David Williams - VP, General Counsel and Chief Compliance Officer Patrick Williams - President and CEO Ian Cleminson - EVP and CFO.

Ivan Marcuse - KeyBanc Capital Markets Jon Tanwanteng - CJS Securities Bill Dezellem - Tieton Capital Management Gregg Hillman - First Wilshire Securities Management.

Operator:.

Thank you and good day, everyone. My name is David Williams. I'm Vice President, General Counsel, and Chief Compliance Officer at Innospec Inc. Thanks for joining our First Quarter 2016 Financial Results Conference Call. Today's call is being recorded. As you know, late yesterday, we reported our financial results for the quarter ended March 31, 2016.

The press release is posted on the company's website at 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 everyone 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 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 first quarter conference call. Despite the challenging market conditions, we have delivered a good EPS performance in the quarter.

We have exceeded our earnings from Q1 2015, which is quite an achievement, given the market turmoil and the strength of the comparative quarter, which also include the Aroma divestment.

We've had to deal with volatile market conditions, especially in oilfield services, one of the warmest winters on record across most of the world, continued political instability, and further exchange rate headwinds.

Against this background, I'm pleased that we have delivered improved earnings both on a GAAP and adjusted basis and encouraged that we have a great foundation for future growth.

This quarter's performance combined with continued strength of our balance sheet has given us the confidence to further increase our dividend and to continue our buyback program we announced in Q4 2015.

We continue to report our fields and oilfield services businesses as one combined business unit, but it is our intention to split these out from our Q2 results in August. Ian will say a little more about this later in the presentation.

Field specialties sales were down in the quarter, but this was mainly driven by the well-publicized industry-wide decline in the oil and gas business. In oilfield services, we have been successful in gaining new business and extending our customer base, but this has not offset the contraction in volume across the market.

Our Q1 performance was also impacted by a $9 million phasing of sales to a major customer. Having held back in Q1, they have now resumed their normal order pattern in Q2. In fuels, we have also successfully battled against softer fuel demand, the warm winter, and a change in refinery crude slates requiring lower volumes of one specific product line.

We continue to work closely with our customers to bring them state-of-the-art technology with unrivaled customer service. With this background, the business has performed well, showing its robust nature, and as anticipated, gross margins remain very good. Our strategy in performance chemicals remains on track.

Our delivery of new products and technology is well aligned to our customers needs. This continues to underpin our growth in this market. We are confident that our track record of success in personal care will continue, and this market remains one of our key focus areas for acquisition.

As we indicated on the last call, we delivered the majority of the latest order in octane additives during the quarter, although the final small portion was delivered in April. We now have a further order of similar size which we expect to deliver in the next few months. Beyond that, we have no further visibility.

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 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 first quarter were $212.1 million, a 21% decrease from $269.2 million a year ago. Overall gross margin increased from last year to 35.9%, driven by improvements across all our businesses.

EBITDA for the quarter was $32.8 million, an 11% decrease compared to last year. Net income for the quarter was $18.9 million. Our GAAP earnings per share were $0.77, including special items, the net effect of which increased our first quarter earnings by $0.16 per share.

A year ago, we reported GAAP earnings per share of $0.76, which included a negative impact from special items of $0.19. Excluding special items in both years, our adjusted EPS for the quarter was $0.93, a 2% increase from $0.91 a year ago, which also included $0.05 of earnings from the Aroma divestments.

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

In this quarter, primarily as a result of an expected lower contingent payment at the end of 2016, the adjustment resulted in a net $1.6 million credit to the income statement and a $0.04 adjustment to EPS.

Moving on to slide 7, revenues in field specialties for the first quarter, which includes our fuels and oilfield services businesses, were $149.8 million, 25% lower than the $199.4 million reported a year ago.

In oilfield services, sales of $36.2 million were down 46% on the first quarter of 2015, impacted by the well-publicized reduction in customer activity. This decline comprised a 39% fall in volume on a 7% adverse price mix impact. The quarter was also impacted by a $9 million order phasing from one major customer.

