INNOSPEC INC.(IOSP)Q2 2026 法說會逐字稿

Thank you. Welcome to Innospec's Second Quarter Earnings Call.

This is David Bentley Jones, and I am 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 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 filings with the SEC. Please see the SEC site and Innospec site for these and related documents. In today's presentation, we have 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 investor understanding of the company's performance and the impact these items and events had on financial results. With me today from Innospec are Patrick S. Williams, President and Chief Executive Officer, and Ian Philip Cleminson, Executive Vice President and Chief Financial Officer. And with that, I will turn it over to you, Patrick.

Thank you, David. Welcome everyone to Innospec's second quarter 2026 conference call. This was a strong quarter for Innospec with all businesses contributing to double-digit sales and operating income growth. Performance Chemicals operating leverage drove a 15% operating income increase over last year. In North Carolina, we continue to prioritize plant repairs and process improvements which will drive long-term benefits. In parallel, we are commercializing new technologies in all end markets and targeting further margin improvement opportunities across the business. We expect these combined efforts to drive further improvement in the second half of 2026. Fuel Specialties had another strong quarter, delivering revenue and operating income growth with margins in our target range. Volume and price mix improved as the business continued to achieve consistently strong results through a range of economic cycles. While there may be some margin headwind in the sequential quarter because of the lag between pricing and cost inflation, we expect a continued strong performance. Oilfield Services operating income in the quarter improved sequentially and versus the prior year, driven by recent DRA plant expansion and growing opportunities for this technology in the markets we serve. However, performance is below our expectations in our completions and production business where opportunities remain for growth and margin improvement. Furthermore, our Middle East business is positioned for growth as onshore completions activity levels recover. We are confident that these combined efforts will drive further sequential improvements in the second half of 2026. 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 your questions.

Thanks, Patrick. Turning to slide 7 in the presentation. The company's total revenues for the second quarter were $491.4 million, a 12% increase from $439.7 million a year ago. Overall gross margin increased by 0.1 percentage points from last year, to 28.1%. Adjusted EBITDA for the quarter was $50.1 million compared to $49.1 million last year, and net income attributable to Innospec for the quarter was $30.8 million compared to $23.5 million a year ago. Our GAAP earnings per share were $1.25 including special items, the net effect of which decreased our second quarter earnings by $0.02 per share. A year ago, we reported GAAP earnings per share of $0.94 which included the negative impact from special items of $0.32 per share. Excluding special items in both years, our adjusted EPS for the quarter was $1.27 compared to $1.26 a year ago. Turning to slide 8, revenues in Performance Chemicals for the second quarter were $190.3 million, up 9% from last year's $173.8 million. Volume reductions of 2% were offset by a positive price mix of 8% and a favorable currency impact of 3%. Gross margins of 17.3% decreased 0.2 percentage points compared to 17.5% in the same quarter in 2025. Operating income of $16.4 million increased 15% from $14.3 million last year. Moving on to slide 9, revenues in Fuel Specialties for the second quarter were $185.7 million, up 12% from the $165.1 million reported a year ago. Volumes were up 7%, with price mix up 3% and a positive currency impact of 2%. Fuel Specialties gross margins of 36.6% decreased 1.5 percentage points compared to 38.1% in the same quarter last year on a weaker sales mix. Operating income of $36.3 million was up 3% from $35.4 million a year ago. Moving on to slide 10, revenues in Oilfield Services for the quarter were $115.4 million, up 14% from the $100.8 million reported a year ago. Gross margins of 32.3% increased 2.7 percentage points from last year's 29.6% on an improved sales mix. Operating income of $8.7 million increased 40% from $6.2 million a year ago. Turning to slide 11, corporate costs for the quarter were $21.6 million compared with $20.9 million a year ago. The effective tax rate for the quarter was 25% compared to last year's 26%. Moving on to slide 12, cash from operating activities was $7.2 million before capital expenditures of $16.5 million. In the second quarter, we bought back just over 87 thousand shares at a cost of $6.4 million. As of June 30, Innospec had $250.2 million in cash and cash equivalents and no debt. And now I will turn it back over to Patrick for some final comments.

Thanks, Ian. With our diversified global supply chain and manufacturing footprint, our teams continue to manage through the direct impacts of geopolitical disruption, delivering in sales, margin and operating income improvements. We remain focused on security of supply and innovative solutions for our customers. We will continue to implement improvements across all our businesses that will position us for further growth and margin improvement. Our short-term expectations are for further operating income growth in Performance Chemicals and Oilfield Services in the second half of 2026, and steady performance in Fuel Specialties. Our strong debt-free balance sheet continues to allow for significant flexibility in the current environment to pursue further organic investment, M&A, dividend growth and buybacks. Operating cash generation was again positive in the quarter, and our net cash position closed at over $250 million. Our teams are focused on opportunities to improve working capital efficiency and we expect these actions will support increased operating cash flow in the second half of 2026. This quarter, we continued our record of returning value to shareholders with our semiannual dividend of $0.92 per share, and $6.4 million in share repurchases. Now I will turn the call over to the operator and Ian and I will take your questions.

