Q3 2023 Innospec Inc Earnings Call
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Thank you welcome to <unk> earnings call. This is David Jones, I'm aspects 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 the anticipated results implied by such forward looking statements. The risks and uncertainties are detailed in <unk> 10-Q.
10, Qs and other filings with the SEC.
Please see the SEC site and inspect site for these and related documents.
We've also included non-GAAP financial measures a reconciliation to the most directly comparable GAAP financial measure it can change in the earnings release, the non-GAAP financial measures should not be considered as a substitute for or superior to those prepared himself.
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.
With me today as a matter of spec 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 2023 conference call.
You can expect delivered another set of good results.
We are well positioned for continued organic growth through innovation and customer partnerships across all our businesses.
Performance chemicals delivered strong sequential operating income growth along with margin expansion as new personal care contracts commenced and borrowings from our existing business improved.
Destocking remains a headwind we believe that it has peaked we are cautiously optimistic that we will achieve further sequential operating income growth and margin improvement in the coming quarters.
In addition, we believe that our continued investments in technologies like our industry, leading one four dioxane free and sulfate free chemistries are well aligned with ongoing consumer and regulatory trends.
The fuel specialties operating income was broadly similar to last year as improved margins offset lower sales volumes.
These results were below our internal targets, but we expect sequential margin improvement and operating income growth with our chemistries into the winter quarters.
Margin improvement remains a key medium term focus and opportunity for our fuel specialties business.
Oil field services had another strong quarter with double digit operating income growth and margin expansion over the prior year.
As expected activity levels moderated on a sequential basis, but remained on track for significant full year improvement in 2023.
In the fourth quarter, we anticipate similar results to this quarter as we continue to have a strong pipeline of opportunities across all of our oilfield segments and geographies.
Now I will turn the call over to Ian <unk>, who will review our financial results in more detail then I'll return with some concluding comments after that and I will take your questions.
Thanks, Patrick turning to slide seven in the presentation. The Companys total revenues for the third quarter with $464 1 million or.
10% decrease from 513 million a year ago.
Overall gross margin decreased slightly by <unk> eight percentage points last year to 29, 6%.
EBITDA for the quarter was $56 5 million compared to $59 2 million last year and net income for the quarter stage, $9 2 million compared to $58 7 million a year ago.
GAAP earnings per share were $1 57, including special items, the net effect of which decreased our third quarter earnings by two cents per share.
A year ago, we reported GAAP earnings per share of $1 55, which included a negative impact from special items of <unk> 19 cents per share.
Excluding special items in both years, our adjusted EPS for the quarter was $1 59 compared to $1.74 a year ago.
Turning to slide eight revenues in performance chemicals for the third quarter were $145 2 million down 9% from last year's $159 7 million driven by a negative price mix up 19% being partially offset by higher volumes of 7% and a positive currency.
Patterns of 3%.
Gross margins of 29% decreased by three six percentage points compared to 24, 5% in the same quarter in 2022 due to a weaker sales mix and higher cost inventory.
Operating income decreased 33% from last year to $16 9 million.
Moving onto slide nine revenues in fuel specialties for the third quarter were $169 3 million down 5%.
$78 7 million reported a year ago.
Volume reductions of 4% and a negative price mix of 4% were partially offset by a positive currency impact of 3%.
Fuel specialties gross margins of 31, 3%, but one four percentage points above the same quarter last year due to a richer sales mix.
Operating income of $27 6 million was down slightly from $27 9 million a year ago.
Moving on to slide 10 revenues in oilfield services for the quarter were $149 6 million down 14% from $174 6 million in the third quarter last year.
Gross margins of 36% were down <unk> four percentage points from last year's 36, 4%.
Operating income of $16 4 million was up 15% over the prior year.
Yes.
Turning to slide 11, corporate cost for the quarter with $19 million and within our expected range compared with $17 4 million a year ago.
The effective tax rate for the quarter was 17, 5% compared to 29% a year ago due mainly to the favorite favorable geographical split of our profit.
Moving on to slide 12 cash generation for the quarter was very strong with an operating cash inflow of $58 1 million before capital expenditures of $16 7 million.
As of September 30 of 2023, and its back half 'twenty $207 2 million in cash and cash equivalents and no debt and now I'll turn it back over to Patrick for some final comments. Thanks Ian.
We are entering the fourth quarter with good momentum in all businesses and we expect our balanced portfolio to deliver sequential improvement.
We continue to execute on a diverse pipeline of organic growth opportunities.
