David Williams - General Counsel Patrick Williams - President & CEO Ian Cleminson - EVP & CFO.

Ivan Marcuse - KeyBanc Chris Shaw - Monness Crespi Jon Tanwanteng - CJS Securities Debra Fiakas - Crystal Equity Gregg Hillman - First Wilshire Securities Management Matt Dhane - Tieton Capital.

Good day and welcome to the Q3 2015 Innospec Earnings Conference Call. This conference is being recorded. At this time, I would like to turn the conference over to Mr. David Williams, General Counsel. Please go ahead..

Thank you, and good day, everyone. My name is David Williams. I am Vice President, General Counsel and Chief Compliance Officer at Innospec. Thanks for joining our third quarter 2015 financial results conference call. Today's call is being recorded. As you know, late yesterday, we reported our financial results for the quarter ended September 30, 2015.

The press release is posted on the company's website, www.innospecinc.com. An audio webcast of the call and the slide presentation on the results are also now available and will be archived on the website.

Before we start, I would like to remind everybody that certain comments made during this call might be characterized as forward-looking statements under the Private Securities Litigation Reform Act of 1995.

Generally speaking, any comments regarding Management's beliefs, expectations, targets or other predictions of the future are forward-looking statements. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from the anticipated results implied by those forward-looking statements.

These risks and uncertainties are detailed in Innospec's most recent 10-K report as well as other filings we have with the SEC. We refer you to the SEC's website or our site for these and other documents. In our discussions today, we have also included some non-GAAP financial measures.

A reconciliation to the most directly comparable GAAP financial measures is contained in our earnings release and in the presentation that follows, a copy of which is available on the Innospec website.

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 will turn it over to you, Patrick..

Thank you, David. And welcome everyone to Innospec's third quarter 2015 conference call. We're pleased to report yet another strong quarter for Innospec, particularly impressive when you consider prevailing economic conditions, geopolitical issues and the environment around the world.

Our strategy continues to be robust in the face of these challenges and we believe we've performed better than many of our peers. While we're optimistic that we'll meet our objectives for the year, the outlook for 2016 remains very uncertain in some of our businesses as a direction of crude oil and gas prices is yet to be established.

That said, we believe we're well positioned both financially and operationally for the market upturn when it comes. We delivered to our own expectations in the third quarter with continued gains in sales, margins and profitability across the Board.

In fuel specialties, the Americas delivered continuing strong results in our core fuels business with new business closures alongside continued gross margin improvements driven by lower raw material prices and a generally richer sales mix. At the same time, the business in EMEA performed well, but sales gains were offset by adverse currency impacts.

In Asia Pacific, sales were down slightly due to market conditions with margins again strengthening due to a richer sales mix. AvTel sales were strong, but a weaker customer mix resulted in slightly lower margins. We see no fundamental shift in demand in this product line in the near or medium term.

Needless to say, the oilfield market remains extremely challenging with low crude oil prices prevailing throughout the quarter. Despite this we posted a strong third quarter and oilfields specialties with sequential sales holding steady including some market share gains.

Gross margins showed good growth driven by a strong performance in our fracstem business and a richer sales mix in our production business. Considering general market conditions we believe that this is a very incredible performance.

Nevertheless we continue to be diligent regarding both customer service and cost containment measures so that we remain aligned with our customers. We believe that we'll reach our goals in oilfield specialties for the full year and we're well positioned in the market.

However the low price of crude and gas continues to have a huge impact on our customer's investment plans and we remain very cautious regarding prospects for the next quarter and in 2016. In performance chemicals, we completed the disposal of the Aroma Chemicals business during the third quarter.

Adjusting for this, third quarter sales were about the same as last year. Our personal care business continues to deliver strategy with good volume growth and stronger margins, but this was offset by a weaker performance in the polymers business.

We remain optimistic about our personal care business and continue to invest substantially to underpin further growth. Our new product launches of personal care have led a strong foundation for the future and have already delivered additional sales. In Octane Additive, we completed a Q3 order.

We've now received an additional order of similar value which we expect to fulfill over the coming months. Now I'll turn the call over to Ian Cleminson, who will review our financial results in more detail. Then I'll return with some concluding remarks. After that we will take your questions.

Ian?.

Thanks Patrick. Turning to Slide 6 in the presentation, the company's total revenues for the third quarter were $254.2 million, an 11% increase from $228.2 million a year ago. The overall gross margin increased from last year to 35.6% driven by improvements across all our businesses.

