Q2 2023 Innospec Inc Earnings Call
Now I'd like to hand, the conference over to a speaker today, David Jones. Please go ahead.
Thank you welcome to <unk> second quarter earnings call. This is David Jones, I'm Inspector General Counsel and Chief compliance Officer.
The earnings release for the quarter in this presentation are posted on the company's website.
During this call we will make forward looking statements, which are predictions projections and other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from anticipated results implied by such forward looking statements. The risks and uncertainties are detailed in the unexpected case.
<unk> and other filings with the SEC. Please.
Please see the FTC site inspect site for these and related documents.
In our discussions today. We've also included non-GAAP financial measures a reconciliation to the most directly comparable GAAP financial measure is contained in the earnings release.
The non-GAAP financial measures should not be considered as a substitute for or superior to those prepared in accordance with GAAP.
They are included as additional items to aid investors understanding of the company's performance. In addition to the impact that these items and events had on financial results.
With me today from minutes back are Patrick Williams, President and Chief Executive Officer, and he Clemenson Executive Vice President and Chief Financial Officer, and with that I'll turn it over to you Patrick Thank.
Thank you David and welcome everyone to <unk> second quarter 2023 conference call.
Overall this was another good quarter for inspection.
Excellent results in oilfield services continued to offset weaker activity in performance chemicals.
In fuel specialties, we have taken a further charge to exit our trading relationship in Brazil.
Our inventory was misappropriated in the first quarter.
Excluding this $8 million charge, which reduced our EPS by 21 cents.
Our sales and EBIT grew and gross margins improved over the prior year.
As expected performance chemicals was again impacted by customer Destocking and high cost inventory, which drove volumes margins and mix lower in the quarter.
While these headwinds will likely carry into the second half of the year, we expect our new personal care contracts to drive sequential sales operating income and margin improvement.
Our priorities remain focused on executing sequential sales and margin improvement and a return to our operating income run rate to 2022 levels.
In fuel specialties continued price action and slowing inflation, partially offset lower volumes in the quarter.
As noted in our earnings release adjust.
Adjusting for the $8 million reserve charge gross margins were unchanged versus the same quarter last year and remained in our target range of 32% to 35%.
We do not expect any further charges related to Brazil, and we expect gross margins to remain in this range for the balance of 2023.
In terms of operating margins, our target continues to be 19% to 21%.
We remain focused on growing sales, while maintaining margins is a key focus and opportunity for the global fuels specialties team.
Oilfield services had another very impressive quarter.
Continued strong activity in production chemicals combined with further sequential improvement in our other oilfield segments drove significant organic growth.
Operating income was over six times the prior year.
Gross margin expanded by nine nine percentage points.
In the quarter, we anticipate that sequential operating income will moderate on lower production chemicals activity, but we remain on track for significant full year growth in 2023.
We continue to pursue topline and margin expansion opportunities across all our oilfield segments.
Now I will turn the call over to Ian Clemson Who'll review, our financial results in more detail then I'll return with some concluding comments after that in and I will take your questions Ian.
Thanks, Patrick.
On to slide seven in the presentation. The Companys total revenues for the second quarter.
$180 4 million, a 3% increase from $467 6 million a year ago.
Overall gross margin increased by one four percentage points from last year to 31, 3%.
EBITDA for the quarter was $46 2 million compared to $52 9 million last year.
Net income for the quarter was $28 9 million compared to $32 3 million a year ago.
Our GAAP earnings per share were $1 16, including special items, and Thats effects of which decreased our second quarter earnings by <unk> 12 per share.
A year ago, we reported GAAP earnings per share of $1 29, which included the negative impact from special items of <unk> <unk> per share.
Excluding special items in both years our <unk>.
Adjusted EPS for the quarter was $1 28.
Compared to $1 58, a year ago.
Our adjusted EPS of $1 28 increased <unk> 8 million charge from exiting the Brazil trading relationship, which reduced our EPS by 21.
We do not expect any further charges related to this matter and we continue to pursue both legal and insurance recoveries.
Turning to slide eight revenues in performance chemicals for the second quarter were $127 8 million down 24% from last year's $169 million driven by a negative mix at 8%.
Volume decline of 16%.
Gross margins of 17, 3% decreased by eight six percentage points compared to 25, 8% in the same quarter in 2022 due to a weaker sales mix higher cost inventory and adverse manufacturing variances, resulting from lower production volumes.
Operating income decreased 68% from last year to $9 6 million.
Moving onto slide nine revenues in fuel specialties for the second quarter were $154 2 million down 13% from the $176 4 million reported a year ago.
A positive price mix of 3%, partially offset by a 16% reduction in volume.