Cash generation was again excellent this quarter and our net cash position strengthened to over $207 million.
This quarter, we increased our semiannual dividend of <unk> 72 per share, bringing our full year dividend to $1 41, representing a 10% annual increase.
With our extremely strong balance sheet and a history of disciplined cost management. We are positioned to continue consistent shareholder returns invest in organic growth and pursue complementary M&A.
With our foundation of World Class innovation and customer service remain well placed for long term growth.
Now I will turn the call over to the operator, and Ian and I will take your questions.
Thank you Yeah participants as a reminder, if you wish to ask a question. Please press star one on your telephone keypad and wait for a name to be announced to withdraw. Your question. Please press star one again please.
Please standby, while we compile the Q&A narrow studies will take a few moments.
Okay.
And now we'll go and take the first question.
And it comes from the line of Jon <unk> from CJS Securities. Your line is open. Please ask your question.
Hi, Good morning. Thank you for taking my questions. Jonathan I first wanted to come in our performance chemical segment, congratulations on a nice quarter there.
Wondering how much of the sequential improvement was from new products and how much of the improvement was from legacy products recovering I suppose destocking.
And you start selling more than demand.
John is a pretty good balance of both.
We did the expansion and a couple of our sites and we're starting to see that volume flow through.
And in some of the heritage products and some of the new product. So it's really been a combination of both and we expect that to continue into Q4 and into 2024 as well.
Where are you in the ramp of the new products did you only get maybe half of it in the quarter compared to the run rates you're expecting how much is left as you go through the next couple of quarters getting through the contracted run rates, yes, we still have a ways to go.
It's fairly early in the process.
And.
The consumer is still a little hesitant I mean, you know there's a lot of conversations around destocking, we're not seeing it as drastic I think that works quite overused quite frankly.
For probably markets like AG et cetera.
So it is still early in the process just theres consumer the consumers a little hesitant. So you do have some volume demand down.
But I think that it's early in the process and I think we'll see Q4 will tell us a lot going into 2024 to work we're fairly cautious that this is going to be let's say fairly optimistic that 2024 and be a good year.
Got it Okay, and then second just on the oilfield business. It seems like you've found at steady state now after a year.
Really really strong performance is this kind of the run rate you're expecting going forward and into next year or are there opportunities for growth from these levels. How should we think about this business.
You go forward.
Lap that.
Yes, I think what you saw in Q3, you will see in Q4 and Thats, probably the run run rate going into 2024.
Okay great.
Last question, just any update on the priorities for your cash.
Yes.
We're very cautious with our balance sheet.
No.
People talk about being burning cash in your pocket, but in markets like today I think it's great because we're going to have a lot of opportunities.
Our focus is organic growth our focus is to continue to increase our dividend.
Be flexible on the buyback and just as important is looking at key.
Acquisitions or mergers in our key markets.
And we're starting to see a lot more activity in that area due to some chemical companies haven't stressed balance sheets and some private equity funds seven stressed balance sheets. So.
It really bodes in our favour managing this business the way we are today and I think we'll be opportunistic.
Okay, Great I will jump back in queue. Thank you.
Thank you.
Thank you.
David will take over next question.
Thank you Ms amendments.
And the next 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.
Excellent.
Just wanted to follow up on the performance chemicals business.
Seem to be fairly confident that you've seen destocking peak.
I think some other personal care suppliers are out there, saying that destocking is probably going to continue through year end.
Can you, maybe just give a little bit more color on what youre hearing pretty customers.
And maybe why your business might be behaving a little bit differently than others in the personal care space, Yes, I think in the markets that were primarily playing in the natural and natural beauty et cetera.
We've seen that peak.
Opinion on where other chemicals.
Companies play there could be still some destocking, but I do think that thats, a probably overused word because we're seeing if anything we've probably seen volume construction more than we have destocking.
But from what we're seeing from the customers that we supply to.
And the indications that we're getting for Q4 and also moved into Q1.
We're starting to get back to some normalized order patterns.
If you remember the supply chain is more of you cut the time and half where you supply products now to the customer and so there won't be this big ramp up once destocking is over.
It's not going to be.
Restock everything it's going to be more in time inventory.
And on time inventory, but I think for us we're starting to see normalized inventories in this business.
Alright, that's very helpful and then switching over to fuel specialties.
Notice that there was some additional inflation that that may be impacted your gross margins relative to your expectations do you expect that price cost pressure to remain an issue into Q4 or is there some improvement coming and then I guess just given the positive seasonal.
