Q3 2024 Innospec Inc Earnings Call
Thank you. This is David Jones. There are links for the quarter and this presentation are posted on a company's website. During this call we will make forward looking statements which are projections about future events.
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David Jones: With me today from InnoSpec are Patrick Williams, President and Chief Executive Officer, and Ian Cleminson, Executive Vice President and Chief Financial Officer. With that, I turn it over to you, Patrick. Thank you, David, and welcome everyone to InnoSpec's third quarter 2024 conference call.
Patrick Williams: Overall, this was a good quarter for InSpec, with results broadly in line with our expectations.
Performance Chemicals and Fuel Specialties delivered double-digit operating income growth with margin improvement, while oilfield services continued at lower activity levels as expected.
Performance Chemicals Operating Income was similar to the first two quarters of 2024, and we expect comparable performance in the coming quarter.
Our target for 2025 remains to return our operating income, run rates, and margins to full-year 2022 levels.
We continue to expand our industry-leading portfolio of 1,4-Dioxane and sulfate-free technologies.
supported by our formulation expertise, we will deliver the value and performance that our customers require for their next generation of products.
In addition to growth and personal care, we see a broad mix of multi-year organic opportunities in our home care, agriculture, and other industrial end markets.
Field Specialties deliver double-digit operating income growth with improved gross margins which remain within our target 32 to 35 percent range.
With a steady demand outlook for heavy transportation fuels over the coming decades, our focus continues to be on cleaner and renewable fuels along with lower emissions.
Our technology pipeline will drive opportunities in both fuel and non-fuel applications.
As expected, oil field services continue to be impacted by lower activity in our Latin America business.
We currently assume these lower levels will persist through the end of this year and into 2025.
Our team remains focused on multiple growth and margin improvement opportunities in our other oilfield segments, which we expect to drive sequential quarterly growth in 2025.
Now, I will turn the call over to Ian Cleminson, who will review our financial results in more detail. Then, I will return with some concluding comments. After that, Ian and I will take your questions.
Ian Cleminson: Thanks Patrick. Turning to slide 7 in the presentation, the company's total revenues for the third quarter were £443.4 million, a 4% decrease from £464.1 million a year ago.
Ian Cleminson: Overall gross margin decreased by 1.6 percentage points from last year to 28%.
Ian Cleminson: Adjusted EBITDA for the quarter was £50.5 million compared to £54.3 million last year and net income for the quarter was £33.4 million compared to £39.2 million a year ago.
Speaker Change: Our gap earnings per share were $1.33 including special items, the net effect of which decreased our third quarter earnings by 2 cents per share.
Ian Cleminson: A year ago, we reported gap earnings per share of $1.57, which also included the negative impact from special items of $0.02 per share.
Ian Cleminson: Excluding special items in both years, our adjusted EPS for the quarter was $1.35 compared to $1.59 a year ago.
Speaker Change: Turning to slide 8, revenues in performance chemicals for the third quarter were £163.6 million, up 13% from last year's £145.2 million.
Ian Cleminson: Acquisition growth of 8% and volume growth of 9% were partly offset by an adverse price mix of 4% due mainly to lower raw material costs flowing through to selling prices.
Ian Cleminson: Gross margins of 22.1% increased 1.2 percentage points compared to the same quarter in 2023, benefiting from a richer sales mix and higher production volumes.
Ian Cleminson: Moving on to slide 9, revenues in fuel specialties for the third quarter were 165.8 million, down 2% from 169.3 million reported a year ago.
Ian Cleminson: A 2% increase in volume was offset by an adverse price mix of 4% with a favourable sales mix outweighed by lower pricing from the easing of raw material costs.
Ian Cleminson: for your Specialties Gross Margins of 33 points.
Ian Cleminson: with 2.3 percentage points above the same quarter last year because of a favourable sales mix and the easing of raw material pricing.
Ian Cleminson: Operating income of £30.9 million was up 12% from £27.6 million a year ago.
Ian Cleminson: Moving on to slide 10, Revenues in Oilfield Services for the quarter were £114 million, down 24% from £149.6 million in the third quarter last year.
Ian Cleminson: Gross margins of 28.3% decreased 7.7 percentage points from last year on a weaker sales mix.
Ian Cleminson: Operating income of £7.1 million decreased 57% on £16.4 million one year ago.
Ian Cleminson: Due to the reduced activity in our production chemical business, we expect operating income in Q4 to continue at a run rate slightly below this quarter.
Ian Cleminson: Turning to slide 11, corporate costs for the quarter were £11.8 million compared with £19 million a year ago, primarily due to the £8.4 million recovery of historic pension costs.
