Earnings Call Transcript - IOSP Q4 2021

Operator, Operator

Good day and thank you for standing by. Welcome to Innospec's Fourth Quarter, 2021, Earnings Release and Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please, be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, David Jones, General Counsel. Please, go ahead.

David Jones, General Counsel

Thank you. Welcome to Innospec earnings call for the quarter, and year-end December 31st, 2021. The earnings release in this presentation are posted on the company site at innospecinc.com. 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 forward-looking statements. These risks and uncertainties are detailed in Innospec's 10-K, 10-Qs, and other filings with the SEC. Visit the SEC site or Innospec's site for these and other documents. In our discussion today, we've also included some non-GAAP financial measures. A reconciliation from the most directly comparable GAAP financial measures is contained in our 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 clarification items to aid investors in further understanding the company's performance in addition to the impact that these items have on financial results. With us today from Innospec are Patrick Williams, President and Chief Executive Officer, and Ian Cleminson, Executive Vice President and Chief Financial Officer. That, I'll turn it over to you, Patrick.

Patrick Williams, CEO

Thank you, David. And welcome, everyone, to Innospec's Fourth Quarter 2021 Conference Call. I'm pleased to present another very strong set of quarterly results for Innospec. Despite sustained supply chain labor and inflationary headwinds, we ended the year with record quarterly sales and full-year operating income up 74% on the prior year. Cash flow was extremely strong in the quarter, and our net cash position improved to $140 million. In addition, today we announced that our board has approved a new $50 million share repurchase program. I'm extremely proud of the way our Innospec team has navigated this year's volatile market conditions to deliver these strong sets of quarterly results and full-year results. Our business teams remained safe, resourceful, and customer-focused throughout this challenging year. We believe we are entering 2022 well-positioned for continued innovation and growth in all our businesses. Performance Chemicals achieved record quarterly sales and surpassed $0.5 billion in full-year sales for the first time. The business delivered its fourth consecutive year of operating income growth and margin expansion with full-year operating income up an impressive 29% over 2020. With our $70 million organic growth investment plans in motion, and our new state-of-the-art Global Technology Center on track for completion by Q2 of this year, we are well-positioned to meet our customers' growing technology demands. Customers and consumers want sustainability, but they also want high performance. This dual requirement will continue to drive exciting, technology-led future growth opportunities across all our Performance Chemical markets. Fuel Specialties achieved record quarterly and full-year sales along with improved operating leverage. Gross margins ran below our target, in the 32% to 35% range, but this was primarily due to continued delays in jet fuel demand recovery, sales mix, and contract formula price increases, which naturally lag cost inflation. As jet fuel demand continues to recover and cost inflation moderates, we expect gross margins to return to our target range. Consistent with our Performance Chemicals business, the majority of our current sales and future growth opportunities in Fuel Specialties are directly tied to sustainability. I am proud of the role that Innospec's technology plays in directly addressing these global initiatives to deploy cleaner fuels and increase fuel economy. Our technology adds critical safety, emission reduction, and performance properties to diesel, renewable, and distillate fuels. As society moves towards cleaner fuels, tighter emission standards, and higher efficiency engines, our addressable market expands. The global drive to find cost-effective ways to reduce emissions, burn cleaner fuels, and increase operational efficiency plays directly to our technology leadership. Oilfield Services grew sales and expanded operating margin for the 6 consecutive quarters. The overall market environment in terms of commodity prices, completion, and production activity is expected to continue to improve in 2022. As in the prior quarter, with this backdrop, there continues to be significant potential for operating growth. 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, and after that, Ian and I will take your questions.

