David Jones - VP, General Counsel, Chief Compliance Officer & Corporate Secretary Patrick Williams - President, CEO & Director Ian Cleminson - EVP & CFO.

Sean Milligan - Johnson Rice & Company William Dezellem - Tieton Capital Management Jonathan Tanwanteng - CJS Securities Christopher Shaw - Monness, Crespi, Hardt & Co..

Good day, and welcome to the Innospec's First Quarter two018 Earnings Release and Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. David Jones, General Counsel, Chief Compliance Officer. Please go ahead, sir..

Thank you. Let's start with Slide 2. Thank you for joining our First Quarter two018 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, 2018. The press release is posted on the company's website, innospecinc.com.

The slide presentation on the results is now available on our website, and both an audio webcast and the slide presentation will be archived on the website for six months.

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 at SEC. We refer you to the SEC's website or our site for these and other documents. Slide 3.

In our discussion today, we've also included some non-GAAP financial measures, a reconciliation to the most directly comparable GAAP financial measures contained in our earnings release and in the presentation that follows. A copy is available on the Innospec website. Slide 4.

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'll turn it over to you, Patrick..

Thank you, David, and welcome everyone to Innospec's First Quarter two018 Conference Call. We are very pleased with our start to 2018 with excellent revenue growth in all our core strategic businesses. This quarter is also notable in that sales in Octane Additives were minimal, which provides a clear picture of the strength of our future business.

Although our adjusted EPS was only up 2%, if we exclude Octane Additives from both periods, then the underlying adjusted EPS was up by 13%. This underlines the strength of our business. I am particularly encouraged by the excellent results of our Performance Chemicals division.

When we acquired part of this business at the start of 2017, we set ourselves a very clear strategy of integration, growth and margin improvement. I am delighted to report that we have delivered on all three elements. Our strategy is right on track and ahead of schedule.

As we indicated, now that the integration is complete, we will be commenting on Performance Chemicals as a single business rather than referring to the heritage and acquired components. Fuel Specialties also had a very solid quarter, driven by customer adoption of our new technologies.

This has been tempered by raw materials, which are being driven by sustained higher crude prices. As we have often indicated, at this point in the cycle, there can be a brief lag which can depress margins for a short period.

Our views on the sustainable margin levels for this business are unchanged, and this remains a very strong and reliable business. Oilfield Services continues to operate in very challenging markets. While customer activity continues to drive growth, prices and availability of both raw materials and transportation continue to impact margins.

With revenues growing 40% year-on-year, there's obviously been a need for additional working capital to support this growth. However, we are confident that the trends in this business, which were apparent towards the end of the quarter, will drive improved operational leverage and profitability.

As we indicated on our last call, sales in Octane Additives for the quarter were minimal. We have now received an order to the value of $8.7 million, which we expect to deliver in the second quarter. We have indications that our customer may play smaller orders from this point on as they manage their inventories.

We will continue to update you on each call. Our operating cash flow resulted in a small outflow in the first quarter, which was expected. As in previous years, we believe that cash flow will improve as the year progresses while reducing leverage further during the year.

Now I will turn the call over to Ian Cleminson, who'll 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 of the presentation. The company's total revenues for the first quarter were $360.7 million, a 23% increase from $294.3 million a year ago.

The overall gross margin decreased by 1.9 percentage points from last year to 29%, primarily driven by the mixed effects of higher growth in Performance Chemicals and minimal sales from Octane Additives. Adjusted EBITDA for the quarter was $43.9 million, a 12% increase compared to last year.

Our GAAP earnings per share were $0.90, including special items. The net effect of which decreased our first quarter earnings by $0.12 per share. A year ago, we reported GAAP earnings per share of $0.70, which included a negative impact from special items of $0.30 per share.

Excluding special items in both years, our adjusted EPS for the quarter was $1.02, a 2% increase from $1 a year ago. As Patrick mentioned, excluding Octane Additives from both years, adjusted EPS increased by 13% year-over-year. Turning to Slide 8.

Revenues in Performance Chemicals for the first quarter were $124 million compared to $94.5 million last year, a 31% increase. Volume growth of 10% and a favorable price mix of 9% were augmented by a positive currency impact of 12%. Gross margins of 20.5% were up 2.8 percentage points.

In the first quarter of 2017, margins were impacted by a fair value inventory adjustments. However, even adjusting for this, underlying margins were up 1 percentage points, which is just ahead of our expectations for this business. Operating income for the quarter was $12.1 million, up 102% on the $6 million in the comparative quarter.

Moving on to Slide 9. Revenues in Fuel Specialties for the first quarter were $143.4 million, a 13% increase from the $126.4 million reported a year ago. Volumes were up by 1%, backed up by a positive price and product mix effects of 4% and an 8% positive currency impact.

Revenue growth was particularly strong in both the Americas and EMEA, driven by healthy customer demand. Fuel Specialties gross margin for the quarter was a little softer at 33.8%, down 2.7 percentage points from the same quarter last year. This is close to our expected range despite increasing raw material costs.

Operating income for the segment was $28.2 million, up 4% from $27 million in the first quarter of 2017. Moving on to Slide 10. Revenues in Oilfield Services increased 40% over the same quarter last year and sequentially increased by 16% over the fourth quarter of 2017.

Strong customer activity in the Americas drove a volume increase of 33%, and this combined with the positive price mix impact of 7%. Gross margins were down 4.4 percentage points in the comparative quarter to 33.8% as we continue to be impacted by raw materials and transportation issues.

However, there were signs of some improvements late in the quarter. Operating income of $3 million was flat compared to the same period last year, but up $2 million over the fourth quarter of 2017. Moving on to Slide 11. As we expected, there were minimal sales of Octane Additives in the first quarter, impacted $6.9 million a year ago.

As a result of this, the business made an operating loss of $1.4 million in the quarter compared to an operating profit of $2 million last year. Subject to logistics, we will deliver the latest order for $8.7 million of products during the second quarter.

Beyond this, we have limited visibility, although indications are that future orders may be at this magnitude as our customer manages their inventories. Turning to Slide 12.

Corporate costs for the quarter was slightly higher than expected, up $13 million compared to $10.9 million a year ago, driven mainly by increased personnel-related expenses and the additional services required to support our enlarged group. On a quarterly basis, we expect corporate costs to be in the range of $12 million to $13 million.

The effective tax rate for the quarter was 25.3% compared to 25.9% last year, reflecting the geographical mix of the business, and we expect the full year effective rate to be approximately 25%. Moving on to Slide 13.

As expected, the business experienced a small operating cash outflow of $2 million in the quarter compared to an outflow of $19.9 million last year. This quarter's small outflow was driven by the increased working capital requirements to support the revenue growth in all core businesses.

Capital expenditure was $3.8 million for the quarter, and we capitalized $0.8 million of software. We expect to return to positive cash generation in the near term as the working capital position stabilizes.

As of March 31, Innospec have $78.1 million in cash and cash equivalents and total debt of $218.8 million, resulting in net debt of $140.7 million. I'll now turn it back over to Patrick for some final comments..

Thanks, Ian. Innospec has been on a long strategic journey from a single-product company to our current balanced and growing portfolio of specialty chemical businesses. This quarter has been a reflection of the future shape of the business with minimal sales in our Octane Additives segment.

To have increased our underlying adjusted EPS by 13% without a contribution from Octane Additives is a landmark achievement.

Not only did our businesses perform well, but we have a number of improvement plans in place, which we believe will further improve the quality of the business in the coming quarters, both in terms of profitability and cash flow.

We remain active in the M&A market as we have capability and capacity to absorb further acquisitions, which could enhance the portfolio and increase shareholder value. I am very pleased to announce that the board of Innospec has approved a further increase in our semi-annual dividend.

Over the last four years, we have increased our dividend every six months with an annualized increase between 10% and 15% every year. The board has approved a semi-annual dividend payment of $0.44 per share, which will be payable later this month, returning further value to shareholders.

We believe that we are well positioned to continue to grow and improve profitability in all of our strategic businesses throughout the rest of 2018 and beyond. Now I will now turn the call over to the operator, and then Ian and I will take your questions..

[Operator Instructions]. We will take our first question from Sean Milligan..

Just you mentioned some headwinds in the Fuel Specialties side relative to crude prices. Just trying to see if you could put some numbers around that, how much operating margin you think that cost you and sort of what the lag effect should be as we roll through 2Q, 3Q..

Yes, Sean. I think if you look at - probably about 1% that there was the cost of raw material and transportation costs, a rise in transportation. So really if you break it down, it was probably a full percentage point..

Okay. And then on the Oilfield Services side, you mentioned some kind of late-quarter trends, I'm guessing, relative to customer activity levels. But trying to get a sense on where you think margins in that business can settle out this year in higher operating environment for you all..

Yes. We talked about for quite some time about getting to that inflection point where we have more volume on the same asset, an SAR cost. So a lot of what we've been doing behind the scenes is adjusting the SAR for the fit for business as well as looking at all of our costs from a raw material standpoint, input and output costs.

I think a lot of the work that we've done, we started to see the benefit in the latter part of this quarter, which should then help improve, not only gross margins, but bottom line profitability into Q2 and Q3. And that's really been the focus of this business. It's - we have the growth, the sales growth there.

It's now getting behind the scenes, making sure we turn that sales growth into profitable and operational growth. And that's the focus that we've had, and I think we'll start seeing the benefits. We're starting to see it now. I think you'll see some of it in the second quarter. You should see the full benefit of that in Q3..

I mean, are we talking about being able to get the EBIT margins kind of in the mid-single digits or sort of upper mid-single-digit range?.

I would say a little bit above mid-single digits. Our goal is to get into double digits over a period of time, but we'll probably be focusing on that mid-single to 6%, 7% in that area..

Okay, great. And then in terms of some kind of longer-term initiatives at points, you all talked about some changes in the gasoline additive market. Just trying to understand your outlook there, kind of where you think we are in the adoption of kind of new additives and when that potentially could be impactful to you all..

Yes. It's still a fluid market, and you're specifically talking about GDI, gasoline direct injection. And I think it's still too early in the process, Sean, to put a value on it. A lot of the new engines - a matter of fact, almost all the new engines coming out are GDI.

So it's really a function of how you blend PFI in with GDI and when is that timing going to be. And so to us, it's more of a timing issue, which would give us, really, a general idea of market size at that point. We don't know the adoption timing. We don't know how mass it's going to be.

Again, when some of the major oil companies start moving to treating GDI, it'll give us a much better opportunity and a much better visibility..

We will take our next question from Bill Dezellem from Tieton Capital Mgt..

This is Bill Dezellem with Tieton Capital.

Did anything change with the Fuel Specialty business other than the pricing lag that impacted margins? Or were there other factors that were impactful to margins that entered in the equation also?.

No, Bill. I would say it was 90% pricing margins. Typically, it's raw material. And as we alluded to, it's a 3 to 6 month lag. I think we've gotten our lag down a little better than six months, but it's just a lag in pricing. When you see crude oil jump up, when you see raw materials jump up, you've got that lag in between.

That's typical of any chemical business. The other 10% is we had a product - if you recall, we had a cetane product. That is more of a commodity. And it comes and goes in volumes, but it's a low-margin product. That's probably 10% mix. It came back..

That's quite helpful. And then relative to Oilfield, the programs that you referenced to improve margins, it sounds like some of those have already started to take effect late in the quarter. And so I'm hoping you can detail some of the things that you had done there that is benefiting the business..

Yes. I mean, it's typical blocking and tackling. I mean, if you look at oilfield service companies in general and you look at today's market, it's primarily E&P companies making the money and oilfield service companies suffering, and it's just years of a lag effect.

So for us, it's getting control over your transportation costs, getting control of your raw material pass-through. It's getting control of internal manufacturing efficiencies. It's just general blocking and tackling that - not that it's been neglected.

I think that this business grew so fast and crude prices ran up so fast that we had a lot of rolling elements that we had to deal with. I think that the management team has a good focus now. We're directly involved to make sure there's a direct focus, and I think we're starting to see the benefits of all that's getting our hands around it..

Great. And then inventories were up $40-or-so million sequentially.

Would you talk to that please?.

Sure, Bill. That's the real mix across all our businesses. As you know, Octane Additives had no sales in quarter one, but we have built some inventories ahead of the expected shipments in quarter two. And then a little bit of build in the higher growth levels in Performance Chemicals and Oilfield as well.

So it's really supporting that top line growth though, so it's a good sign. But we do have to be careful. We have to manage inventories, and we have to manage our cash flow off the back of that. So we are mindful of what we've done..

Great. And I would like to ask one more, if I may. Relative to the M&A front, you mentioned in the opening remarks that you are active on the M&A front.

Can you provide as much color around that as you will, please?.

Yes. We've integrated the Huntsman acquisition. I think we've proven that to be - we've done a good job there. We set what we said we were going to do, and we did it. It was very strategic to the business. We are now looking to add in similar portions of our portfolio.

The issue we have right now, Bill, is that multiples are so high in some of the areas that we need to get into or want to get into that we're just going to be very good stewards of our shareholder money, those businesses that we look at that we might have paid 8x EBITDA two years ago that are selling for 12x EBITDA.

And we're just not going to buy a business at 12x EBITDA in this price market. So we're strategically looking. We've looked all over the world. It's not only looking at geographic expansion, but it's looking at product and technology expansion in our prime businesses. We're not necessarily looking for another leg.

It's more really what we have in place today..

So really, it's, I think using your term, filling in around the edges or tuck-ins with the three businesses that are in place today, and presumably that's primarily two businesses, Performance Chemicals and Oilfield.

Or do you see opportunity in Fuel Specialties?.

Don't see a lot in Fuel Specialties. I mean, there could be some consolidation or technology buys in Fuel Specialties or a regional expansion, like a manufacturing site somewhere.

But you're right, it's primarily Personal Care, Home Care, agriculture, probably actives and probiotic type as well as some technology plays only, not asset plays primarily, but technology plays and geographic expansion in Oilfield..

We will take our next question from Jon Tanwanteng from CJS Securities..

Sorry if I missed a bit of the beginning of the call, so I apologize you're repeating things.

But to start, can you just talk about the spank in Fuel Specialties, what's going on there? And do you see margins recovering as you're pricing catches to input costs?.

Yes. I mean, we've always said that margins were high in the beginning, the first part of '17. We said it would drop down into that normalize range of 34% to 35%. We're really at 34% is - if you look at 33.8%. There was a drastic increase in raw materials. That's across-the-board in most chemicals.

There's typically a lag in this business, as we said earlier. And I think you'll see that catch back up and get back into that 34%, 35% range. So there's nothing abnormal that we haven't seen in the past. It's just - again, it's that lag that we have to catch back up on..

Okay, got it. And then just on the chemical side. $125 million in revenue. I think it's far behind - far beyond any quarter that we had modeled in 2018. Do you see that run rate as sustainable? Or can you even build from that? But tell us how you see the future for that business by - in '18 and '19..

Yes. I mean, when we announced the acquisition, we spent a lot of time behind the gates really making sure that strategy was fit. And I think that it's a rarity, in a lot of cases, where the strategy goes better than what your strategic inputs were. I think we'll see growth. I don't know that we'll see it to this extent.

But I definitely think that this is a model that's working. We're adding to the model. It's functioning very well. The individuals from the - not only the acquired business, but from the heritage business, have done a phenomenal job managing this business and integrating it appropriately. It's a great team over there.

So my view is I think we're going to have better growth than we anticipated. But I want to temper a little bit going into 2, 3 and 4, that don't expect this type of high growth every single quarter. Let's see how it plays itself out over the next few quarters..

Okay, that's fair. And then finally, just on the octane side.

Did you mention how big the order was that you received? And do you expect all that shipped in Q2?.

Yes. It's $8.7 million in Q2..

Okay.

And do you see more orders in the rest of the year at all?.

Yes. I think we'll see some - as we alluded to in the text is that we'll probably see smaller orders as they manage inventory and cash flow. So instead of the large orders that we get all at once, you'll see a lot of smaller orders in this $8 million to $9 million range..

We will go to our next question from Chris Shaw from Monness, Crespi..

First question, just curiously on the Oilfield Services. Was there any weather impact in the first quarter? I thought I had read some other guys sort of in the space that the cold weather snow might've impacted some business. That might be even more on the drilling side. I know you guys are more exposed to production.

So was there any impact?.

No, there was. It's interesting, Chris, because you still had a Hurricane Harvey impact, too, where you have a lot of sites that are just coming up and not to their max volume yet. So you not only have a lag from the hurricane, then yes, you got hit with some of the cold weather impact. So you really got a double whammy. Now it really didn't affect us.

If you look at the revenue rate, it was a great revenue rate. Where it affected us is tight raw material and high prices, not only from a raw materials standpoint but from a transportation standpoint. And we were just slow to react. I think that we were more reactive than proactive.

And so now the mindset mentality is to be more proactive in the marketplace, and that's we're planning on doing..

Got it. And then Performance Chemicals, obviously, great job. The Huntsman acquisition team is really good. Can you remind me - I remember when you did the deal, the - that business is lower margin. I think you're buying it primarily in the sense to get some capacity in Europe to make some - maybe some higher-margin product that you already had there.

Is that what's been happening exactly? Like is that how you've been driving growth for your new - your existing high-margin products into Europe and things like that? Just put a - give you chance to run through the sort of - a little bit of more of the achievement you have done there..

Sure. What's pleasing about the quarter when we it dissected is that not only was the heritage business up strong across-the-board globally, but also, the acquired business was just as well up strong with improving margins.

And a lot of the things that we talked about, the multiple assets that we had, that we acquired really had a lot of other capabilities that we could put on those assets as well as making components for other parts of our business. So strategically, it really fit exactly what we were looking for.

I think that opportunities coming out of that business are abound. So we feel very confident moving into the rest of this year and '19, that we have a very solid footing. But it's really - Chris, it's been across-the-board. It hasn't been one function. It's been across-the-board business.

We added assets to the dry on the fly, and that asset is almost full. We put capacity in, and it's almost 100% full already. So there's a lot of things that we've done in really looking at the future of this business that have panned out very well for us.

So I think the pleasing part of this, as I said earlier, it's across-the-board and it's sustainable..

Does that mean you get to add capacity soon? And I don't know what sort of the CapEx needs for something like that would be.

Is it buying or something a larger project that would - possibly you guys would undertake?.

Yes, good question. In Performance Chemicals, it's mostly minor. Yes, you're adding capacity in some areas, but it's really not a lot of CapEx. You'll see some larger potential CapEx coming out - that have been coming out in some of our newer products in other areas of the business. But you're not talking - all of our plans are not large CapEx plans.

But with the growth that we've had in not only Oilfield and the growth that we've had in Performance Chemicals, we've obviously had to add CapEx. And that's what we've done to support the business..

We will take our final question from Sean Milligan from Johnson Rice..

One follow-up. There's been a lot of focus recently on a Permian differentials blowing out because of production levels relative to pipeline takeaway capacity.

And I know you all sell some chemicals into the midstream market, but when you - or at least kind of like in conversations with you all, it doesn't - midstream doesn't seem to be a big percentage of your overall revenue within the energy portion of your business.

So just trying to understand if you see opportunities to sell kind of new products in midstream customers and what you think - if there are those products, what that kind of growth would look like second half of this year and '19?.

Yes. I mean, if you look at the breakdown, we're about 5% to 10% drilling, probably 65% frac stimulation and the rest of that's production. And then where we meet in between is on the Fuel Specialties side is on the pipeline side, between crude pipeline and distillate pipeline. So for us, we've really set ourselves up for the whole model.

I think what you will see is, yes, that we will have new product opportunities in all three of those core businesses in Oilfield, and hopefully, you'll see some announcements here in the near future and exactly see what we're talking about.

But for us, it's a function of new products into some of these markets that really haven't had a lot of technology in the past. And we view ourselves as a technology company that's bringing new technologies to the market. And that's our focus in Oilfield, really, is to differentiate ourselves with service and technology..

There are no further questions. So I'd like to turn it back over to Mr. Patrick Williams, President and CEO, for any additional or closing remarks..

Thank you all for joining us today, and thanks to all our shareholders, customers and Innospec employees for their interest and support. If you have any further questions about Innospec or matters discussed today, please give us a call. We look forward to meeting you again and discuss our Q2 2018 results in August. Have a great day..

Ladies and gentlemen, that concludes today's call. You may now disconnect..