Hello, this is David Jones and I'm Innospec's General Counsel and Chief Compliance Officer. Yesterday, we reported our financial results for the quarter ending September 30th, 2021. The earnings release in this presentation are posted on the company site at innospecinc.com.

During this call, we will be making forward-looking statements, which are predictions and projections. 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 Innospec's 10-K, 10-Qs, and other filings with the SEC. Please see 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 to the most directly comparable GAAP financial measures is contained in our earnings release, which is also posted on our site. 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 help investors further understand the company's performance in addition to the impact that these items and events 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. And with that, I turn it over to you, Pat..

Thank you, David and welcome everyone, to Innospec's Third Quarter 2021 Conference Call. This was another very good quarter for Innospec. Our global business teams did an excellent job managing through a difficult supply chain, in an inflationary environment.

All businesses delivered strong sales growth, while holding overall gross margins in line with historic levels. Our outlook is for ongoing tightness in logistics and raw materials as we move through the coming quarters.

We will continue to acquire close communication in coordination with our suppliers and customers to limit the impact of any future price actions which may be required to offset inflation.

Our balance sheet remains strong and I am delighted that the Board has approved another increase to our semi-annual dividend to $0.59, bringing our full year dividend to $1.16, a 12% increase. Performance Chemicals delivered another excellent quarter with record sales, improved margins, and a 44% increase in operating income over 2020.

Our technologies directly address growing long-term consumer trends like clean beauty, sustainable packaging, and low carbon formulations. To keep pace with the demand, associated with these trends, we expect to materially step up our organic growth investment in 2022. These investments are targeted for our existing U.S.

and European sites and will add incremental capacity, economies of scale, and flexibility to these operations. The majority of this growth CapEx will support our premium, industry-leading personal and homecare ingredients and formulations.

Accordingly, we recently raised our medium term organic volume growth outlook from mid-single-digits to high single-digits for Performance Chemicals. In Fuel Specialties, sales and operating income were up significantly over last year as global fuel demand continues its recovery toward pre-COVID 2019 levels.

In the coming quarters, both volumes and mix, are expected to improve in parallel with the further lifting of the global COVID-19 restrictions and the acceleration of jet travel, and particularly, international jet travel. Over the medium term, we fully expect global demand for diesel, jet, and renewable fuel to exceed 2019 levels.

Our technologies will continue to play a critical and increasing role in reducing fossil fuel consumption and emissions, while also supporting renewable fuel adoption in the global commercial trucking, marine, and aviation fleets.

In parallel, supported by our technical and R&D leadership, we are actively extending these technologies outside of fuel applications into areas such as coatings and petrochemical industries, where our business has constantly and consistently delivered double-digit annual growth over the past four years.

In Oilfield Services, sequential sales and operating income grew and operating margin expanded for the fifth consecutive quarter. The recovery in this business is progressing, but the rate of progress is below our internal expectations.

The overall market environment in terms of commodity prices, completion, and production activity is healthy and expected to continue to improve, sequentially. With this backdrop, we continue to see significant potential for operating income growth and margin expansion in the coming quarters.

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, we will take your questions.

Ian?.

Thanks Patrick. Turning to slide seven in the presentation. The company's total revenues for the third quarter were $376.1 million, a 43% increase from $265.1 million a year ago, driven by recovering demand in all our businesses compared to a COVID-19 impacted prior year. Overall gross margin increased by 0.3 percentage points from last year to 30%.

EBITDA for the quarter was $41.4 million compared to $31.5 million last year. Our GAAP earnings per share were $0.94, including special items, the net effect of which decreased our third-quarter earnings by $0.21 per share.

A year ago, we reported GAAP earnings per share of $0.51, which included the negative impact from special items of $0.20 per share. Excluding special items in both years, our adjusted EPS for the quarter was $1.15 compared to $0.71 a year ago.

Turning to slide eight, revenues in Performance Chemicals for the third quarter were $132.8 million, up 30% from last year's $102 million. Volumes grew 10% with a positive price/mix of 19% and a favorable currency impact of 1%. Gross margins of 24.5% were up one percentage point compared to 23.5% in the same quarter in 2020.

Operating income increased 44% from last year to $17.8 million. We believe our capital expenditure funds in Performance Chemicals will support the delivery of a high single-digit volume growth over the medium term.

Our estimated spend on these capital projects is $32 million in 2022 and the same again in 2023, as the business accelerates its growth plans to meet market demand. Moving on to slide nine, revenues in Fuel Specialties for the third quarter were $156.4 million, 30% higher than $120 million reported a year ago.

Volumes grew by 17% and there was a positive price/mix effect of 12%, with a favorable currency impact of 1%. Fuel Specialties gross margin for the quarter was slightly below our expected range of 31.4% compared to 33.6% in the same quarter in 2020. Operating income increased 20% from last year to $26.6 million.

Moving on to slide 10, revenues in the Oilfield Services for the quarter were $86.9 million, approximately doubling from $43.1 million in the third quarter last year as customer activity continues to increase. Gross margins of 35.9% were up 2.5 percentage points on last year's 33.4%.

Operating income of $2.7 million was a $7.2 million improvement from the loss of $4.5 million a year ago. Turning to slide 11, corporate costs for the quarter were $15.7 million compared to $13.3 million a year ago, due mainly to higher share-based compensation accruals.

The effective tax rate for the quarter was 24% compared to 37.1% last year, which included the adverse impact of the change in the U.K. tax rate. The adjusted effective tax rate was 22.3% compared to 23% a year ago, due primarily to the geographical distribution of profits.

Moving on to slide 12, cash generation for the quarter of $2.8 million before capital expenditures of $7.9 million was adversely impacted by an increase in working capital due to higher levels of trading and inventory growth to offset supply chain disruption.

We've taken a positive decision to hold greater volumes of raw materials and finished goods where it makes commercial sense to do so to ensure continued production at our plants and supply to our customers. We will keep this under review as we move through the fourth quarter and into 2022.

As of September 30th, 2021, Innospec had $89.2 million in cash, cash equivalents, and no debt. I'll now turn it back over to Patrick for some final comments..

Thank you, Ian. Tight supply chain and inflationary conditions are expected to persist in the coming quarters. We will continue to adapt and manage through the environment, while maintaining our excellent standard of customer service.

We will continue to work with our suppliers and customers to look for ways to limit the impacts of future price actions which may be required in the coming quarters to offset inflation. These near-term challenges will not delay our execution of the significant number of organic growth investments, which are planned for 2022.

As we have frequently noted, organic growth is our capital allocation priority and in 2022, we expect to complete a record level of these growth investments in Performance Chemicals. These investments will primarily support increasing demand for our premium, personal and home care technologies.

While the size and quality of our near-term organic pipeline has favored building over buying, we continue our disciplined pursuit of M&A opportunities, which would add further scale and complement our Performance Chemicals business.

In parallel, with these market growth opportunities, we believe we are well-positioned in our businesses to benefit from increasing demand as economies continue to recover and move closer to full reopening.

While the support of our strong balance sheet, we are continuing our record of returning cash to our shareholders by again increasing our semi-annual dividend to $0.59, which represents an annual increase of 12%. Now, I will turn the call over to the operator, and Ian and I will take your questions..

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of Jon Tanwanteng from CJS Securities. Please go ahead..

Hi. Good morning. This is Stefanos Crist for Jon..

Good morning..

Hey, good morning..

First, can you talk about where you expect margins to go sequentially, just given the input price environment and how mix trends in Q4?.

Yes, so let me take that one. I think, certainly, each business in turn. I think Performance Chemicals will stay around that 24% to 25% gross margin range. We're in a good place there. We're able to pass through inflationary increases.

And I think the important thing is that we're working both with our suppliers and customers to ensure it's not just a straight pass-through, but there's lots of innovation and creativity in the supply chain as well. Fuel Specialties, we expect gross margins to increase a little bit into Q4 and into Q1. They are at the lower end of our range right now.

We expect them to be broadly between 32% to 36%, but just below 32%. And one of the things that we struggle a little bit in Fuel Specialties and inflationary environments is that the pass-through of raw material increases is on a lag, normally around about three months.

So, at the bottom end of that lag, right now, we'll catch that up as we move through Q4, and into next year. And then in Oilfield, we expect those gross margins to stay broadly where they are in the sort of the low-30s, maybe even switching to the mid-30s, in terms of growth percentage points..

Great, thank you.

And I do just want to go a little bit more on the Oilfield gross margins, around the 35%, is that level sustainable? And then how should we think about the impact there on volumes versus price?.

So, yes -- the gross margins themselves, I said they'll stay in that sort of mid to low-30s. There'll be some sales mix issues in there, depending on how the quarter volumes go. And this is a business that is although volume-driven, volume doesn't really impact our manufacturing facilities -- we -- as most of the cost is in raw materials.

So, as long as we're taking price action, passing that through and being very disciplined there, then we should be fine to stay within that range..

Great. Thank you and I'll just ask one more.

