Innospec Inc.

Thank you for standing by. Welcome to the InnoSpecs first quarter 2025 earnings release and conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be the question and answer session. To ask a question during the session, you need to press star 1 1 on your telephone keypad. You will then hear an automatic message advising your hand is raised. To withdraw a question, please press star 1 1 again. Please be advised that this conference has been recorded. I would now like to hand the conference over to our first speaker today, David Jones, General Counsel and Chief Compliance Officer. Please go ahead.

Thank you. Welcome to NSFAC's first quarter earnings call. 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 predictions and projections about future advances. These statements are based on current expectations and assumptions that are subject to risk and uncertainties that could cause actual results to differ materially from anticipated results implied by FIT's forward-looking statements. The risks and uncertainties are detailed in INSPEC's 10-K, 10-Qs, and other filings with the SEC. Please see the SEC site and INSPEC site for these and related 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 measures should not be considered as a substitute for or superior to those prepared in accordance with GAAP. They 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 Innispec are Patrick Williams, President and Chief Executive Officer, and Ian Clementson, Executive Vice President and Chief Financial Officer. And with that, turn it over to you, Patrick.

Thank you, David, and welcome everyone to InSPEC's first quarter 2025 conference call. This was a good quarter for InSPEC with overall results in line with our expectations. Against an increasingly volatile economic backdrop, our balanced portfolio benefited from strong growth in fuel specialties, which offset lower results in performance chemicals and oil field services. Performance Chemicals began the quarter with good momentum, similar to other companies' activity moderated due to April 2 tariff announcements. While the majority of our products go into consumer staples, we believe that customers will remain conservative and manage inventory levels closely in the short term, while uncertainty surrounding trade policy remains. While the second quarter started broadly similar to the first, market conditions are extremely volatile. We currently expect these conditions to be a headwind against our stated 2025 target for sequential improvement in operating income. Despite these near-term challenges, our pipeline continues to develop in all-in markets, and we do not see any change in our customers' long-term drive towards technologies which deliver superior performance and value. Field specialties had an excellent quarter. Operating income grew by double digits and margins expanded. The team continued to make progress on margin improvement with all regions contributing to the strong performance. While there is significant uncertainty in the current market, global fuel demand has historically been relatively steady through economic cycles. In addition, our fuel specialty's business has been a consistent high-margin, strong cash generator. Against this backdrop, we remain focused on delivering full-year operating income growth and margin improvements. Oilfield services operating income margins were below our target and expectations. Operating income declined on a sequential basis on lower-than-expected activity. As expected, there were no sales in Latin America, and any potential recovery is likely delayed due to the indirect impact of ongoing trade policy negotiations. These declines were partially offset by continued growth and strong performance in our Middle East and our DRA business. We remain on track to bring our previously announced expansion for our market-leading proprietary DRA technology online in the fourth quarter. In addition to our top-line initiatives, we have begun a series of actions to align our U.S. cost structure with the market. We expect these initiatives to drive sequential operating income and margin improvement in the coming quarters and leave us well-positioned for profitable growth. Now I will turn the call over to Ian Clementson, 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?