As Patrick indicated, the normal order pattern has now resumed. Sales in fuels were down 14% to $113.6 million, driven by a very warm winter and a strong comparative quarter. Volume decline was 7%. Price mix accounted for a 5% reduction, and foreign-exchange movements accounted for a further 2%.

The segment's overall gross margin was 34.2%, up from 30.8% recorded a year ago, a reflection of a richer sales mix. Gross margins in fuels expanded by 5 percentage points, while oilfield services gross margins declined by only 1 percentage point.

Operating income for the quarter was $16.7 million, down 29% from last year's $23.5 million, with a 2% increase in fuels operating income offset by $5.5 million operating loss in oilfield services.

Turning to slide 8, adjusting prior-year comparators for the disposal of Aromas, revenues in performance chemicals for the first quarter were flat when compared to last year, at $44.5 million. Underlying growth in personal care was 3% over a strong comparative quarter, offset by a 9% reduction in the polymers business.

Overall, volume improvements of 6% was offset by a 5% adverse change in price mix and a negative exchange rate impact of 1%. The segment's gross margin was 29.7%, benefiting from a richer sales mix, with increased sales of higher-margin personal care products.

When adjusted for the divestments of the Aromas business, operating income of $6.1 million for the quarter was 30% higher than 2015's first quarter. Moving on to slide 9, as expected, net sales in octane additives for the quarter were $17.8 million compared to $12.2 million a year ago.

The segment's gross margin was 66.3%, benefiting from increased production volumes. Octane additives reported operating income of $11 million during the quarter compared to $5.1 million in last year's first quarter.

As Patrick noted earlier, the final small portion of the Q1 order was delivered in April and we now have a further order which we expect to deliver over the next few months. Beyond this, we have no further visibility. Turning to slide 10, as indicated in our last call, corporate costs normalized in the first quarter at $7.2 million.

This was higher than the same quarter a year ago, which benefited from some specific one-off credits. The effective tax rate for the quarter was 22.9% and the expected tax rate for the full year is currently 20%.

Moving onto slide 11, we closed the quarter with a net debt position of $41 million after paying $44 million deferred consideration relating to the acquisition of Independence Oilfield Chemicals. We purchased 161,029 shares during the quarter at a total cost of $7.5 million.

And we are announcing a semiannual dividend for the first half of 2016 of $0.33 per share, which continues our strong track record of growing our dividend by 10% annually. For the quarter, net cash generated from operations was $6.6 million compared to $14 million for the same quarter last year after adjusting for the disposal of the Aromas business.

As of March 31, Innospec had $115 million in cash, cash equivalents, and short-term investments, and total debt of $156 million. Moving on to slide 12, as we have indicated, we will be changing the way we are reporting our results from the next quarter.

In order to deliver on our commitment of enhanced transparency for our investors, we will be reporting oilfield services as a separate business segment. At the same time, we will combine the polymers product line with fuel specialties, which will allow our investors a clearer view of the attractive growth in margins in our personal care business.

We will also be providing some historical data in this format to allow proper comparisons. Now I will turn it back over to Patrick for some final comments..

Thanks, Ian. At times like these, it's very important for a company to have a balanced portfolio of assets and businesses. While market conditions and our oilfield services business remain a huge challenge. We believe that our portfolio enables us to absorb these downsides and emerge stronger as the market recovers.

We will continue to focus on meeting our customers' needs while controlling our cost and delivering state-of-the-art solutions. The quarter did show some signs of improvement. We have gained new customers while seeing the impact of our cost control measures. However, substantial improvement will only come with a sustained rise in crude oil prices.

Fuel specialties and personal care continue to provide us with growth, while our overall portfolio continues to be cash generative. Our investment in both R&D and capital projects is delivering new products and technology for our markets.

We have increased our dividend by at least 10% every year since we instituted a regular dividend, and we have acquired shares under our repurchase program. Our financial strategy has delivered a very strong balance sheet, which allows us to invest in organic growth and continue to seek attractive acquisition opportunities in our target markets.

These are difficult times for many in our industries, but we are confident that our strategy and our financial prudence will continue to deliver enhanced shareholder value. Now I will turn the call over to the operator and Ian and I will take your questions..

Thank you. [Operator Instructions] Our first question today comes from Ivan Marcuse of KeyBanc Capital Markets. Please go ahead..