Ian Cleminson: The effective tax rate for the quarter was 25.4% compared to 17.5% in the same period last year, reflecting the geographical location of taxable profits.
Ian Cleminson: For 2025, we expect our tax rate to be 27%.
Speaker Change: And now I'll turn it back over to Patrick for some final comments.
Patrick Williams: Thank you, Ian. I am pleased with the overall results this quarter, which were generally in line with our expectations.
Patrick Williams: Fuel Specialties and Performance Chemicals both delivered double-digit operating income growth over the prior year, while Old Food Services was flat with the second quarter.
Patrick Williams: In the fourth quarter, we expect relatively steady sequential results in performance criticals and oilfield services.
Patrick Williams: and some growth on seasonal demand and fuel specialties.
Patrick Williams: In 2025, we believe we are well-positioned for full-year growth in fuel specialties and performance chemicals with sequential quarter recovery in oil field services.
Patrick Williams: This was another excellent quarter for cash generation.
Patrick Williams: With over $300 million in net cash on our balance sheet, we are well positioned to continue to pursue organic investments and complimentary M&A while returning value to shareholders through dividend growth.
Patrick Williams: This quarter, we increased our semi-annual dividend to $0.79, bringing our full-yield dividend to $1.55, representing a 10% annual increase.
Patrick Williams: Now we'll turn the call over to the operator and Ian and I will take your questions.
Speaker Change: Thank you. As a reminder to ask a question please press star 1 1 on your telephone and wait for your name to be announced. To re-enter your question please press star 1 and 1 again.
Speaker Change: We will now take the first question from the line of Mike Harrison from Seaport Research Partners. Please ask your question.
Mike Harrison: Hi, good morning.
Speaker Change: Morning, Mike. Good morning, Mike.
Mike Harrison: So I was hoping that we could start out with the oil field business. I guess I was a little bit surprised to see that that revenue did move a little bit higher sequentially. I'm just curious, are you guys
Speaker Change: feeling good about the opportunities that you're seeing outside of Latin America to make up some of this
Speaker Change: revenue shortfall and and maybe can you give us some some details on
Speaker Change: on where you're looking for those opportunities and how you expect them maybe to play out over the next few quarters.
Patrick Williams: Yeah, my name is Patrick.
Speaker Change: I think if you look at Q4 and then we look at the full year of 2025,
Mike Harrison: We don't see really a lot of business running through that Latin American entity quite yet.
Mike Harrison: I think with the new government coming in, getting a handle on what's going on, we'll hope to see some traction, but it's kind of a wait-and-see approach.
Mike Harrison: But what we have done is we've concentrated on not only market improvement, but also business activity in our other businesses, being DRA, being U.S. completions, and in other areas including production chemicals.
Speaker Change: A big push that we have right now is in the Middle East, in specific to Saudi Aramco. We've made a lot of headway there.
Speaker Change: and all the people in Saudi and those offices in the Middle East have done a really good job. Matter of fact, I just returned from a trip there and we have a lot of opportunities there. We've proven ourselves with great products. We've proven ourselves with great services.
Speaker Change: and we'll continue to do that. And that's where I think you'll see the uplift moving forward in 2025.
Speaker Change: All right, and then in fuel specialties, if I kind of look at the
Mike Harrison: You know, SG&A expenses or operating expense line, it seems like that came in a lot lighter than it was last quarter. Can you just talk about whether there was anything unusual going on on the SG&A line within fuel specialties?
Speaker Change: No, nothing at all Mike. A little bit of timing of costs, perhaps a little bit of bad debt relief. Nothing of any significance whatsoever.
Mike Harrison: All right, great. And then, um...
Mike Harrison: Performance chemicals, I know that pricing number is still lower. It sounds like that was just passed through of lower raw material costs, but can you just talk about the trends you're seeing in raw material costs and when we might expect to see that price mix number kind of stabilize?
Speaker Change: Yeah, so generally across the business, Mike, we're seeing pretty stable raw material pricing right now and a lot of our
Speaker Change: Pricing comes from crude derivatives or natural products and it's pretty stable at the moment. So in fuels
Speaker Change: We've seen some higher gross margins and some stability there, we've caught up on all the pricing there, and in performance chemicals, that sort of pass-through is sort of stabilising now. So we're seeing year over year.
Speaker Change: movements but we're not seeing sequential movements as violent as we have done in the year-over-year numbers so I think sequentially you're going to see that settle down I think it's just going to take a little bit of time period so we get the comparatives more realigned
Speaker Change: All right, and then last question for me is just on the guidance. It sounds like you're talking about a seasonal uptick in the fuel specialties business.
