Good day, and thank you for standing by. Welcome to the Innospec's Third Quarter 2023 Earnings Release and Conference Call. [Operator Instructions].§ I would now like to hand the conference over to your first speaker today, David Jones, General Counsel and Compliance Officer. Please go ahead.

Thank you. Welcome to Innospec's earnings call. This is David Jones, I'm 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, 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-Q and other filings with the SEC. Please see the SEC site and Innospec's site for these and related documents. 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 compared to, those prepared in accordance with GAAP. They are included as additional items to aid investor 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 Third Quarter 2023 Conference Call. Innospec delivered another set of good results. We are well positioned for continued organic growth through innovation and customer partnerships across all our businesses. Performance Chemicals delivered strong sequential operating income growth, along with margin expansion as new personal care contracts commenced and volumes from our existing business improved. While destocking remains a headwind, we believe that it has peaked. We are cautiously optimistic that we will achieve further sequential operating income growth and margin improvement in the coming quarters. In addition, we believe that our continued investments in technologies like our industry-leading 1,4-Dioxane-free and sulfate-free chemistries are well aligned with ongoing consumer and regulatory trends. In Fuel Specialties, operating income was broadly similar to last year as improved margins offset lower sales volumes. These results were below our internal targets but we expect sequential margin improvement and operating income growth with our chemistries into the winter quarters. Margin improvement remains a key medium-term focus and opportunity for our Fuel Specialties business. Oilfield Services had another strong quarter with double-digit operating income growth and margin expansion over the prior year. As expected, activity levels moderated on a sequential basis but remained on track for significant full year improvement in 2023. In the fourth quarter, we anticipate similar results to this quarter as we continue to have a strong pipeline of opportunities across all our oilfield segments and geographies. 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. Ian?

Thanks, Patrick. Turning to Slide 7 in the presentation. The company's total revenues for the third quarter were $464.1 million, a 10% decrease from $513 million a year ago. Overall, gross margin decreased slightly by 0.8 percentage points last year to 29.6%. EBITDA for the quarter was $56.5 million compared to $59.2 million last year, and net income for the quarter was $39.2 million compared to $38.7 million a year ago. . Our GAAP earnings per share were $1.57 including special items, the net effect of which decreased our third quarter earnings by $0.02 per share. A year ago, we reported GAAP earnings per share of $1.55, which included a negative impact from special items of $0.19 per share. Excluding special items in both years, our adjusted EPS for the quarter was $1.59 compared to $1.74 a year ago. Turning to Slide 8. Revenues in Performance Chemicals for the third quarter were $145.2 million, down 9% from last year's $159.7 million, driven by a negative price mix of 19% being partially offset by higher volumes of 7% and a positive currency impact of 3%. Gross margins of 20.9% decreased by 3.6 percentage points compared to 24.5% in the same quarter in 2022 due to a weaker sales mix and higher cost inventory. Operating income decreased 33% from last year to $16.9 million. Moving on to Slide 9, revenues in Fuel Specialties for the third quarter were $169.3 million, down 5% from the $178.7 million reported a year ago. Volume reductions of 4% and a negative price/mix of 4% were partially offset by a positive currency impact of 3%. Fuel Specialties gross margins are 31.3% or 1.4 percentage points above the same quarter last year due to a richer sales mix. Operating income of $27.6 million was down slightly from $27.9 million a year ago. Moving on to Slide 10. Revenues in Oilfield Services for the quarter were $149.6 million, down 14% from $174.6 million in the third quarter last year. Gross margins of 36% were down 0.4 percentage points from last year's 36.4%. Operating income of $16.4 million was up 15% over the prior year. Turning to Slide 11. Corporate costs for the quarter were $19 million and within our expected range compared with $17.4 million a year ago. The effective tax rate for the quarter was 17.5% compared to 20.9% a year ago due mainly to the favorable geographical split of our profits. Moving on to Slide 12. Cash generation for the quarter was very strong with an operating cash inflow of $58.1 million before capital expenditures of $16.7 million. As of September 30, 2023, Innospec had $207.2 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. We are entering the fourth quarter with good momentum in all businesses, and we expect our balanced portfolio to deliver sequential improvement. We continue to execute on a diverse pipeline of organic growth opportunities. Cash generation was again excellent this quarter, and our net cash position strengthened to over $207 million. This quarter, we increased our semiannual dividend of $0.72 per share, bringing our full year dividend to $1.41, representing a 10% annual increase. With our extremely strong balance sheet and a history of disciplined cash management, we are positioned to continue consistent shareholder returns, invest in organic growth and pursue complementary M&A. With our foundation of world-class innovation and customer service, we remain well placed for long-term growth. Now, I will turn the call over to the operator, and Ian and I will take your questions.

