Good day. And thank you for standing by. Welcome to the Innospec's Second Quarter 2021 Earnings Release and Conference Call. [Operator Instructions] I must advise you that today's call is being recorded on Wednesday the 4th of August, 2021. And I would now like to hand over to your speaker for today, David Jones, General Counsel and Chief Compliance Officer. Please go ahead.

Thank you. Late yesterday, we reported our financial results for the quarter ended June 30, 2021. The earnings release and this presentation are posted on the company's site at innospecinc.com. During this call, we will be making 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. Please see the SEC site or Innospec's site for these other documents. In our discussion today, we've also included some non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures is contained in our earnings release posted on our website. The non-GAAP financial measures provided should not be considered as a substitute for or superior to those prepared in accordance with GAAP. They're included as additional clarification items to aid investors to further understand the company's performance in addition to the impact that these items and events had 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. And with that, I'll turn it over to you, Patrick.

Thank you, David, and welcome, everyone, to Innospec's Second Quarter 2021 Conference Call. This was a strong quarter for Innospec as operating income exceeded the pre-COVID 2019 comparative for the first time. In the absence of any material downturn in economic activity due to the recent surge in global COVID cases, we are entering the second half of 2021 with an optimistic view of continued recovery and momentum in all of our businesses. Performance Chemicals delivered an excellent quarter with record sales and a 47% increase in operating income over 2020. Since 2017 and throughout the pandemic, this business has delivered margin expansion and double digit annual operating income growth. We are in the early stages of a global effort by the home and personal care industry to reformulate entire product lines around consumers, which increasingly prefer more sustainable, natural and mild ingredients without any compromise in performance. This trend keeps the technical bar high and allows our research, sales and operations teams to play to their strengths. Our industry-leading technology, combined with our formulation expertise, positions us as a key development partner with our customers to address these long-term trends. We are adding substantial new capacity to meet current and future customer demand, and our new R&D facilities are expected to be online by the first quarter of 2022. In addition, we are fast tracking further growth investment opportunities in the U.S. and Europe. In Fuel Specialties, sales and operating income exceeded their pre-COVID comparative levels for the first time. While global fuel demand achieved sequential improvement, there continues to be a gap versus pre-pandemic levels, giving us headroom for further growth. Along with critical safety improvements, our fuel additives decrease diesel and distillate consumption, resulting in immediate and material customer cost savings as well as significant reductions in…

Thanks, Patrick. Turning to Slide seven in the presentation. The company's total revenues for the second quarter were $354.5 million, a 45% increase from $244.9 million a year ago, driven by recovering demand in all our businesses compared to that in the COVID-impacted prior year. Overall, gross margin increased 6.5 percentage points from last year to 30.6%. EBITDA for the quarter was $50.6 million compared to a loss of $19.5 million last year. Our GAAP earnings per share were $0.90, including special items, the net effect of which decreased our second quarter earnings by $0.40 per share. A year ago, we reported a GAAP loss of $1.62 per share, which included a negative impact from special items of $1.44 per share. Excluding special items in both years, our adjusted EPS for the quarter was $1.30 compared to a loss of $0.18 a year ago. This quarter benefited from above-average order phasing for our AvGas fuel additives. The impact of these orders was approximately $0.16 of EPS for the quarter. Turning to Slide 8. Revenues in Performance Chemicals for the second quarter were $128.2 million, up 34% from last year's $95.7 million. Volumes grew 18% with a positive price/mix of 9% and a favorable currency impact of 7%. Gross margins of 24.6% were down 1.4 percentage points compared to 26% in the same quarter in 2020. Operating income increased 47% from last year to $17.9 million. We believe our Performance Chemicals business can sustain high-single digit revenue growth, reflecting the strong organic opportunities in the pipeline. Moving on to Slide 9. Revenues in Fuel Specialties for the second quarter were $143.1 million, 33% higher than the $107.4 million reported a year ago. Volumes grew by 20%, and there was a positive price mix effect of 6% with a favorable currency impact…

