Innospec Inc. (NASDAQ:IOSP) Q1 2024 Earnings Call Transcript

Innospec Inc. (NASDAQ:IOSP) Q1 2024 Earnings Call Transcript May 10, 2024

Innospec Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to the Innospec's First 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. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, David Jones, General Counsel and Chief Compliance Officer. Please go ahead.

David Jones: Thank you. Welcome to Innospec's First Quarter Earnings Call. The earnings release for the quarter and this presentation are posted on the company's website. During this call, we will make forward-looking statements, which are predictions and other statements about future events. These statements are based on current expectations and assumptions that are subject to risks 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 Innospec's 10-K, 10-Qs and other filings with SEC. Please see the SEC site and Innospec's site for these and related documents. In our discussions today, 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 of these items and events had on financial results. With me today from Innospec are Patrick Williams, President and Chief Executive Officer; and Ian Cleminson, Executive Vice President and Chief Financial Officer. And with that, I'll turn it over to you, Patrick.

Patrick Williams: Thank you, David, and welcome, everyone, to Innospec's first quarter 2024 conference call. I am pleased to report a strong start to 2024. Excellent performance across all our businesses drove double-digit operating income growth and margin improvement. Performance Chemicals delivered on our target for sequential improvement as operating income more than doubled over last year. While customers remain disciplined in their order patterns, volumes have improved in our key end markets. Supported by our strong organic growth and technology pipeline, we are cautiously optimistic that we can maintain this improvement in 2024. In addition, our recent QGP acquisition is performing in line with expectations as was immediately accretive.

Our focus remains on continued progress returning operating income run rates and margins to levels consistent with full year of 2022. Fuel Specialties achieved another steady set of results. Gross and operating margins improved over the prior year and were within our targeted range. Our team has continued to build a strong pipeline of regional product and market growth opportunities in both fuel and non-fuel applications. Oilfield Services achieved operating income growth and margin expansion over the prior year. Softer production chemicals activity in the quarter was more than offset by further improvement in our other segments. In the second quarter, we expect significant headwinds in production chemicals activity. And consequently, operating income will be substantially lower than previous quarters.

We are cautiously optimistic that operating income run rates will return to our targeted $15 million to $20 million per quarter range in the second half of the year. 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?

Ian Cleminson: Thanks, Patrick, and good morning, everyone. Turning to slide 7 in the presentation. The company's total revenues for the first quarter were $500.2 million, a 2% decrease from $509.6 million a year ago. Overall gross margin increased by 2.1 percentage points from last year to 31.1%. Adjusted EBITDA for the quarter was $64 million compared to $52.7 million last year and net income for the quarter was $41.4 million compared to $33.2 million a year ago. Our GAAP earnings per share were $1.65, and including special items, the net effect of which decreased our first quarter earnings by $0.10 per share. A year ago, we reported GAAP earnings per share of $1.33, which included a negative impact from special items of $0.05 per share.

Excluding special items in both years, our adjusted EPS for the quarter was $1.75 compared to $1.38 a year ago. Turning to Slide 8. Revenues in Performance Chemicals for the first quarter were $160.8 million up 6% from last year's $151.4 million. Growth attributable to the QGP acquisition of 6%, volume growth of 13% and positive currency impact of 1% were offset by an adverse price mix of 14%, due mainly to lower raw material costs flowing through to selling prices. Gross margins of 23.4% increased 7.5 percentage points, compared to 15.9% in the same quarter in 2023 benefiting from increased sales and production volumes. Operating income of $21.1 million approximately doubled on last year. Moving on to Slide 9. Revenues in Fuel Specialties for the first quarter were $176.9 million, down 7% from $190.3 million reported a year ago an adverse price/mix of 6% and a 2% reduction in volumes were partially offset by a positive currency impact of 1%.

Gross margins of 34.3% were 4.1 percentage points above the same quarter last year. Operating income of $33.4 million was up 3% from $32.4 million a year ago. Adjusting for the $7.4 million inventory write-off in Brazil, in the prior year, gross margins were 34.1% and operating income was 39.8%. The decrease in adjusted operating income year-on-year was mostly, due to the timing of sales in our avgas business. Moving on to Slide 10. Revenues in Oilfield Services for the quarter were $162.5 million down 3% from $167.9 million in the first quarter last year. Gross margins of 35.3% decreased 4.2 percentage points from last year's 39.5% on a weaker sales mix. Operating income of $16.9 million increased 6% from $15.9 million one year ago. n the second quarter we expect operating income to be significantly lower due to a slowdown in our production chemicals business.

We expect operating income will be in the $7 million to $10 million range. However, we are cautiously optimistic that operating income run rates will return to our $15 million to $20 million per quarter range in the second half of this year. Turning to Slide 11. Corporate costs for the quarter were $20.2 million compared with $17.7 million a year ago, due mainly to the growth and timing of IT expenditure and higher performance-related remuneration. The effective tax rate for the quarter was 25.1% compared to 26.2%, a year ago. Moving on to Slide 12. Free cash generation for the quarter was excellent, with an operating cash inflow of $80.6 million before capital expenditures of $14.3 million. As of March 31st Innospec have $270.1 million in cash and cash equivalents and no debt.

And now I'll turn it back over to Patrick, for some final comments.

Patrick Williams: Thanks, Ian. I am very pleased with the strong performance of all our businesses delivered in the quarter, including the new acquisition. In partnership with our customers we remain well placed for growth through technical innovation and excellent customer service over the medium to long-term. This quarter our Board approved a further 10% increase in our semiannual dividend, to $0.76 per share. With net cash of over $270 million, we continue to deliver on our record of returning value to shareholders while maintaining flexibility for M&A, dividend growth, organic investment and buybacks. Now I'll turn the call over to the operator, Ian and I will take your questions.

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