Q2 2019 Earnings Call
Thank you good day, everyone. My name is David Johnson, Our Vice President General Counsel and Chief compliance officer at Innospec. Thank you for joining our second quarter 2019 financial results Conference call.
This call is being recorded.
As you know late yesterday, we reported our financial results for the quarter ended June 32019.
The press release is posted on the company's website at Www Dot Innospec Inc. Dot com.
The slide presentation on the results is now available on our website and both an audio webcast and the slide presentation will be archived on the site for six months before we start I would like to remind everybody that certain comments made during this call might be characterized as forward looking statements under the private Securities Litigation Reform Act of 1995.
Generally speaking any comments regarding management's beliefs expectations targets or other predictions of the future are forward looking statements. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from the anticipated results implied by those forward looking statements.
These risks and uncertainties are detailed in L. specs. Most recent 10-K report as well as other filings we have with the FCC.
We refer you to the Fccs website or our site for these and other documents.
In our discussion today Weve also included some non-GAAP financial measures.
A reconciliation to the most directly comparable GAAP financial measures is contained in our earnings release, a copy of which is available on the Innospec website.
With us today from Innospec are Patrick Williams, President and Chief Executive Officer, and Ian Cleminson, 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 Innospecs second quarter 2019 conference call.
We are pleased to report another good set of results, which underlines the strength of our strategy and the value of operating with a balanced portfolio.
Our core businesses have all performed well during the quarter, most notably our oilfield services business, which has delivered another excellent performance.
This quarter once again had minimal sales in octane additives compared to the previous year.
Excluding octane additives operating income increased by 37%.
And our adjusted EPS is up 40%, which is impressive by any standards.
I'm delighted to open with remarks relating to oilfield services.
This has been an excellent quarter on both revenue and margins.
We delivered sales revenue up 29%, which is better than most in the industry.
Our continued focus on improving margins is delivering with gross margins moving up close to 34%.
In addition, with continued cost control. This has translated to operating income which has more than doubled.
Over $10 million for the quarter.
Performance chemicals had a solid quarter remain ahead of schedule against the strategic targets, we set out almost three years ago.
Sales revenue was down but this was mainly attributed to lower selling prices.
Driven by pass through of lower raw material cost in our contractual business.
However, once again our focus on margins has delivered a further improvement which has resulted in operating income increasing over 13%.
The business continues to develop and market very attractive new products, which are well aligned with consumer trends.
Fuel specialties sales in March were broadly flat on a strong comparative quarter.
The business suffered a minor disruption to supply and operations in the USA during the quarter due to a suppliers outage.
Our team has worked hard to minimize this issue and return operations and customer service back to normal.
These actions have ensured that there are no long term implications.
As previously indicated sales in octane additives were minimal in the quarter. So operating income was down $5.1 million on the same period last year.
So overall given the headwinds this has been a very good quarter for innospec showing that we have a very sound and strategic foundation for further organic and acquisitive growth.
Now I will turn the call over to Ian Cleminson, who will review our financial results in more detail.
That I will return with some concluding comments after that we will take your questions Ian.
Thanks, Patrick.
Turning to slide seven in the presentation. The company's total revenues for the second quarter were $362.4 million, a 1% increase from $358.1 million a year ago.
The overall gross margin increased two percentage points from last year to 30.7% driven mainly by improved margins in oilfield services on performance chemicals.
EBITDA for the quarter was $43.8 million.
Slightly on last year.
Our GAAP earnings per share were 90 cents, including special items, the net effect, which decreased our second quarter earnings by 22 cents per share.
A year ago, we reported GAAP earnings per share of 89 cents, which included an adverse impact from special items will be 11 cents.
Excluding special items in both years, our adjusted EPS for the quarter was $1.12 cents, a 12% increase from one dollar a year ago, demonstrating the value of our strategic businesses on the strength of our overall portfolio.
It's worth noting that the results were impacted by around six cents due to higher share based compensation accruals and by approximately 20 cents due to a lower I would say now that his contribution.
Even with these headwinds the businesses posted some impressive results.
Moving on to slide eight our oilfield services business has delivered excellent results in the quarter.
Revenues of $123.5 million, 29% on the same period last year.