Thanks Ian. This was an excellent quarter for Innospec, and the general outlook is positive in our end markets heading to the second half of 2021. Our company is built on a combination of innovative technology and highly responsive customer collaboration and support. This is a culture that is shared by all our employees. Demand is accelerating for our advanced technologies, which enable higher operational efficiency, reduce carbon footprint, and more natural and mild products. We will continue to leverage and deliver on the strong pipeline of growth opportunities that these trends present in all our businesses. With respect to cost inflation and supply chain tightness, these conditions will likely to continue in the coming quarters. We are taking additional price action where required and close communication with our suppliers and customers will remain a focus as we manage through this environment. We expect to announce further growth investment projects in the coming quarters, which support our specialized technologies and product formulation expertise. In addition, our strong balance sheet gives us flexibility to support strategic acquisition opportunities and continue our record of returning value to our shareholders through our balanced capital management program. Now I will turn the call over to the operator, and Ian and I will take your questions.

[Operator Instructions] Our first question for today is from Jon Tanwanteng from CJS Securities.

Hi good morning, it's Pete Lucas for John. You guys covered a lot. Just a couple of quick questions. Should we expect cash flows to turn positive again in Q3? Or will there be more working capital investment going forward?

Yes. Good morning, Pete. I'll take that one. Yes, we've had a big outflow of working capital driven by the sales growth. And as you'd imagine, we have to fund that. That's good working capital on the balance sheet. Q3 and Q4, we expect to return to positive free cash flow.

Very helpful. Thanks. And then is the overall inflation supply chain and logistics situation improving at all into Q3? Getting stable, getting worse? And where do you see your biggest headaches there?

I think -- it's Patrick. I think it's getting stable. There's still some tightness and there's still some issues. And quite frankly, there's still a hangover from the freeze down the Gulf. But with the tight inflation costs and overall market conditions, we've been able to manage through it, and we do not see that affecting us in Q3 and Q4.

Great. And last one for me. Just a technical one. How should we think of the tax rate on a go-forward basis after the changes in the U.K?

Yes. We're still in that sort of 24% to 25% range. The U.K. change is all impacted on our deferred tax, so the adjusted rate of 24% to 25% is pretty good to stick with.

The next question is from David Silver from CLK.

Yes, hi thank you very much. So there were a lot of kind of teasers in the press release this time, and I was hoping just to see if we could get a little bit more color. But the first one I would say would be about the incremental growth opportunities that you mentioned in Performance Chemicals, so above and beyond the project that you accelerated some development spending on. You did talk about kind of what sounded like discrete growth opportunities. And I was just wondering if you might be able to kind of detail it, like what makes these opportunities worthy or justifying of some discretionary capital down the road? I mean do you have the customer and a long-term agreement kind of in place or envisioned? Maybe just talk about what comes after the current growth opportunity that you accelerated your development spending for. Thanks.

Yes, David. It's across the board. As you know, when you put a strategy in place, sometimes it takes years for that strategy to really take off. And as we've discussed in previous calls, we've been working on this strategy quite some time on sustainability, mild products, and natural products. And that's where our focus has been, and that's where the growth is coming from, hence, that's why we have the capital projects. But it's really across the board, quite frankly. It's in home care. It's in agriculture. It's in mining. We've had growth in all sectors in our Performance Chemicals. And we see that moving forward. We've moved our growth rates up we used to say mid-digit growth. Now we're at high-single digit growth. And it wouldn't surprise me to see us in double digit growth consistently over the next few years in that business. We've got a strong pipeline of products across all our businesses. But in primarily Performance Chemicals that you're asking about, it's really in all sectors of that business. So the guys have done a really good job positioning our company to take advantage of the consumer markets and really take off, and you can see it in our results.

Okay. Thank you for that. I guess I did want to ask the question about the M&A pipeline. So Patrick, you've kind of discussed the M&A target funnel, I guess, with potential opportunities. And I guess your company was associated with one very large opportunity. But I'm just wondering, you highlighted both Performance Chemicals and I think Oilfield Services as areas where bolt-ons or incremental complementary technologies or products might be a reasonable target. So as you look at the -- could you just give us some perspective on how you view the M&A opportunity set and what you think might be able to get done over kind of maybe a medium term time horizon?

