Innospec Inc
NASDAQ:IOSP
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Innospec Inc
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Good day, and thank you for standing by. Welcome to the Innospec's First Quarter 2021 Earnings Release and Conference Call. [Operator Instructions]
I would now like to hand the conference over to our speaker today, David Jones, General Counsel and Chief Compliance Officer. Please go ahead, sir.
Thank you. This is David Jones. The quarter 1 earnings release and this presentation will be available on the company's site for at least 6 months. During this call, we will make forward-looking statements, which are predictions, projections and other statements about future events. These statements involve a number of risks, uncertainties and assumptions, including the effects of the pandemic such as its duration, long-term economic impact, measures taken by government authorities to address it in the manner which the pandemic may impact other risks and uncertainties that could cause actual results to differ materially from the anticipated results implied by forward-looking statements. These risks and uncertainties are detailed in Innospec's 10-K, 10-Qs and other filings with the SEC. Please see the SEC site or Innospec's site for these other documents.
In today's presentation, we've also included some non-GAAP financial measures. A reconciliation to the most directly comparable GAAP financial measures is contained in our earnings release.
With us 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.
Thank you, David, and welcome, everyone, to Innospec's First Quarter 2021 conference call. We are pleased with our start to 2021 with all our businesses reporting sequential growth in the quarter. Performance Chemicals had an excellent first quarter and we expect the business to continue to capitalize on the long-term shifts in consumer trends that align with our technologies.
The expectation in our Fuel Specialties and Oilfield Services businesses is for oil and refined fuel demand to continue to improve through the rest of this year and into 2022. Based on this positive outlook, we continued strong cash flow and debt-free balance sheet. The Board has approved a 10% increase to our semi-annual dividend, continuing our record of returning value to shareholders.
Performance Chemicals delivered excellent results with sales growth in all end markets despite the ongoing effects of the pandemic on European demand. Operating income for the first quarter reached a record of 17% over the prior year. The medium- to long-term outlook for our industry-leading technology continues to be very promising and our R&D pipeline is active across all our end markets.
To meet increased customer demand, we have approved $10 million in organic growth investments, which are incremental to our original 2021 plans. Further projects are under review as we accelerate our strategy and investments.
During the quarter, we also broke ground on our new state-of-the-art Global Research and Technology Center in North Carolina, which is scheduled for completion by year-end. In Fuel Specialties, global demand in the quarter was still well below pre COVID '19 levels with aviation lagging behind other transportation fuels. Customer activity is expected to continue to recover through the balance of 2021.
In renewable fuels, we are seeing more opportunities to leverage our industry-leading additive technology to address operational issues that are unique to these sustainable alternatives. We are also finding widespread interest in our technologies that were originally developed for fuels, and we have been modified to improve safety and process efficiency in global coatings and plastic manufacturing operations.
In Oilfield Services, we delivered sequential growth in our completions, production and DRA businesses, which more than offset the negative impact of the U.S. winter storm event in mid-February. We expect further improvements in activity levels in Q2 and for the rest of the year.
Specifically to our DRA business, we are now in the process of completing our third capacity expansion to meet increased customer demand. To address sustainability in our Oilfield business, we have developed water-based chemistries, which allow our customers to decrease petroleum-based raw material use without compromising performance.
As a key technology partner to our customers, we have the benefit of being at the front end of collaboration on next-generation products driven by our consumer and regulatory trends. Many of our customers have well documented objectives to sustainability and to substantially reduce their carbon footprint over the coming years.
With the formation of our Disruptive Technologies Group, we are continuing to invest resources to identify and develop the new chemistries, molecules and formulations that will help enable our customers to reach these important targets. These new technologies include bio-based versions of our industry-leading additives without any compromise in performance. Our success has always been built on innovation and strong customer collaboration and the efforts within our Disruptive Technologies Group will deliver tremendous long-term growth opportunities for Innospec.
Now I will turn the call over to Ian Cleminson, who will review the financial results in more detail, then I will return with some concluding comments.
After that, we will take your questions. Ian?
Thanks, Patrick. Turning to Slide 8 in the presentation. The company's total revenues for the first quarter were $339.6 million, a 9% decrease from $372.3 million a year ago, driven by reduced customer activity in Oilfield Services and lower demand due to the pandemic in Fuel Specialties. Overall gross margin decreased by less than 1 percentage points from last year to 29.7%. EBITDA for the quarter was $41.4 million compared to $56.7 million last year.