Driven by good customer activity in both stimulation and production.
Customers are continuing to find our combined technology and service offering very attractive.
Market share continues to grow.
Gross margins improved 3.8 percentage points.
Sales mix improved in the quarter.
As we previously indicated the gross margin improvements combined with good cost control has generated a substantial improvements in operating income.
She is a 10.1 million for the quarter compared to just $4.1 million in the same period last year.
Turning to slide nine revenues in performance chemicals for the second quarter were $104.7 million down 12% for 108.9 million a year.
Okay.
Driven by 5% reduction in volumes and negative currency impact of 4%.
Adverse price mix, a 3% reduction in raw material prices translated into lower selling prices.
Despite the reduced revenue we have further improved margins as part of our long term strategic gross margins of 2.9 percentage points.
Operating income was up 13% to $11 million from $9.7 million in the same quarter last year.
Moving on to slide 10 fuel specialties produced a very solid set of results for the quarter right on our expectations.
Revenues for the second quarter were $133.3 million down by 1% from last year as a positive price mix of 5% was offset by an adverse currency impact of 4% comparing combined with a 2% reduction in volumes.
Gross margins of 33.5% was similar to the comparative period within our expected range.
Operating income was up around 1% to $44.1 million.
Moving on to slide 11.
Novitas revenues for the quarter of $1.9 million compared to 10 million a year ago.
Operating income of $9.1 million compared to $5.2 million in last years second quarter.
We are currently working to fulfill an order of approximately $6.5 million, which we booked in Q3.
Beyond this we have limited visibility that's our expectation is for one small to find loaded in Q4.
We will continue to update you on these quarterly calls.
Turning to slide 12, corporate costs for the quarter with $30.6 million compared to the $14.4 million recorded a year ago.
The effective tax rate for the quarter was 26.9% similar to the 26.1% of last year driven by the geographical location.
Taxable profits.
Moving on to slide 13, net cash provided by operating activities in the quarter is $50 million compared to 3.3 million a year ago.
In the quarter. The Cobi also distributes it 12.2 million to shareholders for the semi annual dividend.
As of June 32019, Innospec had 106.1 million in cash and cash equivalents and total debt of 160.9 million maybe go a net debt position to approximately 43 times EBITDA.
I'll now turn it back over to Patrick for some final comments.
Thanks, Ian despite some significant challenges the quarter, we have once again produced a strong set of results.
With good underlying growth in earnings and excellent cash generation.
Excluding our octane additives business, our core operating income grew by 37%.
Oilfield services had a particularly strong quarter.
We are ahead of our expectations on revenue growth and we continue to slowly improve margins.
This resulted in a 146% improvement in operating income.
Compared to the second quarter of 2018.
And as a testament to the great job the oilfield team has done.
Performance chemicals revenue were impacted by lower raw material prices I am very pleased with our continued improvement in margins, which is aligned with the goals we set back in 2017.
The development of new technology continues to be the backbone of success in this business.
And we have confidence in its future growth prospects.
Joe specialties had a quieter period after two quarters of good read and revenue growth.
But the business remains right on track and margins are in the normal range that we would expect.
The business had to deal with a significant supplier outage during the quarter.
And I'm delighted with the way our team developed alternative arrangements to minimize any disruption to our customers.
We had a very strong quarter for cash flow with an operating cash inflow of $50 million, which has helped to further strengthen our balance sheet.
Net debt is approximately <unk> 0.3 times EBITDA.
This compares to 1.7 times EBITDA at the end of 2016, when we made our last significant acquisition.
At the very into the quarter, we faced an additional challenge in the form of a cyber security incident.
Which we understand has impacted hundreds of companies and organizations across the USA.
While this has caused some short term disruption to our communications. We have continued to produce product throughout and we are well on our way back to normal levels of service.
We do not expect any long term impact.
I would like to take this opportunity to thank all of our customers suppliers and employees, who have supported us through this difficult period.
Our key organic growth projects remain on track and are well positioned to acquire when we are confident of adding shareholder value and the multiples are acceptable.
With good fundamentals and strong pipeline of organic growth projects and potential for further acquisition growth.
We feel very confident about our future.
Now I will turn the call over to the operator in and I will take any of your questions.
