Innospec Inc (IOSP) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen. My name is Shea (ph) and I will be your conference facilitator. 1 At this time, I would like to welcome everyone to the Octel Corp. third-quarter 2005 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS).

It is now my pleasure to turn the floor over to your host, Victoria Hofstad from Citigate. Ma'am, you may begin your conference.

Thank you. Good day and welcome to Octel Corp.'s third-quarter 2005 financial results conference call. Today's call is being recorded.

This presentation may contains forward-looking statements, including statements regarding operating performance, future events or developments, including earnings per share growth and recent developments in a major market, all of which are inherently difficult to predict. Actual results could differ materially for a variety of reasons, including the impact of risks associated with business plans, changes in senior management and government investigations and our voluntary disclosure to OFAC and the effects of changing government regulations and economic, market and competitive conditions, including the rate of decline and demand for TEL. More information about factors that could potentially affect Octel's financial results is included in the Company's filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended December 31, 2004 and all subsequent filings.

With us today from the Company is Paul Jennings, President and Chief Executive Officer, and Jim Lawler, Executive Vice President and Chief Financial Officer.

At this time, I would like to turn the call over to Mr. Jennings. Please go ahead, sir.

Thank you, Victoria. Good morning to everyone and I appreciate you joining us for the Octel call third-quarter results conference call for 2005. After a few initial comments from me, I will turn the call over to Jim Lawler, our CFO. Jim will go through the financial results released last evening in some detail for the third quarter and year-to-date.

Our company has been very resilient over the last few months. We have started to see real progress in a number of areas and the impact of the loss of a major customer in TEL in quarter two 2005 has been fully offset by gains elsewhere this year.

Following Jim's comments and report, I will then review our business performance, goals and objectives, and how we wish to exit 2005. We will then open up the call to take your questions and comments.

I would now like to pass you over to Jim Lawler, our CFO.

Thank you, Paul. Good morning, everyone.

I would now like to review Octel's performance for the third quarter of 2005.

The third quarter for Octel sees us past three significant milestones on the journey to transform Octel's business to that of a quality specialty chemical company. These three milestones are as follows -- the Petroleum Specialties business continues to deliver strong revenue growth in the third quarter, recording 20-plus% for the quarter with a 300-plus% improvement in operating income for the quarter. Secondly, total corporate costs, at 6 million for the quarter, are reduced by 22% year-over-year, providing a further proof point in the establishment of a fit-for-purpose infrastructure as we exit 2005. Last but not least, I am delighted to announce that Octel has successfully agreed to terms of a new committed financial arrangement which extends until circa May 2009. The new facility, which is in the document stage of the process, will afford Octel the requisite operational flexibility to complete its transformation to a specialty chemical company. This progress must be viewed in the context of other specialty chemical companies who like ourselves have been impacted by Hurricane Katrina and significant raw material price increases.

I will now move on to the specifics contained within Octel's results for the third quarter. The third-quarter results are a net loss of 9.1 million in the quarter, which compared to a profit of 9.1 million for the same period last year.

In summary, the results are as follows -- the third-quarter 2005 net loss after goodwill -- TEL goodwill impairment and the restructured costs were 9.1 million, which represents $0.74 per diluted share, compared with a net income of 9.1 million, which represented $0.70 per diluted share for the third quarter in 2004.

Revenue for the quarter, at 136 million, represents 5.8% growth from the prior year for the same period.

Specialty Chemicals continues in the third quarter to represent circa 60% of revenue with TEL now representing circa 40% of revenue.

TEL business goodwill impairment was a charge of 7.4 million, which represents a charge of $0.60 per diluted share for the quarter, compared with 3.6 million, which represented a charge of $0.28 per diluted share for the same period in 2004.

Restructuring and other expense charges for the quarter were $20.4 million, which represents a charge of $1.65 per diluted share for the quarter, compared with a charge of $4.4 million, which was $0.34 per diluted share for the corresponding period in 2004. Restructuring charges and other expense -- the restructuring charges were primarily the result of reconfiguring the TEL manufacturing facility. That equated to a charge of 6.2 million to meet the future customer demands, fixed-asset write-offs positioned with the centralization of the UK Research and Development technology facility, and $0.9 million; the relocation of the head office, $1 million; the rationalization of Octel's U.S. manufacturing facility in the Performance Chemicals business, $0.4 million; and all other corporate restructuring, $2.1 million.

In other expenses, Octel has recorded a 5.5 million charge related to the write-off of Octel's share in an investment. During quarter 3, Octel was informed of a significant reduction in the projected sales of the company. -- of the company that developed novel catalyst technology, where Octel had a 40% share holding.

From the net revenue forecast, it was apparent that the scale of the available opportunity was smaller than prior business cases had suggested. Consequently, the likely return on the venture is now significantly below that available in our core business. This has resulted in a 5.5 million, 100% write-down of the investment.

