Innospec Inc.

Good day and thank you for standing by. Welcome to the Innospec's second quarter 2026 earnings release conference call and webcast. At this time, all participants are in early mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, please press star 1-1 on your telephone. You will then hear an automated message and your hand is raised. To withdraw your question, please press star 1-1 again. Please note that today's conference is being recorded. I would now like to have the conference over to your speaker, David Jones, General Counsel and Chief Compliance Officer. Please go ahead.

Thank you. Welcome to InnoSpec's second quarter earnings call. This is David Jones, and I'm InnoSpec's General Counsel and Chief Compliance Officer. 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 predictions about future events. These statements are based on current expectations and assumptions that are specific to risk and uncertainties that could cause actual results to differ materially from the anticipated results implied by such foreign-looking statements. The risks and uncertainties are detailed in InnoSpec's filings with the SEC. Please see the SEC site and InnoSpec 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 these items and events had on financial results. With me today from Innspec are Patrick Williams, President and Chief Executive Officer, and Ian Cleminson, Executive Vice President and Chief Financial Officer. And with that, I turn it over to you, Patrick.

Thank you, David. and welcome everyone to Inispec's second quarter 2026 conference call. This was a strong quarter for Inispec with all businesses contributing to double digit sales and operating income growth. Performance Chemicals operating leverage drove a 15% operating income increase over last year. In North Carolina, we continue to prioritize plant repairs and process improvements, which will drive long term benefits. In parallel, we are commercializing new technologies in all end markets and targeting further margin improvement opportunities across the business. We expect these combined efforts to drive further improvement in the second half of 2026. Field Specialties had another strong quarter, delivering revenue and operating income growth with margins in our target range. Volume and price mix improved as the business continued to achieve consistently strong results through a range of economic cycles. While there may be some margin headwind in the sequential quarter because of the lag between pricing and cost inflation, we expect a continued strong performance. Oilfield services operating income in March is approved sequentially and on the prior year driven by recent DRA plant expansion and growing opportunities for this technology in the markets we serve. Performance is below our expectations in our completions and production business where opportunities remain for growth and margin improvement. Furthermore, our Middle East business is positioned for growth as onshore completions activity levels recover. We are confident that these combined efforts will drive further sequential improvements in the second half of 2026. Now I will turn the call over to Ian Cleminson 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 7 in the presentation, the company's total revenues for the second quarter were $491.4 million, a 12% increase from $439.7 million a year ago. Overall gross margin increased by 0.1 percentage points from last year to 28.1%. Adjusted EBITDA for the quarter was 50.1 million compared to 49.1 million last year and net income attributable to Innespec for the quarter was 30.8 million compared to 23.5 million a year ago. Our gap earnings per share were $1.25 including special items, the net effect of which decreased our second quarter earnings by two cents per share. A year ago, were reported gap earnings per share of $0.94, which included the negative impact from special items of $0.32 per share. Excluding special items in both years, our adjusted EPS for the quarter was $1.27 compared to $1.26 a year ago. Turning to slide eight, revenues in performance chemicals for the second quarter were $190.3 million, up 9% from last year's $173.8 million. Volume reductions of 2% were offset by a positive price mix of 8% and a favorable currency impact of 3%. Gross margins of 17.3% decreased 0.2 percentage points compared to 17.5% in the same quarter in 2025. Operating income of $16.4 million increased 15% from $14.3 million last year. Moving on to slide 9, revenues and fuel specialties for the second quarter were $185.7 million, up 12% from the $165.1 million reported a year ago. Volumes were up 7%, with price mix up 3% and a positive currency impact of 2%. Your specialty's gross margins of 36.6% decreased 1.5 percentage points compared to 38.1% in the same quarter last year on a weaker sales mix. Operating income of $36.3 million was up 3% from $35.4 million a year ago. Moving on to slide 10, revenues in old field services for the quarter were $115.4 million, up 14% from the 100.8 million reported a year ago. Gross margins of 32.3% increased 2.7 percentage points from last year's 29.6% on an improved sales mix. Operating income of 8.7 million increased 40% from 6.2 million one year ago. Turn to slide 11. Corporate costs for the quarter were 21.6 million compared to 20.9 million a year ago. The effective tax rate for the quarter was 25% compared to last year's 26%. Moving on to slide 12, cash from operating activities was $7.2 million before capital expenditures of $16.5 million. In the second quarter, we bought back just over 87,000 shares at a cost of $6.4 million. As of June 30th, Innespec had $250.2 million in cash and cash equivalents and no debt. and now I'll take it back over to Patrick for some final comments. Patrick.

