Q2 2025 Innospec Inc Earnings Call

Speaker #1: After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one and one on your telephone.

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Speaker #1: I would now like to turn the conference over to the first speaker, David Jones, General Counsel and Chief Compliance Officer. Please go ahead.

Speaker #2: Thank you. Welcome to INNOSPEC second quarter earnings call. This is David Jones, and I'm INOSPEC's general counsel and chief compliance officer. The earnings released for the quarter and this presentation are posted on the company's website.

Speaker #2: During this call, we make forward-looking statements, which are predictions 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 from the anticipated results implied by such forward-looking statements.

Speaker #2: These risks and uncertainties are detailed in INNOSPEC's 10K, 10Qs, and other filings with the SEC. Please e the SEC's site and INNOSPEC's site for these and related documents.

Speaker #2: In today's presentation, we have also included non-GAAP financial measures. A reconciliation to those directly comparable GAAP financial measures is contained in the earnings release.

Speaker #2: The non-GAAP financial measures should not be considered as a substitute for or superior to those compared in accordance with GAAP. They are included to aid investor understanding of the company's performance in addition to the impact that these items and events had on financial results.

Speaker #2: With me today from INNOSPEC are Patrick Williams, president and chief executive officer and Ian Cleminson, executive vice president and chief financial officer. And with that, turn it over to you, Patrick.

Speaker #3: Thank ou, David. And welcome everyone to INNOSPEC's second quarter 2025 conference call. This was a od quarter for INNOSPEC. Our balanced portfolio benefited from strong growth in fuel specialties operating income, which offset lower results in performance chemicals and oil-fueled services.

Speaker #3: Performance chemicals delivered strong high single-digit sales growth, but gross margins remained below our expectations. We are focused on delivering sequential gross margin improvement and operating growth in the second half of the year.

Speaker #3: This is a priority for the business. And we are cautiously optimistic that we can achieve these results through a broad range of opportunities that have been identified and actioned by the team.

Speaker #3: Fuel specialties had another strong quarter. Operating income grew by double digits and margins expanded. The business benefited from good performance across all regions and in markets including non-fuel applications.

Speaker #3: Our outlook continues to be for steady performance in this business, with focus on operating income growth and margin improvement. operating income improved on a sequential basis due to our focus margin improvement as discussed last quarter.

Speaker #3: Our medium-term operating income margin target is above 10%, and our teams will continue to drive sales technology and cost management actions to meet these objectives.

Speaker #3: We Oil-fueled services remain focused on delivering further operating income and margin improvement through the second half of this year. Our outlook does not anticipate any resumption of Latin American activity for the remainder of the year.

Speaker #3: Now I will turn the call over to Ian Cleminson, who will view our financial results in more detail. Then will return with some concluding comments.

Speaker #3: After that, Ian and I take your estions. Ian?

Speaker #4: Thanks, Patrick. Turning to slides seven in the presentation. The company's total revenues for the second quarter were $479.7 million. A 1% increase from $475 million a year ago.

Speaker #4: Overall gross margin decreased by 1.2% points from last year to 28%. Adjusted EBITDA for the quarter was $49.1 million, compared to $54.1 million last year and net income for the quarter was $23.5 million, compared to $31.2 million a year ago.

Speaker #4: Our GAAP earnings per share were 94 cents, including special items. The net effect of which decreased our second quarter earnings by 32 cents per share.

Speaker #4: A year ago, we reported GAAP earnings per share of $1.24 cents, which included the negative impact from special items of 15 cents per share.

Speaker #4: Excluding special items in both years, our adjusted EPS for the quarter was $1.26 cents, compared to $1.39 a year ago. Turning to slide eight, revenues and performance chemicals for the second quarter were $173.8 million, up 9% from last year's $160.1 million.

Speaker #4: Volumes grew 4%, driven by lower margin products, with a positive price mix of 2% and a positive currency impact of 3%. Gross margins of 17.5% decreased 5.1% points, compared to the same quarter in 2024, due to lower sales pricing and a weaker sales mix.