Our GAAP earnings per share were $0.94, including special items, the net effect of which decreased our first quarter earnings by $0.12 per share. A year ago, we reported GAAP earnings of $1.34 per share, which included a negative impact from special items of $0.08. Excluding special items in both years, our adjusted EPS for the quarter was $1.06 compared to $1.42 a year ago. It's worth noting that due to the 13% uplift in our share price over the quarter, our adjusted EPS was reduced by a $0.14 charge for higher share-based compensation.
Moving on to Slide 9. Revenues in Fuel Specialties for the first quarter were $139.3 million, 5% lower than the $147 million reported a year ago. Volumes were down by 7% and there was a negative price/mix effect of 3%, offsetting a 5% positive currency impact.
Fuel specialties gross margin for the quarter was at the low end of our expected range of 32.2% compared to 34.8% in the same quarter in 2020. The operating income for this segment was $23.8 million, down 26% from a year ago. Fuel demand has continued to improve and subject to any further sustained economic lockdowns, demand for our few additives should continue to recover over the remainder of 2021 and beyond.
Turning to Slide 10. Revenues in Performance Chemicals for the first quarter were $125.9 million, up 11% from last year's $113.1 million as an increase in volumes of 7% and a positive currency impact of 6% offset an adverse price/mix of 2%. Gross margins of 24.9% were up 0.5 percentage points compared to 24.4% in the same quarter in 2020. Operating income increased 17% from last year to $18.3 million. We believe our Performance Chemicals business can sustain mid to high single-digit revenue growth, reflecting the strong pipeline of organic growth opportunities we have.
Moving on to Slide 11. Revenues in Oilfield Services for the first quarter was $74.4 million, down 34% on the first quarter of 2020, driven by low levels of customer activity in U.S. completions. Gross margins of 32.9% were up 0.6 percentage points on last year's 32.3%. Operating income of $1.2 million was down from $7.2 million in the same quarter last year, but was a dramatic improvement over the $0.2 million in the fourth quarter of 2020. Moving into the second quarter, we currently expect to see further improvement in activity levels and demand for our products and services.
Turning to Slide 12. Corporate costs of $15.1 million were up $2.3 million from last year, primarily driven by higher share-based compensation and acquisition costs. The effective tax rate for the quarter was 24% compared to 25.1% in the same quarter last year.
Moving on to Slide 13. This was another excellent quarter for cash with net cash generated from operations of $22.7 million before capital expenditures of $10.3 million. As of March 31, Innospec had $117 million in cash and cash equivalents, and finance lease debt of $0.4 million, resulting in a net cash position of $116.6 million.
And now I'll turn it back over to Patrick for some final comments.
Thanks, Ian. Innospec has started 2021 with good momentum. Continued economic recovery will drive further growth throughout the balance of this year and our prospects for 2022 remains strong.
In Oilfield Services, as activity levels increase, we will continue our focus on driving operational leverage improvements. In Fuel Specialties, we are targeting overall margin improvement as global fuel consumption recovers through the rest of 2021. In Performance Chemicals, we will execute on organic growth projects to drive incremental revenue, although much of the benefit from these investments will not be realized until 2022.
And in all our businesses, we will continue to develop and commercialize technologies that support our customers' long-term sustainability objectives. Improving demand in all our businesses, coupled with supply chain tightening, is driving cost inflation. In close coordination with our customers, our supply chain, manufacturing and sales teams have done an excellent job managing through this environment. In addition to keeping our customers supplied, we are implementing price increases to counteract cost inflation caused by the current supply chain imbalances.
With respect to our proposed acquisition of Elementis, this was consistent with our previously communicated objective to prioritize M&A that aligns with Performance Chemicals. We believe that this deal would have been a compelling strategic fit and would have substantially expanded both our portfolio of complementary products and our geographic footprint. Our decision to cease active consideration of this acquisition is also consistent with our disciplined approach to valuation and use of leverage.
We continue to generate excellent cash flow, further strengthening our balance sheet, allowing us to increase our semi-annual dividend by 10%. We will remain disciplined in our approach in seeking acquisition opportunities that will expand our Performance Chemicals business.
In parallel with acquisition efforts, we will continue to execute on the multitude of organic investment opportunities that exist within all of our businesses.