Thanks Ian. With our diversified global supply chain and manufacturing footprint, our teams continue to manage through the direct impacts of geopolitical disruption delivering sales, margin and operating income improvements. We remain focused on security of supply and innovative solutions for our customers. We will continue to implement improvements across all our businesses that will position us for further growth and margin improvement. Our short-term expectations are for further operating income growth in performance chemicals and oilfield services in the second half of 2026 and steady performance in fuel specialties. Our strong debt-free balance sheet continues to allow for significant flexibility in the current environment to pursue further organic investment, M&A, dividend growth, and buybacks. Operating cash generation was again positive in the quarter, and our net cash position closed at over $250 million. Our teams are focused on opportunities to improve working capital efficiency, and we expect these actions will support increased operating cash flow in the second half of 2026. This quarter, we continued our record of returning value to shareholders with our semi-annual dividend of $0.92 per share and $6.4 million in share repurchases. Now I will turn the call over to the operator, and Ian and I will take your questions.

Thank you. As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Once again, please press star 1 1 and wait for your name to be announced. to withdraw your question, please press star one, one again. We are now going to proceed with our first question. And the questions come from the line of Mike Harrison from Seaport Research Partners. Please ask your question.

Hi, good morning. First question is on the performance chemicals business. I was hoping you could give us an update on the repair and upgrading process at your facilities. Would you say that that's mostly complete at this point or where do we stand on that?

Mike, I would say it's Patrick. I would say we're probably about 60% of the way through it. We've still got some minor repairs and now it's doing a little more pipe work for more expansion, but we're getting close. I think by the end of Q4, we should be fully repaired and fully optimized at that point.

All right, and then in terms of just what you're seeing in the pricing versus raw material realm on performance chemicals, the price mix there was up 8%. Did that keep pace with raw material cost inflation that you saw in the quarter? And I guess it looks like some of the oleochemicals are coming a little bit lower. Is that something that's helping to maybe provide a little bit of margin benefit

Yeah Mike it's Ian. The team have done a really good job actually with keeping up with the price increases and they've been pretty creative around the edges as well about putting new formulations into customers hands where we've needed to set price action they have and you can see year over year that the margins are pretty comparable and they've obviously improved sequentially over Q1 as well so we are seeing price inflation We're handling it pretty well at the moment, and we continue to expect to be able to handle it, and we'll pass through where we need to. So the markets are pretty choppy at the moment. Prices are moving up and down pretty rapidly, but we've got a good handle on it, and the team are doing well.

All right, and then a similar question on fuel specialties. I think that gross margin number for Q2 came in maybe a little bit better than you had anticipated. But it sounds like maybe you're anticipating some margin pressure sequentially into Q3. Can you just give us a little bit of sense of how you're seeing the raw material flow through and that contractual pricing pass-through mechanism?

Yeah, sure, Mark. You see it again. As you know, in fuels, we have the pricing lag up and down. Fuels is mostly... are all crude derivatives based. So the team again are chasing prices up at the moment. You've seen a little bit of margin compression in Q2. Some of that is pricing, but some of that is also sales mix in the quarter. We're actually quite pleased with what the team have done there. They're on top of it. As we move into Q3, I would expect a little bit more pressure on the gross margins because of the lag, but again, there's nothing here that is really concerning us. It's a well-trodden path. The team are well-versed in what they need to do, and the market is responding correctly to our actions, so we're in good shape. I think as we move through Q3 and into Q4, we're hopeful that if we get stability in prices, we'll start to see some stability in margins.

All right, thanks for that. And then last question for me is just on the oil field business. I was hoping you could give some additional detail on what you're seeing in the drag reducing agent portion of that business. It sounds like you guys have added capacity and you've started to see some some good uptake of that additional capacity. But how much growth are you seeing in that business overall and how much of that is coming in the Middle East as a result of some of the, I guess, crude logistics issues they're facing in the wake of the Iran war?

Yeah, so we added capacity and the majority of that capacity is almost sold out. We added new customers in North America, but again, as you just alluded to, We have shifted a lot to the Middle East, more importantly for the East-West pipeline and other pipelines that go along that corridor. You know, I've always said, and we said it in the last quarter, that where there's chaos, there's opportunity. And we see this as not just a short-term fix. We think that they're going to move more products to that pipeline over time, even if straight over moves are open in the near term. And so, you know, our product is extremely good product and I think that it's been taken very well in the Middle East and we'll continue to ship products as we go. There is another opportunity for us to do another expansion of DRA down the road and that's being discussed as we speak.

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

As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. We are now going to proceed with our next question. And the questions come from the line of David Silver from Freedom Capital Markets. Please ask your question.