EBITDA for the quarter was $42.1 million, a 29% increase over last year. Net income for the quarter was $35.6 million. Our GAAP earnings per share of $1.45 included special items, the net effect of which increased our third quarter earnings by $0.27 per share.

A year ago, we reported GAAP earnings per share of $0.83 but that's included a negative impact from special items of $0.03. Excluding special items in both years, our adjusted EPS was $1.18, a 37% increase from $0.86 a year ago.

As part of the Independence acquisition, we're required under GAAP to fair value of the contingent consideration that we expect to pay in 2015 and 2016 on a quarterly basis. Any adjustments to the fair value is charged to the income statement and is non-cash and adjusted out for EPS purposes.

In this quarter, primarily as a result of our expected lower contingent payouts in 2015 and 2016, the adjustment resulted in a net $8.5 million credit to the income statement and a $0.20 adjustment to EPS.

Moving on to Slide 7, revenues in Field Specialties for the third quarter were $190.3 million, 22% higher from the $156.1 million we reported a year ago. The increase was boosted by a strong contribution from the recent acquisition in Oilfield Specialties, which added 32% to revenues.

Excluding the acquisition volumes were up slightly by 1% offset by an adverse currency impact of 5% and a 6% weaker sales mix in the quarter.

By region excluding Oilfield Specialties revenues in the Americas were up 10% year-over-year driven by volume growth or fell by 13% in EMEA and 17% in Asia Pacific due to adverse exchange impact and a weaker sales mix. Sequentially revenues in Oilfield Specialties remain steady from the second quarter and AvTel delivered to plan.

As expected gross margins in the segment softened from the strong second quarter to 36.3% but continue to benefit from a richer sales mix and lower raw material price compared to a year ago. As a result, gross profit was $69 million up 30% from last year's $53.2 million and operating income was $27 million.

Turning to Slide 8, adjusting prior year comparisons for the disposal of Aroma Chemicals revenues in performance chemicals for the third quarter were about the same as last year at $43.6 million. Volume growth of 13% was offset by lower pricing of 6% and an adverse currency impact of 7%.

By region, sales in the Americas were broadly same to last year and fell by 4% in EMEA driven mainly by currency impact. Sales in Asia Pacific were 21% driven by volume. Gross margins were 28.4% in the third quarter, benefitting from a richer sales mix with increased sales of higher margin in personal care business.

Performance Chemicals operating income for the quarter was $5.4 million broadly flat compared to last year’s third quarter on a like-for-like basis. Moving on to Slide 9, net sales in octane additives for the quarter were $20.3 million in line with expectations. The segment's gross margin was 44.3% and operating income for the quarter was $8 million.

As Patrick noted earlier, we have recently secured an additional order and expect to deliver $19 million of revenues over the coming months. Beyond this we have no further visibility.

Turning to Slide 10, corporate cost for the quarter were $9.3 million slightly low than a year ago and just below our expected range of $10 million to $11 million for the quarter. There was notable engine impact for the quarter compared to a charge of $0.8 million a year ago.

The effective tax rate for the quarter was 14% lower than previously expected due to the change in geographic mix of taxable earnings. For the full year adjusted effective tax rate is now anticipated to be around 21%.

Moving on to Slide 11, we closed the quarter with net debt of $4.9 million, a significant improvement from $71.1 million at the end of second quarter of 2015 with a $41.5 million contribution from the sale of our Aroma Chemicals business in the quarter.

The company retired 84,633 shares at $4 million which completed the current 20 million Board authorized share repurchase program. Net cash generated from operations was very strong at $35.5 million. As of September 30, we had cash and cash equivalents of $132.8 million and total debt of $137.7 million.

I will now turn it back over to Patrick for some concluding comments..

Thanks Ian. In conclusion, we delivered to our expectations in the third quarter and we're pleased with our performance particularly considering the state of the markets worldwide. Innospec continues to be in an excellent financial position and consequentially the Board feels very comfortable to continue to commitment to return value to shareholders.

And we delivered despite continuing our policy of increasing our semiannual dividend, which we raised to $0.31 per share for the second half of 2015 and this brings our full year dividend to $0.61 per share, which is an increase of approximately 11% from 2014.

