Innospec Inc. (NASDAQ:IOSP) Second Quarter 2022 Earnings Conference Call August 3, 2022 10:00 a. m. m. ET
Participating companies
David Jones – General Counsel and Chief Compliance Officer
Patrick Williams – President and Chief Executive Officer
Ian Cleminson, Executive Vice President and Chief Financial Officer
Conference Call Participants
Mike Harrison – Port Research Partners
Stefanos Crist – CJS Securities
David Jones
[Call abruptly]
David Jones. I am the general counsel and chief compliance officer of Innospec. Last night, we released our monetary effects for the 3 months ended June 30, 2022. The publication of the effects and this presentation can be found on the company’s website.
In the course of this call, we will make forward-looking statements, which are predictions, projections and other statements relating to long-term events. These statements are based on existing expectations and assumptions that are related to risks and uncertainties that may cause actual problems. effects differ materially from the expected effects implied by the forward-looking statements. The dangers and uncertainties are detailed in 10-K, 10-Q and other documents filed through Innospec with the SEC. Make a stop at the SEC’s online page or on innospec’s online page for those and other documents. In our discussion today, we have also included non-GAAP monetary measures. A reconciliation with the maximum directly comparable GAAP monetary measure is contained in our earnings statement. Non-GAAP monetary measures deserve not to be considered as a replacement or superior to those ready under GAAP. They come with more elements to help investors receive compensation. the functionality of anyone, in addition to the influence of those pieces and occasions on monetary effects.
Joining Through Innospec’s Me are Patrick Williams, President and Chief Executive Officer, and Ian Cleminson, Executive Vice President and Chief Financial Officer. And with that, I pass the word on to you, Patrick.
patrick williams
Thank you, David, and welcome everyone to the convention call of the 2022 quarter of The Time of Innospec. It’s another very smart quarter for Innospec. The production chain and source groups have remained incredibly resourceful in the face of those persistent global imbalances and we continue to build on our reputation as a consistent and reliable spouse for our clients.
Performance Chemicals sales increased in all end markets. Operating profit increased by 61% compared to last year and EBITDA margin exceeded 20%. Demand for private care generated the maximum margin and advanced in the operating source of revenue compared to last year and more than offset weaker demand in smaller segments, such as home care in Europe. To the expansion of non-public care, we are adding capacity as a component of our current two-year,70 billion biological investment program. In addition, this quarter we opened our new 20,000-square-foot global generation center, which is R
To better position ourselves for long-term expansion, last week we completed the acquisition of other significant land adjacent to our main U. S. functional chemicals production facility. Fuel Specialties posted an 11% increase in operating profit compared to last year’s quarter. Gross margins were higher again at the lower end of our target range, but we expect inflation to normalize and higher-margin end markets, such as jet fuel, to fully recover. We continue to be successful in introducing our cutting-edge technologies into new programs and end markets. Several of those segments, such as low-sulfur marine fuels, renewable fuels, and non-fuel application areas, have seen double-digit expansion in recent years. Sustainable development goals.
Oilfield Services’ operating profit roughly doubled from last year. Despite the continued expansion of our chemical production segment, the resumption of our final touch activities and overall functionality still fall short of our internal expectations. We expect a sequential operating source of revenue and continued strong expansion in the coming quarters.
Now, I’m going to talk to Ian Cleminson, who will analyze our monetary effects in more detail, and then I’ll come back with some comments, and add after that, Ian and I will answer your questions.
Ian Cleminson
Moving on to slide 7 of the presentation, the company’s overall profit for the time being was $467. 6 million, a 32% increase from $354. 5 million a year ago.
EBITDA for the quarter was $53. 9 million compared to $50. 6 million last year and net revenue for the quarter was $32. 3 million compared to $22. 4 million a year earlier. which reduced our current quarterly earnings to $0. 29 according to the percentage. A year ago, we reported GAAP earnings of $0. 90, which included a negative effect on specialty parts of $0. 40 according to the percentage. Excluding special parts for both years, our adjusted EPS for the quarter was $1. 58 compared to $1. 30 a year ago.
For slide 8, Performance Chemicals’ profit for the current quarter is $169 million, up 32% from $128. 2 million last year. Volumes increased by 6% with a positive combined value of 34% which offset an unfavourable exchange rate effect of 8%. Gross margins are 25. 8% higher through 1. 2 percentage points, compared to 24. 6% in the same quarter of 2021, reaping benefits from expansion in the higher-margin non-public care business.
Moving on to slide 9, Fuel Specialties’ profit for the current quarter was $176. 4 million, up 23% from $143. 1 million a year ago. 7%. Fuel Specialties gross margins were 33. 3%, 3. 7 percent lower than a solid quarter last year and will remain at the lower end of our expected diversity until inflation moderates. .