Yeah, hi, good morning. Thanks very much. I'll apologize. I think my feed was cutting in and out just a little bit. So apologies if I make you repeat yourself here. I'd like to go back to Mike's question about the work done, you know, with your performance chemicals facilities in the wake of the unplanned outages and the disruptions earlier this year. So, Patrick, you did mention that the work, the discretionary upgrading work should be done by the end of the year. You know, in a qualitative basis, I mean, have you guys kind of thought about what or what kind of benefit should we expect to result from, you know, the project once it's complete? Is it capacity related? Is it efficiency related? What kind of benefits and, you know, if you could ballpark them, that'd be great. Thank you.

Yeah, David. Sure did. The number one priority was to get the plant repairs up and moving so we could provide products to our customers. That was the number one priority on our list. And we've accomplished that. We still have a ways to go. We're still tight. But I think as these efficiencies come on, it will give us more capacity. It'll give us better yield rates and it'll also improve safety, everything along that plant that we needed to improve. It's hard to put a number on yet on what it's going to increase, you know, how much volume it's going to help increase, but it is a pretty good number that we're looking at, you know, probably north of 10% at least moving forward for next year.

10% on capacity, that is. On capacity, yeah. Okay, great. Thank you for that. And I did want to kind of go back to oil field and, you know, maybe just pick your brain, Patrick, for your approach to, you know, investing and taking advantage of some opportunities. So you certainly touched on the DRA opportunity emerging in the Middle East You know, what do you sense, you know, the opportunities are or how you want to be positioned, you know, in the shale basins here? In other words, you know, will production be structurally higher for some period of time because of, you know, the geopolitics, as you mentioned, or, you know, are we still in kind of a phase where the industry is A little more careful with their capex than maybe they've been in the past. But, you know, what are the broader, you know, opportunities in the global oil market beyond, you know, DRAs in the Middle East?

Yeah, I mean, you can follow the rig count and see it hasn't spiked like you thought it would. And we've always said that E&P companies are taking a more disciplined approach now. But you have to remember, you have longer laterals. More stages. So you're getting more volume of oil through well than you have in the past. So there's really not a need to have a large uptick on drilling. But what we're seeing is still a very disciplined approach by E&P companies. And we just have to be prepared with new technologies, which we should be launching here within the next six months that will help us propel in that area, as well as other areas like South America and Mexico. and, you know, we're watching things over in Mexico. We're seeing some things starting to turn and hopefully we'll have some opportunities there over the next six months.

Oh, wow, Mexico. I wasn't expecting that. Okay, interesting. You know, maybe just to go back to fuel specialties, I mean, the revenues were up, you know, double digits. Operating income was up, you know, 3%. So there was some margin effect there. Was that all due to raw material costs or was there kind of a notable mixed effect? And then more broadly, it seems like that segment is on track for another record year. Just wondering if you had any thoughts about that record revenue and operating income. Thank you.

Yeah, let me take that one, David. It's Ian. So as we said previously to Mike, the gross margin compression that we saw year over year, most of that was from sales mix. There was a little bit of pricing in there, but most of it was the mix at the top line. And the business is progressing really nicely, as you said. So at the half year point, is pretty much where we expected it to be. We expect the business in Q3 to be a very similar set of results to what we did in Q2, and then we're into the winter season. So the business is very well set for a very strong second half of the year, and that is built on great technology, great service to the customers, a really dedicated team that's out there executing day in, day out, and we're really pleased with where they've got it. So yeah, they're all well set. It's not easy. but they will drive really hard for a record year.

Okay, and then last question from me and this is kind of a big picture question but, you know, your results were very strong here in absolute terms but I think even in relative terms, you know, you surprised me and I guess the consensus a little bit in terms of your ability to produce and ship, you know, in the wake of the disruptions that you suffered in the first quarter. Maybe just to comment on how you were able to kind of reposition or react so effectively and seemingly not miss a beat in terms of shipments and driving I think across your businesses, you know, several of which, you know, did suffer some mechanical disruptions. So, you know, just broadly speaking, is there a lot of flexibility inherent in your system? And, you know, is there still a lot of flexibility, you know, assuming you're producing at, you know, the 2Q level? Is that something that, you know, incremental growth might have to be addressed through additional, you know, CapEx or other types of resourcing?

No, I think we first have to give credit to the management team and the individuals at the plant. I mean, this has been a very, very difficult process for us to go through. You know, you had the winter storm hit. We found out a lot of weaknesses within the system. We worked night and day, seven days a week to get it fixed to make sure we're not missing load to customers. And that's been very difficult without claiming a force majeure. So we fought our way through that. I think, as I said earlier, the efficiencies that are coming about and coming through now that will hit the fourth quarter is going to give us additional capacity without more CapEx once we spend this original CapEx. So we're in a really good position. I think that you'll see, you know, over the coming quarters, you'll see improvements. We could have had some nice volume improvement in the quarter, but we just couldn't make it. We were at capacity. So I think we will start seeing volume improvements as the quarters come. But it's been a lot of work, David, and I got to give credit to credit due. We put ourselves in this position, but we fought like hell to get out of it. And we're not going to ever go there again. but we're sitting in a good spot. We can see the light at the end of the tunnel and we're very confident moving forward.