To ask a question, please press 1 and wait for your name to be announced. We are now going to proceed with our first question. The questions come from the line of Mike Harrison from Seaport Research Partners. Please ask your question.

Hi. Good morning. First question is on the Performance Chemicals business. I was hoping you could give us an update on the repair and upgrading process at your facilities. Would you say that is mostly complete at this point, or where do we stand on that?

Mike, I would say we are probably about 60% of the way through it. We still have some minor repairs and some additional pipe work for more expansion. But we are getting close. I think by the end of Q4 we should be fully repaired and fully optimized at that point.

Alright. And then, in terms of what you are seeing in pricing versus raw materials in Performance Chemicals — the price mix there was up 8% — did that keep pace with raw material cost inflation that you saw in the quarter? I guess it looks like some of the oleochemical prices are coming down a little bit. Is that helping to provide a little margin benefit?

Mike, the team has done a really good job keeping up with price increases. They have been creative at the edges with new formulations for customers. Where we needed to take price actions, we have, and you can see year over year that margins are pretty comparable and have improved sequentially over Q1 as well. We are seeing price inflation and handling it pretty well at the moment. We continue to expect to be able to handle it and will pass through where necessary. The markets are choppy right now and prices are moving up and down rapidly, but we have a good handle on it and the team are doing well.

Alright. And then a similar question on Fuel Specialties. The gross margin number for Q2 came in perhaps a little better than you had anticipated, but it sounds like you are anticipating some margin pressure sequentially into Q3. Can you give us a little sense of how you are seeing raw material flow through and the contractual pricing pass-through mechanism?

Yes. In Fuels, we have the pricing lag up and down. Fuels is mostly crude derivatives based. The team are chasing prices at the moment. You have seen a little margin compression in Q2; some of that is pricing, but some is also sales mix in the quarter. We are pleased with the team's execution. As we move into Q3, I would expect a bit more pressure on gross margins because of the lag. But there is nothing here that is concerning us. The team are experienced in managing this and the market is responding to our actions. If we get price stability, we should see stability in margins as we move through Q3 and into Q4.

Alright. Thanks for that. And then last question for me is on the Oilfield business. Could you give some additional detail on what you are seeing in the drag reducing agent portion of that business? It sounds like you added capacity and are seeing good uptake. How much growth are you seeing overall, and how much is coming from the Middle East as a result of crude logistics issues following the Iran war?

We added capacity and the majority of that capacity is nearly sold out. We added new customers in North America, and as you mentioned, we have shipped a lot to the Middle East, particularly for East–West pipeline and other pipelines along that corridor. Where there is disruption, there is opportunity. We see this not just as a short-term fix; we expect more products will move to those pipelines over time, even if the Strait of Hormuz opens in the near term. Our product is very effective and has been well received in the Middle East. We will continue to ship as demand persists. There is another potential expansion of DRA capacity under discussion.

We are now going to proceed with our next question. The question comes from the line of David Silver from Freedom Capital Markets. Please ask your question.

Thanks very much. I apologize — my feed was cutting in and out a little. I wanted to go back to the work at your Performance Chemicals facilities after the unplanned outages earlier this year. Patrick, you mentioned discretionary upgrading work should be done by the end of the year. Qualitatively, what kind of benefits should we expect once the project is complete? Is it capacity-related, efficiency-related? If you could ballpark, that would be great. Thank you.

David, the number one priority was to get the plant repaired so we could provide products to our customers, and we have accomplished that. We are still tight, but as the efficiencies come on, it will give us more capacity, better yield rates, and improved safety across the plant. It's hard to put an exact number on the volume increase yet, but we are looking at probably north of 10% capacity improvement moving into next year.

Is that correct?

Yes.

Great. Thanks. I wanted to go back to Oilfield and ask about your approach to investing and taking advantage of opportunities. You touched on the DRA opportunity in the Middle East. What do you sense the broader opportunities are in global oil markets? Will production be structurally higher for some time because of geopolitics, or is the industry still being disciplined with CapEx? What are the broader opportunities beyond DRAs in the Middle East?

You can follow the rig count and see it has not spiked as some expected. E&P companies remain disciplined. However, longer laterals and more stages mean more oil per well than before, so there isn't necessarily a need for a large uptick in drilling. We're seeing a disciplined approach by E&P companies. We are preparing with new technologies that we should be launching within the next six months that will help propel growth in that area and in regions like South America and Mexico. We are watching developments in Mexico and seeing some early signs of activity that could produce opportunities over the next six months.

Mexico — I was not expecting that. Interesting. Maybe to go back to Fuel Specialties: revenues were up double digits and operating income was up 3%. Was the margin effect all due to raw material costs, or was there a notable mix effect? Broadly, it seems that segment is on track for another record year. Any thoughts on record revenue and operating income?

David, most of the gross margin compression year over year in Fuel Specialties was from sales mix. There was a little bit of pricing impact, but mix was the main driver. The business is progressing nicely and at the half year point is where we expected it to be. We expect Q3 to be similar to Q2, and the business is well set for a very strong second half of the year, supported by strong technology, service and execution from the team. They are well positioned to drive for a record year.

And last from me — your results were very strong in absolute and relative terms. How were you able to reposition or react so effectively and not miss a beat in shipments and driving revenue growth given the earlier disruptions? Is there flexibility inherent in your system, or will incremental growth require additional CapEx or resourcing?

We have to give credit to the management team and plant personnel. This was a very difficult period — a winter storm exposed weaknesses, and we worked around the clock to get it fixed and to meet customer commitments. We did that without claiming force majeure. The efficiencies that are coming through will provide additional capacity without more CapEx beyond the work we are already doing. We are in a good position and expect to see volume improvements as quarters progress. It has been a lot of work, and I give credit to the team for fighting through it. We will not go through this again, and we are confident moving forward.

We are now going to proceed with our next question. The questions come from the line of Jonathan Tanwanteng from CJS Securities. Please ask your question.

Hi, good morning. Thank you for taking my questions and really nice quarter. I was wondering if you could quantify the impact in Q2 from the repair and upgrade activity. It sounds like you're taking a little longer to get back where you want to be. What do you think you might be leaving on the table heading into Q3 and maybe Q4? Do you make it up on the back end when things are up and running, or are those sales gone?

Let me take that first, Jonathan, and then Patrick will add color. As Patrick mentioned earlier, we were supply constrained in Q2 and got as much volume out of North Carolina as we could. There could have been more volume. Our expectation is that broadly Q3 will be very similar to Q2 for Performance Chemicals. The additional capacity will not really come on until Q4 at the earliest, and more likely into Q1 next year. So you will see us operating toward the top end of what we are capable of now. Q3 will be similar, and Q4 might see a little more uptick sequentially. That's how we see it right now.

The number one priority was getting the plant up and running to meet contractual volumes, and we have done that. Now it's about putting better efficiencies in place to increase yields and volume. As Ian said, you will see that toward the latter part of Q4 and then for sure in Q1.

So we missed some volume — will we pick some of that back up in Q4 or Q1 next year? You will not pick it up in Q3?

Correct. Q3 will be similar to Q2. The additional volume from improved capacity will more likely come in Q4 and into Q1 next year.

Thanks. You mentioned improved price and mix in this segment. Could you go into more detail on where exactly you are winning and what is driving that, and how sustainable that is as you get more capacity online? Both for Q2 and looking forward.

We did a good job on pricing in Q2 in Performance Chemicals. Year over year mix was pretty flat. Sequential comparisons are distorted by the winter storm impacts in Q1. Moving into Q3, we expect the business to continue to manage pricing and potentially swap formulations with customers where appropriate, and where not, we will take pricing actions. We don't expect to see the full benefit of the improvements until part of Q4 or early 2027 because we won't have the capacity to change sales mix materially before then. We also expect new products to come online which will help the margin profile. Overall, we are managing raw material pressures through customers and supply chains in the same disciplined way as in Q2.

To add to Ian's comments, across all our businesses we've had to manage tight raw material timelines. There have been force majeures on some raw materials, so we've had to reformulate and manage tightness in the market. Timing of shipments has been difficult, and our supply chain and teams have done a very good job dealing with inflationary pricing and tight supply. We feel confident we have a handle on it, and we expect general improvements as we move forward.

You mentioned earlier that Mexico might come back later this year. Can you talk about what is going on there, and if you can size or time a potential ramp-up of business in Mexico?

It's interesting. There have been public announcements of capital spending in areas like polyethylene, crude and natural gas plants, and that is starting to filter through to the need to get more crude out of the system. It won't return to previous levels and will be a slow process, but we are seeing more activity and conversations. We won't sell products without acceptable payment terms, so we will slow-play it until the environment changes. There are opportunities and some customers have come to us with specific payment arrangements. I don't think you'll see an effect this year and we're not counting on it next year, but we are positioning ourselves so that when they return to using chemicals, we are one of their first choices.

Got it. Just to be clear, they are reaching out to you proactively rather than you waiting for something to happen?

Yes, we are having more conversations and people are reaching out with opportunities, though volumes and timing remain uncertain.

We have no further questions at this time. I will now hand back to Patrick S. Williams for closing remarks.

Thank you. 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 third quarter 2026 results in November. Have a great day.

This concludes today's conference call. Thank you all for participating. You may now disconnect your lines. Thank you.