Good day, ladies and gentlemen, and welcome to Innospec's First Quarter 2022 Earnings Release and Conference Call. I would now like to turn the conference over to your speaker today, David Jones, General Counsel. Please go ahead, sir.

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, 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-Qs, and other filings with the SEC. Please see the SEC's site and Innospec's site for these and related documents. In our discussion 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 in better 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.

Thank you, David, and welcome, everyone, to Innospec's First Quarter 2023 Conference Call. I am pleased to present another strong set of results for Innospec. Our balanced portfolio again delivered strong ongoing results this quarter. Sales growth and margin improvement in oilfield services partially offset lower activity in Performance Chemicals and a $7.4 million misappropriation of inventory in Fuel Specialties. As expected, this was a soft quarter for Performance Chemicals. Weaker demand and customer destocking efforts continue to negatively impact volumes and margins in the quarter. In the near term, we believe that economic uncertainty will remain a headwind. However, we see no change in our customers' medium- to long-term plans to shift to more mild and natural formulations. Our priorities remain focused on developing technology and margin improvement opportunities that will position us well beyond any short-term recessionary concerns. As new personal care contracts begin in the third quarter, our targets for sequential operating income growth and margin improvement. In Fuel Specialties, gross margin improved sequentially over the prior quarter. The pace of inflation has slowed in some of our markets, and we have continued to take price action where required. This combined with a strong sales mix contributed to a sequential margin improvement. As indicated in our earnings release, Fuel Specialties' results were impacted by a $7.4 million misappropriation of inventory in Brazil. Adjusting for this, Fuel Specialties operating income grew by 12% to $39.8 million and gross margin expanded to 34.1%. We are aggressively pursuing legal actions related to this matter. Despite this isolated event, margin improvement remains a key focus and opportunity for our Global Fuels business in 2023. We expect these efforts to support gross margins at the lower end of our target range through the end of the year. Oilfield Services had an excellent quarter. Strong orders in Production Chemicals, combined with further sequential growth improvement in our Oilfield segments, continued to drive significant growth. Operating income was over six times the prior year and gross margins expanded by 6.2 percentage points. Despite potential for some moderation in Production Chemicals order activity, we feel optimistic that we can deliver full-year operating income growth in 2023. In addition, we continue to pursue margin improvement opportunities across the business. Now I will turn the call over to Ian Cleminson, who will review our financial results in more detail, then I will return us to concluding comments. After that, Ian and I will take your questions.

Thanks, Patrick. Turning to slide seven in the presentation, the company's total revenues for the first quarter were $509.6 million, an 8% increase from $472.4 million a year ago. Overall gross margin decreased slightly by 0.5 percentage points from last year to 29%. EBITDA for the quarter was $53.9 million compared to $59 million last year, and net income for the quarter was $33.2 million compared to $36.5 million a year ago. Our GAAP earnings per share were $1.33, including special items, the net effect of which decreased our first quarter earnings by $0.05 per share. A year ago, we reported GAAP earnings per share of $1.46, which included a negative impact from special items of $0.07 per share. Excluding special items in both years, our adjusted EPS for the quarter was $1.38 compared to $1.53 a year ago. Turning to slide eight, revenues in Performance Chemicals for the first quarter were $151.4 million, down 9% from last year's $167.1 million. Our positive price mix of 6% was offset by a volume decline of 13% and an adverse currency impact of 2%. Gross margins of 15.9% decreased by 8.5 percentage points compared to the same quarter in 2022 due to a weaker sales mix and adverse manufacturing variances resulting from lower production volumes. Operating income decreased 59% from last year to $10.4 million. Moving on to Slide nine, revenues in Fuel Specialties for the first quarter were $190.3 million, down slightly from the $191.8 million reported a year ago. A positive price mix of 22% partially offset a 20% reduction in volume and adverse currency impact of 3%. Fuel Specialties gross margins of 30.2% were 1.4 percentage points below the same quarter last year. Operating income of $32.4 million was down from $35.5 million a year ago. Adjusting for the $7.4 million misappropriation of inventory in Brazil, adjusted gross margins were 34.1%, benefiting from a richer sales mix and stabilizing raw material prices, allowing pricing to catch up. Adjusted operating income was $39.8 million. Moving on to Slide 10. Revenues in Oilfield services for the quarter were $167.9 million, up 48% from $113.5 million in the third quarter last year. Gross margins of 39.5% were up 6.2 percentage points from last year's 33.3%. Operating income of $15.9 million was a $13.4 million increase over the $2.5 million in the prior year. Turning to Slide 11. Corporate costs for the quarter were $17.7 million compared to $19 million a year ago, due mainly to lower share-based compensation accruals. The effective tax rate for the quarter was 26.2% compared to 24.3% a year ago. The increase in the effective tax rate was primarily because of the higher proportion of the company's profits being generated in higher tax jurisdictions. Moving on to Slide 12, free cash generation for the quarter was broadly neutral with an operating cash inflow of $21.8 million with low capital expenditures and internally developed software costs of $22 million. At March 31st, Innospec had $147.5 million in cash and cash equivalents and no debt. And now I'll turn it back over to Patrick for some final comments.