Speaker #4: Operating income of 14.3 million decreased 33% from 21.2 million, last year. Moving on to slide nine, revenues in fuel specialties for the second quarter were $165.1 million, down 1% from the $166.6 million, reported a year ago.

Speaker #4: Volumes were down 7%, with price mix up 4% and a positive currency impact of 2%. Fuel specialties' gross margins of 38.1% were three and a f percentage points above the same quarter last year, benefiting from a stronger sales mix and disciplined pricing.

Speaker #4: Operating income of 35.4 million was up 16% from 30.4 million a year ago. Moving on to slide 10, revenues in oil-fueled ices for the quarter were $101 million, down 7% from $108.3 million, in the second quarter last year.

Speaker #4: Gross margins of 29.6% decreased 1% point from last year, on a weaker sales mix. Operating income of 6.2 million improved sequentially, helped by cost control measures but decreased 15% from 7.3 million one year ago.

Speaker #4: Turning to slide 11, corporate costs for the quarter of 20.9 million compared with 17.6 million a year ago, and included a 2.3 million legacy environmental provision.

Speaker #4: The effective tax rate for quarter was 26.3%, compared to 28.6% a year ago, benefiting from the geographical location of profits. Moving on to slide 12, cash from operating activities was 9.3 million, before capital expenditures of 16.2 million.

Speaker #4: In the second quarter, we brought back almost 90,000 shares at a cost of 8.2 million, and paid a semiannual dividend of 20.8 million. As of June 30th, INNOSPEC had 266.6 million in cash and cash equivalents, and no debt.

Speaker #4: And now I'll turn it back over to Patrick for some final comments.

Speaker #3: Thanks, Ian. Our immediate priority is margin improvement in performance chemicals and oil-fueled services. These improvements are expected to come from sales, cost actions, new technology, and other opportunities across all regions and in markets.

Speaker #3: Fuel specialties has delivered strong results year to date, and is expected to remain steady. Overall, our balanced portfolio is well positioned for growth at improved margins as our business teams deliver on these objectives.

Speaker #3: This quarter, we paid our semiannual dividend of 84 cents per share, and repurchased 8.2 million shares. With over 266 million in net cash, we have significant balance sheet flexibility for further organic investment, complementary M&A, and shareholder returns through dividend growth and buybacks.

Speaker #3: Now I will turn the call over to the operator, and Ian and I will take your questions.

Speaker #1: Thank you, Sal. As a reminder to ask a question, please press star one and one on your telephone and wait for your name to be announced.

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Speaker #1: To withdraw your question, please press star one and one again. We are now going proceed with our first question. And the questions come from the line of Mike Harrison from Seaport Research Partners.

Speaker #1: Please ask your question.

Speaker #5: Hi. Good morning.

Speaker #2: Hello, Mike. Good morning, Mike.

Speaker #5: I had a handful of questions here on the performance chemicals business. First of all, you noted that you were seeing higher volumes of some lower margin products and that mix was a drag on margin.

Speaker #5: Can you give us a ittle more color on what those products were and is this something you guys are doing internally or is this more of a customer shift or trading down and I guess the end question is do you expect that trend of weaker mix to continue into the second half or was it more isolated in the second quarter?

Speaker #2: I think there's a little bit of hesitancy in the market, Mike. I think that you know with all the tariff talk and the geopolitics going on, there's been a little bit of a consumer shift to a lower commoditized product.

Speaker #2: We don't give actual products out on the phone calls, but that's what we've generally seen in the markets. And you know in addition, when you start looking at the recovery in pricing, you know there's always a lag going up as oil chemicals go up.

Speaker #2: The lag going up takes a considerable time. You get the benefit as raw materials come up on the back end, but right now we're still climbing that ladder.