The Company has also recognized a charge of $4.2 million of exchange loss in other expense in the quarter and a charge of $3.7 million in the nine months to date.

The Company policy is to partially hedge forward forecast cash flows in order to mitigate downside risks. Octel's operating income has benefited from the strengthening of the U.S. dollar against Sterling during 2005, as margins earned in Euros and Sterling are worth more in recorded dollars and Octel's significant euro and Sterling-denominated fixed costs are worth less in reported U.S. dollars. However, there is an offsetting loss at forward contracts taken out as more disadvantaged rates mature. Under FAS 133 accounting, Octel is also required to mark-to-market all outstanding foreign currency contracts. This exercise has resulted in an exchange loss that partially offset the benefits seen in operating income.

I will now move on to discuss the evolution of the Octel business model to a specialty chemical company and its effect on gross margins. As previously communicated, the Octel business model has started to evolve toward that of a specialty chemical company. This means that as the predicted decline of the TEL business increases, it will become a lesser proportion of the business, which means that Octel will continue to see overall gross margins decline from their current levels. It is therefore vital that we continue to address the efficiency of the overall cost base.

The third-quarter results reflect gross margins of 33.7%. This represents a decline of 6.6 points when compared to the same period last year. This decline is essentially driven by the changing business mix towards the more normal margins associated with a specialty chemical business. The rapid growth of margins (indiscernible) and the raw material price increases, and the effects of the margin model in the recently acquired Performance Chemicals business.

I will now move on to discuss SG&A. At $6 million, total corporate costs were 1.7 million, 22% lower than the third quarter of 2004 and are 1.6 million lower than the second quarter of 2005. Underlying corporate costs, after separating out the FAS 87 pension charge, are 33% lower in the third quarter 2005 as compared to the third quarter, 2004. In the nine months to date, underlying corporate costs are 5% lower than in 2004. This reflects the benefits of streamlining the executive structure base. The total SG&A cost base, at 20.9 million, is 15.4% of net sales -- is a full 2.5 point improvement and represents a 2.1 million or 9.1% reduction from prior year for the same period. The effect of a full quarter of all the newly acquired businesses was to increase SG&A costs by 1.1 million compared to the third quarter of 2004.

The effect of the reversal from a pension credit to a pension charge was also to increase costs by 1.1 million in the quarter. Thus, the like-for-like reduction in SG&A is 4.1 million, an 18.7% reduction.

Cash flow -- cash flow from operating activities was a 19.0 million inflow for the quarter and an inflow of 15.9 million for the first nine months of 2005. This compares to a positive cash flow of 36.9 million for the comparative nine-month period last year. The primary causes of the decline in cash generation to date are the reported lower cash income, the timing of tax payments, and the buildup of TEL inventory to accommodate the accelerated reduction in TEL manufacturing capacity to ensure an ongoing effective cost base to efficiently recognize the loss of a major TEL customer.

Liquidity and financial condition -- I will now move on to share with you the liquidity and financial condition of Octel. I am delighted to confirm that, after constructive discussions with its senior lenders, Octel has agreed the committed terms, subject to documentation of a new, 3.5 years financing facility that will enable the Company to pursue its strategic objectives. The maturity date of the new financial facility will be circa May, 2009. The Company initiated discussion with its senior lenders in quarter three two review the bank debt repayment schedule and covenants to establish the appropriate financing facilities that are aligned to Octel's requirements as a specialty chemical company. The Company remains in compliance with all financial covenant arrangements as at September 30, 2005.

I will now share with you the results for each business unit.

TEL business -- TEL performance, as previously discussed, continued to be significantly impacted by the loss of a major customer. However, the business showed considerable resilience in limiting the reduction in net sales in the quarter to a decline of 19% over quarter three for 2004.

Sales to two other key regions were ahead of expectations. Sales to Southeast Asia were ahead of quarter three 2004 by 50% -- that's 5-0% -- and sales to Africa declined only by 3% versus quarter three, 2004.

Sales for the quarter were 53.6 million, which represents a 19% decline versus prior year, in line with a volume reduction in the quarter of 19%, year-over-year.

Gross margin for the quarter, at 47.8%, was marginally below expectations, and represents a 5 point decline when compared to the prior year. This was primarily associated with increased manufacturing cost per ton, as volume declined, and the increasing raw material costs, principally lead and sodium. Octel will continue to benefit from significant margins in the TEL business.

TEL operating income, before goodwill impairment for the quarter of 19.9 million, represents a year-on-year decline of 33%, driven primarily by 19% volume decline and the reduction in gross margin described earlier.

Octel is currently in the process of resizing its manufacturing capacity to align it to the predicted decline in the TEL business. Octel remains on track with the TEL downsizing plan, but we have retained the flexibility to respond to short and mid-term fluctuations in demand while aligning capacity to the sales volume of the future. Octel has announced a plan to reduce TEL manufacturing capacity on the Ellesmere Port UK sites in the third and fourth quarter and recognized the severance costs associated with that program.