Now we will go and take our first question and it is from Jonathan Tanwanteng from CJS Securities.

My first one is on the Performance Chemicals segment. Congratulations on the nice quarter there. I was wondering how much of the sequential improvement was from new products? And how much of the improvement was from legacy products recovering as destocking peaks and you start selling more to end demand?

Jon, it was a pretty good balance of both. We did the expansion in a couple of our sites and we're starting to see that volume flow through in some of the heritage products and some of the new products. So it's really been a combination of both, and we expect that to continue into Q4 and into 2024 as well.

Where are you in the ramp of the new products? Did you only get maybe half of it in the quarter compared to the run rate you're expecting? How much is left as you go through the next couple of quarters getting to the contracted run rates?

Yes, we still have a ways to go. It's fairly early in the process, and the consumer is still a little hesitant. I mean there's a lot of conversations around destocking. We're not seeing it as [indiscernible]. I think there was quite overuse quite frankly, except for probably markets like , et cetera. So it's still early in the process. Just there's consumer -- the consumer is a little hesitant, so you do have some volume demand down. But I think that it's early in the process, and I think we'll see Q4 will tell us a lot going into 2024. We're fairly cautious that this is going to be, let's say, fully optimistic that 2024 is going to be a good year.

Got it. Okay. And then second, just on the Oilfield business. It seems like you found a steady state now after year of really, really strong performance. Is this kind of the run rate you're expecting going forward into the next year? Or are there opportunities for growth at some of these levels? How should we think about this business as you go forward? Have we kind of lapped that on that period [indiscernible]

Yes. I think what you saw in Q3, you'll see in Q4, and that's probably the run rate going into 2024.

Okay. Great. Last question, just any update on the priorities for your cash?

Yes. We're very cautious with our balance sheet, and I know that people talk about being -- burning cash in your pocket, but in markets like today, I think it's great because we're going to have a lot of opportunities. We -- our focus is organic growth, our focus is to continue to increase our dividend, be flexible in the buyback, and just as important is looking at key acquisitions or mergers in our key markets. And we're starting to see a lot more activity in that area due to some chemical companies having stressed balance sheets and some private equity funds having stressed balance sheet. So I think it really bodes in our favor managing this business the way we are today, and I think we'll be opportunistic. So I just wanted to follow up on the Performance Chemicals business. You seem to be fairly confident that you've seen destocking peak. I think some other Personal Care suppliers are out there saying that destocking is probably going to continue through year-end. Can you maybe just give a little bit more color on what you're hearing from customers? And maybe why your business might be behaving a little bit differently than others in the Personal Care space.

Yes. I think in the markets that we're primarily playing, the natural and -- natural beauty, et cetera, we've seen that peak. Depending on where other chemical companies play, there could be still some destocking. But I do think that, that's a probably overused word, because we're seeing -- if anything, we've probably seen volume destruction more than we have destocking. But from what we're seeing from the customers that we supply to and the indications that we're getting for Q4 and also moved into Q1, that we're starting to get back to some normalized order patterns. If you remember, the supply chain is more of, you cut the time in half where you supply products now to the customer so there won't be this big ramp-up once destocking is over. It's not going to be let's restock everything. It's going to be more in-time inventory and on-time inventory. But I think for us, we're starting to see normalized inventories in this business.

