Innospec Inc.

Good day and thank you for standing by. Welcome to the InnoSpec third quarter 2024 earnings release and conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Jones, General Counsel and Chief Compliance Officer. Please go ahead.

Thank you. This is David Jones. The earnings released for the quarter in this presentation are posted on the company's website. During this call, we will make forward-looking statements, which are projections about future events. These statements are based on expectations and assumptions that are set to risk 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 aspects 10-K, 10-Qs, and other filings with the SEC. Please see the SEC site and NSFAC site for these interrelated documents. In today's presentation, we've also included non-GAAP financial measures. A reconciliation to the most directly comparable GAAP financial measure is contained in the earnings release. The non-GAAP financial measure should not be considered as a substitute for those prepared in a qualitative GAAP. There are included as additional items to aid investor understanding of the company's performance in addition to the impact that these items and events had on financial results. With me today from Minnespec are Patrick Williams, President and Chief Executive Officer, and Ian Clementson, Executive Vice President and Chief Financial Officer. With that, I turn it over to you, Patrick.

Thank you, David, and welcome everyone to InSPEC's third quarter 2024 conference call. 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% 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, oilfield 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 oil field segments, which we expect to drive sequential quarterly growth in 2025. Now I'll turn the call over to Ian Clemson, 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.

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. Overall gross margin decreased by 1.6 percentage points from last year to 28%. 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. 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. A year ago, we reported gap earnings per share of $1.57, which also included the negative impact from special items of 2 cents per share. Excluding special items in both years, our adjusted EPS for the quarter was $1.35 compared to $1.59 a year ago. Turning to slide eight, revenues in performance chemicals for the third quarter were 163.6 million, up 13% from last year's 145.2 million. Acquisition growth of 8% and volume growth of 9% were partly offset by an adverse price mix 4%, due mainly to lower raw material costs flowing through to selling prices. 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. Operating income of £20 million increased 18% over last year. We expect to be able to maintain this level of operating profit in the fourth quarter. 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. 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. Fuel specialties gross margins of 33.6%, were 2.3 percentage points above the same quarter last year because of a favourable sales mix and the easing of raw material pricing. Operating income of £30.9 million was up 12% from £27.6 million a year ago. 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. Gross margins of 28.3% decreased 7.7 percentage points from last year on a weaker sales mix. Operating income of 7.1 million decreased 57% on 16.4 million one year ago. Due to the reduced activity in our production chemical business, we expect operating income in quarter four to continue to run rates slightly below this quarter. 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. 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. For 2025, we expect our tax rate to be 27%. Moving on to slide 12, for the quarter, operating cash flow was $73.5 million before capital expenditures of $11.7 million. As of September 30th, NSBIC have $303.8 million in cash and cash equivalents and no debt. And now I'll turn it back over to Patrick for some final comments.

Thank you. I am pleased with the overall results this quarter, which were generally in line with our expectations. Fuel Specialties and Performance Chemicals both delivered double-digit operating income growth over the prior year, while Oilfield Services was flat with the second quarter. In the fourth quarter, we expect relatively steady sequential results in Performance Chemicals and Oilfield Services and some growth on seasonal demand in Fuel Specialties. In 2025, we believe we are well-positioned for four-year growth in Fuel Specialties and Performance Chemicals with sequential quarter recovery in oilfield services. This was another excellent quarter for cash generation. 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 valued shareholders through dividend growth. This quarter, we increased our semiannual dividend to 79 cents, bringing our folio dividend to $1.55. representing a 10% annual increase. Now I will turn the call over to the operator and he and I will take your questions.

Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To answer your question, please press star one and one again. We will now take the first question. from the line of Mike Harrison from Seaport Research Partners. Please ask your question.

Hi, good morning.

Morning, Mike. Good morning, Mike.

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 revenue did move a little bit higher sequentially I'm just curious, are you guys kind of feeling good about the opportunities that you're seeing outside of Latin America to make up some of this revenue shortfall? And maybe can you give us some details on where you're looking for those opportunities and how you expect them maybe to play out over the next few quarters?

Yeah, Mike, it's Patrick. I think if you look at Q4 and then we look at full year 2025, we don't see really a lot of business running through that Latin American entity quite yet. 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. But what we have done is we've concentrated on not only market improvement, but also business activity in our other businesses, be it DRA, be it U.S. completions, and other areas, including production chemicals. 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. And all the people in Saudi and those offices in our 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 that we've proven ourselves with great products, we've proven ourselves with great services, and we'll continue to do that. And that's where I think you'll see the uplift moving forward in 2025.

All right. And then in fuel specialties, if I kind of look at the, 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?

No, nothing at all, Mike. A little bit of time with costs, perhaps a little bit of bad debt relief. Nothing of any significance whatsoever.

All right, great. And then... 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?

Yeah, so generally across the business, Mike, we're seeing pretty stable raw material pricing right now. A lot of our pricing comes from crude derivatives or natural products. It's pretty stable at the moment. So in fuels, we're seeing some higher gross margins and some stability there. We've caught up on all the pricing there. And in performance chemicals, I beg your pardon, that sort of pass-through is sort of stabilising now. So we're seeing year-over-year 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.