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

Thanks, David. Thanks, David.

Thank you. As a reminder to ask a question, please press star 11 and wait for your name to be announced. To withdraw your question, please press star 11 again. We are now going to proceed with our next question. and the questions come from the line of John Tanguantang from CJS Securities. Please ask your question.

Hi, good morning. Thank you for taking my questions and really nice quarter. Good morning, John. Thank you, John. Good morning. I was wondering if you could quantify the impact in Q2 from the repair and upgrade activity. And it sounds like you're taking a little bit longer to get back where you want to be. What do you think you might be leaving on the table heading into Q3 and maybe Q4? Do you make it up on the back end when things are up and running or are those sales gone?

Yeah, let me set that first, John, and then Patrick will come over the top a little bit. As Patrick alluded to on previous questions, we were really supply constrained in Q2. We got as much volume out of North Carolina as we could. There could have been more in there. Our expectation is that broadly Q3 will be very similar to Q2 across performance chemicals that volume the additional volume the additional capacity won't really come on until Q4 at the earliest probably more likely into Q1 next year so I think you're going to see us I don't mean plateaued it's probably the wrong word but I think we're probably operating towards the top end of what we're capable of now so I think Q3 will be very similar Q4 might see a little bit more of an uptick and the rest of you.

We have missed some volume. You know, will we pick some of that back up in Q4, Q1 next year? Yes. But you won't pick it up in Q3.

Okay, great. Thank you. And then I was wondering if you could go into a little bit more detail on just the improved pricing mix in this segment. I think you called out that, you know, you're doing a good job in getting new formulations to customers. But could you go into a little more detail of where exactly you're winning What's driving that and kind of how sustainable that is as you get more capacity online?

Are you asking John about in the future or are you asking about Q2? Both. Both, okay. So, yeah, we did a good job on pricing in Q2 in performance chemicals. The mix was pretty flat year over year. and I think sequentially obviously the winter storm impacts at Q1, so it's not a really good comparison because of the volume interruptions that we had. As we move into Q3, our expectation is that the business will continue to manage pricing, potentially swap out some formulations with customers where we can, but where we can't, we'll take pricing action. I don't think we'll really see the benefit of the improvements that we're making until back part of Q4 early 2027 because we just won't have the capacity, John, to change the sales mix and the profile there. Additionally to that, we're also expecting new products to come online as well, which will help the margin profile. But I think overall, the way we're managing raw materials, you'll see us do the same again in Q3 to what we've done in Q2. That's responsibly manage it through our customers and through our supply chains.

Yeah, just to add a little color to Ian's comments. In all of our businesses, we've had to manage extremely tight timelines on raw materials. You know, there's been force majeure on some raw materials, so we've had to reformulate away. There's been a tightness in the market in general, and timing of shipments has been extremely difficult. So our supply chain, our management team, and all the businesses have done a really good job dealing with not only the inflationary pricing, but obviously the tightness of the market. So we feel confident that we have a handle on it, and I think that we'll just continue to see those general improvements as we move forward.

Great, thank you. And then I think you mentioned earlier that you have some confidence that Mexico might come back later this year. I was wondering if you could just talk about what's going on there and if you can size or time the ramp up of potential return of business there.

Yeah, it's interesting. They've had some public announcements about spending capital in certain areas. Some was on polyethylene, some was on crude, some was on gas plants, petrochemical plants. That's filtering through now to saying that they realize they actually need, now's the time, that the country needs to get more crude out of the system. It's never going to be what it was. I think technology's changing a little bit, but it's going to be a slow process. As we always told you, we're not going to sell products that we're not going to get paid on for six months to a year. And so until that environment changes, we're just going to slow play it. But in saying that there's opportunities, we have had some people come to us and said, we've got opportunities. Here's our payment. It's not large volumes. I don't think you'll see any effect this year. We're not counting on it even for next year. If it comes, it comes. So it's more putting ourselves in a position that when they have to return back to using chemicals, that we're one of their first choice and that's what we're doing. But we are just seeing, we're seeing more activity and having more conversations.

Got it. No, that's helpful. And just to be clear, they're not reaching out to you as opposed to, you know, just waiting for something to happen. Correct. Got it. Thank you. Thank you. Thanks, John.

We have no further questions at this time, so I'll now hand back to you two, Patrick Williams, for closing remarks. Thank you.

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 third quarter 2026 results in November. Have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you.