The Board of Directors has also considered that our balance sheet is sufficiently strong to authorizing new share repurchase program, which will buy back up to $90 million or common stock over the next three years. We're confident that our strategy will continue to deliver results by providing innovative products and services to our customers.

We appreciate the loyalty and efforts of our employees and the continued support of our customers and shareholders worldwide. Now I’ll turn the call over to the operator. Ian and I will take all your questions..

Thank you. [Operator Instructions] And we will take our first question from Ivan Marcuse from KeyBanc Capital Markets. Please go ahead..

Hi guys nice quarter. Thanks for taking my questions. The first question I have is on the fuel specialties business. The gross margin again stayed -- was against strong and I am assuming there is a benefit of raw materials in their price cost benefit.

How big of a benefit was that to your year-over-year improvement and gross margin? What's your expectation going forward in that business?.

Yeah, Ivan it's probably the expectation was probably, about two or three percentage points higher than we would normally expect. Historically we've always traded around about the 30 to 32 mark. Currently if you take that probably sits towards the top end of our expectations in Q3. And as we said on our last call, we do expect it trend down.

It did and we expect it to trend down a little bit further into Q4 as well. So, currently we're expecting Q4 to look more like 33, 34 in this segment..

Great and speaking about Q4 and fuel specialties last year it was a very big quarter, is there any reason why you wouldn’t repeat that or was there something I can’t remember if there is something special in there..

Yeah, last quarter in Q4 last year Ivan we had a very cold winter and what that meant particularly in the U.S. is that we got a lot call flow improvement to the system and that went to win on started early, it's very hard and it went along long time. So that really helped those hit a very good number last year..

I think Ivan it's going to all be dependent on whether if you go to core fuel specialties business, if we have a decent winter either A, in Europe and the Americas, we could have a really nice fourth quarter, but I would probably say it would be on average fourth quarter as we sit today..

Great and then if I am looking at this right it looks like you had a bigger quarter at least in IOC and on a sequential basis in the third quarter in the oilfield chemicals, but you're pretty cautious going to the fourth quarter.

Why wouldn't that momentum continue or did you see a de-acceleration as you move to the quarter and is this is your order book falling off a little bit in looking on to the fourth quarter?.

Yeah, we didn’t see a full de-acceleration in the latter part of Q3, but typically in the oil field sector even in good times or bad times you see a generally slow fourth quarter.

A, winter time, B, the immovability of rigs and products, but I do think for us we're always cautious in this market sector with good prices and natural gas prices where they set today. And I think we will just rather we give us guys cautious remarks and see where the quarter falls out.

But I do think you'll see some slow down, What we've always said from Q1 forward is that we hit, either flat or even less 10% we've outperformed the market and so as we've said in our script, we will remain on track with that. I think we're going to definitely hit out numbers or staying at least even as we stated earlier..

Great, and where you stand today, I guess Ian what sort of the payout expectation fourth quarter for IOC, as the cash flow stands?.

It's still got a little bit we're to do and Ian it’s looking round about $40 million to $45 million payment..

Or you use data which comes straight out of cash on hand..

Yeah, it comes straight out of cash..

Great, thanks a lot for taking my questions..

No problem, Ivan..

Thanks Ivan..

Thank you. Our next question comes from Chris Shaw in Monness Crespi. Please go ahead..

Hey, good morning guys, how you are doing?.

Good..

You gave a 1% volume number for fuel specialties segment, I guess ex the IOC acquisition is that despite for the volume growth of just the core of your additives business or is there -- I am trying to get a sense of how the volumes are in that business or is that pretty accurate for that?.

Yeah, there is a little bit variability between regions Chris. We've had good volume growth in EMEA in the quarter. Pretty flat in APAC, we did see a drop-off as we said in AvTel in terms of volume. A lot stronger pricing in sales mix.

So there is a little bit of variability in that, but overall we do see positive volume growth in our core field specialties business this quarter and we certainly expect that in future quarters as well..

Okay. And then I guess maybe asking Patrick just a more broad outlook, maybe for your oilfield business, but just in general I think usually what do you think for the U.S.

oil production will look like or what's going to happen in that market? Do you have any updated view on oil production goes in the U.S.?.

Yes Chris I don't think it's changed a lot since my last view, but I do think at some point in time we will start getting relief on pricing.

There has to be a northern trend upwards on crude, but we have taken into effect there is a lot of wells behind pipe, drilling will pick up anytime soon in the next six to eight months just due to the fact that it will be more fracking of wells that have been put behind pipe.