Thanks, Ian. This was a good start to the year for Innospec. Adjusting for the one-off misappropriation of inventory, both our oilfield services and fuel specialty businesses achieved operating income growth and margin expansion. We expect our balanced portfolio to continue supporting our results in the coming quarters. Our focus remains on margin improvement in all businesses, along with potential sequential operating income growth in Performance Chemicals. With net cash of over $147 million, we continue to deliver on our record return value to shareholders while maintaining flexibility to pursue M&A and invest in organic growth. This quarter, our board approved a further 10% increase in our semiannual dividend to $0.69 per share. Our pristine balance sheet, global footprint, and technical leadership position us well to navigate any economic volatility. In partnership with our customers, we remain well placed for growth through technical innovation and excellent customer service over the medium to long term. Now I'm going to turn the call over to the operator, Ian, and I will take your questions.

Ladies and gentlemen, we now begin the question-and-answer session. We are now taking the first question, so please stand by. The first question comes from Mike Harrison from Seaport Research Partners. Please go ahead.

Hi, good morning. Can you hear me okay?

Yes, good morning Mike.

Good Morning Mike.

We're very interested in the Fuel Specialties business, especially the margin strength if we set aside the inventory issue. How sustainable do you view that margin strength? Can you also comment on your pricing strategy and whether you have caught up with the inflation you've been experiencing? Are you currently exceeding your pricing expectations now that some of your input costs have moderated?

Yes, Mike, let me take that one. So yes, really pleased with the quarter from Fuel Specialties. We've taken action on raw material pricing where we've needed to do that. It's a little bit patchy in that some parts of the raw material environment are coming down, some are stable, and we're still seeing inflation in some areas. So it's not a uniform picture. You're right on the ability of our pricing to pass through; it's certainly done that in the first quarter of this year. And we've also seen a really strong sales mix in the first quarter, where we've sold a much lower proportion of high-volume, low-margin business, and we've achieved a lot more of our lower volume, high-margin business. So there's a really strong mix in there for us. So the underlying 34% is very strong. We still feel that for the full year, 32% gross margins across the full year is achievable, and that's what we're going to be aiming for. If we can keep going at the pace we're at, to keep our pricing focused and working with our suppliers and customers, we think we're going to be in good shape.

All right. And I guess any color that you can provide on the inventory misappropriation that occurred in Brazil? And I think we're mostly curious to see if there is action you can take is there any chance that you recoup even a portion of that loss?