Ian Cleminson, CFO

Thanks, Patrick. Turning to Slide 7 in the presentation, the company's total revenues for the fourth quarter were $413.2 million, a 33% increase from $310.8 million a year ago, driven by recovering demand in all our businesses compared to our COVID-impacted prior year. Overall, gross margin decreased by 2 percentage points from last year to 27.3%. EBITDA for the quarter was $44.8 million, compared to $40.2 million last year. A net income for the quarter was $23.9 million, compared to $22.6 million a year ago. Our GAAP earnings per share were $0.96, including special items. The net effect of which decreased our fourth-quarter earnings by $0.34 per share. A year ago, we reported GAAP earnings per share of $0.91, which included the negative impact from special items of $0.36 per share. Excluding special items in both years, our adjusted EPS for the quarter was $1.30 compared to $1.27 a year ago. For the full year, total revenues of $1.5 billion increased 24% from $1.2 billion in 2020. EBITDA for the year was $178.2 million compared to $108.9 million in 2020. And net income was $93.1 million compared to $28.7 million a year ago. Our full-year GAAP earnings per share were $3.75, including special items, which decreased our full-year earnings by $1.05 per share. In 2020, we reported GAAP earnings of $1.16 per share, which included the negative impact from special items of $2.06 per share. Excluding special items in both years, our adjusted EPS for the year was $4.80 compared to $3.22 a year ago. Turning to Slide 8, revenues in Performance Chemicals for the fourth quarter were $138.4 million, up 21% from last year's $114.6 million. Volumes grew 2% with a positive price mix of 21%, offsetting an adverse currency impact of 2%. Gross margins of 21.4% were down 2.4 percentage points compared to 23.8% in the same quarter in 2020, impacted by the slowdown of our manufacturing facilities over the holiday period and one-off inventory provisions. We expect gross margins to return to 24% in Q1, 2022. Operating income increased 16% from last year to $16.9 million. For the full-year, Performance Chemicals revenues of $525.3 million were up 23% from last year's $425.4 million, and operating income increased by 29% to $70.9 million. Moving on to Slide 9, revenues in Fuel Specialties for the fourth quarter were $179.5 million, 30% higher than the $138.3 million reported a year ago. Volumes grew by 10%, and there was a positive price mix effect of 22% offsetting a negative currency impact of 2%. Fuel Specialties gross margins for the quarter were below our expected range at 27.4% compared to 31.4% in the same quarter in 2020, driven by a weaker sales mix and contract price increases, which naturally lag cost inflation. We believe gross margins will return to 32%, being the lower end of our expected range in Q1, 2022 as pricing actions take effect. Operating income increased 1% from last year to $25.7 million. For the full-year Fuel Specialties revenues were up 21% to $618.3 million, and operating income was up 24% to $104.6 million. Moving on to Slide 10. Revenues in Oilfield Services for the quarter were $95.3 million, up 65% from $57.9 million in the fourth quarter last year, as customer activity continues to increase. Gross margins of 35.9% were up 0.8 percentage points on last year's 35.1%. Operating income of $4.3 million was a $4.1 million improvement from a year ago. For the full-year Oilfield Services revenues of $339.8 million were up 33% from last year's $255 million, and operating income of $10.4 million compared to an operating loss of $9.5 million in 2020. Turning to slide 11, corporate costs for the quarter were $13.2 million, compared with $10.7 million a year ago, due mainly to higher compensation accruals. The full-year adjusted effective tax rate was 22.7%, compared to 23.5% a year ago, due mainly to the geographical distribution of profits. For 2022, we expect the adjusted effective tax rate to be 24%. Moving on to Slide 12, this was another excellent quarter for cash, with cash generated from operations of $68.8 million before net capital expenditure of $9.2 million. In the quarter, we paid the previously announced semi-annual dividend of $0.59 per common share. This brought the total dividend for the full-year to $1.16 per share, a 12% increase over 2020. For the full-year, cash from operations after net capital expenditure was $57 million compared to $116.2 million during 2020. As of December 31st, 2021, Innospec had net cash of $141.7 million, a substantial improvement compared to net cash of $104.7 million a year ago. Now, I will turn it back over to Patrick for some final comments.

Patrick Williams, CEO

Thanks, Ian. Entering 2022, we expect tight supply chain and elevated cost inflation to continue. It is imperative that our business teams maintain their sharp focus on technology, customer service, pricing, and gross margin management. We are cautiously optimistic that these conditions will moderate in the coming quarters. We are well-positioned for continued growth and margin expansion in all businesses. Our portfolio is dominated by technologies that are critical to the performance of personal care, cleaning, and other daily use applications, including more sustainable and cleaner transportation. Further price increases have been announced in all businesses in the first quarter, and in parallel, we continue to introduce innovative products that can help offset the impact of higher prices to our customers through enhanced performance. Our businesses did an excellent job managing cash and working capital during the quarter, increasing our net cash position to over $140 million. We will continue to create value for our shareholders through our disciplined execution of our capital allocation programs. These include funding our well-defined pipeline of organic growth projects, pursuing complementary acquisitions, and increasing capital returns to shareholders through dividend growth in our newly announced $50 million share buyback facility. Now I will turn the call over to the Operator, and Ian and I will take your questions.

Operator, Operator

Thank you. Your first question today comes from the line of Jon Tanwanteng from CJS Securities. Please, go ahead. Your line is open.

Jon Tanwanteng, Analyst

Hi. Thank you. Good morning, everyone. I was wondering if you could talk about your high-level expectations for pricing versus volume as the components of your revenue growth in each of the segments moving forward. I assume there's more pricing coming, but I'm curious about the volume side of those expectations, specifically as we enter Q1 and into 2022?