Thanks, Patrick. Turning to slide seven in the presentation, companies' total revenues for the first quarter were $440.8 million, a 12% decrease from $500.2 million a year ago. Overall gross margin decreased by 2.7 percentage points from last year to 28.4%. Adjusted EBITDA for the quarter was 54 million compared to 64 million last year, and net income for the quarter was 32.8 million compared to 41.4 million a year ago. Our gap earnings per share were $1.31, including special items, the net effect of which decreased our first quarter earnings by 11 cents per share. A year ago, we reported gap earnings per share of $1.65, which included the negative impact from special items of 10 cents per share. Excluding special items in both years, our adjusted EPS for the quarter was $1.42 compared to $1.75 a year ago. Turning to slide eight, revenues in performance chemicals for the first quarter were 168.4 million, up 5% from last year's 160.8 million. Volume growth of 5% and a positive price mix of 3% were offset by a negative currency impact of 3%. Gross margins of 21% decreased 2.4 percentage points compared to 23.4% in the same quarter in 2024 due to a weaker sales mix and lower sales pricing. Operating income of 19.8 million decreased 6% on 21.1 million last year. Moving on to slide nine, revenues in fuel specialties for the first quarter were 170.3 million, down 4% from the 176.9 million reported a year ago. with a 2% adverse price mix and a negative currency impact of 2%. Fuel Specialty's gross margins of 35.7% were 1.4 percentage points above the same quarter last year, benefiting from a stronger sales mix and stable pricing. Operating income of £36.9 million was up 10% from £33.4 million a year ago. Moving on to slide 10, revenues in oilfield services for the quarter were 102.1 million, down 37% from 162.5 million in the first quarter last year, driven mostly by a lack of Latin American business. Gross margins of 28.4% decreased 6.9 percentage points from last year's 35.3% on a weaker sales mix. Operating income of 4.1 million, decreased 76% from 16.9 million one year ago. It is now over a year since we made sales to our major Latin America customer. From Q2 onwards, our quarterly results will be directly comparable and not show the sharp decreases we have seen year over year from this one piece of business. Turning to slide 11, corporate costs for the quarter were 17.7 million compared with 20.2 million a year ago, driven by lower personnel-related costs. The effective tax rate for the quarter was 26.1% compared to 25.1% a year ago. Moving on to slide 12, cash from operating activities was 28.3 million before capital expenditures of 15.5 million. In the first quarter, we bought back 34,100 shares at a cost of $3.3 million. As of March 31st, Inispec had $299.8 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, Ian. With our diversified global supply chain and manufacturing locations, we believe that we are well positioned to manage the direct impacts of the global tariffs. Despite any near-term volatility, we remain focused on our continued commitment to security of supply, innovation, and world-class customer service. We will continue to implement improvements across all our businesses that will position us for growth and margin expansion as market conditions recover. Our strong debt-free balance sheet allows for significant flexibility in the current environment to pursue further M&A dividend growth, organic investment, and buybacks. Cash generation was again positive this quarter, and our net cash position increased to almost 300 million after purchasing 34,100 shares at a cost of 3.3 million. In addition, this quarter our board approved a further 10% increase in our semiannual dividend to 84 cents per share, continuing our record of returning value to shareholders. Now I will turn the call over to the operator, and he and I will take your questions.

Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star 1 1 on your telephone keypad and wait for your name to be announced. To withdraw a question, please press star 1 1 again. Please stand by while we'll compile the Q&A or studies. We'll take a few moments. And now we're going to take our first question. And it comes from the line of Mike Harrison from Seaport Research Partners. Your line is open. Please ask your question.

Hi, good morning. Morning, Mike.

Morning, Mike. I was hoping that you could give us maybe a little bit more detail on how you guys are looking at the direct impact of tariffs. Any color that you can provide on what tariffs could mean to your input costs And if you could also give us any detail on portions of your business where you're maybe exporting out of the U.S. and could see some of your products affected by tariffs or bringing product into the U.S., I guess.

Yeah, Mike, I'll let Ian start with that question. I'm sure I have some additional information to add.

Sure. So, Mike, you know, like... Like many other companies, we're monitoring the situation. It changes daily, so it's not an easy backdrop to Planet Games. But our supply chains are really well positioned to source and manufacture across the different regions. We have various optionality there which we can implement. So we're monitoring tariffs, and a lot of that is really an extension of the supply chain and logistics problems that we've seen over the last number of years, including during the pandemic. So as more details emerge, we'll position ourselves accordingly. What we're not going to do is make knee-jerk reactions, change manufacturing, change supply chain until we're absolutely certain of the background position. In terms of the general impacts, they're not that high. Our trade with China, both in terms of raw materials and finished products, is pretty low. We do have a lot of trade from Europe into the US and from the US into Europe. So each of the businesses slightly differently impacting. We believe that in performance chemicals, the main impact will not be economic in terms of the impact of tariffs. It'll actually be on the consumer and the customer caution that we've seen in the first quarter. We think that'll be the main headwind. But that doesn't change our focus on the R&D. and the investment in the technologies that we've got. And we don't think that changes any direction from our customers. I think in fuel specialties, again, that's a business that is regionally based. I think we can handle all the different dynamics there. And as we've moved through different economic cycles with our business, it tends to be a fairly stable business. So we don't expect there to be any financial impacts or any economic headwinds in that business. And I think in oil field, our main concern is with Mexico and the difficult negotiations that are going on there. That's likely to delay any resumption of the Mexican business, which we lost just over a year ago. So there's a lot of moving parts across all our business, but most of it we think we can manage. And as long as we've got a firm and solid backdrop, we'll deal with what's in front of us.

Yeah, I think, Mike, that Ian covered it very, very well. You know, I think the key here is that you don't panic in markets like this. It'll work itself out. As Ian alluded to, we don't have a lot of imports or exports going from China and or India. I think that the positive is, too, is we have flexible assets. So if and when we need to turn those assets a different direction, we can do that. So we are in a strong position there. And I And I think another thing, a little bit of color to that, too, is, you know, Ian alluded to the consumer. It's interesting watching what's going on, because in Q1, you know, if you look at January and a half of February, and let's call it in performance chemicals, great order pattern. Everybody was excited. And then all of a sudden, all the tariff talk hit and things slowed down. We are starting to see pickup again, starting in Q2. So it's going to be interesting to see how this plays out over the next 90 days. and see where everything falls out with all the tariff conversations.

All right. That's very helpful.

I wanted to dig in on the performance chemicals business. You just mentioned that you've seen kind of a, you know, strength to start the year and then a sharp weakening and now some improvements. We tend to think of that as being a pretty resilient business selling into mostly personal care and some household applications. So I'm curious, do you think what you're seeing there in those trends is related more to what your customers are doing to manage inventory levels and production? Or is this more of an end consumer trade down or weakening? And then I guess the second piece of that is just your commentary around the margin trajectory there. You know, is that really just having to do with volume leverage? Or, you know, are there changes in mix or price-cost pressures or other factors that are playing into your more cautious view on the margin in performance chemicals?

Yeah, I'll start with the first part of your question. I think it was a little bit of both. I think when, you know, for instance, when COVID hit and you saw a lot of our customers stuck with inventory, didn't know what the consumer was going to do, there was complete panic in the marketplace. This is not like COVID from that standpoint. This was a reset button where the customer said, our customers said, what's the consumer going to do, right? And until we know that, we're just going to pull back a little bit. I think that's starting to filter its way out. I do think that this agreement with the UK is a start of other agreements to come, I think, especially in Europe. So I think that will be a net positive over the short and long term. But we're starting to see the consumer settle down a little bit. You know, there's still the big concern around inflationary pricing. There's still big concerns about a global recession, but we haven't seen the panic button, and we are starting to see that increase, which is a positive. And our customers, who are directly related to the consumer, are starting to buy again. So that's a positive. We won't really be able to kind of give you more guidance than that until we see how these next couple of months go due to the volatility in the marketplace. So we'll just sit tight and kind of give you guys as much feedback as we can. In regards to pricing, it was mixed. I also think, and there's a plan going on internally in all of our businesses on margin improvement and cost improvement. And so we're doing that across all three of our business units. But a lot of what happened is you had good volume, but you didn't have the best mix. And I think that that's going to work itself out over time as well. So I do think we're sitting in a good position. I think there is...

just a wait and see mode to see kind of what happens over the next 90 days. All right.

And then you specifically mentioned some cost actions that you're taking within the oil field business. And I was just curious if you could, you know, give some additional detail on what you're doing there.

Yeah, I mean, it's overall it's it's consolidation of assets. It's personnel. its efficiencies, its raw material costing. There's a lot of things that we're doing that we've been working on. It's ongoing, but we should start seeing those benefits at least in Q3 and Q4. But these are cost initiatives that have been going on for quite some time, and we have really put the pressure on to get these moving. It's an interesting dynamics in the market right now with crude prices where they are. and what's going on globally in OPEC increasing their production. You know, the good thing is about that business is it's well diversified now. I think if we get some things right in the U.S., there's a lot of upside. And obviously, if our Latin America customer comes back, which we do think, we still think they will at some time, that's going to be a net positive overall when that happens.

All right.

The last question for me is just if you can walk through maybe how we should be thinking about earnings cadence for the rest of the year. I'm curious, you know, when I look at overall operating income, is Q2 expected to be sequentially lower and then maybe we get back to sequential improvement for the rest of the year? I know it's kind of a you know, limited visibility environment, but any color that you could provide on the outlook would be very helpful. Thanks.

Mike, let me take that one. And I'll go business by business because it's probably a little bit easier. We think field specialties will be, you know, right on target for the full year. We don't think it'll be far off the expectations that that you set and the other analysts have set for the full year. Obviously, the second quarter and the third quarter do tend to dip down a little bit. That's seasonally driven. But we don't see any impacts from tariffs and we don't see any economic impacts blowing that business offline. So I think in the second quarter in fuels, you'll see the revenues come off a little bit and you'll see the operating income come down a little bit. But that is all part of the seasonality. And I think The way you've modelled it, Mike, is the way we see it for the second quarter. I think in performance chemicals, I think what we'll probably see is a second quarter very similar to the first quarter in terms of sales, gross margins and operating income. And I think for the rest of the year, that's the sort of level that we expect the business will continue to operate at, absent any real fundamental change in the backdrop. I think certainly for the second and third quarter, that's what we expect. If things shake out more positively, we'd expect that business to improve its margins and improve its operating income. But for now, I think Q1 is reflective of what we'll see in the second quarter. And then for oilfield, as we've talked about on the call already, there's a lot of initiatives going on, not just to cut costs and not just to reorganise internally, but to also grow that business. And we've got some really strong areas of growth in the Middle East and DRA and other parts of the business that we want to continue to push hard. But we do need to right-size ourselves in other places. So our expectation for the second quarter is something similar, if not slightly better than the first quarter. The third quarter, again, should be sequentially improved. And then hopefully the fourth quarter will improve again. So from here on in, we expect to see some very slight improvement in our oilfield business. We expect performance chemicals to be pretty similar to Q1, and we expect our upfields business to be absolutely on target for the full year.