Fuel specialties gross margins of 29, 1% with three three percentage points below the same quarter last year.
Operating income of $17 1 million was down from $31 5 million a year ago.
Adjusting for the 8 million, Brazil charge adjusted gross margins were unchanged versus the same quarter last year and operating income was $25 1 million.
Moving onto slide 10.
Revenues in oilfield services for the quarter were $198 4 million.
62% from $122 2 million in the second quarter last year.
Gross margins of 43, 1% were up $9 nine percentage points on last year's 32, 3%.
Operating income of $28 million was $23 5 million increase over the $4 5 million in the prior year.
Turning to slide 11, corporate cost for the quarter with $24 million compared with $18 5 million a year ago.
Lower share based compensation accruals, partially offset acquisition related and other costs.
The effective tax rate for the quarter was 21% compared to 23, 6% a year ago with.
The decrease in the effective rate was primarily because of lower proportion of the company's profits were generated in higher tax jurisdictions.
Moving on to slide 12 free cash free cash generation for the quarter was very strong with an operating cash inflow of $55 million before capital expenditures of $17 3 million.
As of June 30th and expect to have $165 9 million in cash and cash equivalents and no debt.
And now I'll turn it back over to Patrick for some final comments.
This was another good overall quarter for an inspection.
The first half of 2023.
Our balanced portfolio has performed very well in the face of significant end market headwinds.
Adjusted for the Brazil charge, we delivered EBIT growth and gross margin expansion over last year.
As Destocking runs its course, and we've returned to normal customer order patterns. Our business teams will stay focused on the key drivers of <unk> long term growth.
Namely best in class innovation and customer service.
With excellent cash flow in the quarter and net cash of over $165 million, we continue to deliver on our record of returning value to shareholders.
Best in organic growth and pursuing complementary M&A.
This quarter, we continued to return value to shareholders with our $17 2 million semi annual dividend.
And $6 million of share repurchases.
In partnership with our customers, we remain well placed for long term growth.
Now I will turn the call over to the operator, and Eni will take your questions.
Thank you Dear participants as a reminder, if you wish to ask a question. Please press star one one on the telephone keypad and Mike for your name to be announced to withdraw. Your question. Please press star one again, please Jim Barber will compile the Q&A roster. This 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.
Good morning, Mike Good morning, Mike.
Wanted to start with performance chemicals.
Can you maybe talk a little bit more detail about what youre seeing in terms of monthly volume trends and I guess, what are you hearing from customers in terms of the.
Period of Destocking, and when you might expect to see those order patterns.
Start to normalize again.
Yes, Mike it's Patrick.
We're starting to see order patterns pick up we saw obviously a difficult Q1.
Volumes are pretty stagnant in Q2, but towards the end of the quarter. We started to see the patterns picked up when we get a fairly good view about 30 days in advance.
So in the third quarter, we're seeing volumes continue to go up.
Albeit at a slower pace than we hoped but they are going up quarter over quarter.
And we're cautiously optimistic.
That the Destocking has been put behind us and that the markets are starting to starting to normalize so I would hope and suspect by Q4 and beginning of Q1 next year that will be back to somewhat normalized volumes.
And the activity.
Alright, and you you categorized in performance chemicals that 8% decline, we would normally see that listed as price mix.
You just call that mix.
What was happening with pricing in the quarter on a year over year basis, and can you give some more color on what drove your mix lower.
Yes, Mike. This is Ian Yes, we were really pleased with the ability of the business to handgun supplies.
We've worked very hard.
We're very mindful that the sales mix is a little bit off the sort of higher end higher margin business is down year over year.
But the business has been really disciplined in maintaining prices and that has not been easy against that.
High inflation backdrop.
So yes, Greg jump out of the business day, and that's why we didn't call it out as price and mix. It was just mix this quarter.
Okay.
Alright, and then just curious on the.
Our fuel specialties business and the volume decline you showed there I know that some of those prior declines were related to some of the lower margin additives that you might just be reselling and you kind of exit that business or participate in that business.
A more opportunistic basis, but.
But it seems like the sequential step down that we've seen in revenue was a little bit bigger than what we might normally expect just due to seasonality.
So I'm just curious is there some destocking that you saw from your customers in that fuel specialties business or maybe any other changes going on in underlying demand there.
Yes, I think you've probably covered in banking.
We certainly saw some higher volume lower margin business dropped away year over year very similar to what we saw in Q1.
We've not seen any destocking I think there's probably a little bit more seasonality in the fuel specialties business. The last couple of years, it's been relatively flat as we've come out of the pandemic.
This year as we come off the winter season, we do feel about Q2, and Q3 will be a little bit lower based on the seasonality of the business.
In Q4.
