Ladies and gentlemen, thank you for standing by, and welcome to today's Innospec's Fourth Quarter 2019 Earnings Release and Conference Call. [Operator Instructions]. I must advise you that this conference is being recorded today, 19th of February 2020. Without any further delay, I would now like to hand the conference over to your presenter, David Jones, General Counsel. Please go ahead, sir.

Thank you. Good day, everyone. My name is David Jones. I'm General Counsel and Chief Compliance Officer. Thank you for joining our fourth quarter 2019 and year-end 2019 financial results conference call. Today's call is being recorded. As you know, yesterday we reported our financial results for the full year and quarter ended December 31, 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 as well, and both an audio webcast and the slide presentation will be archived on the site for 6 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 and 10-Q reports for the quarter ended March 31, 2019, the quarter ended June 30, 2019, and the quarter ended September 30, 2019, as well as other filings we have with the SEC. We refer you to the SEC's website and our site for these and other documents. In our discussions today, we've also included some non-GAAP financial measures. A reconciliation to the most directly comparable GAAP financial measures is contained in our earnings release, 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'll turn it over to you, Patrick.

Thank you, David, and welcome, everyone, to Innospec's Fourth Quarter and Full Year 2019 Conference Call. I am delighted to be able to report another very good quarter's results, which further underlines the resilience of our strategy and the value of operating with a balanced portfolio in uncertain times. In sharp contrast to many in the industry, Oilfield Services has again delivered an outstanding performance, both in terms of sales revenue and operating income. Performance Chemicals has substantially improved its margin profile despite battling the headwinds of raw materials and exchange rates, which resulted in a 42% improvement in operating income. And in Fuel Specialties, despite the negative impact of short-term supply issues, we still increased full year sales and operating income over 2018. During our Q2 results call in August, I indicated that we had experienced some supplier disruption in Fuel Specialties, which was impacting a number of companies, not just Innospec. We thought that the impact would be minimal and then normal service would be restored in a reasonable time frame. This proved not to be the case and the issues have been more complicated to solve than we anticipated. However, we have developed alternative and sustainable supply solutions for all our products impacted and will return to normal business operations at the end of the first quarter of 2020. We've been working with our insurance providers to cover the financial impact of this disruption. We are extremely pleased with the recent performance of our share price, which benefits all our shareholders. This has resulted in a higher accrual for our share-based compensation plans in the fourth quarter, which was equivalent to $0.19 of EPS. Without this accrual, we would have delivered EPS of $1.66 for the quarter. Even with these challenges, 2019 was a fantastic year for…

Thanks, Patrick. Turning to Slide 7 in the presentation. The company's total revenues for the fourth quarter were $390.7 million, a 1% decrease from $395 million a year ago. Overall, gross margin increased from last year to 30.3%, driven by improved margins in Performance Chemicals and Fuel Specialties. EBITDA for the quarter was $55.2 million, broadly the same as the $55.1 million generated in the fourth quarter of 2018 as the decline in Octane Additives was offset by the growth in our strategic businesses. Net income for the quarter was $31.1 million compared to a $20.4 million last year, which was adversely impacted by U.S. Tax Reform adjustments. Our GAAP earnings per share were $1.26, including special items, the net effect of which decreased our fourth quarter earnings by $0.21 per share. A year ago, we reported GAAP earnings of $0.83 per share, which included a negative impact from special items of $0.79. Excluding special items in both years, our adjusted EPS for the quarter was $1.47, a 9% decrease from $1.62 per share a year ago due to the decline in Octane Additives and a $0.19 impact of increased share-based compensation. For the full year, total revenues of $1.51 billion increased 2% from $1.48 billion in 2018. Net income for 2019 was $112.2 million or $4.54 per diluted share compared to $85 million or $3.45 per diluted share a year ago. Special items decreased net income for the full year by $16.8 million or $0.68 per diluted share. In 2018, similar items decreased net income by $33.9 million or $1.38 per diluted share. Excluding special items in both years, our adjusted EPS for the year was $5.22, an 8% increase from $4.83 a year ago. EBITDA for the year was $201.8 million compared to $187.4 million in 2018, an…

