Ladies and gentlemen, and thank you for standing by. Welcome to the Innospec's Third Quarter 2019 Earnings Release And Conference Call. [Operator Instructions]. Also I must advise that the call is being recorded today, Wednesday, the 6th of November, 2019. And without any further delay, I would now like to hand the call to your first speaker today, David Jones. Thank you, please go ahead.

Thank you. Good to everyone, my name is David Jones, I'm Vice President, General Counsel and Chief Compliance Officer at Innospec. Thank you for joining our third quarter 2019 financial results conference call. Today's call is being recorded. As you know, late yesterday we reported our financial results for the quarter ended September 30, 2019. The press release is posted on the company's website at innospecinc.com. The slide presentation on the results is now available on our website and both an audio webcast and a slide presentation will be archived on the website for 6 months. Before we start, I would like to remind everyone that certain comments made during this call might be characterized as forward-looking statements under the Private Securities Litigation Reform Act of 1995. Generally speaking, any comments regarding management's beliefs, expectations, targets or other predictions of the future are forward-looking statements. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from the anticipated results implied by those forward-looking statements. These risks and uncertainties are detailed in Innospec's most recent 10-K report and the 10-Q reports for the quarter ended March 31, 2019 and June 30, 2019 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. On Slide 3, we go over the use of non-GAAP financial measures. In our discussion today we've also included non-GAAP financial measures. A reconciliation to the most directly comparable to GAAP financial measures is contained in our earnings release, a copy of which is available on the Innospec website. For today's agenda, 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 turn it over to you, Patrick.

Thank you, David, and welcome everyone to Innospec's Third Quarter 2019 Conference Call. With many segments in the chemical industry reporting difficult trading conditions, I am very pleased to be reporting another good set of results for Innospec. Despite some of these headwinds, we continue to find our combination of good technology aligned with a focus on customer service is supporting our profitable growth. However, we remain cautious about future prospects as the market dynamics remain uncertain. During turbulent times like this, our strategy of operating a balanced portfolio of businesses allows us to continue to grow up by taking advantage of positive trends in some sectors while dealing with these challenging market conditions. We have delivered excellent sales growth in 2 of our business units, which has contributed to an operating income improvement of 14%, and adjusted non-GAAP EPS has increased by 17% compared to same quarter last year. This strong operating performance and favorable tax conditions in the quarter meant that we delivered $30.1 million of net income, which is up by 46% on the third quarter of 2018. This was also an excellent quarter for cash generation, which has allowed us to reduce net debt to just $22.7 million, which is equivalent to approximately 0.1x EBITDA. Fuel specialties had an excellent quarter as sales increased in both aviation and marine applications, which added to a solid performance in our traditional markets. The product mix during the quarter was particularly rich, which contributed to gross margins which were at the higher end of our expected range. While we are confident of continued improvements in this business, future prospects will be more aligned with typical growth rates in these markets. We expect to experience turbulent additions in our Performance Chemicals business adversely impact by global trade disputes and difficult…

Thanks, Patrick. Turning to Slide 7 in the presentation. The company's total revenues for the third quarter were $371.9 million, a 2% increase from $363.1 million a year ago. The overall gross margin was 32%, up from 30.6% last year, driven by improvements in all our strategic businesses. EBITDA for the quarter was $51.1 million, up 14% compared to $44.7 million in the same quarter last year. Our GAAP earnings per share of $1.22, included several special items, the net effect of which decreased our third quarter earnings by $0.18 per share. A year ago, we reported GAAP earnings per share of $0.84, which included a negative impact from special items of $0.36 per share. Excluding special items in both years, our adjusted EPS for the quarter was $1.40 per share compared to $1.20 reported in the third quarter of 2018, a 17% improvement. Moving on to Slide 8. Revenues in Fuel Specialties for the third quarter were $144.1 million, 7% higher than the $134.9 million reported a year ago driven by a 12% improvement in volumes, offset by negative price mix impact of 3% and an adverse currency impact of 2%. We delivered margins at the higher end of our range at 37.5%, up 1.3 percentage points on the same period last year driven by a rich product mix. Operating income was up for the quarter at $31.1 million, an 8% improvement on last year. Turning to Slide 9. Revenues in Performance Chemicals for the third quarter were $99.9 million down by 13% compared to $114.8 million in the same quarter last year. In addition to a 3% adverse currency impact and a 3% negative price mix impact, the volumes were down 7% compared to the same period last year. Gross margins were 22.6%, up 0.6 percentage points on…

Thanks, Ian. These are very complex and challenging times for everyone in the chemical industry. Our downstream customers are feeling the headwinds with global trade disputes and the drag on growth, which is exacerbated by uncertain government policies. The key to future growth for Innospec will be continued successful investments and the development of new technologies. This has allowed us to outpace the markets during this year, and it will continue to be our core competence in the future. With challenging conditions, it is essential to have a strong balance sheet, which allows the company to take advantage of opportunities when they arise. The performance of our business also has delivered excellent cash generation in the quarter, which has further reduced our leverage with net debt to EBITDA now at 0.1x. We first introduced a regular dividend 6 years ago, and we have delivered an annual increase of 10% and 15% during that period. I am delighted that the Board has decided to again increase our semiannual dividend which results in an annual dividend of $1.02 per share, which is a 15% increase over last year. This delivers on our commitment to return value to shareholders. Now I'll return the call over to the operator, and Ian and I will take your questions.

[Operator Instructions]. Our first question is from the line of John Tanwanteng.

Congrats on a great quarter. Can you break out how much IMO 2020 product was in your fuel business this quarter? And was that also prep work or was that actually additives going into bunker fuels?

Yes, John, it's Patrick. It was mostly prep work still on precleaning the tanks. You will not see the actual performance-driven side of it until IMO 2020 actually kicks into effect. So it's mostly just tank cleaning, more than anything else, in preparation for IMO 2020. And we typically don't give product lines and what their actual revenue and contribution is to the quarter. But I will tell you this, it is definitely making a difference now in that business, and we continue to see that moving forward in 2020.

Okay. Great. And any update on how you expect that to kick in as they start by the Performance Additives towards the end of this quarter or in January or whenever they need to be buying the stuff by?

Yes, we're still in the unknown stage. Again, we don't know if it's going to be treated at the refinery or at the terminal or on the vessel. And so it's still kind of up near, I would say, by end of Q4, first part of Q1, we'll have a much better idea of what it's going to look like, what the market conditions are going to look like.

Okay, great. On the DRA side, can you kind of color the growth opportunity there for the next 12 to 24 months? And is most of that in oilfield or is that also [indiscernible] refineries and the fuel side as well?

Yes, most of it's in oilfield. And we're selling quite a bit now to Brazil, China, Australia. And just starting here in the U.S. now. We've have our -- all of our first commercial sales have gone out the quarter. We would expect that the plant that we've built for this first stage of DRA will be full by Q1 of next year, and we'll be looking to add additional capacity at that time. But this business, even with depressed crude prices, this business continues to go up due to the fact that's it's an energy savings for the pipeline. So for us, we see this as a growth business and if you recall, John, we've always said to take cyclicality out of the oilfield market, we need to be selling to Saudi, and we need to have DRA, and that's exactly what has gone on in this quarter.

Got it. No, that's great to hear. And remind me what the capacity of that unit is at this point in terms of revenue per year?

Yes, it's fairly small right now. We don't give capacity on it, but it's fairly small. But you'll probably see us triple that capacity sometime in 2020.

Okay. So maybe just go back, could you size the opportunity for you guys?

No, we typically don't give that number, John. But I would say -- all I can tell you it's north of $20 million, well north.

Okay, great. And then finally, just can you discuss your Oilfield outlook, ex the DRAs? And just given the decline rig counts, I know you're sensitive to [indiscernible] and why you're doing the expansion, but just your outlook for that bit of it?

Yes, I mean it's difficult. Everything is driven off crude prices and nat gas prices. And I think you're really starting to see -- some leverage balance sheets are hitting the market on the E&P side of business that concerns us. So we obviously, have to watch for credit risk. But most of the customers that we're involved with -- as we've always said, we get about a 6-month outlook on what it looks like for their drilling programs, and they're pretty solid going into 2020. So we feel confident there. I think as long as crude stays in that $53, $54 and above range, we should still see single to high single-digit growth numbers. We're not as susceptible as we used to be with crude prices due to the fact that we've balanced out that portfolio by again, as I said earlier, selling into Saudi and DRA. And so, this is why we can really -- managing market in the downturn, and that's what we've been able to do.

Got it. And then, are you gaining share in that business outside of DRAs? Or is it more of a -- is it is more co-related to production?

No, we're gaining share.

Okay, great. Ian, one last one for me, just given where the stock is today, and it's well deserved by the -- what should we expect impact to compensation in Q4?

Yes, John, I would say that for every sort of that million -- every sort of $1 change would probably have about a $1 million impact on the share base compensation. It's early days yet, John, so let's see how the share price performs over the next quarter. But it's as you said, it's well deserved.

The next question is from the line of David Silver.

So I guess I would like to start maybe with the Fuel Specialties segment, and in particular, the 12% volume growth that you recorded this quarter. I -- that seems to be well above the historic underlying growth rate in that segment. So I was wondering if you could point out whether it was timing, whether there's a specific new business opportunity that flowed into the results of this quarter. And if it was possible, if there was any way to size the marine fuel -- initial marine fuel sales as may be a percentage of that -- that share of that 12% year-over-year?

Yes David, it's Patrick. If you look at the business it was driven by AvTel, and it was driven by the marine applications as well. In general, though, across our traditional business, it was up as well. But where you're seeing a little slow down in consumption of gasoline, you're not seeing a slowdown in consumption of diesel from what we've seen in the marketplace today. So that's really where the growth has come from in the quarter. We'll see that balance itself back out in Q1. We don't see a 12% increase in Q1 moving forward, we go back to our traditional or 2% to 3%, but that's really what drove the growth in Q4 -- or sorry, Q3.

Okay. And then I'd like to -- I'm relatively new here, so I apologize if I'm going to be asking something you've said a number -- a few times before, but I was comparing the Oilfield Services level of activity to a few years ago when crude oil prices, in my estimation, were not substantially different, but your activity levels are substantially different. And I believe this is all organic because I believe your M&A efforts in that area were around 2012 or so -- or ended around 2012 or so. So could you talk about, let's say, why you're running it may be close to a $500 million revenue pace in that segment this year? And let's say in 2017, you were closer to $300 million. I mean what are the key elements that lead to that much higher level of activity?

Yes, David, what I'll do is have Ian answer the front portion, and then I'll come on the back side of it.

Sure. David, so looking back in our business, the activity levels that we've been able to execute across a number of fields are enhanced. So this business started small, the direct operator model was new to the market. And that's really gained traction over the last number of years and aligned with the excellent technology we have and the high service levels that we've been able to deliver. It's really caught the attention interest of a number of customers across a number of key fields in Texas and Oklahoma. So really the organic growth that you've identified has really been about us establishing ourselves in the market and really expanding our offering to our existing customers and bringing in new customers. So it's gaining market share, and that's what we've been able to do tremendously well over the last couple of years and all credit to the guys out there.

Yes I think, Ian's made a good point. And you did as well, David. This is all organic growth. And so we have outpaced the market quite substantially. And it's not just what goes on in Texas, Oklahoma, Colorado and states that we have -- we're very well established. But we also do a lot of business over in South America that we've expanded. We've obviously -- have talked about taking cyclicality out of this business, which we knew we had to get into Saudi due to OPEC and the arrangements within OPEC and how they operate. But just as important, we knew we had to get into DRA because that crosses over into every Fuel Specialties business. And so for us, it was a function of bringing on high margin products into a very cyclical market that are noncyclical. And that's really what's helped establish the third quarter, and that's why we feel very confident going into Q4 and into 2020.

Okay. And then, just to follow-up, let me just think for a second. I know that there are initial sales of DRAs in the Oilfield Services segment. Am I correct in assuming that they did not materially benefit earnings per share or operating income, in other words, there were initial sales, but at least at this stage not the -- not highly profitable in regards to 3 -- third quarter results. Is that correct?

That is correct. That is correct. You'll start to see more benefit in Q4 and also in Q1.

All right. And then I would like to circle back on Performance Chemicals and the shortfall there, and in particular, your commentary in the release regarding a potential relatively quick relatively full rebound. So could you just talk about maybe the nuts and bolts behind the volume drop this quarter? In other words, we know that major European economies are soft. I do wonder whether Brexit kind of threw a monkey wrench in maybe some people's shipment plans given the cross-border issues in theory there. So maybe if you could kind of, maybe, just get behind some of the numbers that maybe talk about the levers that you thought fell a little short in the third quarter, and that you indicated might be rebounding in the near future?

Yes, I think of a lot of it, David, was -- you just said it, there's a lot of speculation within the global trade environment, whether it's the tariffs with China, whether it's Brexit, I mean there's a lot of different geopolitical issues going on around the globe. And we saw a little bit of destocking going on in the quarter as well. And so along with destocking, along with depressed raw material cost, which are passed through, along with a hit on FX, you generally saw a fairly tough quarter in Q3. Now what we're seeing in the momentum coming out of Q3 going into Q4, is that the destocking has stopped and people are starting to order again. I think the rhetoric around the trade winds on the trade tariffs is starting to change a little bit and people are hoping that there's some positivity coming out of that near future. Brexit is all and unknown, it's basically kicking the can down the road, we think the new policy is. But for us, we're prepared from all aspects on how to operate under these conditions. We realize we took a hit in Q3, I don't think we'll see that again, I think Q4, you'll see us pulling back out of that.

Okay. And if you could just remind me, but within Performance Chemicals, what would you say the percentage exposure is to Europe? Is it more than 60% or how would you kind of characterize that business kind of as we look at it today?

Yes, it's roundabout.

The geographic exposure, sorry.

It's roundabout 60%.

No further questions at the moment sir. Please continue.

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 meeting up with you again for our fourth quarter results in February, 2020. Thanks again.

So that does conclude our conference for today. Thank you all for participating. You may all disconnect.