Ian Cleminson, CFO

Jon, let me start on that one, then I'm sure Patrick will provide some comments. Going through the individual businesses, and as we've discussed throughout 2021, we're really pleased with where Performance Chemicals is - in a really sweet spot. We're expecting high single-digit growth, and we expect most of that growth to come through volume. There will be a raw material impact in the mix. Those revenues are likely to be a little bit lower than in 2021, but the underlying business expects high single-digit growth mainly through volumes. Fuel Specialties is slightly different. Fuel Specialties has now reached back to that pre-COVID diesel demand globally. We still have a little more to come in terms of volume from jet fuel, but that will come slowly throughout 2022. You may well see additional volume in Fuel Specialties, but overall, that business will settle back into low single-digit growth rates. Again, we will see some price inflation in the revenue line there, but underlying, you will expect to see about 1% to 2% volume growth in that business. Oilfield Services is where we are a little uncertain at the moment. Customer activity is slowly returning, and we're capturing our share of the market. We expect the business to perform better than it did in 2021. So again, we're optimistic that we'll continue to see good volume growth there as well.

Patrick Williams, CEO

I think Jon, it's been nice to see volume growth versus just pricing activity. It's been consistent throughout all three businesses as you alluded to yourself. We're pretty confident, we're very happy with the quarter, and we're very satisfied with the year-end results.

Jon Tanwanteng, Analyst

Okay, great. Thank you for that color, and it's also encouraging to see that you're expecting gross margin improvement in Q1. I was wondering if you could discuss OpEx going forward and if there is inflation that you need to address there as well, particularly in terms of wage inflation and employee retention?

Ian Cleminson, CFO

Yes, Jon. Like everybody else in the industry and wider economy, we are seeing significant wage inflation. We've seen a lot of raw material inflation, freight, trucking, you name it. It's all coming through. We're very clear that our people are our key assets. We want to do everything we can to attract the best talent and retain the best talent. So, we're taking action across all our businesses around wages, working conditions, and flexibility. Yes, you'll see a lot more of that. How that impacts our operating expenses? We've baked all that into our numbers. It will add some pressure on operating margins, but we think it's the right thing to do. We'll take the appropriate actions in whichever part of the world we're operating in.

Jon Tanwanteng, Analyst

Okay, great. One question on the buyback authorization: is that more opportunistic where you're waiting for some opportunity, or is that something you plan to execute relatively quickly on, given the alternatives in your capital allocation strategy?

Patrick Williams, CEO

It's a little bit of both Jon. It's being opportunistic in the marketplace, it's preventing dilution, and it's a combination of both thoughts. You'll see that because we have such a balanced capital allocation program, this is easily manageable. We believe this will continue moving forward as the years progress. We think we're in a good spot. We've identified a great growth program in Performance Chemicals over the next five years, focusing on our capital allocation. We've increased the dividend by 10% to 12% every year. We want to continue achieving that. Along with a share buyback, we can potentially increase our efforts over time as well, putting us in a strong position.

Jon Tanwanteng, Analyst

Got it. One final question for me if I may, regarding the $70 million investment; can you break that up between product lines and end-markets, and what exactly you're putting the money into?

Ian Cleminson, CFO

Yeah Jon. Let me start. So, the $70 million is over just over two years with investments primarily in the US and Europe. We're focusing on a number of our facilities. The primary focus of that initially will be in the personal care markets, but we'll also be investing in capacity for our home care markets, which will also support our growing business in agriculture and industrial and mining as well. The primary focus will be personal care, which is where we're seeing the most growth right now. However, we're also considering the other parts of our business. This funding will go into capacity expansions and the infrastructure needed to manage that growth, whether that's chunking, piping, or other necessities. There's a lot ongoing, and it's a multi-year program that will support high single-digit growth not just into 2022, but also into '23 and '24 and beyond.

Patrick Williams, CEO

Yes, to add to that, Jon, the focus is around sustainability and natural solutions. That has been the theme all along, and will drive our growth moving forward. As Ian mentioned, typically when we add expansion and other reactors, the volumes are typically already addressed. It’s a well-planned program supported by promising contracts, heavily leaning on sustainability and long-term growth.

Jon Tanwanteng, Analyst

Got it. Thanks, guys. I'll jump back in the queue.

Patrick Williams, CEO

Thank you.

Ian Cleminson, CFO

Thanks, Jon.

Operator, Operator

Thank you. I will now hand the call back to Patrick Williams for closing remarks.

Patrick Williams, CEO

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 being with you again to discuss our first-quarter 2022 results in May. Have a great day.

Operator, Operator

Thank you. That does conclude today's conference. Thank you for participating. You may all disconnect.