How should we think about free cash flow? Are you planning to spend more in working capital going forward?.

Yes, we've not had the best quarter for free cash flow. We had a small free cash flow outflow. And that was mainly driven by a $29 million outflow in working capital. Now, we took a very conscious decision, as we've said in the script too, earlier on, and it's to hold higher volumes of raw materials and higher volumes of finished goods.

And that's really to see us over the supply chain disruptions that we are currently experiencing, and we think that makes good commercial sense. We'll keep our eyes on that as we move into Q4 and into the start of next year.

And in terms of how we see working capital going from here on in, our expectation is that it will be fairly flat between now and the end of the year, and then we'll take another hard look at it as we enter into 2020, then we will see what the external environment looks like, but with the strength of our balance sheet, we think that makes good sense for us to take those actions, to make sure that our plants stay operational and our customers all stay supplied..

That's great. Thank you for taking my questions..

Thank you..

Thank you. [Operator Instructions] And your next question comes from the line of David Silver from CL King. Please go ahead..

Yes, hi, good morning. Thank you very much. I'd like to start with maybe a couple of questions for Ian. Firstly, on the corporate expense line.

I guess when I look sequentially or year-over-year, one of the variances -- one of the bigger variances is on the corporate expense line and I was just wondering if you could maybe talk about what occurred this quarter to maybe put that number at a somewhat elevated level compared to historical levels? And then, what's the outlook for that going forward? Maybe I'll just stop with that question for now.

Thank you..

Sure David, it's a good question. And as you can imagine, over the last 18 months, we had quite an up and down period both on our SAR base, but also from a share price base, and -- this period last year, our share price had dropped quite a bit and because of that, we saw some credits coming through from share-based compensation.

This quarter, we are seeing better performance in the business and we're seeing a better share price performance and that's rebounded a bit.

So, there's a little bit of a delta between where we were this time last year and where we are now, and broadly, corporate costs are -- in that sort of $15 million range, most quarters, they could be a little bit higher, a little bit lower depending on what we're doing.

But that $15 million a quarter is about the range I would expect us to tackle out, David..

Okay, great. And then, also to follow-up, Ian, on the working capital question that you just answered, but you know, there has been a working -- net working capital use, I guess, each of the first three quarters of the year, and the total, I don't know, is $80 million or so, I think on a nine-month basis.

And I know there's a number of arms and legs to that total.

But maybe if you could just talk about for the full nine months, how much of that full working capital increase is really just a recovery from last year versus kind of a net incremental working capital usage to address the issues you raised earlier about purposefully holding more inventory and more finished product goods? Thank you..

Yes, that's a good question, David. So, and as you said earlier, we've outflowed about $82 million of working capital in cash terms in the nine months so far, this year. Of that, I would say, round about $60 million to $65 million is that -- is because of the increased trading we've seen right across all three of our businesses.

Performance Chemicals obviously is accelerating the way in a very nice fashion; Fuel Specialties recovery has been really solid and we're seeing incremental improvements each quarter in Oilfield. We expected that in Q3, we would -- our working capital would stabilize somewhat.

It did not, and that is really -- the last quarter is really the quarter where we've seen a conscious decision by the business to increase its inventory levels of finished goods and raw materials and in fact, most of that focused in our Fuel Specialties' business.

As we look at the individual businesses, Q2 to Q3, both Oilfield and Performance Chemicals, have been relatively flat in terms of working capital, whereas in Fuel Specialties, we've taken that conscious decision to hold more raw materials or finished goods.

And that's really a reflection of the complex and long supply chains that our business has to update..

Okay, very helpful. Thank you. I'm going to switch over to Patrick. I have one question on Performance Chemicals, and then, maybe one on Oilfield. But you did highlight -- or I think Ian highlighted the growth plans for Performance Chemicals over the next couple of years. I appreciate that and it is striking -- noteworthy.

But maybe -- I'm a little unfamiliar with this, but can you just kind of discuss what happens or what are the commercial terms for when you develop kind of one of your more popular new additives.

So, in other words, when you come up with a sulfate-free formulation that's of interest to customer A, is the -- are the commercial terms such that that's provided or supplied on an exclusive basis, or is it typically the case where you can sell it to a wide range of customers, and thereby expand your sales beyond that initial customer level? So, do your breakthrough products -- typically are they provided on an exclusive basis or do you have freedom to sell beyond the initial purchasers?.

David, it's a variety. Some products, if we develop with that specific customer, would be exclusive to that specific customer. But primarily, the majority of our technology is internal and we sell it to the mass markets.

