INNOSPEC INC. Q2 FY2024 earnings call

Management Statement and Operational Highlights

• Performance Chemicals and Fuel Specialties delivered strong double-digit operating income growth and margin improvement.
• Oilfield Services production results declined as expected, with lower production chemical activity persisting.
• Integration of QGP acquisition proceeding to plan.
• Focus on innovation pipeline in Performance Chemicals to maintain growth.
• Fuel Specialties leveraging global footprint and innovation for future growth opportunities.
• Corporate costs decreased, and effective tax rate for full year expected to be 27% due to change in taxable profits geography.
• Strong cash position with $240.2 million in cash and cash equivalents and no debt.

Segment Performance

• Performance Chemicals: Revenues were $160.1 million, up 25% from last year. Gross margin was 22.6%, increasing 5.4 percentage points. Operating income was $21.2 million, up 130%. Contributed significantly to overall growth.
• Fuel Specialties: Revenues were $166.6 million, up 8% from last year. Gross margin was 34.6%, up 5.5 percentage points. Operating income was $30.4 million, up 78%. Drove double-digit operating income growth.
• Oilfield Services: Revenues were $108.3 million, down 45% from last year. Gross margin was 30.6%, down 11.5 percentage points. Operating income was $7.3 million, down 74%. Impacted by lower production chemical activity.

Guidance

• Expect to maintain operating profit level in Performance Chemicals for the second half of 2024.
• Oilfield Services operating income in Q3 expected to continue at a run rate similar to the current quarter.
• Full year tax rate anticipated to be 27% due to change in geography of taxable profits.
• Pursuing organic investments, complementary M&A, and dividend growth while maintaining a strong cash position.

Risks

• Oilfield Services production chemical activity below expectations, with lower levels persisting through the third quarter and possibly the remainder of the year.
• Political issues in the South America/Mexico region impacting Oilfield Services activity, leading to lower orders and inventory dilution.
• Uncertain economic conditions potentially affecting demand across segments.

Question and Answer

Q: So I would like to just start out with the Oilfield Services and the decline on the production chemical side. I was wondering if you could maybe just kind of outline it.

A: Yes, sure, David. It's in our South America, Mexico region, so it's not in the U.S. and it's not in Saudi. It's a customer who has been using dilution on to bring inventory levels down. It's been a very political situation due to election years.

Q: I would like to just switch over to the Fuel Specialties segment for a moment. So the gross margin, I guess, in that segment is at the highest level it's been at, I guess, in a pretty long time since the pandemic began, I guess and should we read the absolute level of gross margin and the pickup? Is this a sign that maybe your business mix, sales mix is getting back to your desired target levels? Or might there be something else going on?

A: We're really pleased with the performance that the Fuel Specialties team have put together in the quarter. They've been focused on pricing. And as you know, in Fuel Specialties, pricing can have a little lag to it as raw material prices go up and down. And we've really worked hard with our customers to keep the tight control over that. And that's part of the reason why we're seeing good gross margins in this quarter. I think the other side of it is that we did have the benefit of a positive sales mix this quarter compared to the comparable quarter. But I do think we're in that range, we're towards the top end of the range that we normally quote. And our feeling is that as we go through the rest of the year, there's no reason why we should step outside that range and certainly step away from the top end of the range. So we feel pretty good about where we're at right now.

Q: And then just one, just 1 to follow up on Fuel Specialties, but in your -- in the press release, I think, Patrick, you highlighted within Fuel Specialties, fuel and nonfuel opportunities. I was wondering if you could just elaborate a little bit more on the nonfuel. Is this the stationary power opportunities? Or might there be something beyond that a little bit...

A: It's a little bit of everything, David. We have some products within that portfolio that treat applications that are outside of fuel. And so some of those applications are coming through this quarter, and we expect those to grow throughout the year. So as you're aware, a lot of the technologies we made based around surface active technology have other applications. And we just tapped into another market that's outside the fuel market.

Q: I was wondering if you could go a little bit more into detail with the Oilfield situation. What is the political issue at hand, number one? And number two, I recall that there is a technological change or switch over also that was involved. Could you elaborate on both of those, if you could, just so we could understand what really is driving this?

A: Yes, as much as we can. We obviously get some information, some limited information depending on who we're talking to. But it's election year. There -- they had numerous of our products sitting in inventory. They have not reordered since probably in the middle of first quarter. They've been diluting inventories and trying to at least three products that go into, a, the pipeline or downhole or offshore. We know they're critically low. We are just waiting and hoping to have some answers and some orders here in the near term. I don't see it until probably fourth quarter, but it's highly political, John. That's the problem. We only get as much information as they want to give us and we do know that the application is starving for product. We know our product works. It's proven. It's been stated in the public. That's probably as much information as I can give you. I mean, -- as we stated, next quarter, we'll give you more color, but I just don't see how they can't start coming back with our technology in the situation that they're in right now.

Q: Secondly, I was just wondering if you could just talk about the different buckets of demand in Performance Chemicals and what you're seeing just in terms of trends or strength and weaknesses between personal care and industrials, ag, some of the other stuff, the 1 creating. If you could give us some color on that, that would be helpful.

A: Yes. We've seen strong demand coming back in Personal Care as we expected. And that's -- that's why we've said that we see very similar quarters moving forward and trending upward. So we're very happy there. Agriculture, quite frankly, starting to come back and the industrial markets are pretty flat. But we're happy with that business. I think we're on a nice trajectory of return. And people are worried about are we running from inflation to an immediate recession? Is the freight train going to hit everybody all at once. We're not seeing that yet, John. We're still seeing a pretty strong quarter of order patterns in Q3 and even moving into Q4. So we're pretty confident in that business is pretty optimistic.

Q: And then just regarding the $240 million cash that you have, I mean, any more urgency in sense to put that to work, especially if rates are coming down, you're getting less interest income on.

A: Yes. I mean I think that a lot of these companies right now are looking at their assets and justification of assets. So we're still looking at a lot of M&A opportunities. We do have a lot of organic growth opportunities as well, which is, obviously, as I always say, you don't have to pay a multiple on organic growth. So that's on our radar, increasing the dividend 10%. We've been doing that consistently. And again, as you start looking at our share price, being opportunistic on buybacks. That's not off the radar. We have a strong business and as you know, we always come back fighting like hell and increase EPS and sales as we always do and we will do that. So if our share price is down, we're going to potentially be opportunistic in buybacks. So hasn't really changed on what we've been saying from day 1, I think that we're going to stay steady as we always have.