Innospec Inc (IOSP) 2026 Q2 法說會逐字稿

Thank you. Welcome to Innospec's second-quarter earnings call. This is David Jones, and I'm Innospecs General Counsel and Chief Compliance Officer. The earnings released for the quarter in this presentation are posted on the company's website.

During this call, we will make forward-looking statements, which are predictions and predictions about future events. These statements are based on current expectations and assumptions that are subject to risk 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 Innospecs filings with the SEC. Please see the SEC site and Innospec site for these and related documents.

In today's presentation, we've also included non-GAAP financial measures. A reconciliation to the most directly comparable GAAP financial measure is contained in the earnings release. The non-GAAP financial measures should not be considered as a substitute for or superior to those compared in accordance with GAAP.

They are included as additional items to aid investor understanding of the company's performance and just to the impact 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 Patrick.

Thank you, David, and 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 incoming margins improved sequentially and on 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 Clemson, 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. Ian.

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 and 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 the 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 one 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 87,000 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'll turn it back over to Patrick for some final comments. Patrick? Thanks, Ian.

With our diversified global supply chain and manufacturing footprint, our teams continue to manage through the direct impacts of geopolitical disruptions delivering 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.

(Operator instruction)

Mike Harrison, Seaport Research Partners.

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 that's mostly complete at this point or where do we stand on that?

Mike, I would say it's Patrick. I would say we're probably about 60% of the way through it. We've still got some minor repairs and now it's doing a little more pipe work for more expansion, but we're getting close. I think by the end of Q4, we should be fully repaired and fully optimized at that point.

All right. And then in terms of just what you're seeing in the pricing versus raw material realm on performance chemicals, the price mix there was up 8%. Did that keep pace with raw material cost inflation that you saw in the quarter? And I guess it looks like some of the oleo chemicals are coming a little bit lower. Is that something that's helping to maybe provide a little bit of margin benefit?

Yeah, Mike, it's Ian. The team has done a really good job actually with keeping up with the price increases. They've been pretty creative around the edges as well about putting new formulations into customers' hands where we need to set price action they have. And you can see year-over-year that the margins are pretty comparable and obviously improved sequentially over Q1 as well.

So we are seeing price inflation. We're handling it pretty well at the moment and we continue to expect to be able to handle it and we'll pass through where we need to. So the markets are pretty choppy at the moment. Prices are moving up and down pretty rapidly, but we've got a good handle on it and the team are doing well.

All right. And then similar question on fuel specialities. I think that gross margin number for Q2 came in maybe a little bit better than you had anticipated. But it sounds like maybe you're anticipating some margin pressure sequentially into Q3. Can you just give us a little bit of sense of how you're seeing the raw material flow through and that contractual pricing pass-through mechanism?

Yeah, sure, Mark, it's Ian again. As in Fuels, we have the pricing lag up and down. Fuels is mostly crude derivatives-based. So the team again are chasing prices up at the moment. You've seen a little bit of margin compression in Q2. Some of that is pricing, but some of that is also sales mix in the quarter. We're actually quite pleased with what the team have done there. They're on top of it.

As we move into Q3, I would expect a little bit more pressure on the gross margins because of the lag. But again, there's nothing here that is really concerning us. It's a well-trodden path. The team are well versed in what they need to do and the market is responding correctly to our actions. So we're in good shape. So I think as we move through Q3 and into Q4, we're hopeful that if we get stability in prices, we'll start to see some stability in margins.

All right. Thanks for that. And then last question for me is just on the oil field business. I was hoping you could give some additional detail on what you're seeing in the drag-reducing agent portion of that business. It sounds like you guys have added capacity and you've started to see some good uptake of that additional capacity. But how much growth are you seeing in that business overall and how much of that is coming in the Middle East as a result. Result of some of the, I guess, crude logistics issues they're facing in the wake of the Iran war.

Yeah, so we added capacity and the majority of that capacity is almost sold out. We added new customers in North America, but again, as you just alluded to, we have shipped a lot to the Middle East, more importantly for the East-West pipeline and other pipelines that go along that corridor. I've always said, and we said it in the last quarter that where there's chaos, there's opportunity, and we see this as not just a short-term fix.

We think that they're going to move more products to that pipeline overtime time, even if it's Strait of Hormuz or open in the near term. And so our product is extremely good product, and I think that it's been taken very well in the Middle East, and we'll continue to ship products as we go. There is, there's another opportunity for us to do another expansion of DRA down the road, and that's being discussed as we speak.

All right. Thanks very much.

(Operator instruction)

David Silver, Freedom Capital Markets.

Yeah. Hi. Good morning. Thanks very much. I'll apologize. I think my feed was cutting in and out just a little bit. So apologies if I make you repeat yourself here. I'd like to go back to Mike's question about the work done with your performance chemicals facilities in the wake of the unplanned outages and the disruptions earlier this year. So Patrick, you did mention that the work, the discretionary upgrading work should be done by the end of the year.

In a qualitative basis, I mean, have you guys kind of thought about what or what kind of benefits should we expect to result from, the project once it's complete? Is it capacity related? Is it efficiency related? Just what kind of benefits and, if you could ballpark them, that'd be great. Thank you.

Sure, David. The number one priority was to get the plant repairs up and moving so we could provide products to our customers. That was the number one priority on our list, and we've accomplished that. We still have a ways to go. We're still tight.

But I think as these efficiencies come on, it will give us more capacity. It will give us better yield rates, and it also improved safety, everything along that plant that we needed to improve.

It's hard to put a number on yet on what it's going to increase, how much volume is going to help increase But it is a pretty good number that we're looking at, probably north of 10% at least Moving forward for next year.

10% on capacity that is on capacity.

Yeah.

Okay, great. Thank you for that. And I did want to kind of go back to oil field and maybe to pick your brain, Patrick, for your approach to investing and taking advantage of some opportunities. So you certainly touched on the DRA opportunity emerging in the Middle East. What do you sense the opportunities are or how you want to be positioned in the shale basins here?

In other words, will production be structurally higher for some period of time because of, the geopolitics, as you mentioned, or, are we still in kind of a phase where the industry is a little more careful with their CapEx than maybe they've been in the past? But, what are the broader opportunities in the global oil market beyond DRAs in the Middle East.

Yeah, I mean, you can follow the rig count and see it hasn't spiked like you thought it would. And we've always said that E&P companies are taking a more disciplined approach now. But you have to remember, you have longer laterals, more stages, so you're getting more volume of oil through well than you have in the past.

So there's really not a need to have a large uptick on drilling, but what we're seeing is still a very disciplined approach by E&P companies and we just have to be prepared with new technologies, which we should be launching here within the next six months that will help us propel in that area as well as other areas like South America and Mexico.

And, we're watching things over in Mexico. We're seeing some things starting to turn, and hopefully we'll have some opportunities there over the next six months.

Oh, wow, Mexico. I wasn't expecting that. Okay, interesting. Maybe just to go back to fuel specialties, I mean, the revenues were up, double-digits, operating income was up, 3%. So there was some margin effect there. Was that all due to raw material costs or was there kind of a notable mix effect? And then more broadly, it seems like that segment is on track for another record year, just wondering if you had any thoughts about that record revenue and operating income?

Yeah, let me take that one, David, Ian. So as we said previously to Mike, the gross margin compression that we saw year over year, most of that was from sales mix. There was a little bit of pricing in there, but most of it was the mix at the top-line. And the business is progressing really nicely, as you said. So at the half-year point, it's pretty much where we expected it to be.

We expect the business in Q3 to be a very similar set of results to what we did in Q2 and then we're into the winter season. So the business is very well set for a very strong second-half of the year and that is built on great technology, great service to the customers, a really dedicated team that's out there executing day in, day out and we're really pleased with where they've got to.

So yes, they're all well set, it's not easy. But they will drive really hard for a record year.

And then last question from me and this is kind of a big picture question, but your results were very strong here in absolute terms, but I think even in relative terms, you surprised me. And I guess the consensus a little bit in terms of your ability to produce and ship in the wake of the disruptions that you suffered in the first quarter.

Maybe just to comment on how you were able to kind of reposition or react so effectively and seemingly not miss a beat in terms of shipments. And driving revenue growth, I think, across your businesses, several of which did suffer some mechanical disruptions. So just broadly speaking, is there a lot of flexibility inherent in your system?

Is there still a lot of flexibility, assuming you're producing at the 2Q level or is that something that, incremental growth might have to be addressed through additional, CapEx or other types of resourcing?

No, I think we first have to give credit to the management team and the individuals at the plant. I mean, this has been a very difficult process for us to go through. You had the winter storm hit. We found out a lot of weaknesses within the system. We worked night and day, seven days a week to get it fixed to make sure we're not missing load to customers. And that's been very difficult without claiming a force majeure.

So we fought our way through that. I think as I said earlier, the efficiencies that are coming about and coming through now that will hit the fourth quarter is going to give us additional capacity without more CapEx once we spend this original CapEx.

So we're in a really good position. I think that you'll see over the coming quarters, you'll see improvements. We could have had some nice volume improvement in the quarter, but we just couldn't make it, we were at capacity. So I think we will start seeing volume improvements as the quarters come.

But it's been it's been a lot of work David and I've got to give credit to credit due is we put ourselves in this position but we fought like hell to get out of it and we're not going to ever go there again but we're sitting in a good spot where we can see the light at the end of the tunnel and we're very confident moving forward.

Okay great I appreciate all the color. Thank you.

(Operator instruction)

Jon Tanwanteng, CJS Securities.

Hi, good morning.

Thank you for taking my questions and really nice quarter.

Good morning, John.

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

Yeah, let me set that first, John, and then Patrick will come over the top a little bit. As Patrick alluded to on previous questions, we were really supply constrained in Q2. We got as much volume out of North Carolina as we could. There could have been more in there.

Our expectation is that broadly Q3 will be very similar to Q2 across performance chemicals. That volume, the additional volume, the additional capacity won't really come on until Q4 at the earliest, probably more likely into Q1 next year. So I think you're going to see us.

I don't mean plateaued, it's probably the wrong word, but I think we're probably operating towards the top end of what we're capable of now. So I think Q3 would be very similar, Q4 might see a little bit more of an uptick sequentially, but that's sort of how we see it right now.

Yes, I think as we said, John, it's the number one priority was to get that plant up and running to meet the volumes, contractual volumes that we had in place and we've done that.

And now it's more putting better efficiencies in place so that we can increase yields and increase volume moving forward. And as Ian said, I think you'll see that towards a latter part of Q4 and then for sure in Q1.

So we have missed some volume. Will we pick some of that back up in Q4, Q1 next year, yes, but you won't pick it up in Q3.

Okay, great. Thank you. And then I was wondering if you could go into a little bit more detail on just the improved price and mix in this segment. I think you called out that you're doing a good job in getting new formulations to customers, but could you go into a little more detail of where exactly you're winning, what's driving that and kind of how sustainable that is as you get more capacity online?

Are you asking John about in the future or are you asking about Q2?

Both.

Yes, we did a good job on pricing in Q2 in Performance Chemicals. The mix was pretty flat year over year, and I think sequentially, obviously, the winter storm impacted Q1, so it's not a really good comparison because of the volume interruptions that we had.

As we move into Q3, our expectation is that the business will continue to manage pricing, potentially swap out some formulations with customers where we can, but where we can't, we'll set pricing action. I don't think we'll really see the benefit of the improvements that we're making until back part of Q4, early 2027 because we just won't have the capacity, Jon, to change the sales mix and the profile there.

Additionally to that, we're also expecting new products to come online as well, which will help the margin profile. But overall, the way we're managing raw materials, you'll see us do the same again in Q3 to what we've done in Q2. That's responsibly manage it through our customers and through our supply chains.

Just to add a little color to Ian's comments. In all of our businesses, we've had to manage extremely tight timelines on raw materials. There's been force majeure on some raw materials, so we've had to reformulate away.

There's been a tightness in the market in general and timing of shipments has been extremely difficult. So our supply chain, our management team and all the businesses have done a really good job dealing with not only the inflationary pricing, but obviously the tightness of the market.

We feel confident that we have a handle on it. And I think that we'll just continue to see those general improvements as we move forward.

Great. Thank you. And then I think you mentioned earlier that you have some confidence that Mexico might come back later this year. I was wondering if you could just talk about what's going on there and if you can size or time the ramp-up of potential return of business there?

Yeah, it's interesting. There's, they've had some public announcements about spending capital in certain areas. Some was on polyethylene, some was on crude, some was on that gas plants, but petrochemical plants. That's filtering through now to saying that they realize they actually need now's the time that the country needs to get more crude out of the system.

It's never going to be what it was. I think technology is changing a little bit, but it's going to be a slow process. As we always told you, we're not going to sell products that we're not going to get paid on for six months to a year.

And so until that environment changes, we're just going to slow play it. But in saying that there's opportunities, we have had some people come to us and said, we've got opportunities, here's our payment, it's not large volumes, I don't think you'll see any effect this year. We're not counting on it even for next year. If it comes.

So it's more putting ourselves in a position that when they have to return back to using chemicals that were one of their first choice and that's what we're doing. But we are just seeing we're seeing more activity and having more conversations.

Got it. No, that's helpful. And just to be clear, they're not reaching out to you as opposed to just waiting for something to happen.

Correct.

Thank you.

Thank you. Thanks, John.

We have no further questions at this time, so I'll now hand back to you to Patrick Williams for closing remarks. Thank you.

Thank you all for joining us today and thanks to all our shareholders, customers and Innospec employees 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.