Speaker Change: maybe kind of steady performance or maybe a little bit of sequential improvement in performance chemicals.
Speaker Change: and then oil field maybe a little bit lower. So is $1.35 that you just recorded, is that still in the right ballpark for next quarter or would you expect to see that a little bit higher on the EPS line? Thank you.
Speaker Change: I think Mike that's broadly in line. I think you'll see some sequential improvement moving forward in oil field and I think you're spot-on on the other businesses and probably that $1.35 maybe a tad higher is right in line.
Speaker Change: All right, thanks very much.
Speaker Change: Thank you, Ron. Thank you. We will now take the next question.
Speaker Change: From the line of John Tan-Wan-Teng from CJS, please go ahead.
John Tan-Wan-Teng: Hi, sorry, I was on mute. Good morning. Thank you for taking my questions. I was wondering,
John Tan-Wan-Teng: I noticed that you had some higher corporate costs from historic pension items in the quarter. I was wondering what the normalized corporate cost looks like and what should we think about going forward?
Speaker Change: Yeah, this is Ian, John, good morning. Yeah, that was a sort of a one-off credit that we received from some historic pension costs in the UK. The adjusted number is about £20 million this quarter for corporate costs and that's a good number going forward into 2025, so £20 million a quarter, £80 million for the full year.
John Tan-Wan-Teng: Got it. Okay. And then, Patrick, I think you mentioned organic investments on top of M&A. What's in the pipeline for you just in terms of investing for growth and in the business?
Speaker Change: It's interesting, we're monitoring it as we speak to make sure that the markets are still fluid like they are.
Speaker Change: but I think you're looking at a little bit still in performance chemicals, some of that with the new acquisition down with QGP in Brazil, a little bit in the oil field, potentially some expansion of DRA and some other areas.
Speaker Change: and then, you know, just looking at other areas of our business that we think geographically we could expand organically. And then we also are looking at additional M&A opportunities outside of that.
Speaker Change: Okay, got it. And then just in light of the election results, what do you think the benefits or impacts might be on your business as we go forward? Looks like the stock might be reacting to that today, and I'm wondering what your thoughts are.
Speaker Change: Yeah, I mean, you know, you see the corporate tax benefits, that's going to help everybody.
Speaker Change: You know, our general view is you hope to have some political stability globally.
Speaker Change: That's the hope.
Speaker Change: I think that general, in general business
Speaker Change: Things are looking positive pre-election. I think post-election there should be quite a bit of positivity as well.
Speaker Change: You know, and I think that whoever gets in there as president, we were hoping that, you know, obviously bring world stability and world peace.
Speaker Change: and bring prosperity back to everybody. And that's the hope that that's going to happen. But our businesses are set up very well no matter what happened with the election. And I do think this is a potential boost.
Speaker Change: Great, thank you.
Speaker Change: Thank you.
Speaker Change: Thank you. We will now take the next question.
Speaker Change: from the line of David Silver from CL King and Associates. Please go ahead.
David Silver: Yeah, hi. Thank you. Morning.
Speaker Change: Here's a question.
David Silver: Good morning. First question would be on the performance chemicals area. So a couple of things, but it's been a few quarters now since you know your Latin American acquisition and I'm just wondering if you could comment on maybe the overall integration and the role it's it's playing currently. So in other words
David Silver: Is that unit, you know, producing for local markets?
Speaker Change: Purely, is it part of, you know, more of a global network where it's specializing in certain, you know, products or formulations and shipping those globally and...
Speaker Change: You know, I think you touched on it earlier, but maybe, you know, overall, does this make you more likely to, you know, try to find more similar kind of strategic bolt-ons in this area. Thank you.
Speaker Change: Yeah, Dave, good question. It was a strategic acquisition to give us manufacturing capabilities in Latin America, especially in-country in Brazil.
Speaker Change: It's fairly diverse in regards to the assets.
Speaker Change: Over time, we'll be able to make not only old-filled products on there, but probably field-spec T products on there as well. So we like the capabilities of the assets.
Speaker Change: It is primarily a Latin American business, but it does have applications in the U.S. as well, and they do have customers in the U.S. It's meeting our expectations. We expect to have a nice year from then going into 2025, especially as the agriculture markets come back.
Speaker Change: So that is very well positioned. What that does do is as we fully integrate that into our system, we'll look at similar type activities in whether it's China or India or areas of the world like that where we need in-country assets.
Speaker Change: and we don't want to go and spend hundreds of millions, but we can control it by spending millions and giving capabilities to all three business units.