Now I will turn the call over to the operator, and Ian and I will take your questions.
[Operator Instructions] Your first question comes from the line of Tanwanteng from CJS Securities.
Excellent quarter. My first question is just on inflation, Patrick. I know it's hitting a lot of companies right now. I know you have pricing power, you can pass things through. But as you look at it, heading to the second quarter, do you see gross margins expanding or staying the same or even contracting, just given the level of price increases we've seen across the board here?
Yes, Jon, it depends on -- some of the customers are contract customers. And so you won't see -- you typically get that 3 to 6 months lag, which is very typical in the chemical industry. So the hope is that on those contract customers, we will at least sustain within the margin range that we always discuss. There are levels where we are increasing margins on new technologies that will benefit the company. But for the most part, I would say that we kept up with the margin profile that we put out -- put forth in the market. And with the price increases, it should keep us within that kind of same levels.
Okay. Got it. But should we expect to be kind of at the lower end of your ranges for the next quarter or so?
I would probably put it in the lower to mid-range, Jon. It won't be on the high end.
Got you. Okay. That makes sense. And then just on the fuels business, 2 questions. One, I believe you pushed out some cold fuels from last year, number 1. Did you actually see that happen and to what extent? And number 2, you mentioned that you were down 9% year-over-year, ADGAS is probably a big portion of that. I was wondering, at ADGAS, how close are you to pre pandemic levels of consumption?
Yes. We see consumption levels come back quite considerably in the first quarter and we saw that in the fourth quarter as well. Aviation is starting to crawl back. I think that you'll see a normalized ADGAS quarter in Q2. So you will see consumption brought up and go into Q2. If you look at the rest of the industry, I think in general, we've seen it come back across the board. So the expectation is that we will see continuous growth throughout the remainder of 2021 as we get through this pandemic.
Got it. So sequential growth you mean or growth year-over-year?
Yes.
Which one?
Both, Jon.
Got you. Okay. Great. And then just, Ian, how should we think of the OpEx SCR growth this year just given the demand you're seeing and have returned?
Yes. What we'll probably see, Jon, is we'll maintain the levels in Fuel Specialties and Performance Chemicals. We don't expect to see much further growth there in SAR costs. Oilfield will be slightly different as the activity levels ramp up, you will see some higher levels of SAR in that business. But our expectation is that we'll be able to control that and we'll be able to leverage a little bit more than we have done in previous years. So you will see some expansion, but I think at the same time, you'll see a higher level of operating leverage coming out of that business. And at the corporate level, subject to any sort of various share price movements and compensation movements, which we can't predict, we should be in that range that we've previously quoted to you, Jon.
Okay. Great. And then just one more to clarify. The -- you said mid-single-digit growth in Performance Chemicals. You did well above that this quarter. Did you mean that for the whole year or just going forward? Just clarify what you meant by the mid-single.
Mid- to high-single digits growth. And we mean that for the rest of the year, Jon.
Your next question is from the line of David Silver from CL King.
Yes. I was hoping to just dig in a little bit more to the record performance by your Performance Chemicals segment and double-digit revenue growth and, I don't know, 17 or what higher than that on the operating income line. I guess, I was wondering if you could maybe -- if it's possible for you to parse the growth into maybe at least 2 buckets, but 1 bucket might be -- just maybe the pure volume-driven elements. In other words, we're washing our hands more or shampooing more. In other words, current technology, but volume growth is the driver.
And then contrast that with maybe the newer additives, the more natural formulations and things like that, in which you'd say it's more company-specific or secular growth that's driving the performance there. So just maybe a little bit of color on incrementally what you're seeing and where that incremental $10 million of investment might be directed would be great.
Yes, David, typically in this industry, you don't see this type of organic growth for 2 to 3 years after you put the strategy in place. And going more natural, sustainable was a strategy that we've worked on for the past 5 years. And fortunately for us, we are right in that alley and we have done a really good job focusing on the consumer trends in this area. And so it really is the natural, sustainable products that have pushed this growth forward. And we're seeing that continuous really in every part of that business, whether it's home care, whether it's personal care. In addition to that, we've seen improvement in our ad markets, in our industrial markets. Albeit a little tinier, we sure are seeing great growth and great margin expansion.
So it's really been across the board, but I will say it's the strategy that we put forth as a business and our global business team and all the individuals that work in that Performance Chemical business have really done a great job putting this plan in place and sticking to it. And our technical team in our opinion is second to none. And so the products that we have are long term. They're sustainable. They're patented. And we believe that we're going to have continued growth moving forward.