Hi. Thanks for taking my questions. The first one is on oilfield chemicals; you reported a $5.5 million loss.

So looking forward, with oil going up a little bit here and you are talking about this customer coming back and reordering, do you anticipate that to get back to the breakeven? Maybe even a little bit of profitability level starting in the second quarter, or is this going to be a somewhat low-single-digit type of drag on your results for the remainder of the year?.

No. I think from what we've seen probably in the last month of Q1, Ivan, was a positive trend upwards in not only revenue but in profit. And I think what you're going to see in Q2 is starting to get back to a positive profit trend holding the GPs at a pretty fairly good state as well..

Great.

Did you see outside of the one customer that you mentioned holding off on his orders, did you see a pretty strong de-stock in the first quarter as well as other customers? Or is it pretty much the loss as a result of this one customer?.

It was a little bit of both. You did see some de-stocking going from Q4 into Q1 and it continued until about March. But, you know, so combined with the one customer that we mentioned that has now resumed their regular order patterns, it was a combination of both that really hit that business in Q1.

But we see quite positive signs moving forward in Q2 and Q3 just from what's on the docket that we've set down with the customers..

Great. And then you talked about you are looking to control your costs, I'm assuming that's SG&A and everywhere else.

But is there going to be some cost reduction plans within oilfield chemicals and the other businesses going forward or do you think you've done what you've needed to do and now business is resuming a little bit and you'll get back into that profitability level?.

I think we've done really what we should have done. I think that now it's really just driving that revenue line. And again, as I said, I think you'll see the positive outcome of that in Q2. We took a lot of those costs out in Q1, but really, you're right. It's been primarily the SGA line..

Great. And then in terms of the fuel specialties business, I understand you had some tough weather comps.

Is there any sort of movements within the AvTel that would have resulted in the down volumes or did you also see some de-stocking in the first quarter within your core fuel business?.

Yes, it was a little bit of everything. You had exchange headwinds; you had some de-stocking, as you just mentioned. You have - when you take Bakken crude out, it's a much higher cetane crude that gets refined, so when it comes out to a finished fuel, you don't need as much cetane and we saw that effect of it.

So really, the combination of a warm winter, a higher volume of sweet crude going into the refinery, along with exchange headwinds, and I think with AvTel, it's always a little bit lumpy. That's coming back to some normalcy and you will see in Q2 that AvTel will come back into a nice order pattern.

So I think you'll see some positive trends moving forward in Q2 as well..

So it seems like, to sum it up, the first quarter was tough from that perspective within your core business.

But going into the second quarter, trends have definitely changed and you would expect to report better results on a sequential basis going forward?.

You're exactly right..

Great. Thanks..

You're welcome..

Thank you. Our next question comes from Jon Tanwanteng of CJS Securities. Please go ahead..

Good morning, guys. Nice job on the earnings, given the headwinds you are facing..

Thanks, Jon..

My question is do you expect the same level of fuel additives margins going forward, given the rally in energy and presumably the input of pricing trends?.

You know, I think that the raw materials are in a fairly stable state right now, Jon. And for us, it's just maintaining really our cost infrastructure. So I think you'll see - you could see margins dip down a little from where it was in Q1, but I still think you're going to have a strong margin profile in fuel additives..

Okay.

And would that presumably be offset by stronger oilfield margins, given the recovery you are seeing?.

I would probably keep oilfield margins where they are. I think you'll see a higher revenue in oilfield in Q2 and I'd keep the margins where they are..

Okay. Got it. And then the performance chemicals segment actually performed quite nicely compared to my expectations.

Does that grow sequentially through the year from what you're seeing today and maybe to break it down, what's the trend in polymers versus personal cares?.

Yes, Jon, we certainly expect our personal care business to continue growing nicely. We've done a good job so far and certainly through 2015 as well. We're targeting high single digit sales growth in personal care.

And there is some offset with polymers, that's a commodity business mainly in Europe and volumes were down quite substantially in Q1 A part of that was due to some manufacturing issues and we do expect it to improve in Q2. What will be the core focus in that business is going to be on personal care.