Yes, Mike. Obviously, it's a fluid situation, it's under legal review right now, but we are going to go full at the recovery of not only the loss of inventory but the recovery of dollars lost. So it's under legal. It could involve criminal charges. There are definitely civil charges sitting out there, but we are going to go after full recoup of all that $7.4 million.

All right. And then the last question I have for now is on the Performance Chemicals business and the customer inventory destocking that you've seen there. Has that started to run its course? Are there still some pockets where order patterns are weak, I guess, with the destocking going on, do you have any sense of what underlying demand dynamics are looking like within that Performance Chemicals business?

Yes, there's still some destocking going on. There's still some high guide inventory sitting at. We are starting to see a little bit of volume erosion from the consumer but with all the contracts that we have signed coming into the second part of the year, not the second quarter, but the second half of the year, we see that improvement coming during that time. So I think we'll see a similar quarter as we saw in the first quarter in Q2, and then you'll start seeing sequential improvement in Q3 and Q4.

Thank you for your question. We are now taking the next question, please standby. And the next question is from John Tanwanteng from CGS Securities. Please go ahead, your line is open.

It's actually Lee Jagoda for John this morning. I want to follow up on the last question regarding the Performance Chemicals segment. Can you remind us of the typical amount of inventory that your customers hold at any given time and how that compares to our current situation? Also, you mentioned some consumer weakness. Is there a scenario where customers are holding off on new contracts and hoping for lower prices instead of increasing their inventory now?

No. I think early on, there was a lot of preordering because of the tightness in raw materials and the length of time to get the raw material to locations. So there was a lot of pre-ordering and pre-purchasing during that time. Now, obviously, as the market slowed a little bit, they're trying to destock what they've had sitting there. There's instances where we saw people had two or three days of inventory. We're now starting to order again. So it's really a mix of everything that's caused the last two quarters to slow down. I think we'll see it again, as I said earlier, in the second quarter, and then we'll start seeing this new contracted volume coming on in Q3 and Q4, which will start the improvement process. But it's a little bit of everything, it's a cause and effect, and it's shaking itself out, and you're seeing that throughout not just our company but really throughout the chemical industry.

Got it. And then just switching gears to the M&A environment. Can you speak to what you're seeing out there, both in terms of multiples? And then sort of your comfort level around the targets that you're looking at and your EBITDA projections given the macro uncertainty and how you balance all those things together?

Yes. I mean we don't look at market volatility as a reason to not acquire or to acquire. If we find something that fits our portfolio and the timing is good, we'll look to purchase it. But we're seeing multiples come down. We're seeing some multiple compression. I still think there's a disconnect between buyer and seller, but that will shake itself out, we think, over the next three to six months. We are starting to see people looking at portfolios and re-evaluating what they should and could do given their wants and needs. We are beginning to see more businesses come out. I think the challenge they have there is, again, that disconnect. They don’t see or they think they should be getting x multiple, and it's being offered with interest rates where they are and market volatility, there's still a disconnect there. But we have looked at a lot. We're still looking at a lot. We think it's an opportunistic time with our balance sheet. And if the right one comes along, we're hoping to get something done this year.

Thank you for your question. We are now taking the next question, please standby. The next question is from David Silver from CL King Associates. Please go ahead. Your line is open.

Good morning. I have a few questions, starting with Performance Chemicals. I'm interested in any customer feedback you can share. I've noticed that your company and other surfactant manufacturers have mentioned consumers moving from higher-value personal care products to more economical options. From your customers' perspective, considering their cautious purchasing behavior, do you believe this shift is temporary? Will consumers return to sulfate-free shampoos once their personal circumstances change or after a recession? Or is this trade-down behavior more permanent or lasting? In other words, how enduring is this decision from your customers during these uncertain economic times? I'm also thinking about how this affects your plans for expanding and ramping up higher-value additives and formulations. Thank you.