Yeah, Mike It wasn't it wasn't a big concern when we looked at it because we did do a deep dive into that.
And as Ian said, there's some commodity products that dropped off.
<unk>, there was a lower <unk> quarter.
So there was nothing really that concerned us theres no loss of customers or any of that debt that you would immediately look at mass the business. So I think overall were not concerned whatsoever.
The volumes that we saw in the quarter.
Yes.
Alright, perfect and then my last question is maybe just to get a sense of kind of sequentially.
Where do you see earnings going and let's let's adjust out the $8 million, Brazil impact.
But net net it sounds like the expectation would be that fuel specialties would be similar to maybe a little bit better.
Performance chemicals, better sequentially, and then I don't know what your expectation is for oilfield sequential decline, but it sounds like that is going to be a little bit softer sequentially. So net net.
That Q3 would look pretty similar to Q2 or should it be higher thank you.
Yes, let me pick up on that one and Patrick will come over the top so second business by business, we expect performance chemicals to be improved in Q3 sequentially.
Our comments to say that we get more volume through we feel a little bit more confidence than we started the quarter in better shape, our expectations that all of that will probably be somewhere around $15 million to $20 million of operating income.
In fuel specialties again, I think a very similar quarter to what we had this time round.
We'll be in that $25 million plus range I don't think it will go above $30 million of operating income.
Well, that's our expectations right now.
Oilfield is a little bit more difficult, we've tempered the expectations and parts of that business, we still see.
Tremendous year over year growth.
All the businesses, but we do think there'll be more in that sort of $15 million to $20 million range in terms of operating income now that could go higher depending on some orders that might come later in the quarter.
Our best guess now is around about $15 million to $20 million operating income range. When you package. It all together I would expect EPS to be broadly somewhere between 140 and 150 as we sit here right now which is very similar to where we are in that quarter.
Excellent. Thank you very much.
Thanks, Mike Thank you.
Now we're going to take our next question.
And the next question comes from the line of David Silver from CL King and Associates. Your line is open. Please ask your question.
Yes, hi, good morning, Thank you.
I'm going to pop holidays in advance I had to join the call just just a few minutes late.
But I do have several questions. So firstly, just if you wouldn't mind.
In the oilfield services I mean, this was a record quarter, both revenues and operating income.
And I would just say, it's probably the third record quarter in a row. So initially when there was this pickup I guess there was a thought that alright. Thank you.
Ian or Patrick May have commented that there was some initial fill benefits and things like that.
But the <unk>.
Continued strength in especially kind of the outsized performance this quarter.
Is this just share gains or with your new products or.
If you were to say, what's what's different with this.
So pick up.
Maybe if you could just comment on whether you think it's cyclical whether it's sustainable.
It.
The new products is at the exit of some competition just if you could kind of characterize what's led to the.
Considerable strength, let's say the last.
Three quarters and especially this one in.
Your comments on the sustainability of it let's say beyond your comments on the third quarter. Thank you.
Yes, David it's Patrick it's a little bit of everything.
Is it share gain.
Let's continue we can continue to progress with pricing.
And its and its global its not just one specific area.
I think the guys have done a really good job across all of the businesses within oilfield specialties to really look at margin expansion pricing technology and share gains and it's really been a little bit of all and where we saw initial fills we.
We picked up more business and so.
That enabled us to have another strong second quarter.
I think as Ian alluded to in the last comments you just made.
Third quarter kind of remains to be seen.
Started out strong we thought it would moderate.
We could get some bigger orders towards the latter part of the quarter that can make it another very strong quarter, but there will be some moderation at some point in time.
We just don't know when and we think it's going to be this quarter, but it could be the fourth quarter, but I think overall I would say the guys have done a really and gals have done a really good job of managing this business and.
We just got to keep pushing forward.
Continue on the path that we're on.
And if I could just follow up.
I'd love for you to comment or expand on the last sentence and one of the paragraphs in discussing oilfield, but you said we plan to continue pursuing top line and margin expansion opportunities across all oilfield segments.
So.
I am interpreting that as maybe a mix of inorganic and organic opportunities, but maybe if you could just.
Expand on what.
What that comment Mike.
Might pertain to.
Yes, let me take that one David I think that's really about the discipline in the business about making sure that when we're growing.
We got profitable.
Profitable growth will be disciplined on pricing with discipline down gross margins as Patrick said.
The business has done a terrific job.
Not just over the last quarter over the last.
A number of quarters to come out of the pandemic and a really strong way.
Really focused down hard and what's important to the business and the customer.
Great technology, delivering great service and delivering great results and we couldnt be more pleased with it.
It's just about keeping that discipline and focus on pricing.