Petroleum Specialties -- Petroleum Specialties' operating income for the quarter was $5.6 million and represents a 300-plus% growth over quarter three, 2004. Sales grew strongly as compared to the third quarter of 2004. Sales growth in EMEA, the Americas and As-Pac was 18%, 30%, and 39% respectively. The business is showing the benefit of leveraging the global customer base through a streamlined organization structure. This process will continue in quarter four, 2005 and quarter one, 2006, as the final piece of the EMEA restructuring is completed. The business then should continue its drive towards customer intimacy with the appropriate infrastructure in place.

Gross margins, at 30%, remain comparable with the relevant quarter last year. The business continues to address the management of material price increases through to the customers in a timely fashion.

Performance Chemicals -- Performance Chemicals recorded an operating loss of $0.5 million for the quarter, which includes non-cash acquisition amortization expenses of $0.3 million. This represents a $1 million decline on prior year, primarily driven by raw material price increases and short-term capacity constraints.

Profitability in one of the newly acquired businesses has been significantly impacted by difficulties in passing on raw material price increases that were higher than expected when selling prices are contractually fixed over a longer period. Sales and profitability were adversely affected in the USA by the impact of Hurricane Katrina, as customers could not call off product during the quarter. The impact of these sales will be recovered in quarter four, 2005.

To provide a more balanced perspective on the progress of this business, the first nine months of 2005 saw sales of 92.1 million, which represents a 250% growth, and a year-to-date operating income of 1.3 million, which represents a 1.1 million improvement for the corresponding period last year.

In summary, Octel has secured, subject to documentation, a new, 3.5 year financing facility with its senior lenders. Octel has started to leverage its global customer base in Petroleum Specialties and to implement a customer intimacy approach across the customer base.

Octel continues to implement the fit-for-purpose organization structure, which has already delivered tangible benefits in quarter two and quarter three, and has seen SG&A drop below 16%. Octel continues to optimize the TEL business with some key customers, extending their requirements beyond original expectations. Octel remains committed to improve the delivery performance of our Petroleum Specialties and Performance Chemicals businesses, and it will continue to successfully manage the decline of the TEL business. Octel continues to accelerate its transformation to a successful specialty chemical company and with its new financing arrangements, remains confident that this transformation can be successfully achieved. Octel will continue to share our progress with you as we drive to deliver the greater value to our shareholders.

Thank you for patiently listening.

Thank you, Jim, for the excellent report.

Jim has reviewed the financial results for the third quarter and year-to-date in some considerable detail. I would now like to spend some covering our business performance. I'm particularly pleased with the cash generation in the third quarter. We have increased our focus on the control of working capital, an area which we will concentrate on more in the future, and this has started to pay off.

We are also managing capital expenditure down to sensible levels, focusing on the essential health and safety expenditure and those investments that can provide real return for the business. Cash generation is a fundamental part of our future strategy and any investments must be made wisely to underpin the future growth of the Company.

Our key short-term goal is to be in a position to exit 2005 with a fit-for-purpose cost structure, organization and business mix to ensure that we can consistently, quarter after quarter, deliver on our objectives and increase shareholder value. As a result, we have already started to make significant changes to the portfolio and management of our businesses to improve performance.

One area where we have spent considerable time is in our Petroleum Specialties business. So, I am particularly pleased to see the excellent performance from this SBU for the quarter. Year-over-year sales were 24% higher and profit growth was over 300%.

I appointed a new head of this business in early September, Patrick Williams. He has been with Octel for some time, initially as a key member of the management team of the Octel Starreon joint venture, prior to his buying the remaining 50% that we did not own in July of last year. He then moved to head the Americas region and has already started to make a difference by exploring ways to use the business model, which has been so successful in North America, elsewhere across the world.

The Europe, Middle East and Africa region has continued to progress and is in the final stages of completing the implementation of its new simplified business model, which will be fully completed by the end of 2005. Asia-Pacific, whilst being our smallest region, has the potential for significant growth. Strategies have been prepared for the development of this region, and the future looks quite exciting.

Petroleum Specialties or fuel additives is a core business of Octel and has the potential, through organic growth, to be significantly larger than it is today. As highlighted last quarter, this business did achieve double-digit EBIT on sales for the quarter, and this remains one of its key goals.

Performance Chemicals appears to have had a quarter which was below expectations. This is true in one of our businesses but elsewhere, there are some very good performances to report. Our UK detergents and European-based additive businesses performed well with good growth year-over-year. Our most recent acquisition, Finetex, which is based in the U.S., was impacted by a lower customer take-off due to Hurricane Katrina, but this will be recovered in quarter four. Unfortunately, after a promising start to the quarter, our UK-based aroma chemicals business suffered some production problems in September, which, when coupled with the rise of raw material prices above expectations and the long-term contractual nature of some of the sales contracts, has impacted its profitability in the short-term. Costs, however, across all the businesses have been kept under control.