Yes, it's interesting. We've been through this before. One of the things about diversifying our portfolio is in Performance Chemicals when we went through this first process of a recessionary time and inflation at some point in time. We found out that we had to be in the low end, mid, and high end. And so we've done that. We've done a really good job of diversifying that portion of the portfolio. So what you do see is you do see the high end moving towards a mid-tier and a mid-tier moving towards the low end. But once you start coming out of recession, they go right back to the high end. And so we've been through it. We prepared for it. I think we're well balanced in our portfolio in Performance Chemicals. And so I think you would just see over the next couple of quarters, you'll start to see the uptick from the contract work that we had in Q3 and Q4. And I think as you see us coming out of these uncertain times that the consumer will start to buy back up in the more mild, natural, etc.

I have a question about the capital spending and investing portion. I noticed in my model that starting in the fourth quarter of last year, you began capitalizing some software costs, which has been a significant amount over the last two quarters. Could you provide some insight into what this project is, the total outlays you anticipate, and how we should view this in relation to your normal capital expenditure budget going forward?

Yes, David. So what we embarked upon is a global implementation of SAP to consolidate all our ERP systems. We've done a lot of the preparation work and throughout 2023, we'll be preparing our EMEA and APAC business. Then we'll roll over into 2025 to tie off most of our Americas business, and that will also roll into '26. In total, the project is around $50 million, but that will be spread over probably the next three years. So we're in fairly early stages of design, and we're in pretty good shape. Everything is on track. Our target here is to have a global system that simplifies our business, gives us lots of insight and leverage so that we can make better, more profitable business decisions.

Got it, thank you. And then I do want to swing over to Oilfield Services and this probably will end up being a two-parter. But this is the second consecutive quarter where you've had really outstanding top line and operating income results. And if I recall correctly, I mean, I think one quarter ago, Patrick or Corbin might have characterized it as a lot of first-fill kind of business that may be temporarily boosted sales volumes. Looking at this second consecutive quarter of historically very attractive growth and margins. Is that still the case? Is this still the blush of kind of early fill or first fill by your customers? Or might there be something else going on? Are there some incremental share gains from your new suite of water-based products that you've introduced? Or is it another factor? Thank you.

It's a little bit of both, David. I think of it as a pleasant surprise, I wouldn't say surprise, maybe a little bit above expectations internally, but there were still some first fill, but there was also expansion of business and volume growth. We picked up new customers, we've grown new technologies—all that balanced out with some large customers expanding into offshore and other areas have really delivered strong growth for the business. I think that you'll see a similar quarter, as you saw in Q1; you'll probably see a similar quarter in Q2. It's been pretty strong, and we're very happy where we are. There's still some margin improvement in some of those areas, just like there is in all of our businesses that we're working on and working with our customers to ensure that we bring the best technology during these high inflationary times. But we're very pleased with where Oilfield is. As we continue to diversify that portfolio, hopefully, we can continue this quest for long-term growth.

And if I could just follow up on that, please. But I hope this doesn't sound too naive, but maybe if you could just highlight the value proposition from the customer's perspective or how your new suite of water-based products or other new products are being marketed so effectively here. So in other words, I'm not an energy expert, but I don't really recall the need to shift drilling fluids and whatnot to a water-based formulation coming up much in the past. So is this the case where it's really the environmental basis for the formulations that are driving the growth? Or is it superior performance? Or is it both? Or, you know, is there another factor? But what, you know, what would you attribute this kind of outsized recent success, you know, with your suite of products, you know, your traditional shale basin customers?

Yes, all of the above. It's excellent customer service. It's onsite customer service. It's changing and excelling in technology, and it's the ESG footprint. So literally, it's all three of those in conjunction that have enabled us to grow this business and change the dynamics of this business over the last year. That's provided, obviously, many opportunities to the company, and it's given us the growth that we expected, and we're looking for sustained growth. Now the key is to make sure it's long-term and sustainable, and that's the key focus for our management team.