We're pulling these initiatives forward on our 5-year growth plan because of the fact that our plants are full and due to the fact that we have other new products that we're going to launch in this market that are right along that natural sustainability pipeline. So we feel like we're sitting in a really good position moving forward.
Okay. And maybe if I could just build on that, you discussed the ground breaking for your global research and technology center in North Carolina. And Patrick, I think this is part of your vision. So maybe if you could just share how you expect that asset to be utilized and just on a couple of kind of vectors, I guess, or elements. I mean, do you see that as primarily supporting 1 or 2 of your segments? Or is it equally all 3? Is it going to be more collaborative, in other words, directed to customer initiated efforts? Or will this be more kind of inward basic research and pursuing things that are internally generated? So there's a lot to unpack there, sorry. But just kind of what is your vision? How do you see that unit being put to best use, maybe over the first couple of years it's up and running?
Yes, David. We have R&D at technology center in the U.K. We have a lot of labs based out throughout the world to support our customer base. The new R&D facility in the U.S. will be specific to home care, agriculture, personal care. And then we have a disruptive technology group that looks at technologies that are 5 years, 10 years down the road, that what we call will disrupt the market. And that's a little bit separate from the R&D center that's being built in North Carolina. So we envision this as new molecule structures. We envision as pure support to the current businesses that we're in right now. We have great lab technicians. We have great PhD chemist down there and we believe it's really going to put a footprint moving forward to support our customer base. We do a lot of collaboration projects with our customers. And I think that what that does, it gives us the ambition moving forward of what is the consumer trends looking like 3 years from now, 5 years from now. It gives us the ability really to be on the forefront of technology. And we are a technology-based company, and that's how we've gotten the growth in all 3 of our businesses. It's not because we're giving a me-too product. It's because we have brought something to the market that's different than everybody else. And that's what we're going to continue to do and that's why this research and technology center in North Carolina is very, very important to us.
Okay. Great. And if I could just ask one more. It'd be focused maybe on the DRA business. But you did indicate that the third capacity expansion for that product was completed. And I just want to clarify if that means that prior to breaking ground on that expansion, you had a full order book? In other words, the volumes are already committed? Or is this going to be more speculative in nature, like where the volume will ultimately be placed? And then if you could just characterize whether the demand is maybe in the traditional petroleum, moving oil through pipelines in the U.S.? Or if maybe the product is being used differently, maybe either geographically or moving other fluids through pipes other than crude oil?
Yes, good question. Typically, we don't put expansion, manufacturing expansion into any of our plants unless we have committed volume. And so the DR expansion is already fully committed volume. We've been very responsible in bringing this volume to market. We think we have an exceptional technology. And therefore, we've had to put this expansion into the fact that we've got contracted volume. It's not just in the U.S. We have volume outside the U.S. and we think our DRA volume in 2022 could be even substantially beyond where we are today. So we're growing the market. We're doing it very responsibly. We're doing it with a great technology, and we will have many more avenues to expand this market moving in towards the -- into the 2021 and move into 2022.
[Operator Instructions] And we have a follow-up question come from the line of Tanwanteng.
Just a follow-up on the DRA expansion. What was your capacity maybe in dollar terms before the third expansion? What will it be after it's finished?
Ian, do you want to take the dollar term?
Yes, Jon, we don't actually break out the dollar. As you know, one, we put this pump together, we do it in a modular way. So we've probably now got -- probably in the region over about 120,000 to 150,000 gallon capacity and we'll probably put about another 50,000 to 60,000 gallon capacity on top of that. But we don't break out the dollar terms because obviously, that's a sensitive number for us, Jon.
And Jon, just to add to what Ian was saying is that this plant is, as you said, it's a modular type plant. So we could move this plant and get up and running in other parts of the world fairly quick and it's not very expensive to do. And that's the neatness about this technology. And so I think for us, being controlled and responsible in the market was #1 to us. Let's bring on smaller volumes on the plant and expand as the market grows with us, and that's what we've done.
Okay. Great. Just trying to think of the ultimate market size for you guys and kind of the share you expect to have over the medium term.
Yes. It's still fairly small. But I think this year, you'll probably see it double over last year.