Thank you ladies and gentlemen, we now begin the question and answer session. If you wish to ask a question. Please press star one and it's kind of fun and wait for your name to be announced if you wish to cancel your question. Please press the hash key once again, if you wish to ask a question. Please press Star then one.
The first question is coming from the line of John Powell Blanton. Please go ahead.
Good morning, gentlemen, thank you for taking my question.
My first one is.
And can you quantify the impact of the stock comp accruals on the operating and net income this quarter.
Yeah, John as we said on the call is round about six cents.
Translates into broadly about two and a half million at the operating income level I'm, sorry, a significant impact that we saw the runup in stock price right at the end of the quarter by about 9%.
Thats come off a little bit in the.
In the July period and into August .
As you know he's such as Mark to market. So a couple of million.
The $3 million.
Okay, great. Thank you and then also on the raw material disruption can you quantify what kind of a headwind that was in Q2 and if there was any middle east into Q3.
Specifically in performance chemicals John .
That the supply disruption that you had and I think in North America, I'm, Sorry, North America, Yeah and.
It's a little bit difficult to say I think what segment I'm sure Patrick will come over the top on this one is that we've done a great job in managing our inventories.
As best we can.
It's really a matter of timing.
I think we've managed to keep most of our customers supplied.
And as we've worked our way through it we have money slip a little bit hand to mouth in some places.
I don't see a major impacts in Q2.
Because we worked through Q3, I think we may see a little bit of impact. So I think every Q4 before we got back to normal.
Yes, John I can correct work.
We're starting to come out of this was.
Couple of raw materials for oil field and for fuel specialties.
But it looks as if we can see the light now we're manufacturing some of the products at our sites.
And we have found alternative sources for the remaining products.
And it looks like by Q4, we should be in the normal operations.
Is that going to be most end margin drag or how do you expect it to play out no I don't think it's going to hit margins at all as matter effect overtime it might improve margins.
Pulled some of this back on our facilities and an alternative areas that we're looking at supply.
So I think over time, it possibly could improve margins on those specific products.
But I would keep the margin lines that you have for fuels and oilfield right where they are.
Okay, Great and then finally and I know, there's a lot of these weird impacts in the quarter.
The cyber attack what what's the damage both from a loss sales perspective, if any on the cost to fix it has everything running now the way you want it yes, it's hard to quantify right now obviously, its insured which is a good thing for us.
But we are back up and running.
And again, we should be back to normal operations anytime.
We never stop shipping products, we never stopped making products.
We never stopped invoicing collecting cash.
Well the end or paying vendors.
So as of now it looks as we should be back up to normal operations.
Probably by the end of this week.
Okay was there a deductible or anything before its insurance pays out yet small deductible.
Okay, and then looking at Q3 that the oilfield business.
Obviously, you've done very well there what were the main drivers there the sequential improvement in can you sustain that and nor could even improve given what you're doing.
Some of its raw material costs come down.
A lot of it is technology that we provide and new technologies to the marketplace.
It's really I think it's a focus that our people have on driving margin the margin profile that we've stressed the last two years controlling cost.
And getting good revenue and what we mean by good revenue is recurring revenue with a strong product portfolio.
And that really has put us in a good position in that and that's put us in a good future position us well for new products that we're bringing to the marketplace. So we were pretty confident even where oil prices are today that we can still post positive growth.
Okay. Great. Finally, just any update on IMO 2020, how do you see that Flushing out I know you had some impact last quarter or benefit rather.
Are you continuing to see that as an improving and can you give us a little more clarity on how 2020 will shape out from a products you can sell into the market and kind of how you're prepping a refinery is now.
Good question notes so right now what we're seeing is the tank cleaning portion of our business for IMO 2020, So everybody's preparing.
Their tanks for this new fuel.
And so a lot of that is cleaning up the tanks and the current sludge you have in the tanks and Thats where were seeing the benefit right now.
Where it goes in 2020, John we're just not quite sure is it going to be treated at the terminal is going to be treated on the ship is going to be treated at the refinery.
Where is the actual treatment going to come from and what are the actual problem is going to be.
We have a general idea when the US went to you LSD and the problems associated with you LSD.