Speaker #2: You know I ink for us as a company, it sits on us that we need to control pricing little better. And that is going to be our focus in Q3, not only from procurement, but pricing to the customers.

Speaker #2: So we've got a long way to go. There is a minor shift in the market, but it's not the market that's causing this. We need to take care of this internally.

Speaker #5: All right. So you mentioned oil chemicals there and we've heard that there's kind of a spike going on in those raw material costs. Is that the bigger driver then that we need to be thinking about and that the key to margin improvement in the second half is more of a pricing versus raw material cost issue?

Speaker #2: Yeah. I'd ably say that's the bigger driver at this point. I think the other drivers are things internally that we need to do a better job of.

Speaker #2: And we're on top of it. I think you're going to e unfortunately a little bit of that lag in Q3. I don't see us coming out of this until the oils come off a little bit, but or until we get to the spike of the or the height of the increase.

Speaker #2: Which I think you'll see in probably Q4.

Speaker #5: All right. Thanks. For that. And then I guess on the more positive side, the strength that you saw in fuel specialties' margin was pretty impressive.

Speaker #5: Maybe almost seemed a little bit unusual; can you p us understand what drove that strong gross margin performance in fuel specialties? And you know what aspects of that strength could be sustainable going forward?

Speaker #2: Yeah. I mean, it's quite frankly, it's price discipline. It's product mix. It's non-fuel applications. They've done a really good job in moving this business forward and in market that's somewhat stagnant.

Speaker #2: And you ow I think the non-fuel applications have been a big benefit. And as I said earlier, discipline pricing. We've got great technology. We've got great people.

Speaker #2: You know that's a very high margin for this business. And it's going to be tough to sustain that in Q3, Q4. You know I do see that coming off a bit.

Speaker #2: But I do think we'll still stay at the high end of what we usually you know when we say that 30 to 34 percent of margin, I think we'll still stay on that high end.

Speaker #2: But it should come off a little bit probably in Q3.

Speaker #5: All right, thank you. And then I guess just kind of bringing it all together as we're trying to think about what earnings could look like in the third quarter.

Speaker #5: It sounds like performance chemicals and oil fields uld both show a little bit of sequential improvement from Q2 earnings levels. Maybe fuel specialties comes off a little bit and net net.

Speaker #5: Q3 should look pretty similar to Q2. Any other color around earnings guidance is always helpful. Thanks.

Speaker #2: Yeah, Mike. I think what you'll see is fuel specialties may be coming off a little bit, not much. I think you'll see oil-fueled services probably about the same as it was this quarter.

Speaker #2: Could have a chance to go up. But I don't think you're going to see performance chemicals go up at all. I think we have a full quarter to fix things before we get back to those normalized run rates in Q4.

Speaker #5: All right. Very helpful. Thank ou.

Speaker #2: Thank ou.

Speaker #1: As a reminder to ask a question, please press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again.

Speaker #1: We are now going to proceed with our next question. And the questions come from the line of John 9110 from CJS. Please ask your estion.

Speaker #6: Hi. Good morning. Thank you for taking my questions. Patrick, I was just wondering if you could help us understand the state of progress in diversifying your oil-fueled customer base.

Speaker #6: And if there's any update, and I know you didn't your guidance, but if there's any update the Latin customer and if they may come back, at some point in the ure.

Speaker #2: Yeah. I don't see it happening this year. I mean, everybody has seen what's going on with that customer. Let's just call it out specific to Mexico.

Speaker #2: They're ying to float $10 billion of bonds. They've got some real big issues internally. That they have to overcome and payment issues as well.

Speaker #2: But there's no doubt that crude oil drives their revenue base in Mexico. So they're kind of caught right now. I don't see any orders coming through in Q3.

Speaker #2: There's a lot of talk going on, but we don't see anything in Q3 and potentially Q4. I do, John, think they will come back.

Speaker #2: It's just a function of timing. And you know we're risk-averse when it comes to payment terms. They have to be able to pay for us to ship product.