Pick up in volume and mix as we get into the winter months.
Where do you think we should expect to see gross margins in Q4 and Q1.
<unk> Q4 in Q1.
Youre still going to see probably margins in the lower end of our range.
There is a big focus on fuels to obviously increase those margins get those back into the mid to upper range.
Typically in the winter months, you have higher margin products, but with some of these inflationary pressures they might normalize each other so I think youll see probably.
The same type of margin profile in Q4, Q1, and hopefully start to improve but the things that we're doing internally into.
Into Q2, and Q3 of next year.
Alright, and the last question for me is just maybe more of a housekeeping question for Ian.
Where should we be expecting the tax rate.
Come in for Q4, and any early thoughts on tax rate guidance for 2024.
Yes, Mark you've said, it's an interesting question.
What we've seen in Q3 is the geographical split of our profit.
Towards lower tax jurisdictions.
<unk>.
A consequence of having some of the operations outside of the U S where they are exposed to foreign currency fluctuation. So that's been a tailwind for us and we think the effective tax rate for Q4 will be about.
22%, so similar to where we were in Q3.
And for next year, we think all those issues will resolve themselves and we'll get back to that 25% to 26% range for the effective tax rate.
Okay.
Okay.
Excuse me, Mike any further questions.
No I'm all set thank you.
Thanks, Brian.
Yeah.
Now we're going to take our next question.
And the next question comes from the line of David <unk> from C. L. King and Associates. Your line is open. Please ask your question.
Okay.
Yes, hi, good morning, Thank you.
The first question.
I would like to just.
Kind of go back to performance chemicals, and the idea that you are starting to ship under you.
Volume contracts.
I guess I was just trying to clarify but you do have a.
Internal expansion capital expansion program underway that I believe was scheduled to be completed.
Maybe mid mid middle of next year, so not nine months or so from now.
Is it your view that you can continue to fill these newer customer contracts.
Based on the assets logistics and production and whatnot assets you have in place now or or might there.
Be a pause until.
The full <unk>.
In turn all discretionary Capex program is in place.
Yes, David.
The good thing about that $70 million Capex, it's done in phases.
So youre not just throwing $70 million out to give one expansion it's multiple reactors.
Have slowed the program down so we have slowed that capex down, but we have added reactors, where we see volumes picking up.
We'll add a lot of that expansion going into next year as well as long as we see.
The activity that we're seeing today. So we have slowed it down we do watch it extremely close.
And we will add those reactors and bring those on as we see those volumes coming on.
Okay, and then may be just a somewhat broader question about resourcing or supporting your growth.
But when I.
Read through the press release, Patrick I think you made kind of constructive.
Comments near term medium term about each of your three segments.
Just like to hone in on two of them personal.
Performance chemicals, and oilfield, but those are areas I think where you know.
To meet the new higher level of demand.
That you are set up for you you would need new resource additional resourcing in terms of maybe not just personnel, but logistics may be some technical support et cetera.
How do you think your how do you think in a spec is positioned here right now.
For the.
Higher growth or higher level of business you anticipate over let's say the next six to 12 months and <unk>.
Maybe just to comment on talent acquisition and being able to get the people.
That you think you need to.
To meet customer requirements sure David Yes, it's a good question.
I think we're well positioned right now for the current growth that we're starting to see.
And all of the businesses.
I think as you just alluded to when you start moving up to the full $70 million expansion of what that means in revenue and what that means or technical service supply chain customer support et cetera, you.
You will have to bring some people on.
Constantly looking at talent, depending on where we're going to place that talent and what our needs are.
I think we've been a fairly attractive company to work for.
Because we have a strong balance sheet, because we really work with incoming talent to train them.
Into not only this business, but what the needs are for the future of the company in and where they fit in for the future of the company.
So we do a lot of things in regards to attracting talent.
Good thing right now is we're very well set.
It would be very minimal of the amount of people that we would need for the current growth rates that we're looking at so it's not like we're having to go out there and Blake at the field to look at multiple people, it's a pretty limited amount of people that we're looking at to add on.
Okay. No. Thank you for that and then maybe just a couple of smaller bore or more focused quest.
Questions and then I'll get back in queue.
But.
One or two of my companies have had kind of a bit of a margin squeeze.
Here.
So much from a.
Management business perspective, but from an AR.
And accounting perspective, and I guess, its maybe a FIFO versus LIFO issue, but those that have used FIFO have found that running maybe the costs from 60 to 90 days ago through the income statement and pairing it up with maybe the lower price points today.