All right. That's very helpful. And then switching over to Fuel Specialties. You noted that there was some additional inflation that maybe impacted your gross margins relative to your expectations. Do you expect that price/cost pressure to remain an issue into Q4? Or is there some improvement coming? And then I guess just given the positive seasonal pickup in volume and mix as we get into the winter months, where do you think we should expect to see gross margins in Q4 and Q1?

I think Q4 and Q1, you're still going to see probably margins in the lower end of our range. There is a big focus on fuels to obviously increase those margins, get those back into the mid- to upper range. Typically, in winter months, you have higher-margin products, but with some of these inflationary pressures, they might normalize each other. So I think you'll see probably kind of the same type of margin profile in Q4 and Q1, and hopefully start to improve with the things that we're doing internally into Q2 and Q3 of next year.

All right. The last question for me is just maybe more of a housekeeping question for Ian. Where should we be expecting the tax rates to come in for Q4? And any early thoughts on tax rate guidance for 2024?

Yes, Mike, it's an interesting question. What we've seen in Q3 is sort of the geographical split of our profits towards our lower tax jurisdictions, and also consequence of having some of our operations outside the U.S. where they're exposed to foreign currency fluctuations. So that's been a tailwind for us. We think the effective tax rate for Q4 will be about , so similar to where we were in Q3. And for next year, we think all those issues will sort of resolve themselves, and we'll be back to that 25% to 26% range for the effective tax rate.

[Operator Instructions]. The next question comes from the line of David Silver from CL King & Associates.

The first question, I would like to just kind of go back to Performance Chemicals and the idea that you're starting to ship under your new volume contracts. I guess I was just trying to clarify, but you do have an internal expansion -- capital expansion program underway that I believe was scheduled to be completed maybe middle of next year, so 9 months or so from now. Is it your view that you can continue to fill these newer customer contracts based on the assets, the logistics and production and whatnot assets you have in place now? Or might there be a pause until the full internal discretionary CapEx program is in place?

Yes, David. The good thing about that $70 million CapEx is done in phases. So you're not just throwing $70 million out to give one expansion. It's multiple reactors. We have slowed the program down, so we have slowed that CapEx down, but we have added reactors where we see volumes picking up. And we'll add a lot of that expansion going into next year as well as long as we see the activity that we're seeing today. So we have slowed it down. We do watch it extremely close, and we will add those reactors and bring those on as we see those volumes coming on.

Okay. And then maybe just a somewhat broader question about resourcing or supporting your growth. But when I read through the press release, Patrick, I think you made kind of constructive comments near term, medium term about each of your 3 segments. I'd just like to hone in on two of them, personal -- Performance Chemicals and Oilfield. But those are areas, I think, where to meet the new higher level of demand that you're set up for, you would need new -- additional resourcing in terms of maybe not just personnel, but logistics, maybe some technical support, et cetera. How do you think Innospec is positioned here right now for the higher growth or higher level of business you anticipate over, let's say, the next 6 to 12 months? And maybe just a comment on talent acquisition and being able to get the people that you think you need to meet customer requirements?

Sure, David. Yes, it's a good question. I think we're well positioned right now for the current growth that we're starting to see in all the businesses. I think, as you just alluded to, when you start moving up to the full $70 million expansion of what that means in revenue and what that means in technical service, supply chain, customer support, et cetera, you will have to bring some people on. We're constantly looking at talent depending on where we're going to place that talent and what our needs are. I think we've been a fairly attractive company to work for because we have a strong balance sheet, because we really work with incoming talent to train them into not only this business, but what the needs are for the future of the company and where they fit in for the future of the company. So we do a lot of things in regard to attracting talent. The good thing right now is we're very well set. It would be very minimal, the amount of people that we would need for the current growth rates that we're looking at. So it's not like we're having to go out there and blanket the field to look at multiple people. It's a pretty limited amount of people that we're looking at to add on.