Once we have sorted out the operational and structural difficulties in a few of our businesses, we expect to grow EBIT margins to double digits, but over a long time frame than in Petroleum Specialties. We now have a number of core attitude businesses in aroma, personal care and other additives, which can provide a platform for our future growth.

TEL performance has held up quite well considering the market dynamics this year. As mentioned last quarter, we have been able to achieve some extensions in the life of the product in a couple of key markets, and these will fully offset the loss of the major accounts in quarter two for this full year. In addition, the lumpy nature of deliveries continued with one major shipping to falling into quarter four, 2005.

We have completed the review of our manufacturing capacity in Ellesmere Port and changes are underway to bring this more in line with the (indiscernible) market demand by the end of 2005. The operation has also been changed to allow us to provide a more flexible manufacturing facility that can respond to the fluctuating market demand -- in addition, work that's been completed in reviewing the underlying TEL for our gas market, one which we intend to be in for some considerable time. This market now represents around 20% of our volume sales.

The move towards a fit-for-purpose cost structure has continued unabated. A number of major changes have been made in the corporate cost structure and we have completed the move of our head office back to the Ellesmere Port side. The underlying corporate cost reduction in the quarter, 33% compared to last year, was a very pleasing performance and I continue to expect to see significant year-over-year savings from these changes as we exit 2005.

Overall, the third-quarter performance has given me a lot of confidence that we are on the right track as a Company. We're seeing significant growth in our Petroleum Specialties business. Performance Chemicals, despite the blip at one of our businesses, is now a meaningful strategic business unit. TEL continues to perform well and generate cash; and we are attacking the cost structure and seeing results.

Our plan for the remainder of 2005 is to establish a fit-for-purpose cost structure, leverage the growth potential of the Specialty Chemicals businesses and deliver sustainable performance in all of our existing businesses.

Thank you for your attention. I would now like to open the call up for questions and comments.

Thank you. (OPERATOR INSTRUCTIONS). Paul Schwitz (ph) from Capital Flow (ph).

Yes, thank you, good morning. I have actually a number of questions, so let me ask one and then I will get back in queue. The first one has to do with the $6.4 million charge for future customer demand in the TEL business. I'm wondering -- I assume these are points of certification. I assume that this is primarily inventories of the future and I'm wondering, just to give us a sense of the size of the inventory you've built, how that compares with your shipments in TEL for the last year.

Thanks for the question, Paul. I don't recognize the $6.4 million charge, but I will in general just go over the inventory build year-over-year, and just quickly tell you the inventories within TEL so you can see what's happening in that business.

Thanks, Paul. If you look at TEL inventory, in 2005 for the quarter, it's $33.1 million. That compares with 15.4 million for the same quarter last year. The 33.1 million was impacted by two things -- one, the loss of the major customer who canceled their order at the very last-minute; but of equal importance and perhaps more important, we chose to facilitate the reduction in the manufacturing capability to build up some inventory to enable us to take a step-down change and reconfigure the manufacturing facility.

I hope that answers your question.

Thank you. Why don't I get back in queue? I will have another question.

Peter Lieu from Lieu Capital Management.

I am very impressed by the dramatic cost containment and the buildup of the specialty chemical company. But I have been spoiled by years of magnificent cash flow and your ability to provide some guidance in the future. I'd like to know how far you are from being able to give more specific guidance on the future. Obviously, the bankers have expressed great confidence in the Company by extending credit through 2009, but when do you feel that you will have a grip on the operations so that you will have -- you'll be able to provide better clues for investors?

Peter, thank you. This is Paul Jennings. First of all, thank you; thank you for your comments. I am glad that you see the results the same way that Jim and I see them as well.

I think that the cash generation of the business, over the last five or six years, has obviously been excellent, and we continue to run the TEL business to generate as much cash as we can in its remaining life. I think, as far as running the specialty chemical businesses are concerned, there are areas of improvement and we've recognized those, particularly in our Performance Chemicals businesses, that we can see improved performance out of those.

I think your comment with regards to how the banks have viewed it is actually quite pertinent. We don't, as a matter of course, publish any forecast cash flows or financial information on the business because it's just not something we've done, given the lumpy nature of the business that we have. We'd rather make sure that we are delivering reasonably close to expectations each quarter.

However, given that the banks will review projections and as a result have come in and extended the facility for an extra two years, which takes us almost through to the end of this decade, I think that should be taken as positive reassurance, as that they feel in the same way about the business as we do, and it's our job as a management team to go ahead and deliver that type of performance. But we need to do it every quarter and we recognized that, and that's something that we're putting in step within the business.

Maybe I can come at the question a little different way. When I started investing in you, your balance sheet had really -- was holding a tremendous amount of debt. On the other hand, every year, you paid off huge chunks of debt, so your cash flow was obviously very, very impressive. Going forward, I think you want the credit facility to make some acquisitions but at the same time, you probably have an objective to bring your debt down from current levels. Can you give me a picture of what that objective might be? Say, two years for now, will the debt be significantly down from current levels, or will you keep the debt at current levels and keep the credit facility -- and keep your cash reserves to make acquisitions?

I think that, in terms of the operating of the business, I think that we've got two or three different areas where we can look at. I strongly believe that we have the ability to grow out our existing business organically with a different cost base; that is one of the key aspects of what we can deliver in the future as a specialty chemical company. I also feel, however, that there will be a time in the not-too-distant future where we will want to look at selective acquisitions of a reasonable size that will actually help us grow and consolidate those positions and in a much stronger way and provide a much stronger specialty chemical company business.

We want to generate the cash (indiscernible) over the next two or three years to provide us the opportunity to do that. We are managing the cash position quite tightly now from a capital expenditure and working capital perspective. We are only looking to make investments, as I said in my preamble, that really are going to provide the sort of returns we expect in the business. So I think the next couple of years actually are going to be quite interesting for Octel. I think that I am pleased that we are on the right track in terms of looking at the cost base and also looking at the future direction. But I think, as a management team, we need to make sure that we deliver on those objectives, get the growth in our existing business, and then we will be in a position to take a look at potential acquisitions that could add value for everybody concerned.

So, I won't be able to give you any specific cash projections in there. What I will say is that the emphasis as to how we take the business forward is more on running our basic business better and then looking at selected acquisitions rather than maybe what had occurred in the past.

I will get back in queue and come back later for more questions.

David Welton (ph) from Smith Barney.

could you give us a little guidance on the corporate costs? Are you going to be able to continue to improve the margin there, and over what period of time?

I think that, David, on corporate costs, I think that we are pleased with the reduction we've seen in the third quarter. I think there's an opportunity for us to keep reducing them a little bit, but we're not looking at the sort of significant levels year-over-year that we've seen over the last couple of quarters. But I think, overall, the run-rate will be significantly less than what we saw in 2004.

Jim, have you got anything you would add on that?

Yes. No, I would just support your comment, Paul. I think the last two quarters have been outstanding. On an annualized basis, we feel that's the comfortable objective that we've set ourselves and will achieve.

Thank you.

Mitch Shapiro from Mitch Shapiro Investments.

How about using some of that cash to buy back stock? Obviously, you've got great cash flow, great prospects. Why not take in your own stock instead of making acquisitions -- do something for the shareholders that have seen a huge decline in your stock?

Yes, this is Jim Lawler responding. In the third quarter, we bought about $0.5 million of stock in the third quarter. We will continue to look at how we deliver value back to the shareholder. Buybacks continues to be in our thought as we close the end of this year and it's a fundamental part of how we will do business in the future. But one of the options that's available to us is how we will deliver value back to the shareholders.

Thank you.

Rich Murphy (ph) from Cross River (ph) Partners.

The 9.8 million charge on the income statement, what is that other expense income? Because that seems to have ticked up from 3.3 in the last quarter.

Yes, the two areas are associated with the 40% investment we had as a company in a capitalist company. That was -- we took a charge of 5.5 million. That's in the "other expense" area. The other item was the exchange loss of 4.2 million.

Okay.

By the way, I should make a comment; there was a write-off of the capitalist company. That was a non-cash charge.

I was just going to ask. Okay. I mean, I would just really what the gentleman said before. I mean, as we take these charges, it's kind of a bitter pill to swallow, watching all of these acquisitions we've done in the past. Congratulations on the great cash flow. I mean, that's terrific. But let's husband that cash and use it for share buyback and some blocking and tackling and building up the cash flow for the future quarters.

Good job, you guys.

Rich, thank you, and I appreciate that. I mean, Jim has covered the points in share buybacks I think very, very well. It is something we look at. Obviously, we're trying to build a little bit of cash to make sure we can pay back some of the debt and the debt repayments to the banks, which is (indiscernible) in that situation and we can only buy back stock during certain times of the quarter, which has impacted us a little bit there. Going through a refinancing exercise, we wanted to make sure we were fully in control of that cash position. But it remains something that we actively consider. I think the message I gave earlier on about, we can run our basic businesses better an on these end -- would we look at anything substantial I think is the important comments. By substantial, that could mean a whole variety of different types of investment.

Great. Yes, I mean, it kind of just hits home. When you see these write-offs, you're just like "why did we do all these acquisitions in the past?" and we talked about the us before, but --

Yes, absolutely.

It's something that, you know, I think we've got a great cash generator here, and you guys seem to have got the costs under control, so hopefully going forward, we will start reaping the rewards.

Thanks; I appreciate your support, Rich.

(OPERATOR INSTRUCTIONS). James Binesek from CN (ph) Capital Management.

Good morning, gentleman. Not to pile on here, but I would also reiterate that it's only been about one quarter that we can say that the results are starting to perk up. Certainly, I would say that's a little premature to claim victory and start talking about acquisitions and setting up bank facilities for the strategic growth of the business. So I would just caution that -- and reiterate that there's still more to be done to solidify the businesses.

Having said that, I was just wondering if you could comment on any restructuring charges or TEL goodwill expected in the fourth quarter, if you have more specific notions about what those might be.

Yes, James, thanks for the feedback, very much appreciated.

I would just say, on the cost base, it's certainly not one quarter. We've been able to demonstrate to prove points at least on the cost base. I recognize, you know, your feedback on the acquisition front. As Paul said, our number one priority is to improve the performance of our current business and choose the right acquisition target at the appropriate time. So, I appreciate your feedback.

In terms of the TEL, the charge of 7.4 million in the quarter, we can never use their language (indiscernible) normalized charge for the quarter because that wouldn't make us using GAAP compliant. But as we close the year, we believe that 140 million will be the total TEL goodwill impairment charge for the year. That will leave circa 88 million on the books as we close 2005.

With regard to the restructure charge, I think you were talking around the TEL manufacturing facility. 6.2 million was the major charge in there, and that was the continued right-sizing to align it to future customer demand. So that was separate from the impairment -- goodwill impairment charge.

Maybe if I could just add a couple of points to what Jim said, which I think will be quite helpful, just the restructurings that we've taken in the quarter do not relate to acquisitions that have been made in the past; they relate to resizing the TEL business. Yes, there was a charge in other expenses about writing off the investment that was made four or five years ago in the particular business that we just didn't consider to have any value.

I think the other aspect on the refinancing, the key word that Jim used in his preamble was that it provides us with the requisite operational flexibility to complete the transformation. That's very, very important, because, obviously, we're looking at having a facility that allows us to run the business that we have today and that operational flexibility is very, very important to us.

Fred Bauer (ph) from Prospecter (ph) Partners.

Good morning, gentlemen. Could you tell me approximately how much money you've spent on acquisitions over the last five years or so?

I think, if we look at the acquisitions that we've done in the last, let's say, 15 months, which is the ones I am particularly familiar with since I've been here, we've spent just over $100 million. It was $108 million on four businesses. It was buying the 50% (indiscernible) Sterling in the U.S., which is an absolute super deal, the acquisition of Leuna Polymer in Germany, which has already repaid itself in cash within 15 months, and then the acquisitions of the aroma business and then the Finetex business in Performance Chemicals. So, that's what we've invested in the last 15 months, consolidating the position in the two specialty chemical businesses.

By my calculations your Specialty and Performance Chemicals business is running at about a $30 million annual EBITDA rate, if I -- basically if I annualize the third-quarter results, which were the best of the year so far. Now, I may not have picked up any special charges in there, but my recollection is that, five years ago, that $30 million of EBITDA, on an annualized basis, is only a little bit more than the number of five years ago. It seems to me, in addition to the acquisition expenditures that you've made in the last 15 months, if we go back prior to that time, we'd pick up a significant amount of additional dollars. I just don't see that, over a longer period of time, there has been any significant value added to shareholders from making these acquisitions.

Maybe I could just respond on that. I think, five years ago, I would doubt very much whether the EBITDA in the Specialty Chemicals business actually made double figures because it was a very, very small business at that time. It's only recently, i.e. in the last 12 months, we've actually separated it into two businesses. Because it's actually reached a critical mass.

As I've said in my call and my preamble, we believe that there is the opportunity for significant organic growth in the businesses that we have, so we haven't -- any acquisitions that we've made, we haven't just bought for this year's profits, we bought so that we can -- because we've seen growth in them in the future. I think what's been pleasing to myself and Jim is that, if you look over the last couple of quarters, since we've been looking after the business, we've started to see some of that growth come through. I mean, obviously, we need to continue to deliver that and accept it. But I think that that's been a good use of the funds.

Having said that, I do recognize what everybody is saying with regards to share buybacks, and that's something that we will continue to review. But whilst we've been paying down significant amounts of debt over the last five years, I think we've probably repaid close to $600 million of debt. We've got to be very, very careful how we manage the cash position and keep the business operating. But certainly, that's in the balance an area that we have to consider as we take the Company forward.

Well, thank you for your answer. Can I have one more follow-up question, unrelated? As you look to volumes for calendar year 2006, what portion of customer demand do you believe you will satisfy from inventory and what portion do you think may come from actual manufacturing operations? I'm just trying to get a handle on the inventory trends.

Yes, I think that -- I mean, obviously, the inventory has slipped into two principle areas, which is the specialties business and also the TEL business. In TEL, we have been maintaining quite high inventory levels because it's been cost-effective for us to do that. We're looking to reduce the capacity and operating size of the plan from the start of the new year to a level that's significantly below what it can produce right now. So that's what we expect to see on TEL.

If you look at the Petroleum Specialties business in Performance Chemicals, then you've got some seasonality in terms of inventories in that particular business. We're getting towards the peak time on inventories where we do -- the products that we sell in the winter period and early spring. We will see some sell-off of inventory through that businesses. But there are no major changes planned on any of the manufacturing operations in those two businesses. We expect them to run at about the same capacity that they're running at now, maybe with a potential improvement, depending on market conditions.

Will the TEL capacity at the beginning of '06 be below your anticipated level of customer demand for '06?

Yes. The answer to that question is yes.

(OPERATOR INSTRUCTIONS)? A follow-up from Paul Schwitz.

Yes, actually there were two points here; one was a point of clarification. Can you tell us with the operating income for the non-TEL business was before charges in the quarter?

Your second part of your question?

The second question is that the diesel additives business looks quite promising. I'm wondering if you could give us an idea of the potential for that business.

I will take the first part. So, the operating income for Petroleum Specialties was 5.6 million, which was circa 300% growth year-over-year. In terms of the Performance Chemicals business, it was a small loss of 0.5 million.

So in total, 5.1 million for the quarter.

I see. Those were already adjusted for the charges.

Absolutely, yes.

Correct.

As far as the growth potential, I mean, the petroleum specialties or fuel additives business, as you know, it's a lot more than just a diesel business. I mean, there's a lot of additives into refineries, heating, marine, various other applications. As I've mentioned earlier, we believe that there's the opportunity for some organic growth in that particular business through geographic expansion, through the introduction of new products and through some of the legislation that's coming through. For example, in the U.S., where the -- bringing in low-sulfur fuels and the regulations are changing next year. We have a range of products that can satisfy that particular demand. So we can see the opportunity for that business to grow organically in the future.

A follow-up from Peter Lieu.

I'd like to ask you if your acquisition criteria has changed in the context of the last 15 months, compared to, say, four or five years ago. Secondly, I have just calculated that a rough cut is that your enterprise value divided by 12-month trailing sales is around 0.5. Have you looked at that evaluation and compared to what your peer companies are valued at?

Yes, maybe if I covered both of those points -- with regards to the enterprise value of the business, I mean, we trade at quite a low PE compared to other businesses in -- (multiple speakers).

You trade at what, sir?

We trade at a very low PE, compared to other businesses in me sector, which, to be perfectly honest, I am surprised at because I think it's probably because people haven't quite got the full message or don't fully understand about what Octel is, in terms of a corporation, and the businesses that we do have in Petroleum Specialties and Performance Chemicals -- and the fact that we have the cash-generative business at TEL, which a lot of businesses would be very glad to have as part of their portfolio.

So I think, unfortunately, that we end up having to apologize for that business rather than registering it as a key asset of the Company. So, I am surprised with the level that we see with regards to our P/E. I would say this wouldn't (indiscernible) I do believe that there's significantly more value in the business.

With regards to acquisitions, I can't comment too much about was done four or five years ago because I wasn't around at the time, other than to say I think the Company was looking to build a cluster of acquisitions in certain areas in Petroleum Specialties to help it grow. What we're now looking at and certainly what we've done over the last 15 months is look at acquisitions in a much more focused way. So, we're looking at key markets, businesses of a certain size, and businesses that are really going to add value. But the primary activity for us right now, and what we need to do with the business, is to get our cost structure fit for purpose, i.e. for the size we are now rather than the size we might be in the future, and to run our basic businesses better. That's something we're going to be aggressively pushing over the next few months.

I'm going to make a comment, which you probably already know, but your low valuation has to do with the uncertainty, both positive and negative, about the forward outlook. I mean, I'm very, very pleased with what you have achieved in the third quarter, but there have been past orders were I've been extremely disappointed. You've also had some management turmoil, and hopefully all of that is behind you. But, if you could do something to improve the visibility going forward with some consistency, it will add an awful lot to your valuation.

I really appreciate that comment, and I think that it's actually right on the button in terms of what we need to do with Octel. You know, in my short-term as CEO, that has become apparent to me quite quickly. It is something that we intend to do something about.

I know you are trying very, very hard and I'm gratified to see some excellent results in Q3, and hopefully that will be extended in the future.

So do I. I appreciate your comments. Thank you.

(OPERATOR INSTRUCTIONS). William -- (technical difficulty) -- from Capital Flow.

I've got a couple of questions. The first one is I believe you said that there is -- at year-end, there will be about 88 million of the TEL goodwill left on the books. If indeed that is the case, can we expect that the vast majority of the 88 million will be written off during 2006, or is there something else that governs -- that less of it would be written off than I would expect to be?

