Innospec Inc. (NASDAQ:IOSP) Q4 2023 Earnings Call Transcript

Innospec Inc. (NASDAQ:IOSP) Q4 2023 Earnings Call Transcript February 14, 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 Fourth Quarter 2023 Earnings Release and Conference Call Webcast. [Operator Instructions]. Please note that today’s conference is being recorded. I would now like to hand the conference over to your first speaker, Mr. David Jones, General Counsel and Compliance Officer. Please go ahead, sir.

David Jones: Thank you. Welcome to Innospec’s fourth quarter earnings call. This is David Jones, I’m Innospec’s General Counsel and Chief Compliance Officer. 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, projections 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-Q and other filings with the SEC. Please see the SEC site and Innospec’s 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 compared 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 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 fourth quarter and full-year 2023 conference call. I am pleased with another excellent quarter for Innospec. Performance Chemicals and Fuel Specialties delivered improved margins and double-digit operating income growth over the fourth quarter last year. While oilfield services maintained a strong performance. In December, we completed the acquisition of QGP Quimica. This acquisition aligns with our previously stated M&A goals to further strengthen our Performance Chemicals segment and add strategic manufacturing in South America. QGP brings meaningful capabilities that complement many of the end markets we serve, including agriculture, Personal Care, Home Care, Industrial, Construction and Mining.

In addition, there is significant manufacturing flexibility for future organic expansion. We expect this transaction to be immediately accretive and approximately $0.08 of EPS in 2024. In Performance Chemicals, operating income in the quarter grew by double digits over the prior year and margins improved. Our focus remains on returning operating income, and run rate and margins to levels consistent with the full year 2022. While the economic environment remains a challenge, we are making progress against that objective. On a sequential basis, Performance Chemicals delivered its second consecutive quarter of operating income growth and margin improvement. We continue to have strong technology pipeline and organic growth opportunities in all end markets.

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Q&A Session

In fuel specialties, operating income grew by double-digit over the same quarter last year and gross margins were within our target range of 32% to 35%. Excluding Brazil, inventory charges incurred in the first half of 2023, full-year operating income grew by 3% and operating margins improved to 18%. We will continue to focus on operating margin improvement. In oilfield services, as expected, activity levels in the quarter moderated compared to last year but remained strong. For the full year, operating income approximately doubled and operating margins expanded above 11%. While we expect production chemicals activity to remain at moderate levels in the coming quarters, we continue to see opportunities for sales growth and margin improvement in all segments and geographies for 2024.

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 the questions. Ian?

Ian Cleminson : Thanks, Patrick. Turning to Slide 7 in the presentation. The company’s total revenues for the fourth quarter were $494.7 million a 3% decrease from $510.7 million a year ago. Overall gross margin increased by 1.8 percentage points from last year to 31.5%. EBITDA for the quarter was $54 million compared to $54.3 million last year. And net income for the quarter was $37.8 million compared to $25.5 million a year ago. Our GAAP earnings per share were $1.51 including special items, the net effect of which decreased our fourth quarter earnings by $0.33 per share. A year ago, we reported GAAP earnings per share of $1.02 which included a negative impact from special items of $0.18 per share. Excluding special items in both years, our adjusted EPS for the quarter was $1.84 compared to $1.20 a year ago.

For the full year, total revenues of $1.95 billion decreased 1% from $1.96 billion in 2022. EBITDA for the year was $210.6 million compared to $225.4 million in 2022, our net income was $139.1 million compared to $133 million a year ago. Our full-year GAAP earnings per share were $5.56 including special items, which decreased our full-year earnings by $0.53 per share. In 2022, we reported GAAP earnings of $5.32 per share, which include the negative impact from special items of $0.072. Excluding special items in both years, our adjusted EPS for the year with $6.09 compared to $6.04 a year ago. Turning to Slide 8. Revenues in Performance Chemicals for the fourth quarter were $137.2 million down 5% from last year’s $143.9 million. A negative price mix of 14% was offset by higher volumes of 6% and a positive currency impact of 3%.

Gross margins of 21.3% were up 2.9 percentage points from last year. Operating income increased 14% from last year to $18 million. For the full year, revenues of $561.6 million were down 12% from last year’s $639.7 million and operating income decreased by 43% to $54.5 million. Moving on to Slide 9, revenues in field specialties for the fourth quarter were $182.1 million. 1% lower than the $183.3 million reported a year ago. Volumes were flat and a negative price mix of 4% was offset by a positive currency impact of 3%. Fuel specialties gross margins of 32.9%, improved by 5.1 percentage points from 27.8% last year. Operating income increased 22% from last year to $32.6 million. For the full year revenues were down 5% to $695.9 million and operating income declined 10% to $109.7 million.

Adjusting for the impact of nonrecurring Brazil inventory charges in the first half of 2023, operating income grew by 3% to $125.1 million. Moving on to Slide 10. Revenues in oilfield services for the quarter were $175.4 million down 4% from $183.5 million in the fourth quarter last year. Gross margins of 38% were down 2.4 percentage points from last year’s 40.4% and operating income of $18.3 million was down 11% from $20.5 million a year ago. For the full year, revenues of $691.3 million were up 16% from last year’s $593.8 million and operating income increased 88% to $78.6 million. Turning to Slide 11. Corporate costs of $24.4 million increased by $7.9 million from last year driven mainly by additional remediation charges and acquisition-related costs.

The full-year adjusted effective tax rate was 23% compared to 27% last year. The decrease is primarily a consequence of having operations outside of the U.S., where they are exposed to foreign currency fluctuations together with the change in profile of our taxable profits by territory year-on-year. For 2024, we expect the full-year effective tax rate to be around 25%. Moving on to Slide 12. This was an excellent quarter for cash with cash generated from operations of $72.4 million before capital expenditures of $21.1 million. In the quarter, we paid the previously announced semiannual dividend of $0.72 per common share. This brought the total dividend for the full year to $1.41 per share, a 10% increase over 2022. For the full year, cash from operations after capital expenditures was $130.2 million compared to $39.6 million in 2022.

As of December 31, Innospec made up $203.7 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 pleased with our operating results the business teams achieved in the quarter and the full year. The foundation of success is innovation, customer service and teamwork across all our global businesses. Our technologies and customer partnerships are first-in-class and the end markets that we serve. We will continue to leverage and invest those strengths as we target growth and further margin improvement in 2024. Cash flow continued to be extremely strong in the quarter full year. After funding the upfront portion of the QGP acquisition and a 10% dividend increase, our net cash position remained over $200 million. We continue to have significant flexibility and balance sheet strength for further M&A dividend growth and organic investment. Now, I will turn the call over to the operator and Ian and I will take your questions.