Turning to slide 10, oilfield revenue for the quarter was $122. 2 million, up 47% from $83. 2 million in the current quarter last year. improvement of $3. 3 million over a year ago.
On slide 11, commercial prices for the quarter were $18. 5 million, up from $11. 6 million a year earlier, primarily due to top-worker expenses driven by an accumulation in stock-based reimbursement and cumulative performance-related expenses. The effective tax rate for the quarter was 23. 6% compared to 44. 1% in the previous year, which included the enacted substitution in UK tax rates affecting deferred tax. The adjusted effective tax rate for the quarter was 22. 8% compared to 24. 2% last year.
Moving on to slide 12, money generation for the quarter was impacted by a $43. 7 million outflow for current capital, resulting in an operating money outflow of $7. 5 million prior to capital expenditures of $9 million. As of June 30, Innospec had $71. 4 million in money and money equivalents and no debt and now,
I will give Patrick the floor for some closing remarks.
patrick williams
Thanks Ian. Se uncertainty about the global economy and supply chain is expected to continue in the coming quarters. This will not distract our attention from safe operations, product innovation, with exceptional service and support for visitors. While we are seeing some signs that this may begin to moderate parts of our business, we continue to manage price movements in close collaboration with our customers. As we move into the third quarter, we are seeing strong demand across all of our businesses. Volumes of personal care products, which generate more than 75% of Performance Chemicals’ operating profit is supported by multi-year contracts, and the recent capacity addition runs out as they move into operation. Fuel Specialties has been a relatively strong business during periods of economic downturn due to the critical functionality of our chemicals in our visitors’ products. We believe that oilfield facilities continue to have significant prospective expansion with a purpose of returning to pre-COVID operating profit grades in the medium term.
This quarter, we continued to repair the percentage shareholder price with our half-year dividend of $15. 6 million and $1. 8 million in percentage buybacks. Despite close economic volatility, our strong balance sheet positions us for further dividend expansion and percentage buybacks while investing our biological investment priorities and mergers and acquisitions.
Now I will pass the call to the operator and Ian and ask them your questions.
Q&A session
Operator
Thank you. [Operator Instructions] Now we’ll take the first one and it comes from the Mike Harrison line of Seaport Research Partners. Your line is open, ask yourArray
Mike Harrison
Hello, hello and congratulations on a quarter.
patrick williams
Thank you, Mike.
Mike Harrison
I wonder if you can overlook the trends you’re seeing in Europe, whether it’s in your Performance Chemicals and Fuel Specialties business, where do you see a wallet that’s softening and where do you see a wallet that can be more resilient?
patrick williams
Mike is Patrick. In Europe, we see that non-public care is still strong on a global scale. The weaknesses we see in Europe are strictly in the domain of home care. Now, a smaller component of our business, we’re still seeing significant expansion in this region and I think we’re seeing the same thing in Fuel Specialties. We have expansion in Europe, we are seeing a big expansion in the United States and South America. It’s still a bit slow and ASPAC due to some Asian countries still closed due to COVID, however overall, we’re still seeing strong demand and strong expansion in most of our markets.
Mike Harrison
And then I have to do this consultation that is being made to many corporations right now, which considers the possibility of energy rationing and perhaps a shortage of herbal fuel in Europe. Can you tell us about the services that may be affected or perhaps more?generally speaking, how it could be affected, however, it has a facility in Germany that relies on ethylene through the pipe. What do you think is going on there and I guess when it comes to special fuels in Europe, I think those products are quite essential to keep the economy running. So would you expect to be higher on the precedence list if there was rationing?
patrick williams
Mike, we execute our contingency plans in all our factories in Europe. We have two plants, one of which, as you just mentioned, has a softened ethylene line, but is in a commercial facility from a major manufacturer. operate this plant for quite some time, if there were a severe shortage of herbal fuel in that area. The other factory is in Castiglione, which would force us to accumulate stock or move to one of our other diversified factories where we can react the same products. So, how smart our company is when we execute our contingency plan, as we plan for those two plants just in case, and it goes to 20% to 80% relief in herbal fuel. I think we’re in a smart position. Now we can’t know what happens to the consumer, we can’t know what happens to incoming raw materials, but what we can are our factories and we think we’re in a pretty smart position.