Speaker #2: And that's kind of where we sit right now. So in answering the rest of your question, I think that oil field has done a better job diversifying in other countries.

Speaker #2: Middle East, you're seeing growth. I think you're seeing good growth in DRA and other areas. But the Latin American customer is going to take some time.

Speaker #6: Okay. Great. Thank you. And just to rehash the fuel specialties' margin question, you mentioned a number of drivers to get to that really impressive 38% level.

Speaker #6: In Q2, which specifically is not repeating in Q3 that maybe gets you back to the normal range that ou're in, even if it's at the high end?

Speaker #2: Yeah. It's really product mix, John. You know we landed some real nice sales mix this quarter. And that'll off a little bit in Q3.

Speaker #2: And along with the sort of solid pricing discipline the business has got, our expectations are that we'll be at the high end of that $32 to $34 range that we normally quote.

Speaker #2: That's the normalized business going into Q3. And as we head into Q4, again, dependent on sales mix, we'll stay within that range, maybe come off a little bit from 34 but let's say we'll update you on the next call.

Speaker #2: But certainly, Q3 will be at the high end of the normalized range.

Speaker #6: Okay. Great. And then any update on capital allocation? I know you brought back some shares in the quarter, which traditionally you've done opportunistically, but not a very heavy component of your capital allocation plan.

Speaker #6: Just wondering if there's any changes that are going on. Obviously, the ock has been lower. But if there's any M&A updates or other things you'd like to do.

Speaker #2: Once you start in, then I'll add to it. Sure. On the capital allocation side, John, you've en this in the market with the buybacks.

Speaker #2: And we have been a little bit opportunistic there. We've got a 50 million authority and we're chewing our way through that. But you know we're just looking at the market carefully.

Speaker #2: We don't want to chase the market down and we don't want to chase the market up. But we'll take the opportunities as and when they arise.

Speaker #2: The focus really for us is on the sort of the longer-term shareholder value and that comes out of the dividend. And that comes out of the business performance.

Speaker #2: So the dividend, we've reased 10% in the first half of the year. You'll likely see us do that again in the second half of the year.

Speaker #2: We think we've got the cash flow and 've got the cash reserves to do that. And so no real changes on the capital allocation front from that respect.

Speaker #2: M&A I'll pass that over to Patrick.

Speaker #3: Yeah. We're still looking at M&A I would probably tell you nothing in Q3 until I get this margin issue fixed and performance chemicals. But you know we will always look.

Speaker #3: We will continue to look. There are some things coming on the market at the end of this year that have some excitement. But again, we're not lucky till I get these margins approved and fixed and performance chemicals.

Speaker #3: I guarantee you it will be fixed.

Speaker #6: Great. Thank ou.

Speaker #2: Thank you.

Speaker #1: As a final reminder to ask a question, please press star one and one on your telephone and wait for our name to be announced.

Speaker #1: To withdraw your estion, please press star one and one again. We are now going to take our next question. And the questions come from the line of John 9110 from CJS.

Speaker #1: Please ask your estion. Hello, John. Your line is opened.

Speaker #7: Hi, Ian. Just quick follow-up if possible. I know you mentioned the geographic mix was a little bit better from a tax perspective. Any thoughts on that going forward and for the rest the year?

Speaker #2: Yeah. I think sort of 26% is probably the right number, John. Obviously, things can change as the business evolves. But right now, that's our sort of full year estimate.

Speaker #6: Okay. Great. Thank you.

Speaker #2: No problem.

Speaker #1: We have no further questions at this time. I will now hand back to Patrick Williams for closing remarks.

Speaker #2: Thank you all for joining us today. And thanks to all our shareholders, customers, and INNOSPEC employees for your interest and support. If you have any further questions about INNOSPEC or matters discussed today, please give us a call.

Speaker #2: We look forward to meeting up with you in to discuss our third quarter 2025 results in November. Have a great day.