Okay. Great. On the M&A front and use of cash, seeing Elementis go was disappointing, but at the same time I think people appreciate that you guys are staying disciplined in a -- it seems to be an overheating M&A market. I'm wondering is there anything else out there that you're looking at now that's as interesting or even close to size or maybe a number of opportunities that could add up to it? Or is it more back to organic investing and increasing the dividend or maybe even looking at share buybacks at this point?
Yes. You made a good point. I think it is an overheated M&A market. You've got low interest rates. You've got a lot of money parked on the sidelines. A lot of people have run from different industries, jumping back into the petrochemical and chemical industry. So we're being very cautious as we always have. We've looked at a lot of M&A. We've passed on a lot. It was unfortunate that Elementis didn't play ball with us due to the fact that the synergies that we had and really the growth that we had in those markets and the growth in the bottle that we could have put forth. But for us, Jon, I think it's -- we have this 5-year plan that we mentioned in our script. We're going to push that forward because organic growth is your cheapest, most profitable growth. You're not paying a multiple on it. So we're very excited about our 5-year plan moving forward, and it's all based off sustainability and easy footprint on the environment. But we'll continue to look at the M&A market. It's overheated. We're not going to overpay. But at some point in time, we're going to find the right deal, whether it's small or whether it's midsize. And hopefully, we'll have an announcement. But we're looking, we're not rushing. We're in no -- we're not in a need to rush right now.
Okay. Great. Any thoughts on buying back your own shares just relative to the valuations that your peers are getting?
Yes. We have a buyback in place. We just increased the dividend 10%. We expect to see further increases on the dividend. We think that's good value to our shareholders. And we continue to look at buybacks. And I think that we'd like to have some dry powder for M&A. We'd obviously like to have dry powder for our organic growth projects that we're pushing forward. And it's not just in Performance Chemicals. We've got other projects like DRA, et cetera in other parts of the business. And so we continue to look at it. The Board continues to monitor it and we'll let you know as soon as we start buying if we do.
We have a follow-up question from the line of David Silver.
Okay. I guess, I was wondering if you might -- if -- sorry, let me start over. Is it too early to get kind of an early read on the progress in your businesses in the month of April? In other words, has the progress that was made during the first quarter, has that been extended into the quarter to date? And maybe if you wouldn't mind, just to touch on like each of your 3 segments briefly, that would be great. So April.
Sure. In general, we're still seeing a strong growth trend in all 3 businesses. Fuel Specialties is coming back just due to consumption levels coming back. Oilfield Services is coming back due to diversifying not only the portfolio, but also you're seeing more E&P activity coming back. So we're definitely seeing that in the Oilfield Services side. In our Performance Chemicals, just due to the fact that our strategy has been put forth and these guys have done a great job, we're still continuing to see the growth there that we've expected to see. So we're pretty excited about the remainder of this year as long as nothing wild happens in the market. And as long as the pandemic stays at bay, I think that you'll see the strength continuing in the next 3 quarters.
Yes. Just to add a little bit to that. We've certainly seen the momentum in Performance Chemicals continuing into April. And the order book for May and beyond looks pretty strong as well. Our Oilfield business, we expect sequential growth over Q1 and we're going to deliver that. We're seeing much more customer activity and completions. Our DRA business is going well. Our production business is going well. So again, you'll see quarter-over-quarter growth there.
Fuel Specialties, quarter 2 is traditionally a quieter quarter for us. We come out of the winter season. So you're probably not going to see a sequential growth. But again, the actual demand underlying in the market is improving outside of aviation. So all our businesses are in better shape than they were. We remain confident throughout the rest of the year that it will continue to improve .
And then just last one, but could you just give us an update on the progress in the marine fuel additives for the products designed to meet the IMO 2020 mandates, just an update on the progress there?
Yes. We had -- due to the pandemic, it slowed down quite significantly. And we alluded to that the last 3 quarters. We've talked about it. We're starting to see a lot more activity with IMO, with our IMO 2020 products as well as GDI. So there's a lot more activity as we expected -- as we start coming out of the pandemic and as you start getting technical resources back in the company to start reviewing products again. So we are starting to see -- not necessarily demand, but activity coming back in both those product lines.
[Operator Instructions] There are no further questions. Sir Patrick, please go ahead now.
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 second quarter results in 2021 in August. Have a great day.
That does conclude our call for today. Thank you for participating. You may all disconnect.