Maybe on a cost plus or fixed margin arrangement have led to a little bit of a.
Squeezed from an accounting perspective here and I just wanted to ask you about that.
If thats an issue is with your company or whether you think.
The current level of pricing is pretty well paired up with.
The accounting for.
Per unit costs cost items.
Maybe just I'll stop there.
Yeah, David we're pretty well pad.
We have seen some pressure.
And our field specialties in our performance chemicals business, where we've probably carried a little bit more inventory than we would like we're working hard on lowering those levels of inventory.
<unk> seen inflation refresh it.
Prices are not coming down across the board.
Inflation is still not still putting cost pressure across the business.
What was pleasing for us is that the way the business of managing our way through that.
<unk> seen improved gross margins in fuel specialties, this quarter and given you're seeing improved gross margins in performance chemicals, we've got performance chemicals.
It's over 20% for the first time this year. So we're managing our inventory we are managing our inventory volumes in our pricing well.
Fuel specialties as well understood in terms of the dates of delay and the lag in pricing that we have so we're not overly concerned we just want to make sure that we're not carrying too much inventory.
These reasons.
It's not been a huge burden frozen is something that we do watch very carefully David.
Okay very good and then maybe one last one.
On fuel specialties here, but.
I may have missed this but I believe in your prepared remarks, there was not.
<unk> a mention of the role of aviation fuel additives as part of the overall mix and maybe as a source of.
Gross margins being a little bit below your target range, but.
Maybe just an update on how that that portion of your.
Fuel specialties mix is progressing and then also maybe just a comment on some of the newer initiatives stationary power et cetera. Thank you.
Yes.
It tells a very small portion of fuel specialties.
And it gets smaller as we move forward.
There is a lot of heat.
Keep going on in regards to getting tell out of Adam low lift gasoline.
Small piston aircraft, but we've been seeing that for years. So it's really nothing new now do I think it could come before 2030 or 2032 it could.
We're well prepared for it but thankfully, it's a very very small portion of fuel specialties, but.
We'll do what the industry needs will supply the product as they need and obviously, we'll take it out of the market when it's time.
But I think we're well positioned.
To deal with that until it's not as big of a product line in fuel specialties as we move forward in fuel specialties. As you just said is moving into greener pastures.
And that's where our focus is in this business.
Okay, very good I'm going to get back in queue. Thanks for all the color.
Thank you.
Yeah.
Now I'm going to take over next question.
Thank you Ms amendments.
And the next question comes from the line of John <unk> from CJS Securities. Your line is open. Please ask your question.
Alright, thanks for the follow up.
I'm trying to get a little more color on your fuel additives volume down.
Down 4% this quarter down because there's definitely more in the first half I'm. Just wondering are you selling to end demand at this point have you lost share.
Or is it just where the market is and kind of what you expect going forward just from a volume perspective.
Where the market is we really haven't lost any market share I mean is just.
Just just ebb and flows.
And as we always say, it's not recessionary proof, but it's almost recessionary approach.
We will have the ups and downs in quarters, but its not necessary that we've lost any big customers.
Yes.
Okay, Great and then is there any update on the potential recoveries from the Brazilian issue you had earlier this year.
Not really we're going through the legalities of tried through the insurance and some civil and criminal legalities over in Brazil.
We've replaced the individuals that were in charge of that business and we.
We've got new individuals' running it and we're off to the races in and getting things fixed and approved.
Okay, Great and then last question.
Assuming this is the run rate for oilfield going forward.
At a revenue level is there a chance to further improve the margin that youre seeing there.
Or are you still are you facing the same inflation concerns and maybe youre seeing and maybe fuel specialties or other.
The other portion of the business I think there's a little a little room for improvement on the margins.
You've still got high cost raw materials. So you still do have some inflationary issues there.
But I do think with some new technologies out there we can improve the margins just are just there that's a big focus of ours right now.
Okay is there any room to improve price if there's inflation.
Could be it could be a little bit of room, that's somewhat stagnated, that's kind of run its course.
Okay understood. Thank you guys.
Thank you.
There are no further questions for today I would now like to hand, the conference over to Patrick Williams for any closing remarks.
Thank you all for joining us today, and thanks to all our shareholders customers and <unk> employees for your interest and support.
You have any further questions about <unk> or matters discussed today. Please give us a call. We look forward to meeting up with you again to discuss our fourth quarter 2023 results in February have a great day.
That does conclude our conference for today. Thank you for participating you may now all disconnect have a nice day.
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