All right, sounds good. Thank you very much.

Thank you.

Now we're going to take our next question. And the question comes from the line of John Tanvanteng from CJ Securities. Your line is open. Please ask your question.

hi thank you for taking my questions i was wondering if you could dig a little bit deeper into your expectation for um you know fuel specialties being relatively unaffected just because i've seen a couple of forecasts that are suggesting that that um fuel volumes and pricing are going to decline um you know as we see these ships come in with you know half loads and and trucking you know to follow that uh just any thoughts on on how those two reconcile if you don't believe them or if it's just too small of a volume to matter and in a global context any help there would be appreciated

Yeah, John, I think in the global context, if you look historically at fuel specialties, whether it's recessionary environment, inflationary environment, it's always been historically a very stable business, not only from a cash flow, but from a revenue and operating income standpoint. We don't see, you know, there's puts and takes in that business that will maybe see some negative on fuels, but a positive on the other side. So we just don't see it. You know, our order patterns don't show it. Our customer communication is telling us otherwise. And because of the resiliency of that business, as Ian alluded to, we see a strong year for that business moving forward.

Okay, great. Thank you. And then, Ian, if you could more specifically quantify what's moving between Europe and the U.S., you know, either one way or the other, just to help us

understand the exposures on a tariff perspective and if you have a number for china that that would be helpful too yeah i'm not going to give you specific numbers john but what i can say is it's pretty immaterial across the group very very low on china both ways we sell very little into china and we import very little raw materials directly into the us so we don't see a problem there um Trade between the US and Europe and Europe and the US, a lot of that can be into company. A lot of it can be services, which so far exempt from the tariffs. So that was where we will see some impacts. But this is where we've got the most flexibility, where we can move our manufacturing assets and we can flex what we want to do and we can flex the supply chain somewhat. So it's not something that we're ignoring. It's not something that we're panicking about, but we have options. But we're not talking hundreds of millions of dollars here, John. We're talking very manageable amounts that we feel that we can navigate our way through.

Okay, great. Thank you. And then lastly, you mentioned that you saw a little bit of a pickup in the trends in performance chemicals in this quarter, I guess, as negotiations have gone and people have maybe assume the tariffs won't be as bad. I'm wondering if you've seen the same pick up in oil field or the expectation for, I guess, sequential improvement is more of your internal efforts than maybe overall demand.

Yeah, I think overall in oil field, a lot of it's going to be internal efforts. As we alluded to in our previous conversations, that we're hoping to see that Latin American business come back. We've expanded more into the Middle East. We're expanding our DRA capacity, which is going to be beneficial to that business. And we're streamlining things in the U.S., which needs to be done. You know, a lot of the pullback on crude is, yes, you had OPEC add some barrels to the market. But more importantly, as you said earlier, John, is that people were discussing, is there going to be a slowdown? Is the consumer going to slow down driving? Things of that nature. The fear is starting to subside. And so I do think that you're going to see some stabilization. I think if you look at crude over the last couple of days, it's gone up. And I think, you know, as long as we're not seeing a complete crash in crude prices, oilfield service is going to be okay.

Okay, great. Thank you.

Thank you.

Thank you.

Dear participants, as a reminder, if you wish to ask a question, please press star 1-1 on your telephone keypad. And now we're going to take our next question. And it comes from the line of David Silver from CL King and Associates. Your line is open. Please ask your question.

Yeah, hi. Good morning. Thank you. Good morning, David. Hey, good morning. Yes, good morning. So I have a question, I guess, more focused on your R&D efforts and collaborations in particular with key customers. So kind of projects that are due to develop over the next year or so, let's just say year or more. But with all the tariff uncertainty that you've highlighted, I'm trying to draw maybe a contrast between how your customers are reacting near term versus maybe projects and collaborations with a longer term. timetable, let's say, to play out. So I think your R&D spend this quarter was an all time high. And, you know, I was just wondering if you could maybe give us a sense of how your collaboration partners on product development and our, you know, just longer term R&D are reacting in the current environment. In other words, is there any pause Are they rethinking maybe the supply chain or the logistics shifting timetables? Just what would you say has been the feedback from your major customers that you're working on this kind of somewhat over the horizon projects? Thank you.

Yeah, David, we really haven't seen any change in the mindset across all three of our business units. You know, if you look at our R&D that we do joint collaboration with, there are specified projects for specified outcomes or performance. And then you have our disruptive technology that looks at what's over the next five to ten years, what's that horizon look like, what's driving regulatory environment, what type of performance characteristics we look for, what's completely game-changing. So they're really two different sectors. But when you look at our actual customers that we do joint collaboration projects across all three business units, there hasn't been a change in mindset. Whether that's, as I said earlier, whether it's regulatory driven or performance driven, there hasn't been a mindset change whatsoever. So that has not slowed down. You know, I think in some instances, quite frankly, it's probably picked up because they want to see something new to introduce to the market. So it's actually a positive at some points in these times when you do see a little bit of increase in R&D because people are starting to look at things differently, which is typically beneficial to us.

Okay, great. Thank you for that. My next question would be just maybe to drill down a tiny bit on the fuel specialties quarter. So, you know, revenue was down. You said price mix was down a bit. but margins and operating income, you know, operating income was up double digits. And I'm just wondering if you could highlight maybe within your portfolio there or your different product lines where you think the greatest improvement was experienced this quarter. So I'm kind of wondering, but you know, is jet fuel now, has it been restored to its traditional, you know, share of your overall fuel specialties business? Also wondering, you know, with another company I follow, they're noting kind of a decent adoption of the GDI engines in certain regions, and just wondering if that is playing into some of the improved results on the margin line this quarter. Thank you.

Sure. I'll let Ian take the front portion. Ian, I'll add to your comments.

Sure. So, yeah, we're really pleased with the fuel specialties business this quarter, David. And what we've seen is really good margin performance across all three regions in EMEA, the Americas, and Asia Pacific. So it's not centered on any one region. The sales mix was certainly more favorable to us this quarter year over year. But what we're seeing is, you know, good momentum across all product lines. And we're really pleased with that. You know, there's some new business coming through. Patrick talked a little bit earlier about how we'll win some business and we'll lose some. We're starting to see some GDI business coming through now, which is nice sized and a really good start for us. So we've got a lot of expectations for this business to maintain the momentum through the remainder of the year, and the team have done a great job, and they're well positioned to execute against that.

No further comments, David, from me.

That's okay. Very good. One other question would be kind of on the capital deployment, I guess, side of things, but... You did get a $50 million authorization for share repurchase. You did mention the $3.3 million of buybacks this quarter, but I think looking at the cash flow statement, there was even a little bit more activity than that. Just big picture 2025 as a whole, is that buyback... authorization or flexibility, is that likely to be used just to offset options-related issuance, or might you say you're thinking of being a little more opportunistic in the current environment? Thank you.

Yeah, good question. I think it's the second part of your answer. We're looking to be a little more opportunistic in this market. We've been continuing to buy back. We'll continue to buy back where we're sitting today. I think it's healthy for us. You know, when you talk about overall capital structure, we have the cash in place to do multiple things, continue to grow our business organically, to look at M&A, to increase our dividend, which we just did, and to continue our buybacks. So we're in a good position from a balance sheet standpoint. standpoint, and I think that we're well balanced in what we're trying to accomplish. We just want to make sure that we've got some firepower for M&A if the right one comes along. There's still a little bit, and I'm sure the question is going to come, there's still a little bit of a disconnect between what the seller thinks is value versus what the buyer is willing to pay. But we are seeing, you know, there is deal slowdown. but there are deals on the market that could potentially be a really good pickup for us if we can get it at the right price. But our balance sheet really gives us the flexibility to do all of those.

Got it. Okay, great. That's it for me. Thank you very much. Thanks, Dan.

Thank you.

Dear speakers, I don't have further questions for today. I would now like to hand the conference over to Patrick Williams for any closing remarks.

Thank you all for joining us today, and thanks to all our shareholders, customers, and InSpec employees for your interest and support. If you have any further questions about InSpec or matters discussed today, please give us a call. We look forward to meeting up with you again to discuss our second quarter 2025 results in August. Have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect. Have a nice day.