Our view of theirs, if you look at a lot of the OPEC countries they balance their budget by crude and they can't sustain these prices -- these price levels for a long period of time. So I think there will be some responsibility in the marketplace. It's just going to take some time.

There is a lot of banks car loans out now and a lot of the E&P companies, there is a lot of shifting in the market, there is a lot of stressed assets out there. I think it's going to take some time to shake it out. It's very similar to the market crises in '99 and 2009.

So for us let's just sit tight and see -- I think we'll see probably mid 50s of crude probably later part of next year and I think that that's a nice price to start generating some upward activity in the oilfield sector..

Okay. Thanks and you just mentioned about the stressed assets.

Have you for your business is there anything out there that's getting more appealing and the need of capital that you can acquire that fits your portfolio?.

Yes we look at our portfolio and we like to have a nice balance between the three businesses and if you look at the balance between the field sector and the oilfield sector there is a nice balance there. Where we're really concentrating on right now is the personal care side and there is a not a lot of stressed assets in the personal care side.

But if you look at oilfield as specific, there is a lot of stressed assets, yes, and we are seeing a lot coming on in the market. The fact is a lot of these assets are borderline bankrupt and if you're volume for the asset and the market share gain or do you just wait and let them go out of business.

Everything that we've seen on the market to date has not been something that we really want to jump in and buy. I think let's sit tight let the market shake itself out. If we find something that really fits and makes a lot of sense at the right multiple, obviously we'll have to take a hard look at it.

But as of today we really haven't seen anything that's caught our eye..

All right. Great. Thanks. It makes sense..

Thank you..

Thank you. Our next question comes from Jon Tanwanteng in CJS Securities..

Good morning, gentlemen. Fantastic quarter. Congratulations..

Thanks Jon,.

Thanks Jon,.

Can you break out the revenue or margin contribution from oilfield at all in the quarter?.

We don't do that at the moment Jon. It sits within our fuel specialties segment and I think what we said on the call is sequentially it's up flatting over Q2 and what we expect to do is in 2016 you'll get a lot more visibility on that. Our intention is if everything goes to plan, that we'll be able to break that in more detail for you going forward..

Okay.

And maybe just from a ballpark perspective, were the margins there above or below the core field business?.

They were probably about in line around that 6% and what we have said previously Jon is that we were aiming for around about $240 million to $250 million revenue in that segment and as Patrick said earlier, we expect to be broadly in line with that..

Okay. Great.

The performance chemical margins were also pretty nice in the quarter, how much of that was actually mix versus input cost?.

It's probably really all mix. We don't get that much tailwind from input cost in that particular segment. So it's really driven by start up. We're just producing more personal care sales as a proportion. They tend to be higher margin in the rest of the business in that segment and it just naturally directs the margins higher..

And I think Jon with the disposal of the aroma business, you're now seeing the true impact on the gross margins for the personal care business..

Okay. Great.

And just on the balance sheet you’re obviously at net zero leverage, you have the buyback, you have the higher dividend, but can we expect more from the M&A side and are you active there? What's the pipeline look like?.

We are active and I think as we stated in the last two calls we're trying to make sure we have a balanced portfolio. So we were really active looking at the personal care sector. I think as everybody knows even multiples are extremely high in that sector.

So we’re cautious in what we're paying and where we're paying geographic where we buy, but we're definitely active in the M&A pipeline.

I think it's probably slow a little bit on oilfield side until we see that market share gain as we said earlier, but we are looking more so on in the personal care than anywhere else but you never know when something pass up in which sector that we will buy but that’s our focus right now..

Okay, and finally just on the timing of that new Octane where you said over the next couple months, but is that all fall in Q4 or some will come into the….

I think majority of that should fall into Q4. We’ll know more in the upcoming weeks but look like the majority come into Q4 if not all of it..

Okay, and just regarding the customer, have the indicated to you that they’re winding down their business there or is just open ended?.

It's just open ended..

Okay, thank you very much..

Thank you..

Jeremy Hellman from Singular Research is next. Please go ahead..

Thank you. And this [indiscernible] in your prepared remarks -- I wonder if you elaborate just on what went into that which are mixed.

What are overweighed and is it -- is this, is the message you recorded in this quarter is something that’s sustainable or just something that is for one quarter only?.