All right. And then the last question for me is just on the guidance. It sounds like you're talking about a seasonal uptick in the fuel specialties business, maybe kind of steady performance or maybe a little bit of sequential improvement in performance chemicals. And then oil field maybe a little bit lower. So is $1.35 that you just reported, 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.

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 may be a tad higher. is right in line.

All right, thanks very much. Thank you, Ron.

Thank you. We will now take the next question. From the line of John Tanbonteng from CJS, please go ahead.

Hi, sorry, I was on mute. Good morning, thank you for taking my questions. I was wondering, 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?

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 U.K., And 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.

Got it. OK. 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?

You know, it's interesting. We're monitoring it as we speak to make sure that the markets are still fluid like they are. 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 in some other areas. 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.

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.

Yeah, I mean, you see the corporate tax benefits. That's going to help everybody. You know, our general view is you hope to have some political stability globally. That's the hope. I think that in general business, things are looking positive pre-election. I think post-election, there should be quite a bit of positivity as well. You know, and I think that whoever gets in there as president, we were hoping that, you know, obviously they bring world stability and world peace. 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.

Great. Thank you. Thank you.

Thank you. We will now take the next question. From the line of David Silver from CL King and Associates, please go ahead.

Yeah. Hi. Thank you. Morning. 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 your Latin American acquisition. And I'm just wondering if you could comment on maybe the overall integration and the role it's playing currently. So in other words, Is that unit producing for local markets purely? Is it part of more of a global network where it's specializing in certain products or formulations and shipping those globally? I think you touched on it earlier, but maybe overall, does this make you more likely to try to find more similar kind of strategic bolt-ons in this area? Thank you.

Yeah, Dave, good question. It was a strategic acquisition to give us manufacturing capabilities in Latin America, especially in country in Brazil. It's fairly diverse in regards to the assets. Over time, we'll be able to make not only oil-filled products on there, but probably fuel specialty products on there as well. So we like the capabilities of the assets. 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 them going into 2025, especially as the agriculture markets come back. So that is very well positioned. And what that does do is as we fully integrate that into our system, we'll look at similar type activities and whether it's China or India or areas of the world like that where we need in-country assets 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.

Okay. And then maybe just to comment on the demand also for performance chemicals, but maybe the demand profile. 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 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, I don't know, causing some adjustments in, in, versus planned demand. But we see the revenue base very close to overtaking your fuel specialty revenues on a run rate basis. Where do you think you are? Have the customers fully engaged in your filling orders for the entire, I don't know, menu of new projects that you anticipated? Or would there still be some incremental demand or customer programs to fill going forward?

Yeah, the hope and I think what we'll see in 2025 is hitting the levels that we were hitting in 2022. 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. I think as you'll see market stabilization, you'll see them moving back up into the higher trends. But it's been a nice rebound. I think we'll continue to see that rebound in 2025. 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 direction. And as long as we get the right price mix, you'll see those margins improve as well.

Okay, if I could just switch over to fuel specialties for a moment. I did want to touch on the margin performance, and I guess I'm looking at EBTA margins here, but the current quarters margin is the highest it's been in quite a while. And I'm just wondering a couple of things, but would that be a reflection of maybe your business mix? um, you know, returning to kind of the, 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, some new business, uh, some new products, uh, you know, getting into the market a little bit more and starting to see the benefits of that. So just maybe a comment on, um, you know, what went into kind of this very strong margin performance in the fuel specialty side. Thank you.

I think it's a mix, David. It's product mix. It's lower raw materials. And there's a conscious effort internally for margin improvement. And so I think combined with all three of those, they had a really strong quarter in margins. You know, You know, I think we have to be cautious moving forward, but we see a similar quarter in Q4 before it maybe trends down a little bit in 2025. But we do see similar type margins in the fourth quarter.

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. You know, just wondering if compared to 90 days, well, 90 days ago when we were talking, I think the situation with your reduced orders was that, you know, your feeling was that the customers can't do without your products forever and that it would hurt, you know, hurt their operations pretty directly. I mean, It's 90 days further on. Any further thinking along those lines? I certainly understand there's a political process or whatever that might be involved, but anything around the edges that you've picked up that maybe indicate how the customer might be proceeding down the road?

Yeah, we have gone through all the product testing processes that was in the market. We know production levels have come off. We know the safety's come off a little bit. We know our product is one of very few products that work in that marketplace. We're well established. We're technically well established. We've got a great partner down there. You know, it's literally a political environment that's out of our control. I think at some point in time, they'll get their hands around it And we'll be there waiting to help them pick up the pieces. But it's definitely something that we're involved in. We're still involved in. You know, we're pretty sure they've probably tried other things that have not worked. So we're just going to sit tight until they need us. And when they need us, we'll be there to help them.

Okay, great. I appreciate all the color. Thank you.

Thank you. I would now like to turn the conference back to Patrick Williams for closing remarks.

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 fourth quarter 2024 results in February. Have a great day.

This concludes today's conference call thank you for participating you may now disconnect.