INNOSPEC INC

RESULTS OF OPERATIONS

The Company reports its financial performance based on three reportable segments, which are Performance Chemicals, Fuel Specialties and Oilfield Services.

The following table provides sales, gross profit and operating income by reporting segment:

Three Months Ended March 31, 2024

The following table shows the changes in sales, gross profit and operating expenses by reporting segment for the three months ended March 31, 2024 and the three months ended March 31, 2023:

Performance Chemicals

Net sales: the table below details the components which comprise the year over year change in net sales spread across the markets in which we operate:

Higher sales volumes for all our regions was driven by increased demand for our personal care and home care products resulting from higher consumer demand. All our regions were affected by an adverse price and product mix due to lower selling prices driven by lower raw material costs. EMEA and ASPAC benefited from favorable exchange rate movements against the U.S. dollar.

Gross margin: the year over year increase of 7.5 percentage points was due to margins returning to a more normalized level when compared to the depressed margins in the prior year. Margins have benefited from raw materials pricing reductions in the current year, combining with the favorable impact for our manufacturing efficiency due to the higher production volumes.

Operating expenses: increased $2.9 million year over year, due to higher selling expenses, including commissions and increased provisions for doubtful debts, together with higher performance-related remuneration.

Fuel Specialties

Net sales: the table below details the components which comprise the year over year change in net sales spread across the markets in which we operate:

Sales volumes were down in the Americas, in part due to a milder winter compared to the prior year which has adversely impacted the sales of our winter related products. ASPAC volumes are slightly up on the prior year due to variations in the timing of demand. Price and product mix was adverse in all our regions due to the decreased sales of higher margin products. AvGas volumes were lower than the prior year due to variations in the demand from customers, being partly offset by a favorable price and product mix from a higher proportion of sales to higher margin customers. EMEA benefited from favorable exchange rate movements year over year against the U.S. dollar.

Gross margin: the year over year increase of 4.1 percentage points was primarily due to the adverse impact in the prior year in relation to the inventory misappropriation of $7.4 million in Brazil. The current year margins are more in line with our normal expectations.

Operating expenses: the year over year increase of $2.2 million includes increased spending on research and development and higher performance-related remuneration.

Oilfield Services

Net sales: have decreased year over year by $5.4 million, or 2 percent, with the majority of our customer activity continuing to be concentrated in the Americas region. Sequentially quarter on quarter, demand from our production chemicals customers has softened. In the short-term we expect production chemicals activity to remain below previous quarters and will continue to pursue further sales growth and margin improvement in our other oilfield segments.

Gross margin: the year over year decrease of 4.2 percentage points was due to an adverse sales mix compared to the prior year comparative.

Operating expenses: the year over year decrease of $9.9 million was driven by lower selling expenses, including lower customer service costs which are necessary to support the demand from certain customers, together with lower provisions for doubtful debts.

Other Income Statement Captions

Corporate costs: the year over year increase of $2.5 million was due to the growth and timing of information technology expenditure, higher performance-related remuneration and the adverse revaluation of our United Kingdom Emissions Trading Scheme carbon credits which can be traded on the open market.

Adjustment to fair value of contingent consideration: the $0.8 million expense in 2024 represents the accretion charge for the acquisition-related contingent consideration payable in relation to our QGP operation in Brazil which was acquired in December 2023.

Other net income/(expense): for the first quarter of 2024 and 2023, included the following:

Interest income, net: was income of $2.1 million in the first quarter of 2024 compared to income of $0.3 million in the first quarter of 2023. Interest income from our cash balances has increased over recent periods due to higher central bank interest rates together with the increases in our cash balances.

Income taxes: the effective tax rate was 25.1% and 26.2% in the first quarter of 2024 and 2023, respectively. The adjusted effective tax rate, once adjusted for the items set out in the following table, was 24.5% in 2024 compared with 25.8% in 2023. The 1.3% percentage point decrease in the adjusted effective rate was primarily due to the fact that a higher proportion of the Company’s profits are being generated in lower tax jurisdictions. The Company believes that this adjusted effective tax rate, a non-GAAP financial measure, provides useful information to investors and may assist them in evaluating the Company’s underlying performance and identifying operating trends. In addition, management uses this non-GAAP financial measure internally to evaluate the performance of the Company’s operations and for planning and forecasting in subsequent periods.

The following table shows a reconciliation of the GAAP effective tax charge to the adjusted effective tax charge: