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

Jon Tanwanteng - CJS Securities Curt Siegmeyer - KeyBanc Capital Markets Chris Shaw - Monness Crespi Patrick Murchison - Coker and Palmer Investment Securities Bill Dezellem - Tieton Capital Management Gregg Hillman - First Wilshire Securities Management.

Good day and welcome to the Quarter Four 2016 Innospec Earnings Call. Today’s conference is being recorded. At this time I would like to turn the conference over to Mr. David Williams, General Counsel. Please go ahead sir..

Thank you, and good day, everyone. My name is David Williams, and I’m Vice President, General Counsel and Chief Compliance Officer at Innospec. Thanks for joining our fourth quarter and year-end 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 December 31, 2016. 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 the Innospec fourth quarter and full-year 2016 conference call. I delighted to report that we have ended the year as we expected with a strong quarter. Our adjusted earnings per share of $1.09 was an excellent performance given the low sales of Octane Additives.

All of our strategic businesses are delivering at or above expectations, which concluded a good year for our company and our shareholders. During 2016, we saw the continued recovery of our oilfield services business and good underlying growth and strong margins in fuel specialties.

We also balanced the performance chemicals portfolio through the acquisition of Huntsman's business at the end of the year position us well for 2017. Excluding Octane Additives, sales in Q4 were up 4% on the same quarter last year. Margins remain strong and with good cost control helped us to deliver an excellent adjusted EPS of $1.09 for the quarter.

We continue to increase our dividend which was up 10% on 2015. Despite some difficult market conditions, fuel specialties delivered 1% volume growth in the quarter which was somewhat offset by price mix in foreign exchange.

The product mix continues to have positive impact on margins and expanding our market share in all regions has set us up well for the coming year. Performance chemicals continue to grow both in established products and with further launches of new technologies.

The acquisition of the Huntsman’s business closed on schedule at the end of the year and we're well into the integration face. This business is performing as we expected and the customer reaction to the acquisition has been very positive. We are now in a position to offer a much wider range of products to our customers in personal care and home care.

In addition, the acquisition provides us with additional platforms in oilfield services, agrochemicals and mining. After a tough period driven by low oil and gas prices, our oilfield services business continued its recovery.

We delivered our fourth successive quarter of sequential improvement and as we indicated in previous calls, the business returned to profit. We are encouraged that the market conditions are now more supportive of our customers drilling and completion programs, and we've seen a real uptick in activity levels.

We are still a long way from the highs of 2014 in 2015 but assuming current crude oil and natural gas prices are sustained, we are more confident than we have been for some time. Octane Additives was very quiet in the quarter as we have indicated.

Although we cannot fully confirm we expect further orders to start again during the first quarter or early in the second quarter of 2017. When we have further information we will update you. We continued with a strong conversion of earnings to cash with cash flow from operations generating 104.5 million during the year.

At year end, having made the acquisition from Huntsman we had a net debt of 171.4 million making our leverage around 1.3 times EBITDA lower than we predicted in July when the deal was announced. Now I’ll 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'll take your questions..

Thanks Patrick. Turning to Slide 6 in the presentation, the company’s total revenue for the fourth quarter were 237.8 million, a 3% decrease from 246 million a year ago. Overall gross margin increased from last year to 38.4% driven by improvements across all our businesses.

Adjusted EBITDA for the quarter was 36.3 million, a 9% decrease compared to last year. Net income for the quarter was 22.1 million. our GAAP earnings per share were $0.90 including special items. The net effect of which decreased our fourth quarter earnings by $0.19 per share.

A year ago we reported GAAP earnings per share of $1.28 but that included a positive impact from special items of $0.04 per share. Excluding special items in both years, our adjusted EPS for the quarter was $1.09, a 12% decrease from $1.24 a year ago.

As part of the Independence acquisition, we are required under GAAP to fair value the contingent consideration that we expect to pay. Any adjustments to the fair value is charged to the income statement is noncash and adjusted out for EPS purposes.

In this quarter the final adjustment resulted in net 3.1 billion credits to the income statement from an $0.08 adjustment to EPS. Moving on to Slide 7, revenues in fuel specialties for the fourth quarter were 142.5 million, 3% lower than the 146.23million reported a year-ago.

Volumes were slightly by 1% somewhat offset by an adverse pricing product mix of 3% and a 1% negative currency impact. The business in EMEA continued to perform well in demanding market conditions. Although the quarter was slightly softer in both the Americas and Asia Pacific. Sales into aviation had a very strong quarter.

This was driven by order patterns rather than any change in underlying demand as we've indicated before Fuel specialties gross margin for the quarter was very strong at 39.9%, up 5.3 percentage points from the same quarter last year. Operating income for the segments was 38.4 million.

For the full year, sales were down 4% to 509.6 million and operating income was up 8% to 110.6 million. Turning to Slide 8, sales in performance chemicals for the fourth quarter grew 4% compared to last year, up 31.9 million. The segment continued its strong growth with volume up 11%, but this is partially offset by an adverse currency impact of 7%.

Sales in EMEA and Asia Pacific grew by an impressive 15% while the Americas were broadly flat. Gross margin of 28.2% was down slightly due to sales mix in the quarter. Operating income for the period was 2.7 million.

Adjusting for the divestments of the Aroma Chemicals business in July 2015, full-year sales of 138.7 million were up 7% on prior year and operating income was up by 28% to 16 million. Making two successive years where our year-on-year growth in operating income exceeded 25%.

Moving onto Slide 9, as Patrick indicated, our oilfield services business continued its recovery during the quarter. Sales were up 22% on fourth quarter 2015 driven by increased customer activity as the overall market improves.

Volume growth of 53% was offset by price mix reduction of 31% with lower raw material cost [indiscernible] at lower selling prices. However, gross margins remain steady and strong at 41%. The segment returned to profit in the quarter as we expected with operating income at 2.4 million compared to a loss of 4.8 million for the fourth quarter of 2015.

For the full year, sales were 191.7 million, down from 265 million in 2015 and operating loss of 4.7 million for the year compared to operating income of 9 million in 2015. Moving onto Slide 10, net sales in Octane Additives for the quarter were 4.1 million in line with expectations and well down from the 20.5 million in last year's fourth quarter.

The segment’s gross margin was 29.3% and operating income for the quarter was 0.2 million compared to 8.8 million a year ago. For the full year, Octane Additives net sales were 43.4 million, down 27% from 2015 and its operating income was 22%, an 8% decrease for a year ago.

As of today, we continue to discuss orders and deliveries for 2017 and we expect to deliver further growth and the like in the first quarter of the year or early in the second quarter.

Turing to Slide 11, corporate cost for the quarter was 16.1 million higher than our expected range due to the acquisition costs, increase share-based compensation driven by the high share price and our long-term incentive plan. In 2017, we expect our corporate cost to normalize as approximately 11 to 12 million per quarter.

The pension credit of 1.6 million in the quarter in line with expectations. The final adjustments to fair value consideration relates to 2014 Independence acquisition resulted in net credits of 3.1 million compared to 9.1 million in the same quarter last year.

The effective tax rate for the quarter was 23.8% and the full-year effective rate of 21.1% was slightly lower than last year's 21.5%. For 2017, we expect the full-year effective tax rate to be approximately 25%.

Moving onto Slide 12, having closed the acquisition of the Huntsman’s business at the end of the quarter with the associated outflow of approximately 200 million, we closed the year with net debt of 171.4 million. There were no share repurchases during the quarter, but we paid the previously announced 7.8 million semiannual dividend $0.34 per share.

This brought the total dividend for the full year to $0.67 per share representing a 10% increase year over year. For the full year, net cash generated from operations was 104.5 million compared to 117.7 million during 2015. As of December 31, Innospec had 101.9 million in cash and cash equivalents and total debt of 273.3 million.

And now I’ll turn back over to Patrick for some final comments..

Thanks Ian. In conclusion, during 2016 we built a really strong foundation for the future of Innospec. We are pleased to be finishing the year with a strong quarter and great momentum. Our adjusted EPS of $3.80 for the year is a reflection of the strength of our strategic business units.

26% increase in the stock price shows the investors’ confidence in our overall strategy. The oilfield services continued to recover with four successive quarters of sequential improvement and we are pleased that the business returned to profit in the fourth quarter.

The relative stability crude oil and natural gas prices combined with returning customer confident makes us optimistic for further growth in 2017. Nevertheless the markets remain challenging and we need to continue on our growing track record of technology development to meet our customer's needs and to stay ahead of our competition.

Fuel specialties continue to face soft market conditions but new product development supported by high-quality customer service enabled us to continue to grow and deliver excellent cash flow. 2016 was a big year for performance chemicals.

Not only did the business again delivered excellent growth, but we closed the acquisition of the business from Huntsman. This balanced our overall portfolio and helps us deliver on our strategic commitment to take more space in our customer's bottles.

We are looking forward to integrating the business during the first half of 2017 and combining the offering to customers in personal care and home care. In addition, we will be looking to grow the smaller new market platforms we have acquired.

We have a broad and balanced portfolio of businesses and even after the recent acquisition, we are still in a very healthy financial position. While there are challenges ahead in 2017, the strong end to 2016 means that we can cautiously be optimistic about the upcoming year.

Our strategy continues to deliver to expectations and remain open to additional acquisitions or other business arrangements that can further enhance our portfolio without overstressing our balance sheet. Now I will turn the call over to the operator, and Ian and I will take any of your questions..

Thank you very much. [Operator Instructions] Our first question today comes from Jon Tanwanteng from CJS Securities. Please go ahead, your line is open..

Could you give us a little more detail on the strength on oilfield, was it all in production or was there anything from drilling completion, any color would be appreciated..

We saw a little uptick in our drilling sector. We definitely saw a very nice uptick in our production and our frac stimulation business and that was across the board quite frankly.

As we always said in the last few calls that we generally get about a three to four month entry as to what the market looks like ahead of time and so as we flagged you guys in the third quarter that we saw strong fourth quarter moving forward in oilfield services, it definitely played to as we anticipated.

So I think across the board John, it was a nice balance which made us really pleased that it wasn't just in one market sector, it was a nice balance across our whole oilfield services sector..

Given the continuous improvement we've been seeing in the rig counts, should we expect oilfields continue improving sequentially as we head into Q1 both on a revenue and margin basis?.

Yeah I think you’ll definitely see growth moving forward into 2017. As we said crude oil prices have stabilized, we've got a good indication that Q1 [indiscernible] Q2 should be a very nice change from what they were in 2016. I think the US has adapted quite frankly to lower oil prices. I think basins that were not making money, now are making money.

I think there's multiple reasons why you’re seeing stabilized, obviously you have cutback in OPEC and non-OPEC countries, but I think just as important whether you look internally or externally, the US has learned from the steel industry, right. The steel industry got decimated during the time when imports were flooding the US market.

I think the US is a very adaptive market now, especially the shale play. And so I think long term you'll see a lot more stability in the oilfield services sector even if you see prices drop a little bit below the $50 dollar mark, but I just don't see that long term.

I think all the countries around need to have a stronger oil price for everybody to make money and I think that we're starting to see that stability in the marketplace..

And could you provide an update on the remaining customer in Octane, have they made any progress in phasing CL or do you expect them to do something in the near future?.

I think that we're probably going to see a similar type of revenue and volume at Avtel that we saw in ’16 from the same customer. I think you’re also going to see it probably go into ’17 as well. There is some progress being made but it's not to the point where they can change the country over to an [indiscernible]..

Okay. Great.

And then finally, just an update on Huntsman business and how it’s performing after owning for a month and a half, what are the goals for this year on the integration front?.

Yeah. It’s performing exactly to expectations. I think we -- as we’ve climbed into the business and have met the wonderful people at Huntsman that we've acquired, we really think there is going to be a lot more value and it's really probably even better than we expected quite frankly..

Okay. Great.

Any kind of headroom we should expect from foreign exchange or macro situation over in Europe?.

Yeah. Jon, as we said to you before, our business is pretty much naturally hedged down to the operating income level. There will be a little bit of volatility in our other income line. That can be positive or negative and I think you’ve probably seen plenty of volatility in that line already as we’ve been through the third and fourth quarter.

And we naturally hedged operating income and we’ll deal with our forward contracts as best we can, so that’s not volatility of our earnings and cash flow. So, I think we’re managing it pretty well..

Yeah. I think the one thing just to add that Jon, one thing we will have to be cautious of obviously is a little bit of margin erosion if oil prices go up substantially. You will see some of that effect in the fuel specialties, not necessarily the other businesses, but maybe in fuel specialties..

Thank you. Ladies and gentlemen, our next question comes from Curt Siegmeyer from KeyBanc Capital Markets. Please go ahead. Your line is open..

Good morning. Nice quarter. Just on fuel specialties. Can you maybe talk a little bit more about what drove the growth there? I know you mentioned some new products, but I was just looking back and noticed that was the highest level of earnings that you guys have had in several years.

So just curious how much of the growth was driven by the aviation gas products that you’ve kind of talked about and your outlook for that business for the rest of the year?.

Sure, a good question. I think aviation obviously drove some of that growth. That aviation piece of the business can be a little lumpy at times, but if you look at it from an annualized revenue basis, it's very steady, it’s about the same revenue on an annualized basis. So we had a nice fourth quarter in aviation.

If you look at it, we’ve had nice margin increase over time. I think that's where we're going to have to be careful. If you look at historically, our margins, we always say are in that 30% to 34% range and we outperformed that in Q4. There could be a little pullback in margins in fuel specialties.

I don't think that these margins are sustainable long term, but it really was -- it was margin increase. It was a good quarter and quite frankly, they set themselves up with a good 2017 with some new business closures as well..

Okay. Great. And then your balance sheet is obviously still in good shape post Huntsman.

I was just hoping for maybe a little bit more color on where you might try to zero in on incremental acquisitions potentially that you talked about being willing to take a look at and also sort of what your comfort range is in terms of a leverage ratio where you think it's sort of the optimal range?.

Yeah. I think it’s a couple of things. I think you have to look at our overall capital and where we allocate capital. I think for us, you're right, the balance sheet is still in a healthy position, much better than we anticipated, coming out of the actual closing of the Huntsman business.

I think for -- if you look at the last couple of years, we've increased our dividend 10% per annum. I think you’ll probably see that again, could be more, but it’s like 10% is probably a nice range. I think secondly, you're going to see us obviously focus on organic growth.

But I think third, we will still look at building the portfolios of the three portfolios that we’re in and I think looking at the proper technology place or geographic place, but we won’t stress our balance sheet. We've stressed all along that if we get anything over 2 or 2.1, 2.2, we'd have to de-lever it very quick.

I just don't feel comfortable ever stressing a balance sheet and as I always say to everybody, I don't do it in my personal life. And I’m sure that I won’t do it in my professional life. And I know where the averages sit on balance sheets and leverage. I just feel very comfortable well below 2..

Thank you. Our next question comes from Chris Shaw from Monness Crespi. Please go ahead. Your line is open..

Hey, good morning, guys. If I could dig into fuel specialties a little bit more. I mean, the volume growth of 1%, just given the comments around Avtel and I think last year, there was some weakness in the cold flow products, because of the weather. I thought the volumes might be higher.

So what are some of the puts and takes there are?.

Yeah. If you look actually look at the winter this year, Chris and for us, Europe and US, it’s actually been quite warm. We've had very -- if you look at days on days and historically go back, it's been a pretty warm winter considering us. So we didn't get the actual cold flow sales that we anticipated in normal ice cold weather or winter I should say.

So I think if you take that in part aside and look at the overall business, it was a pretty strong effort in our overall business that shows the depth of our organization to be able to deliver these numbers during non-cold winter quarter.

If Ian, do you have any color on that?.

Yeah. When you look at the volumes, the Americas was a little bit down on volume. To me, it had a really good quarter. Volumes were quite strong there and again strong enough. So to move on your perspective, overall, not that heavy, but yeah, different regions, different things, Chris and pretty much as we expected..

And then does Avtel, does that product just have the high margin or is it because you just shipped so much during the quarter that it becomes a high margin and it just covers?.

It’s a high margin and we shipped more in the fourth quarter than we – we had some carryover from the third. So we had a little more volume in the fourth quarter than normal..

That makes sense. And then if I can ask on the performance chemicals, what's the impact from the Huntsman deal on margins going forward? I know over the short term, there is sort of some acquisition accounting that's going to hurt them maybe in the first quarter.

But then I thought, if I remember correctly that you mentioned that it was below the normal segment margins, but you hope to get them up over time, but near term, is that going to be an impact?.

Yeah, Chris, let me jot down. I’m sure Patrick will come back over. So in terms of gross margins in the business, our existing business is going to continue in that 29% to 31% range that we've been hitting in the last year. But we will be diluted by the Huntsman business, which has gross margins of 15%.

So when we combine those two together, we expect the gross margins of performance chemicals to be around 20% in 2017..

Okay.

And is there any like first quarter impact specifically from purchase accounting or anything like that?.

Yes. It will be. We’re still working through that, Chris and most of that will come through the amortization charge, which will just start for EPS anyway. It might be one or two, a little bits and pieces just flowing through, but we’ll highlight that on the Q1 call when we get back with you in May time..

Thank you very much. Our next question comes from Sean Milligan. [Operator Instructions] Please go ahead, Mr. Milligan..

Hi. Good morning. This is Patrick Murchison sitting in for Sean Milligan. I had a question referring to the oilfield services segment.

You said earlier that you expect that segment to progress nicely top line the remainder of the 2017, but just kind of wondering is that going to continue to be a volume story, like it was in Q4 or are we going to start seeing some pricing gains to help it back.

Basically kind of want to see if 4Q was the bottom of this pricing decrease that we've been seeing?.

Yeah. I think if you look back, Patrick, the margin, let's talk about gross margins for a minute, we have held the gross margins steady over the last five quarters. So those have remained fairly steady. This is the majority of margin gains and it is – sorry, volume gains than it is margin gains.

So you get to that inflection point and the more volume you will add, all of a sudden, you start adding a lot to the operating income line and that's what we're starting to see..

Thank you. Our next question comes from Bill Dezellem from Tieton Capital Management. Please go ahead..

Thank you.

I actually want to follow up on that last question to start with and make sure that I heard you correctly Patrick that you are feeling as though the volumes are at the point now where the oil field that you're at it in a positive inflection point for prices to go up?.

Yeah. I wouldn’t say prices to go up, Bill. What I would say is that as the volume goes up because of the fact that you're not tracking an SAR cost directly to your volume cost that you will start seeing better operating margins, not necessarily better gross margins..

Okay.

So basically, you’re covering the fixed cost phenomenon?.

That's correct..

And at what point do you anticipate that pricing starts to come back?.

I would say, obviously if crude oil prices start dropping back down below that $45 level, you could see some volume movements. But I think on a pricing -- from a gross margin standpoint, we're still pretty steady there. It would be more of a volume impact than it would anything else..

Okay. So in many energy services industries, pricing improvements have started to come back.

Maybe, I guess to start this question, I should be asking what was the decline in prices that you experienced over this cycle and then let's go from there?.

Yeah. Bill, it’s Ian. I think it’s fair to say we didn’t really experienced that price pressure. If you look back our gross margins in our oilfield business over the last four to six quarters, we've been really disciplined in maintaining prices and maintaining gross margins.

So I think the point Patrick was making is that we have already got that discipline built in. As volumes increase, we will get more operating leverage out of the business..

And as a result, since you didn't have the decrease in pricing, we shouldn't be building in a big increase in pricing to follow either?.

No. I’d keep it probably where it is, Bill..

All right. Thanks. And then if I may just continue down oilfield, you did reference in the release that you had a negative mix impact.

Would you discuss what that was and what that means to those of us on the outside that are layman? The oilfield business and the negative mix and I guess what I would to understand is, what does that actually mean if one was out in the field, what is the negative mix out there?.

For us, the negative mix would mean that we’re selling a different proportion of lower margin business..

And I guess that’s my point of confusion is what is that lower margin business?.

And you said it’s oil field, Bill..

Yeah. We didn’t really have a negative mix in oilfield. So I guess I’m a little confused, Bill to the question. We had a negative mix in fuels, but not in oilfield..

Okay. I must have ready incorrectly. So I'm going to just step off of that question and go to Huntsman quickly if I may.

Why did Huntsman -- why is Huntsman looking like it's likely going to be better than what you originally anticipated?.

Yeah. It’s a great question. Obviously, when we looked at buying, it was more for our personal care and home care sector. As we got into the business and started looking at the technology trees, we realized a lot of the technology they have internally and a lot of technologies they're working on for quite some time fit other aspects of our portfolio.

So they have technology that goes in the oil field. They have some technology that goes in to ag market, some other areas. And I think like, as well along that, we found it to be a very, very good group of people, very professional, willing to really go the extra effort to build this business.

And I think when we start looking at culture, you start looking at purchasing companies, one of the first things you look at, what's the culture like because if you have to constantly change culture, you're going to be chasing your tail cost. For us, we felt like the culture fit.

We felt like they got a great product line and we feel like with the right attention as we can really build this business even further than we anticipated..

That's helpful. And one final question for now. You referenced in your comments that you're open to additional acquisitions for other business.

And two questions I have that would emanate from that one is are you looking now at acquisitions that would be more tuck-in in nature as opposed to I would say structural building blocks like Huntsman was? And then secondarily, describe if you would what you mean and some examples of what another business relationship could look like?.

Sure. Yes, we're looking mostly tuck-in. We don't need a structural change. And I think if you look at what other business arrangements be, it could be a situation where we do a joint venture in another country to get a geographical expansion. It could be a product joint venture, it could be as a shared technology.

So there's multiple ways you can go without always spending money to buy somebody. That's where I think the creative minds come in in growing this business and that’s how we’ve constantly grown it. I don't have to go out and buy constantly to grow. I can do it in other means and ways..

Thank you very much. And our next question comes from Gregg Hillman from First Wilshire Securities Management. Please go ahead..

Hey, Patrick. You were alluding to agricultural chemicals and possibly mining chemicals earlier in the call.

Was that just in reference to Huntsman or was that, were those areas being developed independently in your existing divisions?.

Yeah. If you look at our business in fuel specialties we sell to the mining industry. So naturally, when we bought the Huntsman business and realized a very small portion of their portfolio does sell into the ag chem and mining market. So there are some natural just adjacent markets we could take it into.

Now, the purchase was more for the home care, personal care, but these are some adjacent markets that have great products. Suppliers, products that go into markets we're already very aware of and that some of the markets we're already in just now with this specific product line. So it is an area that we can expand into..

Okay.

Does Huntsman have an agricultural product that's on the market?.

What do you mean by on the market Gregg, sorry?.

I mean being sold to farmers.

Does Huntsman have a product that’s currently on the market, that’s being sold like in ag, like a fertilizer product or some other kind of chemical product being sold?.

Delve into a company who makes fertilizers, they'll sell the molecules who would then sell it on to the customer..

Okay. So it would be a little bit of a stretch for you right now to get involved in the fertilizer, a direct ag chemical business..

Yeah, you won’t see us do that..

Gentlemen, we have no further questions. I’ll hand back to you for any closing remarks you may have. Thank you..

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. We look forward to meet up with you again to discuss our Q1 results in 2019 [ph] in May. Thanks. Bye-bye..

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