As we said earlier, when we split this business out from Q2 onwards, you will be able to see the personal care business as a standalone with higher margins and great growth rates as well. We are going to fold polymers into fuel specialties, where we can optimize the asset as part of the fuel specialties business as well..

Yes, I think to add to Ian's comment, Jon, we did have - we will have some volume fall over into Q2 that should have been in Q1 on personal care as well. So as Ian said, personal care is really - the business is reacting and performing exactly as we anticipated..

Okay. Great. And just a question on the timing of octane.

When do you expect that outstanding order to actually ship? Is that mostly in Q2 or is it going to leak over into Q3 a little bit?.

You saw a little leakage from the first order that leaked into April. That has now been shipped. The new order, we're trying to balance that. Obviously the AvTel and the Mogas orders. You could see a little bit of that leak into the third quarter, sorry, the second quarter - the third quarter. So you could see some leakage into the third quarter.

But we're obviously going to try to get as much out as we can in Q2..

Got you.

And then just a quick update on the M&A environment and use of cash?.

Yes. We're still looking at personal care. We've looked at quite a few deals. We are in the process of speaking to quite a few people. We are just - I think the multiples are starting to come down, which is advantageous. We've steered away from the oilfield for now until some of the better assets come on the market.

You've obviously seen 51 bankruptcies alone in the oilfield services sectors, so it's a highly levered market. So we're watching that very closely. You saw that we increased our dividend again 10% and we've continued to do that on year-on-year basis.

And we're very optimistic in the buybacks and we've taken advantage of the market when we feel it's a good time to buy back, and we will continue to do that.

And we have the balance sheet to do all three of those, and as we've stated all along, our preference is organic growth, but obviously to balance out our portfolios to continue to look at the personal care market..

Great. Thanks for the color..

Thank you..

Thank you. [Operator Instructions] We will now take a question from Bill Dezellem of Tieton Capital. Please go ahead..

Thank you.

First of all, did we understand correctly that your reference to the change in refinery crude slates that was in the press release that that's specifically lower volumes coming out of the Bakken, and that sweet crude just requires less of your chemicals?.

Yes, when you take - a Bakken crude is a very sweet crude. And when you have a very sweet crude and typically as you refine the crude, it puts out a higher cetane fuel, and obviously, cetane is a large product line for our company, and so it requires less cetane in some of that fuel. It primary hit the Gulf Coast and West Coast.

Now, we see that starting to normalize because they are starting to blend heavy crude with sweet. So we're starting to see some normalize in the market, which should benefit us in Q2 and Q3..

Okay. Apologies here for being the slow pony, but the Bakken has been producing for some time.

So what was different in the first quarter relative to prior quarters and why has that been switching back in Q2 and Q3 and normalizing?.

we had a very cold winter in 2015 and we had a very strong first quarter in 2015. And so when you look at a like-for-like quarter, your big negative impact was that cetane business with the warm winter, as well as as we said just earlier in the conversation, customer order patterns, specific customers, and one quite significant order as well..

That's helpful. And that significant order, that's the one that you referenced that was withheld in the first quarter.

Is that correct?.

That's correct..

And so can you talk a little bit more around that, what the circumstances were that caused that order to be held up?.

Yes, we can't talk specific customer, but we can talk specific application. It's in oilfield application that's basically an asphalting dispersant. And the customer just, you know, they de-stocked in Q1, and so now it's just re-stocking back up in Q2..

And was that de-stocking specifically due to the rapid decline in oil prices through the first part of February?.

That is correct..

Okay. Thanks.

And then lastly, what percentage of your revenues do new products represent at this point?.

It varies from business-to-business. Our main target in fuel specialties is around about 35% of products - of sales from new products in the last 5 years. Oilfield is different again, and personal care is a lot higher. But our main field specialties business we target over 35%..

And how about personal care, where does that stand?.

That's a little bit higher. That's more like 40% to 45%..

Great. Thank you, both..

Thanks, Bill..

Thank you..

Thank you. We will now move to Gregg Hillman of First Wilshire Securities Management. Please go ahead..

Yes, good morning..

Good morning, Gregg..