Okay. And then maybe just a couple of smaller or more focused questions, and then I'll get back in queue. But one or two of my companies have had kind of a bit of a margin squeeze here, not so much from a management business perspective, but from an accounting perspective. And I guess it's maybe a FIFO versus LIFO issue, but those that have used FIFO have found that running maybe the costs from 60 to 90 days ago through the income statement and pairing it up with maybe the lower price points today, maybe on a cost plus or a fixed margin arrangement, have led to a little bit of a squeeze from an accounting perspective here. And I just wanted to ask you about that, if that's an issue with your company or whether you think the current level of pricing is pretty well paired up with the accounting per unit cost items? Maybe just I will stop there?

Yes, David, we're pretty well paired up. And we have seen some pressure in our Fuel Specialties and our Performance Chemicals business, where we've probably carried a little bit more inventory than we would like. We're working hard on lowering those levels of inventory. We're still seeing inflationary pressure though. Prices are not coming down across the board. Inflation is still there, and that's still putting cost pressure across the business, but what's pleasing for us is that the way the business is managing the way through that. You've seen improved gross margins in Fuel Specialties this quarter, and you've seen improved gross margins in Performance Chemicals. In fact, Performance Chemicals tipped over 20% for the first time this year. So we're managing our inventory. We're managing our inventory volumes and our pricing well. Fuel Specialties is well understood in terms of the delay and the lag in pricing that we have, so we're not overly concerned. We just want to make sure that we're not carrying too much inventory for various reasons. But it's not been a huge burden for [indiscernible] it's something that we do watch very carefully, David.

Okay. Very good. And then maybe one last one, again, on Fuel Specialties here. But -- I may have missed this, but I believe in your prepared remarks, there was not really a mention of the role of aviation fuel additives as part of your overall mix, and maybe as a source of gross margins being a little bit below your target range. But maybe just an update on how that portion of your Fuel Specialties mix is progressing? And then also maybe just a comment on some of the newer initiatives, stationary power, et cetera?

Yes. I mean, is a very small portion of Fuel Specialties, and it gets smaller as we move forward. There is a lot of heat going on in regards to getting out of low lead gasoline, small aircraft. But we've been seeing that for years, so it's really nothing new. Now do I think it could come before 2030 or 2032? It could. We're well prepared for it. But thankfully, it's a very, very small portion of Fuel Specialties. But we'll do what the industry needs. We'll supply the product as they need, and obviously, we'll take it out in the market when it's time. But I think we're well positioned to deal with AvTEL . It's not as big of a product line in Fuel Specialties as we move forward. In Fuel Specialties, as you just said, is moving into greener paths, and that's where our focus is in this business.

[Operator Instructions]. The next question comes from the line of Jon Tanwanteng from CJS Securities.

I was just trying to get a little more color on your fuel additives. Volume down 4% this quarter, down substantially more in the first half. I'm just wondering, are you selling to end demand at this point? Have you lost share? Or is this just where the market is? And kind of what you expect going forward just from a volume perspective?

No, just for the market. We really haven't lost any market share. I mean it's just -- this business just ebbs and flows. And as we always say it's not recessionary proof, but it's almost recessionary proof. We'll have the ups and downs in quarters, but it's not necessarily that we've lost any big customers.

Okay. Great. And then is there any update on the potential recoveries from the Brazilian issue you had earlier this year?

Not really. We're going through the legalities of -- trying through the insurance and some civil and criminal legalities over in Brazil. We've replaced the individuals that were in charge of that business and we've got new individuals running it, and we're off to the races and getting things fixed and improved.

Okay. Great. And then last question, just assuming this is the run rate for Oilfield going forward at a revenue level, is there a chance to further improve the margin that you're seeing there? Or is -- are you facing the same inflation concerns that maybe you're seeing in maybe Fuel Specialties or other portions of the business?

I think there's a little room for improvement on the margins. You've still got high cost raw materials so you still do have some inflationary issues there, but I do think with some new technologies out there, we can improve the margins just a hair, that's a big focus of ours right now.

Okay. Is there any room to improve price if there's inflation?

Could be. There could be a little bit of room. That's somewhat stagnated though. That's kind of run its course.

There are no further questions for today. I would now like to hand the conference over to Patrick Williams for any closing remarks.

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 fourth quarter 2023 results in February. Have a great day.

That concludes our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.