Now, you could get in a situation where the formulation of that product is exclusive to that customer, but from a primary component, in general, we sell it to the mass. And it -- it's mild, it's sulfate-free, 1-4 dioxin-free. Those are the consumer trends that we really chased four years ago when we put this project and we put this strategy in place.

And as we've said in previous calls, it's really fit well with what we're doing. And that's where all of our plant expansion and our volume expansion is going, is for these more mild and more sustainable products..

Okay and thank you for that. And then, I'd like to shift over to Oilfield, Patrick, and I'd appreciate your medium- to longer term perspective on this question. But the recovery in the Oilfield Services topline, in my opinion, has been a little bit more moderate than I would have expected given the absolute level of crude oil prices.

And I'm just wondering if you could share your, like I said, maybe medium- to longer term view for how you see that part of your business, and I guess, by extension, the domestic energy production, the domestic energy industry, the production side evolving over the next few years? In other words, is this the case where it's just going to take longer to get back to the pre-COVID business levels in that group? Or maybe, should we be thinking about kind of a lower ceiling for that given the current, I don't know, political environment or whatever else you might sight.

So, maybe how to think about prospects for continued recovery in that segment given the current level and direction of crude oil prices? Thanks..

Sure David. And we've discussed this in the past, I think it's an interesting recovery than it has been in the past. Typically, when you have crude prices going up, directionally 10% to 20%, you would see volumes go up as well. It's very different now. A because of COVID or B, because of regulatory, but primarily because of Wall Street.

And the expectations now for some of these oil and gas companies that are public companies are we want to pay down debt, we want to return cash back to shareholders before we put more money in the ground. And that's been a fiscal responsibility, more so from those types of companies.

So, the running and putting money into the ground and drilling has slowed down quite significantly. I think you're going to see it, it's coming back at a slower pace. We're well-positioned. I think it's a very responsible way to bring the market back, it will bring some stability to oil prices and nat gas prices.

The regulatory environment has additionally slowed it down due to the current administration. But those are things that we prepared for. Internally, I would say that we're not as happy with the growth in that business and we expect that to see a much better recovery going into next year. So, I think from a position standpoint, we're well-positioned.

It's going to be a slow, moderate growth for the next probably couple of quarters before you see that substantial long-term growth. I think there's a lot of wait-and-see.

There is a lot of waiting-to-see what OPEC does, there is a lot of waiting-to-see to see what the regulatory environment's going to look like longer term, but additionally and probably just as important, to wait-and-see, is to make sure that the supply and demand -- that the demand is still there, longer term, this is not a short-term blip in the screen.

And so, I think it's just -- it's just buying our time and I think that we're positioned well to take advantage of the market when that market and as that market increases..

Okay. Yes, I'm just going to squeeze in one incremental question, again on Oilfield. But in the past, Patrick, you've talked about when conditions are robust in the industry, you've talked about kind of bundling and kind of being a full-service provider to your key customers.

And then, when things got a little tougher and costs became more of an issue for the customer side, you shifted to more of À l a carte or a smaller, a narrower menu of service offerings.

But where do think we are? Your businesses on that -- on that continuum? I mean are customers looking to access more of your services and technologies in one fell swoop, or do you think the cost-consciousness is still kind of prevailing, and maybe might evolve -- or what might evolve away from that, going forward? Thanks..

It's an interesting question, David. I think it filters across all of our businesses, but it's -- we're in a market environment because of supply chain inflationary issues, where some of the technology that we bring, which is grade-A, top technology, is potentially put aside for a more commoditized technology. We just have to adapt to environment.

Doesn't mean we give up margin, it just means that we have to really look at technology from a different perspective. And I think that's really specific to Oilfield is where you have this transition of market play right now.

And so, we're in that environment and so we just have to make sure we continuously look at technology and make sure we provide that to the customer base to limit as much inflationary pressures that they have and supply chain issues that they have as well. And we've done a good job of that.

And I think, you'll see, specific to Oilfield, we'll return to a probably better Op Inc. as we move into next year, as we do, not only it's simple blocking and tackling things, but as we maneuver that technology around.

The customer is still looking at us as the expertise in chemicals downhole and we will -- continuously to provide that because that's what we do, it's different than everybody else. And for us, it's just remaining intact to make sure that we limit really the effect on that customer, on rising cost. And that's what we're doing..

Excellent. Okay. Thank you very much. Appreciate it..

Thank you..

Thank you. There are no further questions at this time. I would now like to hand the conference back to Patrick Williams for closing..

Thank you all for joining us today and thanks to all our shareholders, the 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 2021 results in February.

Have a great day..