Thanks, Ian. We are very pleased to be able to report this impressive fourth quarter and full year performance, especially given the headwinds that we faced. Our Oilfield Services business had a fantastic fourth quarter and has outperformed the market throughout the year, delivering excellent sales revenue growth and profitability. We have really referred to our strategic intent to focus on margin improvement and profitability in Performance Chemicals. The delivery of these strategic initiatives has contributed to a great year, which culminated in operating income, up 42% for the quarter and 9% for the full year. Fuel Specialties had to overcome a major supply disruption, but we are confident that the solutions we are implementing will have a long-term benefit to the stability of this business. In addition, we have absorbed higher cost of share-based compensation, driven by the significant increase in our share price, which benefits each and every shareholder. Our strategic and focused approach in all our core businesses continues to deliver revenue and profitability growth, which offsets the decline in Octane Additives. We have a pipeline of exciting new innovative technologies, which will drive organic growth in 2020 and beyond. We continue to seek meaningful acquisitions, which will add shareholder value, but will remain disciplined in our approach. Once again, we have generated excellent cash flow, which has moved us into a net cash position. We have reached this milestone only 3 years after the major acquisition in our Performance Chemicals business, which added $200 million of debt. While market dynamics are still influenced by the uncertainty of slower growth and trade disputes across the globe, we are confident that the underlying fundamentals of our business are very sound, and we are well placed to continue to successfully execute our strategy and deliver future financial growth. Now I will turn the call over to the operator, and Ian and I will take your questions.

[Operator Instructions]. The first question comes from the line from Jon Tanwanteng.

Can we talk about the supply disruption and how that will impact Q1 and if there's going to be an ongoing input cost headwind as you transition to a new supplier?

I'll have Ian take the first part of the question. I'll take the second part, Jon.

Yes, Jon, as Patrick alluded to in the script earlier, we incurred this issue in Q2 of 2019. The impact really started to be felt in the fourth quarter as we unwound our supply chain and our inventories, and we expect it to continue throughout the first quarter. Now in the background, our focus has been on supplying our customers, keeping them fully informed of where we're at and providing them as much inventory and products as we possibly can. We've battled with the cost of that, and most of that cost, we expect will be covered by insurance, and we've already covered most of it in Q2 and Q3 through our insurance company, but there's some work to do there. We expect by the end of Q1 to have got through this. And our cost base will be at least the same as it was previous to the incident. So I hope that answers your question.

Yes, it does. And then Patrick, I don't know if you can add any more color on exactly what was the...

So I think Ian covered that extremely well. I think the key there is that the financial implications being covered by the insurance company. And the second key to that is having supply issue corrections moving outside of Q1 into Q2, that's probably a better cost position and less risk.

Great. And then, Patrick, can you just talk about the uptake on IMO 2020 low sulfur additives, maybe broken down by product line? And how you see that playing out in 2020?

Yes. We don't necessarily break it down by product line. But as you originally -- the first couple of quarters, we discussed that there was a lot of business in the tank cleaning area in preparement for the IMO 2020. We are starting to see issues with the new fuel. We're starting to see stability issues. We're starting to see buildup. So I think for us, it's a function of what is next. We know there's going to be issues. We've seen the fuel out there. We're hearing there's problems out in the field. And I think we're starting to see some small sales into the actual IMO performance of 2020 fuels. We'll probably know, Jon, a lot more going into Q1 and Q2 as to what the magnitude is going to be, as any business that's kind of a new market, which this is, until you have some catastrophic failure, you won't see substantial sales. And I think that, that's probably going to happen here in the near term.

Got it. And then oilfield, that had a really great year. Can you talk about the drivers there? And can you build on that momentum, even as rig counts and oil prices continue to be unadmiring and maybe if you could have Saudi and Brazil and DRAs all figure into that mix?

Yes. I think you just hit it on the head, is that we've always said in our strategic intent to build this business is that, A, we had to get into the low lift cost basins, but more importantly, we had to take cyclicality out of this business. And the best way to do that was to obviously move into Saudi and Middle East, build our own DRA plant with our own technology and look at how we implement South America and Mexico. And we have -- strategically have done all of those, and that obviously has helped us produce very good results for the year and also for the quarter. I think that's something that we had to do as an organization to really be viewed as a company that's got a balanced portfolio. And we've done that, it's worked out well. I think DRA's got ways to go. We're debottlenecking DRA as we speak. Due to the fact that we see contractual volumes start to kick in, in Q1 and Q2, so you'll see us probably double the volume output of that asset going into the fourth quarter of this year.

Great. And then finally, just an update on the cash. It's -- you're in a net cash position now. Is it burning a hole in your pocket? Are you happy to sit on until a good M&A target comes along? What's the order of your priorities today?

I think you'll still see us increasing our dividend, 10% to 15%, as we do every year. We think that, that's a good solid spend on our side. I think you'll see us still sit tight with dry powder, looking for the right acquisition. In these global markets and global uncertainty that we're seeing out there, I think you'll probably see some businesses come out in a situation where multiples are more meaningful to us and more palatable. So I think you'll see us put some money to work. I hope it's this year. But as you know, we're very disciplined in our approach to buying something. And if for some reason, Jon, we said the middle half of the year, and we haven't done anything significant, there's obviously a potential for us to do a onetime dividend, which we're not afraid to do that. We've done that in the past. So it's still a pretty balanced outlook on how we want to spend our cash.

Your next question comes from the line from Chris Shaw.

Just a follow-up to Jon's questions actually. In the Oilfield Services now, what -- how much is the ex U.S.? How much is the international business now?

I'd probably say it's still 75%, U.S., with 25% outside the U.S., meaning Mexico, South America and Middle East, and some in Europe, obviously.

And then you touched on, I think, specifically in oilfield, some of the growth opportunities in the upcoming year. But in general, you said now you feel pretty confident 2020 for -- because you have a lot of work and -- with opportunities across the businesses. Can you name a few other ones? Or just give some examples in some of the other segments as well?

Are you talking outside of oilfield?

Yes, exactly.

Yes. I mean if you look at fuels, it's IMO 2020. It's GDI, which is starting to catch some tailwinds, which is a good thing. New technologies that we're bringing to the market for lubricity, detergents, cold flow, for instance, terpolymers. If you look at Performance Chemicals, really, it's the acquisition that we made in the adjacent markets that we've gotten into, like hard surface, home care, the agriculture markets, the construction markets, the mining markets, which are all higher margin markets. And so that's helped out our GPs in that area. Personal Care and the new technologies we're bringing about, this is an area where we've set the 3 business up so well that we don't need to have acquisitive growth to grow. We feel very confident that now we're well-established with our technologies, that we can grow organically and not have to look out and chase multiples for acquisitions. So those are really -- if you look at the balance of our portfolio, those are the growth cycles that you're looking at.

So it's a mix of like adjacencies, new technologies, geographical expansion, all that kind of stuff, all rolled up?

Yes, all of combined.

And then, I think I've asked this before in the past. But when Octane Additives, I guess, ends completely and that segment sort of closes, is there a cost -- a fixed cost that sort of gets -- that's associated with that segment now that gets pushed into Fuel Specialties to support AvTel?

Yes. As you said, Chris, we've answered this over the years. So the AvTel product is made on the same facility as Octane Additives. When we actually finished production of Octane Additives, there'll be a gross margin impact in the AvTel product, which sits within Fuels, that will bring down the gross margin. But overall, the AvTel business will still remain nicely profitable, both in this year and in future years as well. Outside of that, there will be a few stranded costs, which will tuck into corporate. And obviously, there'll be a few one-off redundancy costs when we actually close the facility itself, Octane Additives.

Is it possible to size that impact of AvTel or...?

It will probably be about 1 percentage point on the Fuel Specialties business in terms of gross margin in total.

All right. That's helpful. And then just finally, do you know from last year, the -- I think the share-based accrual for the quarter was $0.29 this year. Do you know what it was for last year? What the impact was?

It was $0.19 this quarter, Chris. I don't know -- I couldn't tell you the number. If you want to have a follow-up, we'll dig that number out for you.

I could probably go back and look as well.

[Operator Instructions]. We have another question from the line from David Silver.

Can you hear me here? I'm sorry, I'm having a little trouble on my end. Can you hear me?

Yes, we can, David.

Okay, sorry about that. I'm not a tech analyst. So I had several questions. First, I'd like to ask you about new product sales during the fourth quarter. So in terms of DRAs, for the last -- in the last quarter, you highlighted sales in the international market, and you indicated in the fourth quarter, would be your initial meaningful sales into the domestic market which I guess is your largest target market longer term. I may have missed it, but I didn't hear any commentary on that. So were the DRAs marketed in the U.S. this quarter? And then on the IMO 2020, earlier -- or sorry, in the last couple of quarters, you've noted revenues from tank cleaning or fuel line preparation kind of products. And I was just wondering if the fourth quarter featured, I guess, additive sales that will go into the marine fuels.

David, let me take the DRA. We don't give revenue sales as a direct number related to DRA, but I could tell you that our first substantial sales did hit in the Q4, and we see a nice balance moving into 2020 as the indication that we're going to be expanding our plant. In addition to that, we finally saw some good sales going into Saudi, which benefited Q4 and that should be ongoing in 2020 as well. So it's the balance that we finally have seen, even though there's been somewhat of a depressed market in the U.S., we've balanced that out with sales outside the U.S. with multiple technologies. So that's a benefit that you'll see holding up in 2020 and beyond. In regards to IMO 2020, most of the last 4 quarters was all, as you just said, in tank cleaning. We're really starting to see now what's going to happen in the operations now that the fuel is in the field and what kind of effects, cause and effects you're going to have. We're hearing those effects out there. As I said earlier in the call, I think a catastrophic event makes everybody do something real fast. But I think you are starting to see a lot of field issues, and we have the additives and the technology to take care of those field issues, and we'll keep pushing those buttons until we see adequate sales.

And just a quick clarification, but the fourth quarter DRA sales, if I understand it right, you're -- the revenues there potentially go into 1 of 2 segments. If they were in the domestic market, would that mean that they were included in Fuel Specialties in the fourth quarter as opposed to Oilfield?

No. All the DRA sales right now go through the Oilfield division and that's where they'll remain.

One other clarification, maybe for Ian. But the fourth quarter featured a negative impact from the supplier disruption. And then you're indicating that insurance will compensate you in the first quarter. And I'm just scratching my head. But does that mean that we will see in effect a transfer or a shift of earnings from 2019 into 2020 as a result of just kind of the timing of this supplier disruption. And if it is in the first quarter, I mean, can you maybe ballpark it? Or how significant will that be as we try to sharpen our models?

Sure, David. So the comments about the supply disruption was regarding volume. So we've seen some volume impact where we've not been able to supply some of our customers or some of those volumes have been deferred. It's not a huge amount. It probably amounts to, probably, round about $6 million of sales out of Q4, which we'd expect to move into Q1 or into Q2 next year. As regards to the additional costs we've incurred by sourcing high cost raw materials or higher cost products, all of that has been washed through in Q4. So we don't expect any further impact positively or negatively on the cost base going into Q1.

The big picture question. I know that your company as a whole is not really tied to China in any big way directly. But I could imagine for maybe IMO 2020 demand, maybe something in your Performance Chemicals areas, there might be an indirect effect. So large companies are starting to report negative effects from the disruptions related to the coronavirus. How does your first quarter or your first half -- what has changed, let's say, budget wise or planning wise over the last several weeks as this virus effect plays out across maybe your customers or indirectly through transportation markets?

Yes. Where we see a little bit is potentially is in our Performance Chemicals where we do take some raw materials from China. Again, it's a positive-negative. Positive is, we don't have manufacturing sites in China. We just have a trading arm, and there are alternatives to that raw material that we can get. So it hasn't negatively affected us as of yet, and we don't see it necessarily affecting us in Q1. And in regards to IMO 2020, because the market is still so small in additive usage, we have not seen a negative effect. Now if this is an ongoing issue with China, you could see something moving into Q2, Q3, but we don't see this is going to be an ongoing issue. So as of right now, Dave, I think, because we don't have a lot of exposure to China, we're pretty confident it shouldn't affect Q1 earnings.

Okay. And can I just ask you 1 or 2 more. Is that okay? Or should I get back in queue.

Go ahead, David.

Okay. I'm going to fire away. I'm picking up on Patrick's comment during his prepared remarks about the GDI opportunity, gasoline direct injection's engine designs, and to me, that is a very large, longer-term growth opportunity. But for me, it's a little harder to shape or quantify, and I was wondering a couple of things. But first of all, could you maybe talk about how the shift to a GDI engine design might increase overall fuel additive demand as you see it? And then how does -- how do you envision your company being able to best or most directly participate? And whether there will be significant cannibalization as you roll out new additive formulations? Does that meaningfully detract from legacy business?

Yes, David, here's the key. We do mostly diesel and jet. We're very small in gasoline additive. So there won't be any cannibalization on our gasoline business, is all upside. Typically, you're treating a PFI for what we call lowest additive concentrate. And we don't really necessarily play in PFI because we're not back integrated into raw material. Where we make a difference is when the market shifts, like the new engines coming out globally, which are shifting to gasoline direct injection, the common PFI does not work as well as GDI, and that's where our technology comes into play, which potentially opens up a much larger market that we have not played in before. So that's really the differential. It's more market opportunity than it is cannibalization.

All right. And then I have one more for Patrick. And this would have to do with Oilfield Services. So I've looked back over the last couple of conference calls, and I noticed that -- well, first of all, you have a very impressive growth, largely organic. And you've talked about your bundled products and services approach. You've talked about your direct to operator model. At one point, you talked about, as kind of a market share driver, "technology" that you offer, and I was wondering if you could clarify or qualitatively discuss where you're differentiating technology in Oilfield Services comes into plug?

Sure, sure, Dave. Without giving away company secrets, obviously...

Qualitative, not, yes -- qualitatively.

Yes, sure. We do a lot of tech trees, and this industry, for quite some time, needed technology. It was usually people blending the same products, same components, just applying it differently. We have done a lot around innovative technologies, not only that work today, but what we think is going to happen in the future around the green, et cetera. So it's really been our technology model, direct to operator and service the hell out of the customer. And that's really what's differentiated ourselves from our competition. And I think as long as we stay focused on that, along with bringing new technologies like DRA, et cetera, and moving into other facets outside of just North America, that business has great potential to still grow even in tough market dynamics.

And as we have no further questions, I will hand back to Patrick for closing remarks.

Thank you all for joining us today, and thanks to all our shareholders, customers and Innospec employees for your interest and support. If you have any further questions about Innospec or matters discussed on this call, please give us a call. We look forward to meeting up with you again to discuss our Q1 2020 results in May. Thanks again.

And that does conclude the conference for today. Thank you all for participating. You may now disconnect.