Innospec Inc (IOSP) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen. My name is [Elpha] and I will be your conference facilitator. At this time, I would like to welcome everyone to the Innospec, Inc. fourth quarter and full-year 2005 results conference call.

[OPERATOR INSTRUCTIONS.]

It is now my pleasure to turn the floor over to your host, Victoria Hofstad from Citigate Sard Verbinnen. You may begin your conference.

Thank you. Good day and welcome to Innospec, Inc.’s fourth quarter and full-year 2005 financial results conference call. Today's call is being recorded. An audio webcast of the call and a slide presentation on the results are now available and will be archived on the Company website, www.innospecinc.com.

During today’s call, Innospec management will refer to presentation slide numbers in their prepared remarks.

This conference call and the presentation may contains forward-looking statements, including statements regarding operating performance, future events or developments, including EPS growth, 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 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 Innospec’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 Innospec 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.

Thank you, Victoria. Good morning, everyone. I’m Paul Jennings, CEO of Innospec. And here with me is Jim Lawler, our CFO.

This is a very important day for us. We have launched our new brand and visual identity, and these are the first set of financial results under our new name.

I would now like to explain our new business reporting format so there is no misunderstanding, and I’m now moving to Slide 2.

In forming Innospec, we have also reviewed our businesses to more clearly identify how they are managed. The new Fuel Specialties business includes our former Petroleum Specialties business, together with TEL for Avgas use to bring together our aviation additive offerings, which was formerly part of TEL, and cold flow improvers from our [Leuna] acquisition, which were previously included in Performance Chemicals. Other than the move of cold flow improvers, our Performance Chemicals business remains unchanged.

Octane Additives is now solely related to TEL for automotive use.

I would now like to hand you over to Jim Lawler, who will go through the financial results in detail.

Thank you, Paul. Good day, everyone. I would now like to review Innospec’s financial performance for the fourth quarter of 2005 and the 2005 full-year results.

You will see on Slide 4, non-GAAP financial measures, which will be referred to as part of the conference call and containment in the presentation available on the website.

Slide 5 addresses forward-looking statements.

Slide 6, which is the quarter 4, 2005 versus 2004. I will now share with you the summary findings of the year.

The fourth quarter clearly [inaudible] the progress that we are making to become an innovative quality specialty chemical company: double-digit-plus revenue growth in our chosen markets in the Fuel Specialties and Performance Chemicals markets; a significant reduction in the corporate cost space versus the prior year; the [harvesting] of the Octane Additives annuity stream in line with expectations.

Slide 6. I will now discuss the specifics contained within Innospec’s results in the fourth quarter. Revenue for the quarter at $135.7 million represents a 10% growth from the prior year for the same period. This includes a 20% growth in our Fuel Specialties business, which I will discuss later on the conference call.

The gross margin for the quarter is 35.7%. This represents a decline of 9.5 percentage points when compared to the same period last year. The margin decline is in part due to the higher margin Octane Additives sales, now representing a lower proportion of our business. And is also impacted by the release in the fourth quarter 2004 of a $6.4 million remediation reserve associated with the decommissioning of our German former manufacturing site.

The total SG&A cost base for the quarter is $26.6 million, 19.6% of net sales, which is $0.2 million-- 0.8% higher when compared to the prior year, which was $26.4 million. At $4.7 million, total corporate costs were $1.3 million or 22% lower than in the third quarter of 2005, and broadly represents the new expected run rate for corporate costs.

Restructuring and other expense charges for the quarter were $9.2 million, which represents a charge of $0.75 per diluted share for the quarter, compared with a charge of $10 million, which was 0-- sorry, $0.81 per diluted share for the corresponding period in 2004.

The $6.2 million restructuring charges were primarily the result of non-cash pension-related curtailment costs associated with severance of $3.1 million; other severance related costs, $1.4 million; and contingent site clearance works of $1.5 million. All other costs associated with the closure of the manufacturing UK HQ offices were $0.2 million.

In other expenses, Innospec recorded a $3 million charge in respect of foreign exchange loss and other expenses.

Hedging losses against the U.S. dollar were $0.5 million, and $1.5 million represents other exchange losses; $0.4 million related to the write-off of a small investment, and $0.6 million related to other sundry items.

Octane Additives goodwill impairment was a charge in the quarter of $10.3 million, which represents a charge of $0.83 per diluted share for the quarter, compared with $17.7 million, which represented a charge of $1.38 per diluted share for the same period in 2004.

Discontinuous operations included the loss or disposal of our OPCI business and a small profit on our [Gamblin] waste water treatment facility.

The fourth quarter net loss after Octane Additives goodwill impairment and restructuring was $7.6 million net loss, which represents $0.62 per diluted share compared with a net loss of $13.3 million, which represented 1.08 cents loss per diluted share-- that’s $1.08 loss per diluted share for the first quarter-- fourth quarter in 2004.

EBITDA pre-restructuring is $20.5 million for the quarter, which is a $2.1 million decline versus the prior year and represents a 15.1% adjusted EBITDA margin for the quarter.

I’m now moving to Slide 7 in the presentation.

Over the full-year 2005, revenue has grown by 12.7% to $527.7 million for the year. Fuel Specialties exhibited strong organic growth. Performance Chemicals grew primarily due to the acquisition, and Octane Additives declined by 20% in the year. The effect of the decline in high-margin Octane Additives sales as a proportion of total sales, and the non-recurrence of the [Nova-10] remediation release shows in the $16.6 million decline in gross profit to $189.4 million, a reduction of 8.1% from 2004.

Total SG&A costs for the full year at $97.5 million represents a 9% growth, essentially driven by the full-year effect of the new acquisitions.

R&D costs, at $11.2 million for the full year are $1.1 million or 11% higher than the prior year, and further demonstrates our commitment to new product development.

Corporate costs for the full year at $26.7 million have reduced by 19% when compared to the same period last year. On an annualized basis, this represents a 30+% reduction versus the prior year.

The full-year restructuring charge of $31.3 million includes $12.5 million of non-cash pension curtailment charges associated with restructuring, $4 million related to the settlement with a former CEO, $2 million related to the closure of [Agastra], and sundry other charges related to severance and demolition activity.

Full-year other expenses of $12.6 million includes $6.7 million related to the write-off of various investments. The balance is primarily due to exchange losses. The full-year results are $123.9 million net loss, and compared to a $6.2 million prior-year net profit. The full-year results EBITDA pre-restructuring is $82.5 million, which is $27.1 million lower than the prior year for the same period, and represents a 15.6% EBITDA pre-restructuring margin.

I am now moving to Slide 8, which is the 2005 net income versus 2004 bridge.

This slide shows the major items that explain the change in operating income pre-impairment from 2004 to 2005. The effect of volume loss in the Octane Additives business can be seen clearly, as can the effect of the considerable one-off restructuring activity undertaken in 2005 and the write-offs of investments. However, the growing contributions from the Fuel Specialties and Performance Chemicals businesses, the considerable savings in corporate costs, are also clearly visible.

The Company enjoyed a non-cash pension credit of $2.7 million in 2004, but this is reversed into a $1.7 million charge in 2005.

I am now moving to Slide 9, which is the Innospec quarterly summary for 2004 and 2005. This slide is an overview of the last 8 quarters of 2004 and 2005. This chart gives you some appreciation of the seasonality of the business, and also illustrates the step-down effect of when a major Octane Additives customer exits lead business.

I will share with you in a moment the quarterly profile of each of our businesses, as I believe these will be of more value to you.

I’m now moving to Slide 10, which is the cash flow 2005 versus 2004.

Cash flow from operating activities was a $23.4 million inflow for the quarter, and an inflow of $39.3 million for the full year of 2005. This compares to a positive cash flow of $25.5 million and $62.4 million for the comparative 3 and 12-month periods, respectively, last year.

The primary causes of the decline in cash generation in the year are the recorded lower income after allowing for non-cash items of $0.9 million; the more adverse timing of tax payments, $33.9 million; and a better working capital performance of $11.7 million.

There has been a significant build-up of inventory to support the growth of the Fuel Specialties business, and to accommodate the reduction in Octane Additives manufacturing capacity, to insure an ongoing effective cost rate. However, this has been balanced by a $17.8 million reduction in receivables due mainly to the timing of fourth quarter shipments and collections in the Octane Additives business.

Capital expenditure was $1.3 million lower than in 2004 at $8.3 million. The $2.8 million inflow on the investment side represents the proceeds on the sale of two subsidiaries from the Performance Chemicals division.

Liquidity and financial condition. In the fourth quarter the Company finalized the new 3.5 year financing facility, which has a June 2009 maturity date.

I will now share with you the results for each of our businesses, starting with our Fuel Specialties business. I am now moving to Slide 11, the Fuel Specialties Executive Summary.

In summary, our Fuel Specialties business recorded sales of $240.6 million in the full year, which is a 23% growth year-over-year for the same corresponding period. Gross profit increased by 18.6 million-- sorry, 18.6% over 2004, while the gross margin reported a small decline. This was essentially driven by raw material price increases and the rapid growth of cetane, which is an enabler to sell other aspects of our product portfolio.

The reported $30.8 million EBITDA pre-restructuring for the full year represents a 27.1% growth year-over-year, and equates to a 12.8% EBITDA pre-restructuring margin for the full year.

I am now moving to Slide 12 to talk to the Fuel Specialties quarterly summary for 2004 and 2005.

Sales continued to grow strongly as compared to the fourth quarter of 2004. Fuel Specialties revenues of $68.9 million recorded a 20% growth for the quarter when compared to the same period in 2004. There was a growth throughout the Fuel Specialties businesses, with a full year-- where, for the full year, the Americas reported a 34.4% growth; the EMEA region, 16.3% growth; and the Asia-Pacific region, 12.2% growth. The business continues its drive towards customer intimacy with the appropriate infrastructure in place.

Gross profits in the quarter grew by $5.1 million to $23.9 million, which is a 27.1% growth when compared to the fourth quarter 2004. Gross margins for the quarter, at 34.7%, represents a 1.9 percentage point improvement versus the relevant quarter last year. The business also now has the capability to smoothly manage material price increases through to customers in a timely and appropriate manner. The business also benefited from a favorable mix due to increased sales of cold flow improver and heating products, which attract higher than average gross margins.

Fuel Specialties operating income for the quarter was $6.3 million, which represents an 8.6% growth over the same period in 2004. EBITDA pre-restructuring for the quarter was $8.0 million, which represents a 12.7% year-over-year growth when compared to the same period in 2004.

In summary, the Fuel Specialties business has the capability to smoothly manage material price increases through to customers in a timely and appropriate manner. Fuel Specialties is leveraging customer intimacy on a global basis and is demonstrating a superior understanding of its chosen markets. This business demonstrates healthy double-digit EBITDA pre-restructuring margins. It’s very pleasing to see this business mature so quickly as it now represents 45% of our revenue.

I am now moving to Slide 13, Octane Additives Executive Summary.

I will now summarize the results of our Octane Additives business. Our Octane Additives business recorded sales of $181.9 million in the full year, which is a 19.5% decline year-over-year for the same corresponding period. Gross profit declined by $37.2 million, or 28.7%, to $92.6 million. The gross margin for the year was 50-- that’s 50.9% compared with 57.4%. This fall is partly due to the $6.4 million release of [Nova-10] provision in 2004. The gross margin is at the expected level for 2005.

The reported $82.0 million EBITDA pre-restructuring for the full year corresponds to the $117.4 million reported for the same period last year. The $82.0 million equates to a very robust 45.1% EBITDA pre-restructuring margin for the full year.

Innospec has re-signed its manufacturing capacity to align it to the market demand for Octane Additives business. Innospec has retained the flexibility to respond to short and mid-term fluctuations in demand. Innospec started 2006 at its new required Octane Additives manufacturing capacity.

I am now moving to Slide 14, which is the Octane Additives quarterly summary for 2004/2005.

Sales for the quarter were 40-- $40.1 million, which represents an 11.7% decline versus prior year; whereas, the volume decline for the quarter is 26.5% year-over-year. Gross profit for the quarter of $21 million represents a 37.3% year-over-year decline when compared to the same period 2004. This is a consequence of a 42.9% volume decline and the release in the fourth quarter of $6.4 million remediation release associated with our German former manufacturing site.

The gross margin for the quarter, at 52.4%, was in line with expectations, but represents a 21.4 percentage point decline when compared to the prior year. This was primarily associated with the $6.4 million, which represents a 14.1% quarter four 2004 remediation release associated with our German former manufacturing site, and the consequence of the volume reductions which I referred to earlier. In summary, the 52.4% gross margin for the quarter was in line with our expectations.

Operating income before goodwill impairment for the quarter of $14.8 million represents a year-on-year decline of 43.1%, driven primarily by a 26.5% volume decline and a reduction in gross margin described earlier.

EBITDA pre-restructuring for the quarter was $18.4 million, which is a 37.8% decline when compared to the prior year for the same period, and is essentially the result of the volume decline and prior year release of the remediation reserve.

In summary, the Octane Additives business is a unique and profitable annuity stream for Innospec, which positively differentiates it from the other specialty chemical companies. Innospec continues to optimize margins and cash in the declining Octane Additives business.

Slide 15, the Performance Chemicals Executive Summary. I will now summarize the results of our Performance Chemicals business.

The business models for Performance Chemicals lags the other businesses, and this reflects the relative newness of the acquisitions in personal care and aroma. Performance Chemicals businesses reported sales of $105.2 million in the full year, which is a 127% growth year-over-year for the same corresponding period. The full-year effect of the acquisitions was to increase net sales by $55.9 million. The reported $7.5 million EBITDA pre-restructuring for the full year corresponds to the $2.7 million reported for the same period last year. The $7.5 million equates to a 7.1% EBITDA pre-restructuring margin for the full year.

As previously discussed in the third quarter conference call, the profitability in one of the recently acquired businesses has been significantly impacted by difficulties in passing on raw material price increases that were higher than expected when selling prices were contractually fixed. As we entered the new financial year 2006, we have taken significant action to appropriate pass on these cost increases to our customers.

In summary, and to provide a more balanced perspective on the progress of this business, 2005 recorded sales of $105.2 million, which represented a 126% growth. The EBITDA pre-restructuring for the full year is $7.5 million, which is a circa 200+% improvement from prior year. We remain confident that we can achieve double-digit EBITDA margins when the business reaches our expectations.

I’m now moving to Slide 16, the Performance Chemicals quarterly summary 2004/2005.

Performance Chemicals’ sales of $26.7 million in the quarter represented a 30% year-over-year growth for the same period, the growth primarily driven by our personal care acquisition. Gross profit for the quarter of $3.5 million represents a 2.9% year-over-year growth when compared to the same period in 2004. Gross margins in the quarter of 13.1% represents a 3.5 percentage point decline for the same period last year. This business continued to be impacted by raw material and energy price increases in the personal care market. We now have been able to appropriately pass on these cost increases to our customers.

Performance Chemicals’ operating income was a small loss of $0.1 million for the quarter, which includes non-cash acquisition amortization expenses of $0.3 million. This small loss represents a $0.3 million decline on prior year, primarily driven by raw material and energy cost increases. As previously discussed, the profitability in one of the recently acquired businesses has been significantly impacted by difficulties in passing on raw material price increases that were higher than expected, when selling prices were contractually fixed.

As we enter the new financial year 2006, we have taken significant actions to appropriately pass on these cost increases to our customers. The EBITDA pre-restructuring for the quarter is $1.5 million, which is a 7.1% growth when compared to the same period in 2004.

Overall and in summary, Slide 17 provides to you a GAAP reconciliation. But, if I just summarize, Innospec Fuel Specialties is leveraging customer intimacy on a global basis and is demonstrating a superior understanding of its chosen markets. Innospec continues to drive to reduce the corporate cost base and managing its cost base for productivity. Innospec continues to optimize margins and cash in the declining Octane Additives business. Innospec remains committed to improve delivery performance and execution.

Thank you for patiently listening. I’ll now pass you over to Paul.

Thank you, Jim. I would now like to take you through our new identity and visual image and further comments on the performance of our business. I’m now moving on to Slide 19.

Since I became CEO, we have been undertaking a complete strategic review of our business. We now have in place robust, strategic plans for each of our core businesses. As a result of this, we have also reviewed our name and identity and decided we needed to more accurately reflect the existing business and the future direction. We have therefore said goodbye to our former name, Octel.

Moving on to slide 20. The name of Octel has served us well for many years, but it has become outdated. When the outside world thought of Octel, they thought of TEL, and they equated this with declining markets and declining business. This is not good for business and it is not correct.

As you all know, the TEL business represents less than 35% of our sales these days and, although it is still an important income generator, this percentage is falling every year. TEL is not the future; it is the past. We must now look to our specialty chemicals businesses to carry us forward, and I’m pleased to say that they are growing stronger every year.

Our research also showed that the name of Octel is viewed as old-fashioned. On top of this, since it does not speak to people of our values, nor does it represent the wide range of businesses that fits under the Company umbrella. So, the time has come to break away from the perceptions of the past and adopt an image that reflects who we are as a business today and the direction we are heading in the future. It made sense to start 2006 with a completely fresh approach.

Moving on to Slide 21. Now, I appreciate that the name Innospec will sound unfamiliar at first, but soon it will become second nature. The word itself is a combination of “innovation” and “specialty,” words that express our approach to the specialty chemicals market through Fuel Specialties and Performance Chemicals. The name is written in a unique typeface to signal that we are different from our competitors. There is no other company quite like ours.

The idea behind our visual device was to mirror our three core businesses. These function around our corporate center so that the whole is greater than the sum of the parts. Together, they form an arrow, which represents we are a forward thinking and growing business with long focus and long direction.

Moving on to Slide 22. So, what do I see in the name Innospec? I see a new, fresh and interesting company. I see a business built from strong company values, with a focus on sustainable development. I see a forward-thinking business that prizes innovation and technical knowledge. I see a workforce in pursuit of performance excellence. I see a company with a clear direction which is growing fast. I see a dynamic company that has a key role to play in the developing world of specialty chemicals.

We want to increase profitability and create more shareholder value. To do this, we have to embrace change and believe in the business we are trying to build. The launch of Innospec is a very important part of that process. It marks the beginning of a new era.

Moving on to Slide 23. We have developed a simply statement to clearly describe what our goals are. These are to be recognized in our chosen markets as the leading provider of innovative specialty chemical solutions, delivering value to our customers and shareholders. And I would now like to take you through each of our individual business.

On Slide 24, our Fuel Specialties business specializes in manufacturing and supplying fuel additives and solutions that help improve fuel efficiency, boost engine performance, and reduce harmful emissions. Our Fuel Specialties business has shown excellent sales velocity in the last 12 months. We have been able to grow all of the three regions: in the Americas, Europe, Middle East and Africa, and Asia-Pacific.

I’m also particularly pleased with the improving gross margins in quarter four as we work towards passing on raw material price increases in a timely fashion. We appointed a new head of this business during last summer, and I’m very excited about the future opportunities in this market. We expect that the sales growth of between 5% and 10% per annum, and gross margins between 32% and 37% for 2006 in this business.

Moving on to Slide 25. Our Performance Chemicals business manufacturers performance chemicals used in a wide range of everyday products and industrial processes. We have a number of operating units as we look to grow this sector of our company. Top-line growth has been strong, mostly fueled by the impact of acquisitions, but the base businesses have also shown some margin improvement. We expect to see sales growth of between 8% and 10% per annum and gross margins between 18% and 22% in 2006 for this business.

We’ve had a difficult year in one of our businesses due to production and raw material cost issues, but we have now started to see real progress. As a result of our strategic review, we have disposed of a number of non-core businesses and product ranges, and we now have a much more focused group operating in the personal care, aroma and detergent markets.

Moving on to Slide 26 and our Octane Additives business. We’re the world’s leading producer of tetra ethyl lead, an octane enhancer used in automotive gasoline for vehicles that run on leaded fuel. Our Octane Additives business now contains only TEL for automotive use, together with our environmental division, which works closely with our customers to insure a responsible phase-out.

Despite the loss of one of our major customers early in 2005, we have been able to keep volume sales above expectations as we were able to work with our existing customers to agree on more gradual phase-outs. As expected, one of our markets did phase out completely at the end of the year and, therefore, we do not expect to see-- sorry, we do expect to see a greater declining volume than normal in 2006. We expect this decline to be in the order of 35% to 40%, but our gross margins will remain between 45% and 50%. As I mentioned, this was not unexpected and has been fully planned for in our revised manufacturing operation which commenced last month. At the present time, we expect to see a more gradual decline after this year for the remainder of the decade.

I would now like to open up the call for any questions that you may have.

Thank you. [OPERATOR INSTRUCTIONS.] Jeff Zekauskas with JPMorgan.

Can you give us an update as to what’s happening in Indonesia in the lead additive business?

I think that-- as you know, Jeff, I mean the businesses that we have remaining in Octane Additives we’re looking to try and work with those countries to insure a more responsible phase-out of the operation. And we were able to continue to sell in that particular region through 2005, and we’re working with the country to try and help them achieve a more gradual phase-out of the products as we take the business forward.

Okay. In terms of the Fuel Specialties business, I was looking through your restated numbers for 2004, and I take it that the aviation gas plus the cold flow improvers–- is the order of magnitude of the restatement about $21 million in sales and $10 million in operating income added to that business?