And you will have similar problems. When you go to this new fuel for IMO 2020, but again, it's kind of premature to say, what it's going to look like what the fuel is going to look like and where the actual treatment will be the good thing is we're ever it gets treated whether it's on the vessel whether it's in the pipeline or whether it's at the refinery we can treat it all three locations. So we're very well positioned.
I think it's kind of a wait and see John I think a lot of people are going to scramble on at the last minute.
Great. Thanks, a lot guys I'll get back in queue.
The next question is coming from the line will increase shutdown.
Please go ahead.
I think Thats me good morning, everyone.
Well the crest voting Chris.
This more questions on the oilfield.
You know you you think you mentioned you're outgrowing the market.
A couple of questions just with that.
One like how fast is the market growing or maybe how fast are you outgrowing the market and are you getting that through market share or just as your customers are growing that much faster than some of the others.
It's a little bit about some of its market share Chris some of its.
Organic growth within our current customer base.
And again I would tell you as I alluded to earlier.
On the earlier question is that we're selective.
Into who we partner with due to the fact that our technology. We think is superior and we need to make sure. We deliver the service that we promised to our customers and we can't do that for everybody.
So we're very selective in who we grow with we provide excellent customer service and excellent products and that's enabled us to further enhance our growth and I don't see that changing near term.
Even though crude oil prices have slipped down to low fiftys.
So I think it's kind of a it's a quarter by quarter to see where crude prices go in and what happens at that point in time.
That's what I was going to ask about the oil. So do you see your customers wont slow down and the lower price oil environment I mean are they.
I mean, I know you have a pretty good take usually on.
The exploration marker the oil market itself. So I mean is it.
Is it that or do you just think your business will continue to grow through providing more products that are technology higher prices such if oil does is they know that's interesting.
I think what you'll see is accrued keeps sliding.
Down below that 50 barrier you could see some some downturn in the market in regards to drilling and completions primarily completions.
There's still a lot of wells behind pipe that haven't been completed.
So I think you'll see a little bit of slowdown on that up to keep slipping.
So we're prepared.
We've obviously been through it before I think the basins that we strategically concentrated on early on and we developed this business.
Puts us in a much better position to where most of our customers still we'll drill and complete.
A fair quantity of wells.
So I think we positioned ourselves very well and obviously this business is not just based in the us.
We've now to fill up some business and in the Middle East.
We have some business and.
In South America, So we've really balanced out the portfolio to not just concentrate on us patients and I think thats going to benefit us as well.
Okay. Then just lastly on say M&A I mean, what's the latest outlook for that is the.
Are the multiples still too high Uh huh.
The pipeline what are you what are you seeing.
Yes, there is a lot out there.
Multiples are starting to come down so we are starting to see a retraction on multiples.
We've looked at a lot of deals we continue to look at a lot of deals.
Obviously, it's got to fit our portfolio, it's got to fit our AR.
Exactly what we're doing from a strategic standpoint for the future.
I think you you should see something from us hopefully sometime this year.
I'm not sure you're going to see any big deals come out of US anytime soon I think from that standpoint, theres too many people still chasing.
Deals that we feel are overvalued.
So we're in a great position to not only increase dividend, but also too.
To fund the organic growth projects that we have and still grow this business, we're not in a position where we have to acquire anymore.
So if the right deal comes along.
We'll buy it if it doesn't come along we're going to focus on organic growth.
Great. Thanks, so much for the color.
Thank you.
Once again, if you wish to ask a question. Please press Star then one on your telephone.
The next question is coming from the line of.
Gentlemen, Tom Watson. Please go ahead.
Hi, just a quick follow up for me and what's your expected on that they are operating expenses here.
For the full year John Yes.
I think what we had in the multiple was probably.
Soon.
Excluding R&D so 218.
The two zero exclude now into its you got it okay and does that include the impact of further stock comp accruals or reversals, given where the share price is now.
It doesn't include any increase or decrease John will just set that was in the quarter.
Okay perfect. Thank you.
Okay. Thank you.
There are no further questions at this time I handling all of that the call to Patrick Williams for final comments. Please go ahead.
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. We look forward to meeting up with you again to discuss our Q3 2019 results in November have a great day.
That does conclude our conference for today. Thank you for participating you may now disconnect.