Discipline and focus on customers and we've got full confidence in the team to go out and execute them and David It's Patrick again, just to add to <unk> comments.
We have a project accelerate across all of our businesses and all of our manufacturing sites.
And that's looking at where we can get cost savings. It's looking at what we can raise prices. It's looking out we can change technologies to provide the customer with a better technology.
At a less expensive cost.
So we're looking at everything we can internally to make sure that we're staying competitive and b were taken out as much cost out of the system that we can and thats across all business units and all businesses in general.
Got it thank you I'd like to switch over to performance chemicals just quickly.
Quickly.
I'd like to pick up on the aspect where.
You were able to gain new personal care contracts beginning in the third quarter.
Kind of at the same time that there is a pretty.
Substantial destocking element going on.
So I was wondering if you could maybe characterize where the new contract opportunities.
Are coming from in other words are your existing customers.
King access to some of your newer products, while they continue to work down inventories at some of your legacy Skus.
Or is this interest from completely new customers.
Just how how might we think about within a pretty tough overall environment.
The nature of how you would characterize your ability to gain.
Some new.
Contract such that.
You anticipate sequential improvement even within a pretty difficult.
Day to day environment. Thank you.
Sure David a lot of those contracts were.
Actually last year.
Hence why we add.
The $70 million spent on manufacturing expansion and.
In addition, so.
This is not something that we necessarily closed this year.
Karin Ford in the third and fourth quarter. These were last year's closures that we had to actually build the plant or the expand the plant to get the volume requirements of these customers are looking for.
It's a lot of it is a reformulation to the natural.
Beauty side of the business.
One four dioxane less toxins in the product more mild more natural.
That's where the market's been heading.
That has not stopped.
You might have seen a slowdown or some or some destocking.
But a lot of this is what's going on and hence why we think that the third quarter will improve in the fourth quarter should improve as well.
So we're confident that as.
The market starts to normalize and the new contracts that start to take effect that we should see some nice growth nice growth in this business moving forward.
Okay, and then maybe one last one kind of a big picture bigger picture question.
But I would like to maybe uses of <unk>.
Darting point your recent new financing.
Credit facility or a financing agreement.
So 250 million base capacity, plus the opportunity to add a $125 million additional and I just im looking at that in the context of a company. That's had an absolutely pristine balance sheet for a few years now.
How should.
Maybe if you could talk about why that the timing and the size and the features of that financing package made made sense for you here in other words is this too is this the dry powder you need to do wave round after round of organic growth maybe in oilfield.
In addition to.
The next round maybe on performance chemicals.
Or is this just pure optionality.
So for a company with a fair amount of cash on the balance sheet and.
History of not holding on to any debt.
Hi.
Maybe you could put us.
Give us your thinking on.
The size and the nature and the timing of.
That redo of your financing credit facility. Thank you.
David I'm going to let Ian talk about the refinancing and I'll address.
A little bit of the M&A activity and the use of capital.
Yes, it does.
The refinance creates really a rollover of our previous facilities.
It's the same in terms of quantum.
We're probably June probably about year round.
We've lapsed so we've renewed that.
With a slightly different banking group.
And with probably less covenants. So we're in good shape and is that the dry powder as you called it is there and available for the business just like it has been.
X number of years, so, yes, very supportive bank group very.
Very supportive of the strategy and we just want to go out and put it to good use.
Yes, David Patrick and just to add to <unk> comments.
We're not ashamed, if you're having a pristine balance sheet.
And you've seen from some of the information that we've put out that we are looking at M&A activity.
We are looking at some deals we'd hope to have something done.
By end of Q3 early Q4, there won't be a large deal so it's not necessarily going to affect the balance sheet much.
So our our Q is let's focus on organic growth and as the markets normalize obviously will have to be putting more capital back to work.
In addition.
We've increased the dividend, which we plan to continue to do so we've been a little bit of buybacks in the market and.
And the plan is to have some dry powder for some more M&A as we move forward.
As you know, we're very responsible and where we deploy cash and we will remain that way moving forward.
So again, we're proud of our balance sheet, we're not going to stress it.
And we're going to move forward in a very responsible conservative way.
Yes.
Thank you very much I appreciate all the color.
Thank you Youre welcome.
Yes.
Thank you.
Dear speakers there are no further questions at this time I would now like to hand over to yourself for any closing remarks.
Thank you all for joining us today, and thanks to all our shareholders customers and inspect employees for your interest and support.
If you have any further questions about out of spec or matters discussed today. Please give us a call. We look forward to meeting up with you again to discuss our third quarter 2023 results in November have a go.
Great day, everyone.
That does conclude our conference for today. Thank you for participating you may now all disconnect have a nice day.
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