You cut your first half of your question was coming in and out, so we really didn’t catch but I think we understand the jest of your question..

Yeah, I think what you were talking about Debra was the mix within fuel specialties and….

Production business was I think what you said?.

Right against so Debra, you have a really poor line. I think Debra the best thing if you dial off and dial back in and the get in the queue and the operator can take -- if we can take the next call please..

Thank you so much..

Our next question comes from the Gregg Hillman in First Wilshire Securities Management..

Yeah, good morning, gentlemen..

Good morning, Gregg..

Can you talk about -- first of all Patrick in oilfields if you come out with a new classics of products lately in oilfield that you haven’t put on market before, that could be material?.

Yeah, that’s a continued process within our R&D program and I think if you look at the oilfield business whether its frac and drilling or production we're continuously come out with new products. Obviously that's how we've gotten share gains and have stayed steady.

So that's continued process or is there anything new and earth shattering that’s on the market yet, not yet..

Okay, and then finally in regulation is there been -- is there anything new on the regulatory front for diesel or harbor or anything that you could speak off like in China for example?.

I think you're starting to see a little more headwind with the Chinese Government getting a lot of pressure, a lot of pressure from a lot of other countries in regards to cleaning up their fuel. It goes the same with India. I think it’s just a matter of timing.

Do we have a crystal ball to say when that timing is, we do not, but we're obviously well prepared within those two specific countries we just discussed to be to really enjoy the fruits of then going to a ultra low diesel field..

Okay. And are you -- do your relationships for the state oil companies in both those countries or the major oil companies already..

We do..

Okay.

Then what would be the potential market if those countries did change regulations or you think?.

It’s hard to say, until they actually take that field down to less that 15 PPM sulphur it’s really hard to say due to the fact that we don’t know is there going to be a little brisk to this spec, is there going to be a sea tank spec, is it going to be what’s the sulphur spec going to going be.

So until they actually come out with the true rigs and we could read off the rigs, we'll be able to dial in what kind of numbers that will look like?.

Okay, thank you..

Thanks Gregg..

Thank you. We'll take follow up question from Ivan Marcuse of KeyBanc Capital Markets..

All right. Great. Thanks for taking my questions. One I got already answered, are you expecting to break out the oilfield chemical business or it's going to be a type of segment when you report it next quarter….

Not next quarter, like you heard us we'll break it out for the first quarter..

Great. And then if -- within your cash -- even with the $40 million payout or whatever it maybe for the quarter, you're still going to probably end barely any sort of net and historically every once in a while you do a special dividend or something like that.

Will that be something you should consider or do you -- or for the time being will you expect to sort of build cash and hopefully an acquisition comes your way?.

I think you just said it's probably the latter Ivan, but of course we always look at special situations, but for right now you can see we're trying to increase our dividend significantly every year and the likelihood is that's what we'll continue to do. Will we do a one time, I would say probably stick with the latter for now, but it could happen..

Great.

And then corporate expense, I don't know if you mentioned this, sustain at 9% to 10% range?.

Yeah I would say probably 10% to 11% is probably a better number..

Okay. Great. Thanks..

Thanks..

Matt Dhane in Tieton Capital Management, please go ahead..

Thank you. You talked on this to an extent, but I wanted to probe a little deeper. Obviously do you called out, you've been gaining great market share within the oilfield base and I know you touched on new product being a dynamic.

I was just curious if you go a little deeper, it's really that the bulk of your market share gains really driven by the new products or is there other dynamics to that -- help me understand what's allowed you to be so successful in such a touch environment there?.

I think two things, I think we've got a very good management team that's very seasoned and they've been in this market for quite some time. I think secondly it's our approach to the market. It's very easy to look at the people that's going on in the oilfield sector with a lot of the acquisitions going on, a lot of consolidation going on.

There is a lot of unknowns in the market and I think for us bringing stability, good products, good management and a good model has really helped us gain market share..

Great. Thank you..

Thank you..

Thank you. There are currently no more questions. At this time, I would like to hand the call back over to the Mr. Patrick Williams..

Thank you all for joining us today and thanks to our shareholders, customers and Innospec employees for your interest and support. If you have any further questions about Innospec or matters discussed on this call, please give us a call. We look forward to meeting up with you up again early next year. Take care..

That will conclude today's conference call. Thank you for your participation ladies and gentlemen. You may now disconnect..