Sure, David. Our primary focus in M&A over the last few years has always been the Performance Chemicals sector and technology driven. And you would have a few outliers that sit there, but our focus still sits Performance Chemicals. We've seen a lot of deals in the market. Multiples are extremely high. There's a lot of cheap cash out in the marketplace right now. And as you know, we're not going to buy just to buy. I don't want to be one of those companies that buy at a 16 multiple, and two years later you sit back and say, why did I do that? So we're going to be smart stewards of our shareholders' cash and our employees' cash. And where we see a great fit for our company, where we see long-term value, not a short-term hit, but long-term value, we'll make that move. And we're continuously looking at acquisitions. We won't stop looking at them. And when we find the right one, you'll see us jump on it again. I think we're in a great position with the balance sheet. We're in a great position with our strategy. All of our businesses are coming back strong. We see a really, really good room to move forward in the next two years, and I think that a nice strategic acquisition is going to fit well. So we're going to continue on the road that we've promised. We've stuck to our guns to be disciplined, and we're going to still do that.

Okay. Great. And then I do have one last question. And again, kind of a teaser in your prepared remarks. But in Oilfield Services, you talked about some incremental -- some opportunities to drive near-term incremental margin improvement. I'm just wondering if you might be able to provide a little more color on those initiatives that you expect to execute on in the back half of the year.

Yes. The first part of it is operating leverage, and we're starting to see that due to revenue increase. But just as important is simple blocking and tackling. It's getting a handle on equipment. It's getting a handle on price increases where needed. It's moving to more sustainable products for our customers. It's technology innovation, and it's controlling of cost. And all of those combined which we expect to see in Q3 and Q4 should really move us forward to moving that operating income line to a much higher number. And that's our expectations, and I think we're going to see it.

I'm going to just throw in a quick one, additional one on the Oilfield Services business. But the oil price has risen, but the regulatory environment and maybe the risk appetite among the capital providers has probably shifted since pre-pandemic. And at your $83 million quarterly level, you would have to go up, I don't know, roughly 50% to get to the revenue level that was prevalent during much of 2019. And I'm just wondering, Patrick, this is your territory from way back. Could you share your thoughts on how you expect production activity or E&P activity in our major shale basins to develop, let's say, over the next six to nine months? Thank you.

Sure, David. It's interesting, because typically when you see a depressed oil price, when that market in a depressed oil price turns, you see activity turn at the same level. We really haven't seen that. This is for the first time in many, many years where it's been a much more disciplined approach. I think shareholders from E&P companies are expecting companies to pay down debt, return value to shareholders and not throw it in the ground. And so it's been a more disciplined approach to the market which, quite frankly, long term, behooves well for everybody because you'll have sustainability and pricing. And so you might not have that short-term jump, but I think you'll have that long-term gain, and that's what we're starting to see in the marketplace. For us to get to those levels that you're talking about, you're correct. We'll see those, but it's going to take some time. And I think as DRA expands its horizons, I think as we get more business in the Middle East and in other parts of that, in Saudi and other areas of the world, and the shale basins come back as we're starting to see them, you'll see that jump. It's just not going to be as fast as we expected. It's going to be a lot more controlled. And that's what we want to see. You don't want to see a big jump, big spike up, and then two years later a big spike down. You would rather see in this market a nice controlled increase, and I think you'll see that run right along with our numbers as well.

Okay. Great. And I would just say I'm happy to get back in queue, but is there another call waiting? I'm just afraid the call might end if there isn't.

You have to ask the operator. We don't see it on our end.

Okay. All right. I'm going to get back in queue. Thank you very much.

Our next question is from the line of Chris Shaw from Moness Crespi.

Hey good morning everyone. David did ask a few of my questions, but just to clarify. So following up on oilfield there, and thanks for what you just answered, but getting back to that revenue level obviously will take some time. But can you get to the income levels that you've seen in the past sooner or much sooner than you had? Has it been that much sooner than getting back to the revenue levels? Is that -- have you taken cost down or improved margin in any way that that would be feasible?

Yes. Chris, it's going to take time. I think if we do the things that the managers have enacted in oilfield, you should see OI improvement. As you see our expansion of our global business, you should see OI improvement. So I think we can get there as we start creeping up to that top line revenue number. We could get there faster with OI than we could revenue, but it's going to take some time to get there.

Got it. And then just back on Performance Chemicals. I was always under the impression that was a more European business for you. Is that not right? Because I'm just impressed, again, like David, impressed how much it's been growing and how quickly. So I thought Europe was coming sort of rebounding slowly, but maybe I'm wrong.

No. It's very well balanced between the Americas and Europe and probably a little higher in the Americas. And then As-Pac is a very small proportionate share of it. But it's pretty balanced between EMEA and the Americas and then a very small portion in Asia.

Was the Huntsman acquisition, was that mostly U.S.? Is that -- if I remember that correctly?

No, that was mostly Europe. That was mostly Europe.

Maybe that's what I'm thinking of. All right.

Our core business is growing extremely well, and the Huntsman business is growing well along with it.

We're going to go back to David Silver from CLK. Please go ahead.

Okay, thanks very much. Patrick, I was going to ask maybe if you could add some color to some of your newer product introductions and how they seem to be developing. So if I was just going to -- and I'm sorry, these would be in the fuel additives area primarily. But a couple of years ago, you launched with pretty high hopes some things like your DRA business, your IMO 2020 suite of additives and the additive potential from the shift to GDI engine designs. And I think, in my opinion, everything kind of got delayed in those areas by the pandemic, but we're starting to reopen. And I was just wondering if you might be able to speak to, let's say, how the DRA business is responding to higher crude oil, and whether the testing and the back and forth between the major shipping, the vessel operators and yourselves have kind of kicked off maybe some IMO 2020 related business. Thank you.

Sure. The DRA business right now sits in the oilfield sector. And right now, we're just treating oil in the DRA. We will eventually, sometime here in the near future, have a DRA for fuels. And that will sit -- the revenue line will sit probably in that fuels specialties business. But that's where we sit on DRA. It's moving to our expectations. It's excellent technology. We've expanded our site. We have more volume coming online, and we have more customers coming online. So that's going to enhance oilfield as well. On the GDI and IMO, we're definitely starting to see an increase in business. We definitely see it in the marine sector. And GDI is getting a lot more visibility. As people come back to work, we're definitely seeing technical teams take a harder look at our products. And as we see that, they're valuing our products more in its performance. And so I think as these next calls come along, as long as we don't -- the delta variant doesn't shut down the globe again and any other issues, we should start seeing Fuel Specialties get the benefit of the IMO and GDI products. And then there are more products than just that. We're doing a lot more different things in that sector that should enhance ourselves over the upcoming years.

Okay. Thanks. And maybe just last one. But I was hoping to maybe just get a little bit of color on the AvGas, your AvGas business. Not so much the unusual nature or the order phasing issue this quarter. But I'm just wondering, that business has been kind of static or, I don't know, in limbo for a little while as the regulatory authorities ponder potential alternatives. And I'm just wondering, have you -- has that business grown, in your opinion, the total addressable market, let's say? And has the market changed in a way that might afford you some additional market share? Just how you see your AvGas business overall maybe developing over a couple year periods would be helpful. Thank you.

No, it's -- the market really hasn't gone up or down 5%. There are no other players in the market but us. And there's nothing from the FAA that sits there right now in the next few years that tells us that it's going to change at all. So, same market share might go up or down 5%. No changes whatsoever in the AvGas market.

All right. And then just, if you don't mind, could you maybe posit why you think the order phasing was so heavily front loaded or concentrated in this quarter? What was unusual about the business environment that led to that unusually concentrated order for the AvGas?

Sure. Ian, why don't you take that one and I'll add to it.

Yes. Let me just --. So what we saw was a number of customers pulling orders forward. And the main reason for that was because of the supply chain disruption that we've seen, difficulty in shipping, availability of shipping. And they want to make sure that they weren't short of products when they needed it. So they've just pulled orders forward into the second quarter, quarters three and four.

Okay. Great. Patrick, did you want to add something or no?

No, I think Ian covered it well. Thank you.

Thank you, everyone, for your questions. I will now hand back to Patrick Williams for any closing comments.

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 2021 results in November. Have a great day.

Thank you everyone for your participation. You may now disconnect your line.