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 June 30, 2024

The following table shows the changes in sales, gross profit and operating expenses by reporting segment for the three months ended June 30, 2024, and the three months ended June 30, 2023:

Performance Chemicals

Higher sales volumes for all our regions were driven by increased demand for our personal care and home care products resulting from higher consumer demand. The acquisition of the QGP business has also delivered a volume increase year over year. All our regions recorded an adverse price and product mix due to lower selling prices, driven by lower raw material costs, together with greater demand from consumers for lower priced products.

Gross margin: the year over year increase of 5.4 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 $2.2 million year over year due to higher sales commissions, increased amortization for acquired intangible assets relating to the QGP acquisition, increased spending on research and development and higher performance-related remuneration.

Fuel Specialties

Sales volumes in all our regions have increased year over year due to increased demand from customers. Price and product mix was adverse in all our regions, with a favorable sales mix being offset by lower pricing resulting from lower raw material costs. AvGas volumes were higher than the prior year due to variations in the demand from customers, together with a favorable price and product mix due to a higher proportion of sales being made to higher margin customers.

Gross margin: the year over year increase of 5.5 percentage points was driven by an improved sales mix from increased sales of higher margin products, together with the easing of raw material and other inflationary pressures and the adverse impact of the Brazil inventory misappropriation and associated costs of exiting the trading relationship in the prior year.

Operating expenses: the year over year decrease of $0.5 million was primarily due to lower provisions for doubtful debts being partly offset by higher research and development expenditure.

Oilfield Services

Net sales: have decreased year over year by $90.1 million, or 45 percent, with the majority of our customer activity concentrated in the Americas region. Sales volumes were adversely impacted by significantly lower production chemical activity in 2024. Management expects to see lower sales volumes continuing in production chemicals through the second half of 2024, with the potential for demand to recover over the near-term, together with the potential growth opportunities in our other oilfield markets.

Gross margin: the year over year decrease of 11.5 percentage points was due to an unfavorable sales mix as customer demand has weakened.

Operating expenses: the year over year decrease of $29.8 million was driven by the lower customer service costs and commissions related to the reduced demand from certain customers, together with lower provisions for doubtful debts and lower performance related remuneration accruals.

Other Income Statement Captions

Corporate costs: the year over year decrease of $2.5 million was primarily due to acquisition related costs in the prior year compared to none in the current year, together with a favorable revaluation for our United Kingdom Emission Trading Scheme credits in the current year compared to an adverse revaluation in the prior year.

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

Interest income/(expense), net: was income of $2.1 million in the second quarter of 2024 compared to an expense of $0.3 million in the second quarter of 2023, driven by the higher interest income being earned in 2024 for our increasing cash balances.

Income taxes: the effective tax rate was 28.6% and 21.0% in the second quarter of 2024 and 2023, respectively. The adjusted effective tax rate, once adjusted for the items set out in the following table, was 28.4% in 2024 compared with 21.0% in 2023. The 7.4 percentage points increase in the adjusted effective rate was primarily due to the fact that a higher proportion of the Company’s profits are being generated in higher 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:

Six Months Ended June 30, 2024

The following table shows the changes in sales, gross profit and operating expenses by reporting segment for the six months ended June 30, 2024, and the six months ended June 30, 2023:

Performance Chemicals

Higher sales volumes for all our regions were driven by increased demand for our personal care and home care products resulting from higher consumer demand. The acquisition of the QGP business has also delivered a volume increase year over year. All our regions recorded an adverse price and product mix due to lower selling prices, driven by lower raw material costs, together with greater demand from consumers for lower priced products.

Gross margin: the year over year increase of 6.5 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 $5.1 million year over year due to higher selling expenses, increased amortization for acquired intangible assets relating to the QGP acquisition, increased spending on research and development and higher performance-related remuneration.

Fuel Specialties

Sales volumes in all our regions have increased year over year due to increased demand from customers. Price and product mix was adverse in the Americas and EMEA, with a favorable sales mix being offset by lower pricing resulting from lower raw material costs. ASPAC benefited from a favorable price and product mix due to the increased sales of higher priced products. AvGas volumes were higher than the prior year due to variations in the demand from customers, together with a favorable price and product mix due to a higher proportion of sales being made to higher margin customers.

Gross margin: the year over year increase of 4.7 percentage points was driven by an improved sales mix from increased sales of higher margin products, together with the easing of raw material and other inflationary pressures and the adverse impact of the Brazil inventory misappropriation and associated costs of exiting the trading relationship in the prior year.

Operating expenses: the year over year increase of $1.7 million is due to higher research and development expenditure and higher performance-related remuneration accruals.

Oilfield Services

Net sales: have decreased year over year by $95.5 million, or 26 percent, with the majority of our customer activity concentrated in the Americas region. Sales volumes were adversely impacted by significantly lower production chemical activity in 2024. Management expects to see lower sales volumes continuing in production chemicals through the second half of 2024, with the potential for demand to recover over the near-term, together with the potential growth opportunities in our other oilfield markets.

Gross margin: the year over year decrease of 7.5 percentage points was due to an unfavorable sales mix as customer demand has weakened.

Operating expenses: the year over year decrease of $39.7 million was driven by the lower customer service costs and commissions related to the reduced demand from certain customers, together with lower provisions for doubtful debts and lower performance related remuneration accruals.

Other Income Statement Captions

Corporate costs: are in line with the prior year, including the benefit of no acquisition related costs in the current year being primarily offset by higher information technology investment together with the adverse impact of inflationary increases.

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

Interest income/(expense), net: was income of $4.2 million in the first six months of 2024 compared to nil in the first six months 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 26.7% and 23.9% in the first six months of 2024 and 2023, respectively. The adjusted effective tax rate, once adjusted for the items set out in the following table, was 26.2% in 2024 compared with 23.6% in 2023. The 2.6 percentage points increase in the adjusted effective rate was primarily due to the fact that a higher proportion of the Company’s profits are being generated in higher 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: