David Williams - Vice President, General Counsel and Chief Compliance Officer Patrick Williams - President and Chief Executive Officer Ian Cleminson - Executive Vice President and Chief Financial Officer.

Sean Milligan - Coker Palmer Chris Shaw - Monness Crespi, Hardt Gregg Hillman - First Wilshire Securities Management Bill Dezellem - Tieton Capital Management.

Good day and welcome to the Q2 2017 Innospec Earnings Conference 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 am Vice President, General Counsel and Chief Compliance Officer at Innospec. Thanks for joining our second quarter 2017 financial results conference call. Today’s call is being recorded. As you know, late yesterday, we reported our financial results for the quarter ended June 30, 2017.

The press release is posted on the company’s website, www.innospecinc.com. An audio webcast of the call and 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 second quarter 2017 conference call. Overall, this has been another good quarter. Once again, we showed the value of our well-balanced portfolio in generating reliable returns for our shareholders. The execution of our strategy is right on track.

We had a record quarter with sales revenue of $326.3 million and adjusted EBITDA, up 10%. In Fuel Specialties, all regions have contributed well to the quarter’s performance and I am pleased that our business in the Americas has sustained its recent improvement.

We have talked regularly about the importance of continually bringing improved new technologies to our Fuel Specialties customers. Improved technology typically has more effective products, which this quarter has created a small improvement in our margins, but has slightly impacted sales revenues.

Performance chemicals had a good quarter, but this is not fully reflected in the results. We delivered on-target EPS of $0.10 per share from the acquired business and sales were ahead of our target. However, gross margins were impacted by some one-off events in the quarter, including a plant outage, raw material and pricing issues.

Without these impacts, which would have all been - which have all been resolved, we would have delivered even better results. Oilfield Services has continued to grow and delivered an excellent performance. Our sales revenue has shown a strong improvement both in the comparative quarter and sequentially.

Sales growth has been underpinned by increased customer activity and continued adoption of our new technologies. We have been careful to control the rapid expansion of this business. And I am happy to note that the business returned a profit of $3.7 million compared to a loss of $1.6 million a year ago.

The business also returned to cash generation in the quarter. As we indicated in the last call, in Octane Additives, we completed the remaining portion of the order received in Q1. We also received a further order for approximately $20 million and delivered the first half of it late in the quarter. The balance will be delivered in Q3.

At this stage, we have no further visibility, but remain optimistic that there will be further business towards the end of the year. Now, I would 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 will take your questions.

Ian?.

Thanks, Patrick. Turning to Slide 7 in the presentation, the company’s total revenues for the second quarter were $326.3 million, a 43% increase from $228 million a year ago and up 11% on the first quarter of 2017.

The overall gross margin decreased 5.3 percentage points from last year to 32.2% driven by the addition of the lower margin acquired business in performance chemicals, but was up 1.3 percentage points on the first quarter of 2017. Adjusted EBITDA for the quarter was $48.9 million, a 10% increase compared to last year.

Our GAAP earnings per share were $1.06, including special items. The net effect of which decreased our second quarter earnings by $0.10 per share. A year ago, we reported GAAP earnings per share of $1.18, which included a positive impact from special items, up $0.15 per share.

Excluding special items in both years, our adjusted EPS for the quarter was $1.16, a 13% increase from $1.03 a year ago. Moving on to Slide 8, revenues in Fuel Specialties for the second quarter were $121.3 million, a 6% decrease from $129.3 million reported a year ago.

While the underlying business remains in good shape, volumes in the quarter were impacted by customer reformulation to our new technologies and phasing of demand in aviation. Overall, there was a volume reduction of 14% and a negative currency impact of 3%. This was somewhat offset by favorable price mix improvements of 10%.

By region, revenues were down by 5% in EMEA and by 4% in Asia-Pacific, but remained flat in the Americas. The aviation product line experienced a softer quarter due to the phasing of orders. Gross margins of 37.3% were up slightly on the first quarter of 2017 and improved by 3.5 percentage points from last year as a result of the stronger sales mix.

Operating income for the quarter was $23.8 million, down 3% from $24.2 million a year ago. Operating income for the first half of 2017 is 5% ahead of the same period last year.

Turning to Slide 9, sales in performance chemicals in the second quarter were $104.9 million, up from $35.3 million a year ago, with a significant part of the comparative improvements driven by the acquisition from Huntsman.

The heritage business grew by 3% compared to last year as volume growth of 8% offset an adverse price mix of 3% and currency impact of 2%. Sales increased by 11% from the first quarter of 2017 with good underlying growth in both the heritage and acquired businesses.

Sequentially, gross margins were down slightly at 16.6% impacted by some one-off events including an unplanned plant outage, some raw material purchasing, and pricing issues. Operating income was up by 38% from last year at $6.5 million and increased 8% on the sequential quarter.

Moving on to Slide 10, as Patrick indicated earlier and as we expected, our oilfield services business continued its recovery with another quarter of improved sales and profits. Sales of $76.1 million were up 64% from the second quarter of 2016 driven by continued improvements in customer activity, especially in our completion business.

Overall, volumes increased by 62% and there was a favorable price mix impact of 2%. Revenues were also up 14% sequentially over the first quarter of 2017. Gross margins were down 4.5% - 4.7 percentage points on the comparative quarter, but remained steady from Q1 at 38.1%.

The business made an operating profit of $3.7 million during the quarter compared to a loss of $1.6 million in the same quarter last year. Moving on to Slide 11, octane additives net sales for the quarter were $24 million compared to $16.9 million a year ago.

Gross margin was 56.3% and operating income of $12.8 million compared to $9.6 million in last year’s second quarter. Our sales comprised the completion of the first order from Q1 2017 and around half of the second order for approximately $20 million which was confirmed during the quarter.

The remaining balance of this order will be delivered in the third quarter. Beyond this, we have no further visibility, but we will continue to update you on these quarterly calls. Turning to Slide 12, corporate costs for the quarter were $12.1 million, similar to the $12.4 million recorded a year ago and within the expected range.

The effective tax rate for the quarter was 25% and the tax rate for the full year is expected to be similar. Moving on to Slide 13, net cash generated from operations was $9 million compared to the $50.4 million a year ago.

Strong cash generation in the third quarter led by Fuel Specialties were somewhat offset by the continued investment in the sales growth of performance chemicals. As of June 30, Innospec had $48.8 million in cash and cash equivalents, total debt of $254.9 million resulting in net debt of $206.1 million.

During the quarter, the company distributed $9.2 million to shareholders for the semiannual dividend. And now, I will turn it back over to Patrick for some final comments..

Thanks Ian. I am pleased with our positive performance in the second quarter compared to same period in 2016 adjusted EBITDA was up 10%, EPS was up 13%. And again, we delivered on our expectations from our recent acquisition. Only the impact of some one-off events prevented us from delivering even better results in performance chemicals.

These one-off events negatively impacted results by approximately $0.09 to $0.11 per share. The benefit of our strong and balanced portfolio continues to provide the flexibility to support both organic and acquisitive growth. Oilfield Services continued its track of improvement recording the fifth consecutive quarter of growth.

This business also improved operating income by more than $5 million compared to the second quarter of 2016. We believe that prospects in this business look good for the remainder of the year.

Fuel Specialties continued to generate good earnings and cash, customer adoption of new hire performance technologies and so margins to remain at the high end of our range. But it’s had a slight impact on revenues.

Performance chemicals has performed well and has sales ahead of expectations, although margins were hit by some one-off events we go very positive about the future growth of this business. As anticipated, we have returned to positive cash generation in the quarter.

However, we have continued to invest in working capital to support organic sales growth, mainly in performance chemicals where volumes were strong. We expect our cash generation to improve further in the second half of the year. Our balance sheet remains very strong and our net debt represents a leverage of approximately 1.4x adjusted EBITDA.

We believe that this not only allows us to focus on projects driving organic growth, but also supports us to continue to look at appropriate acquisition opportunities when the time is right. As I previously stated, the execution of our strategy is right on track.

We are confident that our R&D pipeline is delivering exciting new technologies that are meeting our customers’ needs. We anticipate that these new products will help us deliver sustainable growth in the longer term and we go positive about the rest of 2017.

This strategy combined with our balance capital management program should allow us to continue to create shareholder value. Now, I will turn the call over to the operator and Ian and I will take your questions..

Thank you, sir. [Operator Instructions] We will now take our first question from Jon Tanwanteng from CJS Securities. Please go ahead..

Good morning, gentlemen. Thank you for taking my questions..

Good morning Jon..

Just wanted to dig a little deeper on the reformulation as you mentioned that benefited margins, but impact itself, was there a net margin dollar improvement from those customers that switched at all?.

Yes. Jon, this is Ian. What we saw in Q2 was maybe some new technology that we have got with an improvement in our business and really improving the customer performance. What we saw was about $4 million drop in sales in the quarter year-over-year and that probably impacted the dollar number by about $1 million in total.

Fuel Specialties business is used to this. It’s very much normal for us to reformulate our customers around. So this is normal business for us, it’s not overly concerned by it..

Okay, got it.

And then was that impact quantified in the $0.09 to $0.11 that Patrick mentioned, was that simply - was that only the performance business that you talked about?.

That was strictly the performance business..

Okay, got it.

And Ian if you could, could you quantify the impact of avgas phasing at all?.

Yes. I mean that was mainly volume driven Jon. And we are not going to give you a dollar number touch to that. But let’s just say it’s about a 31% drop in revenue year-over-year. So as you know, that can be the phasing in, the aviation product line can be quite lumpy, and we expect to make all of that back up in the third quarter..

Okay, great.

And then just the pricing input - input pricing headwinds you faced in the performance businesses, are those expected to recover either through moderating pricing or you increasing your prices to the customers?.

Yes. It’s really a one-off event Jon. That was more during the transition - transitional services from Huntsman to Innospec. And we just got caught on the wrong side of raw material, it’s now flushed itself out. So yes, one-off event, it’s been taken care of which shouldn’t affect us going forward..

Okay, great.

Just looking at oilfield, I don’t know if you mentioned it, but why was the gross margin down sequentially and should we expect revenue margin there to grow with rig counts?.

I would keep the margin where we were in the first quarter. So you will see some margin improvement, I think it was a little bit of a price mix. And I would say that as we move forward into Q3 and Q4, as we said earlier, very strong quarters and very strong margin profile..

Okay, great.

And finally just in the octane segment, you mentioned you have no visibility, but have the customers actually made any progress in being able to convert over to unleaded --?.

Yes. I mean they have converted to - two refineries are converted, but as you know the country has to convert. So until the final refinery converts to unleaded, all three refineries have to run off of octane. So we have got some pretty good visibility. We feel like we will probably get another order in Q4 and some of that might fall into 2018.

And I think from visibility we see, it’s probably going to go through 2018 as well..

Okay, great. Thank you very much guys..

Thank you..

We will now take our next question from Sean Milligan from Coker Palmer. Please go ahead..

Hi, guys. Good morning..

Good morning Sean..

Good morning Sean..

Can you - if we just start with performance chemicals, is there any way to quantify the impact the one-off events had on gross profits this quarter?.

Yes. We broke it down, I will bring it down to EPS we put it was about $0.09 to $0.11 in EPS. I wouldn’t necessarily say it was a fairly large negative effect on margins by - it’s probably round about sort of $3.5 million to $4 million of impact at the GP level..

Okay, great.

And those reverse themselves moving forward?.

Yes..

Okay.

And then if we look at the cash generation in the quarter on the working capital side, it seem like another big quarter from a draw perspective, and I guess it’s just continuing to a kind of fund Huntsman, I was just trying to get an understanding of how important capital might change a little bit here in the back half of the year?.

Yes. You called it right Sean. We saw in the second quarter an improving cash generation over Q1, but it’s probably not still where we would like it to be. We probably generated about $9 million of operating cash flow. You are right.

The working capital build was mainly focused on the performance chemicals business as we continued to build out the growth that we are seeing there. And as Patrick mentioned earlier, the growth in the Huntsman business, the revenues that we are generating there are higher than we expected and that needs to be funded.

We do expect the working capital to unwind somewhat in the second half of the year. But we are very clear with the business, we want to control the expansion, we want to control growth. We are not going to start the business of working capital because it is important that we take those opportunities.

Often you will see is generally a lot more cash in the second half of the year than we have in the first half..

Okay, great.

And then on octane, what was the size of the order in the quarter and so how much would that imply you have left to deliver in the third quarter?.

Yes. It was about $20 million and we delivered about a half of that in this quarter, the next half would go into Q3..

Okay.

And then just Jon kind of asked this on the oilfield service side, in terms of trying to get understanding in terms of one visibility on top line growth into the back half of the year; and then two, there are opportunities to push that business from a top line perspective or you just kind of go with the current customer base and not really push it given some of the kind of oilfield service headwinds that are being priced in elsewhere in the market?.

Yes. I mean I would stick with similar growth that we have had in this quarter to go to Q3, Q4 sustaining the profit margins that we have put forth. I think as Ian said and we said in our script is that we want to control the growth going up. There is a lot of oilfield service companies chasing revenue and that’s just not our business.

We want long-term sustainable growth that we can actually make money on. And I think as you see a turn in the market, we typically have a three months to six months visibility with our organic customer base. That’s why we feel confident that the remainder of this year is going to be strong.

Yes, you have is when you move into 2018, you have fluctuation in places. We want to see where oil prices that allow. We have a downward trend if we control the growth going up, we obviously won’t have as big of an impact going down. And that’s really what we are trying to say.

But we feel very confident that oilfield is going to stay steady going through the later parts about this quarter and moving into 2018..

Okay, great.

How much of that business is its completion related at this point versus production related?.

Yes. It’s probably 60% to 65% frac stimulation, maybe a little higher than that. Then the rest with production was a little bit drilling..

Okay, great. Thanks guys..

Thank you..

Thank you, Sean..

[Operator Instructions] We will now take our next question from Chris Shaw from Monness Crespi, Hardt. Please go ahead..

Hi good morning guys, how are you doing?.

Good morning Chris..

Good morning Chris..

I think Patrick you touched on it a little bit and in terms of what the opportunities are with the balance sheet moving forward, but just that Huntsman is a bit in the fold for a couple quarters, I mean what do you - what sort of pipeline do you guys have in terms of acquisitions and I forgot where I think you have talked about it before, but what areas you would be looking to sort of fill in with bolt-on at this point what segments and maybe what geographies?.

Yes, good question. I think at this point we have somewhat put the reins on acquisitions. We want to make sure we have appropriately executed the strategy we put forth with the Huntsman acquisition. We have got nice organic growth in oilfield. So you might see just some small adjacent acquisitions in that area.

But the true focus right now for us is focus on our organic growth, control it, obviously return shareholder value. And I think for us looking at adjacent markets, so it’s not necessarily looking at adding on to Fuel Specialties because we obviously haven’t done that for multiple years.

But it’s more important for us to look at the balance of the portfolio. So we would be looking at adding on to performance chemicals, it would be looking at something in adjacent markets because we do not have mining and agriculture. We are doing in water now, so we will be potentially going down to water phase.

So it’s really balancing the portfolio so that we are not lumping to an energy portfolio. I really feel like right now that with our oilfield and our Fuel Specialties we are on solid ground, nice solid growth, rate margins. We will now organically keep building that and potentially add a little acquisition here and there for technologies.

Outside of that, I think you will see like I said in the balance of the portfolio moving to either [indiscernible] to personal care or some adjacent markets..

Okay, that’s helpful.

In oilfield, I mean I think you characterized this as being steady going forward, but is rig count growth sort of slowed recently, I mean can you grow over sequentially going forward and if the rig count sort of steady, I mean what’s the - what’s sort of the opportunity near-term if oil prices also stay where they are?.

Yes. I mean and I think you still have to be careful on rig count, because again you still have a lot of wells that are behind pipe and need frac stimulation. So yes, rig counts is a nice stat to follow.

But for us, we have a pretty good view as I said earlier that for the next three months to six months what crews we are seeing on with what with our organic customer base. So I think sequentially, we can grow quarter-over-quarter. And really it all depends on where crude sits at the end of 2018. We are not worried about ‘17.

We are very confident where we are in ‘17, what happens to crude in ‘18, if it sticks where it is and you had above 45 range, we will still see sequential growth quarter-over-quarter..

Okay.

And then just back to performance chems for a second - I think you said the non-Huntsman growth was 3%, I can’t remember if you talked about why that was, it’s a bit of a slowdown from what it was in not the first quarter, but I think last year, so what’s the trend in the underlying heritage business there?.

Yes. No concerns there, we slowed the plants down a little bit in the U.S., little bit of order patterns. So we think you will see that return back, should return back to normalcy in Q3..

Okay.

The demand environment will follow?.

Yes. I mean it softened in a few areas, but I think overall with our portfolio which strengthened in other areas. So it’s really balance itself out..

Great. Thanks so much..

Thank you..

We will now take our next question from Gregg Hillman from First Wilshire Securities Management. Please go ahead..

Yes. Good morning gentlemen.

Hi, first of all, the price - how about if the price of oil is like 40 or below, what is that through the oilfield services?.

Well, I think Gregg you will see rig count comes significantly off. But I think if you look at the total industry they have adapted very well to lower oil prices, especially in the basins that we operate in.

So for us I think it won’t be as a drastic slide as it was 2 years ago, it would be a soft slide and I still think that we can make money in the environment..

Okay.

And then in terms of the Huntsman, can you just talk about the revenues and cost synergies that you expect on a go forward basis of over and above what’s already been achieved?.

Yes. When we made the acquisition, we said the acquisition was not for synergies, it was for synergistic growth. And so we are seeing that. And obviously the Huntsman business had a nice quarter in revenue, but the margins were affected by some of the one-offs that we mentioned earlier. So we continually we will see that moving forward.

And we are starting to see a lot of the synergies starting to [indiscernible], so we are very confident that the margin profile will start going up in this business..

In what timeframe?.

Alright. You will start to see in the third quarter..

Okay, that’s good.

And then Patrick, overall just diesel fuel consumption, isn’t Fuel Specialties somehow tied to a diesel fuel consumption domestically or worldwide, is that correct?.

Yes. It is, it’s jet fuel and diesel fuels are primer and we do play in mostly in Europe in gasoline, but that is our primary is diesel and jet..

Okay.

And what were those numbers overall for diesel fuel consumption worldwide or domestic and the same jet fuel in terms of percentage change year-over-year in Q2?.

Yes. Jet and diesel were up on the quarter, not substantially but they were up. But again as we said the issue we had there of why you didn’t see the similar growth as you would see as the growth in diesel and jet for the quarter is that new technologies have better treat rates.

So, although revenues came down, we kept the impact - we actually we benefited in margins. So, that’s just the advent of new technologies, Greg..

Okay, but you said they were up a percentage, but do you know what percentage they were up?.

Yes, I think it’s probably 2% to 3%, but I would have to look at it, but it was up..

Okay. I will circle back on that. Okay, thanks..

No problem..

[Operator Instructions] We will now take our last question from Bill Dezellem from Tieton Capital Management. Please go ahead..

Thank you. I think you began to answer my first question with your last answer and so I am going to expose my ignorance here relative to the new technologies in Fuel Specialties, trying to understand just how this works, you said it’s a normal process, but it’s new for me.

And so it sounds like your new products, your new technologies are simply better.

So, therefore your customers require less of them in terms of sales volume, but because the product is better, you do have a higher margin, am I thinking about that correct?.

Bill, you are spot on..

And so when you net it all out, not thinking about sales, but thinking about profit or cash flow, do you make more or less money per gallon of fuel that’s treated with your product with the new technology versus the old technology?.

We make it little bit more..

And that’s on a profit basis, but on a sales basis, a little bit less..

That’s correct..

And so then the next question is this new that the new technologies or technology is it enough differentiated that you are able to go out and win additional customers or additional market share, how does that phenomenon come into play?.

Yes, it’s early on, Bill, but in this business, in all of our businesses, we continue to produce new technologies and the majority of the new technologies that we bring to the market are patented.

So, it’s really looking at where we play within those certain markets, but yes, it’s early on with two of the new technologies that we brought to the market. I think we will get a better feel for that going out throughout the rest of this year..

And in the past when you have brought new technologies to the market, has that created any market share shifts or when your competitors have and I guess tied to that same question is to what degree do your competitors bring new technologies?.

Yes, I think all of us bring new technologies to the market and that’s why people looked at Fuel Specialties in specific, there is only a few players in the market, because it is highly valuable market, it’s a minefield of patents. I think for us typically when we see a transitional ship to a new technology, we do see a sales bump in the long-term.

I think for these two specific technologies we are talking about, we really have to just see where the market goes, but typically and its new markets that we look at we could typically see a nice sales bump, but again, it’s too early to predict that..

Understood.

But theoretically, the fact that your customers are writing you a smaller check that’s good from their standpoint, so that does enhance their potential desire to do that?.

That’s correct..

And then I would like to shift one additional question and is specific to the announcement that you made about the dried surfactants business and the expansion in France.

I didn’t come up on the call that would you talk in some detail about what’s driving the demand and that your thought process and I suppose I will even just toss in to ask you to address the issue of wanting to expand in France, we hear so much about that being a difficult country to operate in. So, number of questions there please..

Yes, I will address the first one on the dried surfactant and really, Bill, it crosses over into both our Fuel Specialties, I mean, our oilfield specialties and performance chemicals, not the same product right, but the dry product, we call it dry on the flying oilfield and its dried surfactants and personal care.

The whole reason for that is that you are not shipping water. So, you are shipping a dry surfactant that could be blended on location, so it gives not only more competitive price, but it gives you more flexibility. And that’s why we have gone to the dry surfactants. The other is to answer your second question which I believe was operating in France.

It was not necessary that we have said we are going to get into France. Remember, we said, it was balanced out our portfolio in performance chemicals, specifically personal care. And where those assets sit are in France, Italy and Spain.

So, for us, it’s not necessarily that we are expanding in France, because that’s - it’s just because we have a plant in France. Now, if you look at a lot of personal care customers are in France, so it goes give us nice capability sitting and having 8 plants in France, but it’s not that our focus is growth in France.

Our focus is growth around the world, but really, this was core for us in Europe..

And following up on that Patrick, will some of the product produced in that facility the move to West Texas and other places, where oilfield is operating?.

It could be. There are some products that are being made on our new facilities that Fuel Specialties can use and personal care can use in the Americas. So, it could, but typically because of the way our assets are is they are multifunctional assets. So, what we can make in the U.S., we can make in Europe.

So, now we are not shipping things over the water, but we could be more competitive in those specific regions..

That’s quite helpful.

So, what this really is telling us is that you are seeing some demand interest in Europe and specifically where you are wanting to increase your capacity there?.

That’s correct..

Great. Thank you..

Thank you..

It appears there are no further questions at this time. I would like to turn the call back to Patrick for any additional or closing remarks..

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 today, please give us a call. We look forward to being up with you again and discuss our Q3 2017 results in November. Have a great day..

This concludes today’s call. Thank you for your participation. You may now disconnect..