <unk> business at all or does it still require we're a long way off from that happening Chris I mean, it's.
We watch everything that's going on we sit on the panels.
We're quite a ways off until App tilt goes away got it alright, thanks, a lot. Thanks.
Great. Thanks, Chris.
Thank you.
There are no further questions I would now like to turn the conference over to all the Speaker Patrick Williams for closing remarks.
Thank you all for joining us today, and thanks to all our shareholders customers and.
And <unk> employees for your interest and support.
Do 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 first quarter 2023 results and May have a great day.
That does conclude our conference for today, Thank you for participating.
Have a nice day.
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