INNOSPEC INC. Q3 FY2024 earnings call

• Overall, this was a good quarter for Innospec with results broadly in line with expectations. Performance Chemicals and Fuel Specialties delivered double digit operating income growth with margin improvement, while Oilfield Services continued at lower activity levels.
• Performance Chemicals operating income was similar to the first two quarters of 2024, and the target for 2025 remains to return operating income run rates and margins to full-year 2022 levels.
• The company continues to expand its industry leading portfolio of 1,4-dioxane and sulfate-free technologies, with broad mix of multi-year organic opportunities in various end markets.
• Fuel Specialties delivered double-digit operating income growth with improved gross margins within the target range, focusing on cleaner and renewable fuels and lower emissions.
• Oilfield Services continue to be impacted by lower activity in Latin America business, but the team remains focused on growth and margin improvement opportunities in other segments, expecting sequential quarterly growth in 2025.
• This was an excellent quarter for cash generation with over $300 million in net cash on the balance sheet, well positioned to pursue organic investments and complimentary M&A, and increased the semiannual dividend.

Performance Chemicals: Third quarter revenues were $163.6 million, up 13% from last year. Gross margins were 22.1%, increasing 1.2 percentage points compared to the same quarter in 2023. Operating income was $20 million, up 18% over last year. Revenue contribution: approximately 36.9% (163.6/443.4). Fuel Specialties: Third quarter revenues were $165.8 million, down 2% from last year. Gross margins were 33.6%, 2.3 percentage points above the same quarter last year. Operating income was $30.9 million, up 12% from last year. Revenue contribution: approximately 37.4% (165.8/443.4). Oilfield Services: Third quarter revenues were $114 million, down 24% from last year. Gross margins were 28.3%, decreasing 7.7 percentage points from last year. Operating income was $7.1 million, down 57% from last year. Revenue contribution: approximately 25.7% (114/443.4)

• In the fourth quarter, expect relatively steady sequential results in Performance Chemicals and Oilfield Services and some growth on seasonal demand in Fuel Specialties.
• In 2025, believe well positioned for full year growth in Fuel Specialties and Performance Chemicals with sequential core recovery in Oilfield Services.

• Oilfield Services continue to be impacted by lower activity in Latin America business, which is expected to persist through the end of 2024 and into 2025.
• Political and market uncertainties could potentially impact business performance.

Q: Hi, good morning. So I was hoping that we could start out with the Oilfield business. I guess I was a little bit surprised to see that revenue did move a little bit higher sequentially. Just curious, are you guys 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?

A: Good morning, 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 concentrated on not only margin improvement, but also business activity in our other businesses being DRA, being 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 there. We've proven ourselves with great products, we've proven ourselves with great services, and we'll continue to do that, and that's why I think you'll see the uplift moving forward in 2025.

Q: All right. And then, in Fuel Specialties, if I kind of look at the 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 the SG&A line within Fuel Specialties?

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

Q: 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?

A: Yes. 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, that sort of pass through is sort of stabilizing 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.

Q: All right. And then 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 Oilfield maybe a little bit lower. So is the $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.

A: I think Mike is broadly in line. I think you'll see some sequential improvement moving forward in Oilfield, and I think you're spot on the other businesses and probably at $1.35 maybe a tad higher is right in line.

Q: 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?

A: 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. 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.

Q: Okay. 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?

A: 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 Oilfield, potentially some expansion of DRA and some other areas and then 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.

Q: 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? For the stock might be reacting to that today and I'm wondering what your thoughts are?

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

Q: Yes. Hi. Thank you. 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? And 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.

A: Yes, Dave, good question. It's a 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 Oilfield 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 there going into 2025, especially as the agriculture markets come back. So that is very well positioned. And what that does do is we 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 100s of million, but we can control it by spending millions and giving capabilities to all three business units.

Q: 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 a certain amount of new business in mind or customer programs in mind and I know that certainly for a while there, the pandemic or post-pandemic effects kind of were, I don't know, causing some adjustments in versus planned demand. But we see the revenue base very close to where to overtaking your Fuel Specialty revenues on a run rate basis. Just where do you think you are? Have the customers fully engaged? And are you're 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?

A: Yes. The hope and I think what we'll see in 2025 is hitting the levels that we are hitting in 2022. 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 the right mix, the right direction. And as long as we get the right price mix, you'll see those margins improve as well.

Q: 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 EBITDA margins here, but the current quarter's margin is the highest it's been in quite a while and I'm just wondering a couple of things, would that be a reflection of maybe your business mix, returning to kind of 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 new business, some new products getting into the market a little bit more and starting to see the benefits of that? So just maybe a comment on what went into kind of this very strong margin performance in the fuel specialty side? Thank you.

A: 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. I think we have to be cautious moving forward, but we see a similar quarter in Q4 before maybe trends down a little bit in 2025. But we do see similar type margins in the fourth quarter.

Q: Okay, great. That's great. And then just maybe one last one, but I mean, you did touch on the situation in Oilfield with the lower revenue levels. 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 your feeling was that customers can't do without your products forever and that it would 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?

A: Yeah. I mean, we have gone through, all product testing that was in the market. We know production levels have come off. We know the safety has come off a little bit. We know our product is one of a 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. 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. 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.