Mike Harrison
It is ok. And then, I wanted to ask you about the additional land you’ve acquired for Performance Chemicals’ north Carolina facility, suggesting that you have a vision for long-term capital systems beyond the existing $70 million on projects you’re currently spending. So can you help us describe the long-term scope of this North Carolina facility and perhaps what other features, technologies, or product lines will you add?
patrick williams
Yes. This effectively remains in the strategy of the strategy without dioxin 14, without nitrous, without sulfate, gives us a contiguous domain. That gives us more than enough capacity to expand and raise more reactors, as well as roads and expand offices if necessary. , would be more sensible than the $70 million if and when we use that expansion, which I guess will be somewhere in the next five years. But in the next two years, we see ourselves staying where we are and expanding existing facilities. we are currently. It simply gives us the opportunity to. . . Mike, as we expand our strategy and our strategy grows in the market. This gives us the opportunity to climb into this domain of activity that we are currently focusing on.
Mike Harrison
All right, that sounds good. And then the last query for me is Performance Chemicals and the gross margin functionality looks pretty good, not many corporations are showing an improvement in gross margin right now. Can you comment on how you see the charge of pricing bets on the spot as part of Performance Chemicals and perhaps how some of the constant prices of that extra capacity are coming in and can have an effect on your margin functionality as we think about the moment part.
Ian Cleminson
That’s a smart question, Mike. What we’re seeing right now is a smart move, especially in our Performance Chemicals business, and that’s driving this gross margin improvement. We said earlier in the script that the sales mix is very strong for us, which brings our gross margins to that diversity of 25 percentage points. Right now we would expect 24-25% for the rest of this year as we’re adding more volume that we alluded to earlier this is just going to help gross margins and I think it’s just kind of a value looking number . of years and if you probably go back to 2017 when we made the first major acquisition in functional chemicals our gross margins were in that kind of diversity 18% and we knew we could probably grow them much higher and we worked hard and added 5, 6, 7 points percentage. Now from now on it’s going to be pretty gradual, but for sure, as we’re sorting out additional volume here, costs are holding steady, visitor demand is smart. So we look pretty firm for the rest of this year on that 24% to 25% gross margin diversity.
Mike Harrison
And I guess the last one is cost. Do you see at least a moderation in the inflation rate or symptoms of stabilization in some of your input costs?
Ian Cleminson
So specifically at Performance Chemicals, I think we’re just starting to see some moderation towards the end of the third quarter, I have an idea of the current quarter. Let’s see what happens in the third trimester and beyond. Fuel specialties, we haven’t noticed that it went that far in the quarter of the moment, in the quarter of the moment, however, we’re going to start to see it in the third or fourth quarter and it’s the same in the oil fields. So, it’s still pretty complicated for us there, however, we’re doing a great job with our customers, the offering is being created and as you know, we’re going through this thank you to increase stocks through a lot of value increases and we’re going to have to look at that. this continued into the third quarter.
Mike Harrison
IT IS OK. Thanks a lot.
Ian Cleminson
Thank you, Mike.
Operator
We will now move on to our next Array. Wait and our next one comes from jon Tanwanteng’s line of CJS Securities. Your line is open, ask your Array.
Stefanos Christ
Hello. Stefanos Crist is calling Jon, thank you for answering our questions.
patrick williams
Hello Stefanos.
Stefanos Christ
Could you give us a little more detail about the home care industry and how it relates to precisely what you see in customer demand and sentiment and exactly where you see this trend in the future?
patrick williams
Again, as we said, it’s basically in Europe and it’s a call from a small customer to be cutting a little bit. We don’t think it’s long-term, it’s market-oriented. We have placed this corporate well and since it is a smaller component of the company, it is not a big problem. We have the products, the markets there, it’s strictly a necessity right now and it’s not far from Stefano. It’s just a little up.
Stefanos Christ
I’ve eu. Merci. Et just one quick here, what do you see in the M&A pipeline and all the forward-looking goals and maybe a imaginable time in other mergers and acquisitions?
patrick williams
Oui. Je means you see multiples start to retract a bit strictly due to interest rates. I think other people who are now heavily indebted in a worried and potentially recessionary market are looking for things more strategically, which potentially provides us with the opportunity to take anything off the table. We take a look at many offers. We have distanced ourselves from a lot. Some are interested, but I think we are very cautious and lately we are in a volatile market and we just have to be careful. We have more than enough biological expansion for this company to progress and in a controlled way, and so it is now, once we locate that agreement, we are going to let it prevent us, however, we have not discovered this agreement that we are looking for. But I’ll tell you, I think anything can seem in the next 6 to 12 months as our hope.
Stefanos Christ
Super. Thank you very much for answering my questions.
patrick williams
Thank you so
Operator
Merci. No there are additional questions and I would like to speak with our speaker Patrick Williams for closing remarks.
patrick williams
Thank you all for joining us and thank you to all our shareholders, consumers and innospec workers for their interest and support. If you have any additional questions about Innospec or the topics discussed at edArray, please give us a call. to talk about our third quarter 2022 effects in November. Have a wonderful day.