It's Jim Lawler. Bill, no, you cannot make that assumption. The 88 million refers to the future cash flow value of the TEL business. That model, if you like, is based on the principle of last man standing. In other words, there's a future value there until the last customer declares that they're going to exit the business. Therefore, it would be a wrong assumption to suggest that the 88 million will be taken in the financial year 2006. It tails out much longer than that. As Paul indicated earlier, Octel, as a specialty chemical company, has a continued annuity stream from that TEL business, and that goes out into the next decade as well.

Can we expect a ratio similar to what was written off this year?

No. Again, the reason for that is you recollect, in the second quarter, we had a major customer step out very quickly in the process. So, that assumption would be incorrect.

Okay. On the share buyback, how many shares did you actually buy in? I assume, when you said 500,000, you meant $500,000, not pounds.

Correct, absolutely. Every time I quote financial numbers today -- that's a good point of clarification. It is 500 -- sorry, it's dollars.

In terms of the share buyback, as I say, it's about $499,000. That was 29,632 shares at an average price of $16.83

When you talk about the limitations of when you can buy in, is there anything in the future periods that will be much different than this previous period that would potentially change the rate of buy-in, other than price?

We are establishing a facility which will enable us to have an independent party procure, on our behalf, inside the window. So in other words, it complies with SEC regulation. We're looking at different ways of share buybacks going forward.

In the past, we've always been able to do this trade between the third business day and the twentieth business day following the results. That could only be up to a maximum of 25% of the volumes. So we recognize that there's a little bit of opportunities for us to trade on shares and buy back stock. That's something that we want to put in place.

My final question is, is there anything in either of the three businesses, from a gross margin standpoint, that you foresee as being abnormal in either direction over the next two or three quarters?

The only challenge that we've got I can see is relating to some of our Performance Chemicals businesses and making sure that we can fully recover some of the raw material price gains, so the raw material price increases that we've seen. But that particular piece of work is underway.

In other businesses, we actually have been able to put up prices, and they've stuck, which is why the margins in Petroleum Specialties look a little bit healthier.

But overall, at this particular point in time, I don't see anything out there that would materially swing it one way or the other.

A follow-up from Paul Schwitz.

Yes. Thank you for that last response.

You are challenged by a very profitable and high cash flow business being declining and using that to invest in new businesses. We've looked at it in the gross margin line, but how about on the operating margin line? How could the specialty business, or the non-TEL businesses, eventually compare in the long run, from a target standpoint, to the TEL business?

The other question is how long do you anticipate before we will have to take down the TEL business once again, assuming we don't have any big customer cancellations like this year?

Okay, I will cover both of those aspects.

In terms of comparing the two specialty chemicals businesses with TEL, we are actually -- we are in a very fortunate position with the TEL, because the return on sales in that business is so high. It's a very profitable business. We make 30 to 45% EBIT margin on sales, and I'm sure lots of other companies would end in that sort of margin.

Having said that, the returns on the Petroleum Specialties and Performance Chemicals we believe will be double-digit EBIT on sales. We've achieved that in the third quarter for Petroleum Specialties, and that's a key goal for that business and it remains a key goal for Performance Chemicals, albeit it will take a little bit longer. I think you've obviously done your research. If you look at specialty chemical companies, you'll see that if they are making high single digit or double-digit EBIT on sales, then that's a good-quality business. That's what we have already achieved in one of them and we're looking to achieve in the other one.

With regards to TEL, in terms of the actual write-down on that business, we think that we will continue to enjoy a reasonable performance in that business for some time to come. It still has 20% of its volume in additives for (indiscernible) gas, which there is no replacement for. We continue to see that going out for some time into the future. The strategy I have said here is that I'm not prepared to look a customer in the eye and tell them I cannot supply TEL to them because I've closed down the manufacturing facility. Because I think that would be a very poor decision on my part, given the sort of returns we get from the TEL business.

Now, obviously, we have to size the business right; we have to continue to make the right sort of returns. But we believe that that business will be with us for some time. It will make less money than it's made in the past, but it can still generate good cash and good results for some considerable time into the future.

At this time, we have no further questions. I'd like to turn the floor back over to Paul Jennings for any closing comments.

Thank you for your comments and your continued, ongoing support of your company. I hope that you can see that we're starting to make real progress as a company and that the opportunity for growth is real. It's just further enhanced by the agreements of committed terms for new financing arrangements, which take us through to mid-2009. I have no doubt that there will be many challenges ahead but I, along with the rest of the management team, share our main goal as one of delivering value to our shareholders through constantly searching for and achieving performance excellence, delivering each time on our goals and objectives, moving to the fit-for-purpose cost structure of a specialty chemical company, continuing to optimize the value from TEL, delivering sustainable operational performance from all of our businesses and taking advantage of the many growth opportunities available to us in our chosen markets.

Thank you for your attention.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.