Okay. And just one last one. I appreciate it. Just again, building on Oilfield. But from an M&A perspective, I mean, I think you've kind of excluded the Oilfield from it was kind of not considered to merit a tremendous amount of discretionary capital from an M&A perspective regardless of what the opportunities are. With this last couple of quarters of, I guess, record earnings—best quarter last year, second-best this quarter. I mean, I'm assuming there are some targets in there. I'm assuming there's some people who are less attached to the business. But is this kind of an opportunity for you to kind of use this gateway or this product advancement that you've implemented or commercialized to maybe do some opportunistic M&A and maybe get some additional cross-sell or just strengthen your overall product offering?

Yes. I think David, it's more about geographical growth and organic growth for us right now because that's what's enabled the growth where we're at today. We don't necessarily need to go out and acquire, even though multiples, as you said, are very depressed in the oilfield market. I think there's going to be some consolidation, especially with crude prices falling; there are going to be quite a bit of shakeouts over the next six to twelve months. Now could there be an opportunity at that time to pick up something for pennies on the dollar or at a very low price? Absolutely. But as of right now, our focus is probably on M&A, more on the side of Performance Chemicals and Fuel Specialties. And again, if there is something in the oilfield that comes up that makes a lot of sense, we would look at it. But right now, the focus in oilfield is organic growth, diversification, either product diversification or geographical diversification.

Thank you for your question. We are now taking the next question. We are now taking the question from the line of Mike Harrison from Seaport Research Partners. Please go ahead. Your line is open.

Hi, Just a couple more for me. I wanted to ask about the Performance Chemicals pricing. That came in kind of weaker than where it's been trending. And I know you mentioned that mix was lower. So is the pure pricing still pretty strong in Performance Chemicals? Or maybe give us some color on what you're seeing on the price-mix front there?

Yes, Mike, the sales mix hasn't helped us this quarter, that's for sure. A lot of our higher-value products in Performance Chemicals haven't performed as well as we would like. So there's certainly a mix impact there. Pricing is generally holding up pretty well in Performance Chemicals. What I would say is it's not easy; we're under a lot of pressure to reduce prices. We're having to work with customers and having to work with suppliers to navigate through that. But generally, pricing is holding up; the sales mix in the third and second quarters certainly isn't helping us.

Yes, I think there's still some higher-priced inventory that we have still sitting there, too. So that's, as Ian said, that hasn't helped us. We need to get rid of that, and we're pretty close to that happening as we speak.

All right. And then I guess I'm looking for maybe some guidance on either next quarter or full year as we're thinking about earnings. My sense is that next quarter probably looks a little bit similar to this quarter, maybe if we kind of add back the inventory issue. And as we get into the second half with the improvement you're expecting in Performance Chemicals, it seems like when you add that all up, you get to an EPS number for the full year that could approach the $6.50 level. Just kind of curious if you think there's any issues with my math there?

I think I'll just sort of set up quarter by quarter, Mark, if that's okay. So for quarter two, you've heard yourself and Patrick say that broadly, the Performance Chemicals and the Oilfield business will be the same as the first quarter. In Fuel Specialties, we do expect the business to be probably in the round about that $30 million to $32 million of operating income. And you all remember that we usually see a stronger performance in Q4 and Q1 because of the winter period where we do tend to perform a little bit better. As we look out to the full year, I think a lot of it really depends on the two things. One is are we going to see Performance Chemicals bounce back in the middle of the year like we expect it to and how long will we retain that oilfield business at the current level. Our expectations are absolutely that. So I would say at $6.50, probably towards the top end of your range, but that's certainly a target that we'll be aiming for. We probably would be guiding a little bit lower than that right now.

Thank you for your question. There are no further questions at the moment. I will hand back the conference to Patrick Williams for closing remarks. Please go ahead.

Thank you all for joining us today. Thanks to 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 being up with you again to discuss our second-quarter 2023 results in August. Have a great day.

That concludes the conference for today. Thank you for participating.