Speaker Change: Okay and then maybe just to comment on the demand also for performance chemicals but maybe the demand profile.
Speaker Change: that you're seeing currently. So in other words, you did undertake your major organic investment and expansion program with with a certain amount of
Speaker Change: new business in mind or customer, you know, customer programs in mind. And I know that certainly for a while there, you know, the pandemic or post-pandemic effects kind of were
Speaker Change: I don't know, causing some adjustments versus planned demand.
Speaker Change: You know, we see the revenue base very close to where, to overtaking your fuel specialty revenues on a run rate.
Speaker Change: basis, just where do you think you are? Have the customers fully engaged and are, you know, you're filling orders for the entire, I don't know.
Speaker Change: menu of new projects that you anticipated or is would there still be some some incremental demand or customer programs to to fill going for going forward?
Speaker Change: Yeah, the hope and I think what we'll see in 2025 is hitting the levels that we were hitting in 2022.
Speaker Change: You know, you are seeing a product mix differential, especially in high inflationary markets. They've gone to a lower caliber type product, not commodity, but not as the higher type product that we like to sell.
Speaker Change: I think as you'll see market stabilization, you'll see them moving back up into the higher trends.
Speaker Change: But it's been a nice rebound. I think we'll continue to see that rebound in 2025.
Speaker Change: and the goal is to get those to at least 2022 levels and then keep pushing beyond that. So we're moving in the right mix, the right direction, and as long as we get the right price mix, you'll see those margins improve as well.
Speaker Change: Okay, if I could just switch over to fuel specialties for a moment.
Speaker Change: I did want to touch on the margin performance and I guess I'm looking at EBITDA margins here, but the current quarter's margin is the highest it's been in in quite a while.
Speaker Change: And I'm just wondering a couple of things, but would that be a reflection of maybe your business mix?
Speaker Change: returning to kind of the pre-pandemic levels, in other words, the contributions from your higher margin, maybe aviation fuel or other additives, or is this a reflection of maybe some new business?
Speaker Change: some new products, you know, getting into the market a little bit more and starting to see the benefits of that. So just maybe a comment on, you know, what what went into kind of this very strong margin performance and in the fuel specialty side. Thank you.
Speaker Change: I think it's a mix, David. It's product mix.
Speaker Change: It's lower raw materials.
Speaker Change: and there's a conscious effort internally for margin improvement.
Speaker Change: So I think combined with all three of those, they had a really strong quarter in margins.
Speaker Change: I think we have to be cautious moving forward, but we see a similar quarter in Q4 before maybe trends down a little bit in 2025, but we do see similar type margins in Q4.
Speaker Change: Okay, great. That's great. And then just maybe one last one, but I mean, you did touch on the situation in oil field with the lower revenue levels.
Speaker Change: Just wondering if, compared to 90 days, well, 90 days ago when we were talking, I think the situation with your,
Speaker Change: reduced orders was that you know the your feeling was that customers can't do without your products forever and that it would hurt you know hurt their operations pretty directly I mean
Speaker Change: It's a little, you know, it's 90 days further on. Any further thinking along those lines, you know, I certainly understand there's a political process or whatever that might be involved, but
Speaker Change: Anything around the edges that you've picked up that maybe indicate, you know, how the customer might be proceeding down the road?
Speaker Change: Yeah, we have gone through all the product testing that was in the market. We know production levels have come off. We know the safety's come off a little bit.
Speaker Change: We know our product is one of very few products that work in that marketplace.
Speaker Change: We're well-established. We're technically well-established. We've got a great partner down there.
Speaker Change: You know, it's literally a political environment that's out of our control.
Speaker Change: I think at some point in time they'll get their hands around it.
Speaker Change: and we'll be there waiting to help them pick up the pieces. But...
Speaker Change: It's definitely something that we're involved in, we're still involved in. We're pretty sure they've probably tried other things that have not worked.
Speaker Change: so we're just going to sit tight until they need us and when they need us we'll be there to help them.
Speaker Change: Okay, great. I appreciate all the color. Thank you.
Speaker Change: Thank you. I would now like to turn the conference back to Patrick Williams for closing remarks.
Patrick Williams: Thank you all for joining us today and thanks to all our shareholders, customers, and InnoSpec employees for your interest and support.
Patrick Williams: If you have any further questions about MSPEC or matters discussed today, please give us a call. We look forward to meeting up with you again and discuss our 4th quarter 2024 results in February. Have a great day.
Speaker Change: This concludes today's conference call. Thank you for participating. You may now disconnect.