Could you talk about just diesel sales, you know, sales of diesel fuel here domestically and international for the quarter versus a year ago, what they were?.

Yes, diesel volumes are off, if you look at….

By what percent?.

It's about 2% to 3%. If you look at the overall market, obviously diesel sales going into the energy sector, which is extremely high usage for diesel, diesel sales into the mining market is quite significantly down. So in this general market conditions, you saw diesel sales decline a tad.

Now, not necessarily in passenger vehicles and not necessarily in over-the-road vehicles from a transportation standpoint. It was more direct towards the oil and gas business and the mining business. And the hope is that you start seeing that trend come back up.

And I think we're starting to see that trend come back up latter part of the Q1 and starting into Q2..

Okay.

Then what percentage of sales in fuel specialties are tied into overall diesel fuel sales would you say?.

Yes, we don't break it down that way, unfortunately, Gregg, but you can just tell by the sales pattern that it affected us..

just your injectors, the new injectors in the cars.

How - I know you make some additives for that, how is that going -- that product, what's the name of your product for that?.

You might be talking about ECOCLEAN..

Yes, ECOCLEAN.

What's happening with that and what are the drivers behind that domestically and internationally?.

Yes. I mean, strong sales. I mean, you've got higher pressure, higher temperature engines. You've got obviously a lot of the Clean Air acts and CARB. So ECOCLEAN has continued to surge forward. As a matter of fact, we've got trials going on with the railroads.

As in any process with fuel additives and new technology and new engine technology, it's continuous. And so we have multiple trials and we have multiple applications that are in play. Great product and we'll continue to push forward..

What's the order of magnitude in terms of importance to the company of the ECOCLEAN product?.

You know, we have such a diverse portfolio, Gregg. It's not like if ECOCLEAN went way that it would kill our portfolio. It's still a very small portion because we're so evenly dispersed with all of our product lines. But it's obviously very key to customers, it's very key to showing off our technology..

And does it have a higher margin than the normal margin for fuel specialties?.

It's probably about in that same area. It might be a little bit higher, but it's all about in that same area..

Okay.

And then is there anything else happening regulatory-wise, I guess I've asked this question before - in China or other countries that would affect you and your additives that's pending that might happen?.

They are starting to get more pressure. And I think it's just watching the news, you just have to watch, look at China and look at India and the pressure that's come about from all the other national countries about having a Clean Air Activities, a CARB-type diesel or a Euro-type or LSD standardized diesel.

It's going to come, Gregg; it's just a matter of time. I think every quarter we have a discussion about this at some point in time. We'll hopefully have good news and say it's started and we're well positioned when the turn does happen..

And then finally, in terms of gasoline additives, where are you in the development or regulatory process to come out with a gasoline additive product that might be material to the company?.

Still working on it. I would probably say we're still a ways off..

Like the years off?.

I wouldn't say years, but I would say that it's probably something we need to discuss within the next six months..

Okay. Great. Thanks very much..

Thank you..

We'll now take a follow up question from Ivan Marcuse of KeyBanc Capital Markets. Please go ahead..

Thanks.

Just a couple quick questions, what's your CapEx budget for this year?.

It's going to be around about $20 million, Ivan..

Okay. Great. And then if you look at your working capital, it was a bit of a - probably a little bit bigger of use of cash than it's been for awhile now.

Do you expect that to reverse out starting to the second and third quarters as the orders improve?.

What we actually saw, we expected it to increase over Q1. If you look back at the year end, we finished at a little bit lower than we expect did. So we expected some build, perhaps not as much as we would have expected, given the slowdown in oilfield.

But I think as oilfield starts to come back and we see a higher demand in fuels, you would expect a little bit more of an expansion. And as always dependent on how the order patterns go in octane additives will depend on how we finish each quarter because that can have quite a large swing in working capital..

Great.

And then the last question, D&A, do you sort of expect that to maintain its current level going forward or is there any reason that should change?.

That will stay where it is..

Great. Thanks a lot..

No problem..

Thank you. Ladies and gentlemen, I would now like to turn the call back over to Mr. Patrick Williams for any additional or 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 on this call, please give us a call at any time. We look forward to meeting with you again to discuss our Q2 results in August. Thanks again..