Yes, Jeff. This is Jim Lawler.

Hi, Jim.

Hi. Your assessment is exactly correct. As we’ve indicated, aviation fuel has now moved into the Fuel Specialty business along with cold flow improver, and those statistics are correct.

Okay. And is it possible for you to give us an idea of what the effect is on the 2005 numbers, or is it too complicated?

What do you mean by that, Jeff?

In other words, in the restatement of the full year 2005, what’s the income and sales contribution from the cold flow improvers and the aviation gasoline?

Yes, I mean, just again-– it’s Jim. Just to clarify, Jeff, we stated 2004 and 2005, so they are directly comparable.

Okay.

And the statistics are broadly the same year-over-year.

Broadly the same.

Yes.

Lastly, is it possible at all to get a sense for the Company as a whole and for the individual businesses how much of the sales change has to do with price, volume, currency, acquisition?

Jeff, it’s Paul again. I think you have to look at the individual businesses to actually assess that, as you know. If you looked at the Octane Additives business, we’ve had a greater volume decline than the actual decline in sales because we have been able to increase prices.

Yes, that one’s the most clear. I guess, the one that’s hardest for me is the Fuel Specialties.

Okay. Well, maybe [inaudible].

Okay. Good.

Performance chemicals, as we said on the call, the majority of the increase is related to acquisitions because, obviously, 2005 was the first full year of all those businesses. But we have seen some increase of the order of $5 million to $7 million as it relates to the core businesses that we have within Performance Chemicals.

Okay.

And so, I think we’re clear on that particular one. With Fuel Specialties, we’ve seen-- currency is not really a major driver on the top line in that business. The major drivers have been volume and price. And we’ve seen volume growth in principally all our regions. But, we’ve also been able to drive the top line to try and pass on the raw material price increases as well. So, I think-- from my perspective, I think what you’ve seen is that from the volume perspective, I think we’re roughly 5% to 8% higher than the previous year, but we’ve also been able to improve the quality of the margins through passing off price increases.

And just lastly, what was the accounts payable for the quarter?

The accounts payable, Jeff, I’ll send it to you offline, but the accounts payable for the quarter, you saw the working capital, it was circa $11 million improvement for the quarter. The accounts payable number I don’t have offhand. I’ll provide it to you offline.

Okay. Thank you very much.

Rich Murphy with Cross River Partners.

The first question is on the restructuring charge. This year it was 30–- what was it, $33 million? What’s our guidance for next year?

The guidance for next year-- and again, will be available to you post the meeting on the website. And Paul has indicated to you some of our expectations going forward. The guidance is less than $5 million.

Okay. Good.

Rich, this is Paul.

Yes?

I mean, the restructuring that we incurred in 2005, a lot of it was non-cash related, roughly half of it. The rest of it Jim went through in detail through his commentary a sense of where that was occurred. And we don’t expect to see much of that in 2006 because we’ve really worked hard to get the cost base in line and get the business positioned. So, the number of less than 5 is quite a good fit.

Okay. So, we’re not going to be–- we’ve owned the stock for a long time and it seems like every year–- I mean, I’m looking at $19 million, 15.8, and then 31 this year. So, I’m just trying–- less than five would be great if that-- I just want to get a degree of confidence in that.

Well, that’s what we’re indicating.

Okay.

Because we’ve-- as you know, we’ve worked very hard during this year to get the business fit for the purpose of taking it forward. I feel as though we’re pretty much there.

Okay. Great. And the second, on the Fuel Specialties, the raw materials, is there any particular-– you mentioned energy costs, but is there any particular energy costs that I can look at as an analyst to monitor, to see whether things are getting better or worse? Raw materials is kind of a general term.

Yes, I mean, really-– it’s Jim speaking. Really, you’re looking across the spectrum. You know, the gas, electric and oil effect. I mean, no different from-- as reported by other major specialty chemical companies.

Okay.

So, it really is gas, electric and oil perspective.

Is there a benefit from higher oil prices in any of your businesses?

Not from a dependency perspective or, unfortunately, from an advantageous perspective. I mean, Paul, would you--.

No. I think, Rich, what-- sometimes you can get benefit where people might want to use more additives to actually offset an increase in the base price. But, it’s not the trigger that’s to say that, well, if oil prices are higher, we’re going to sell a lot more additives. It doesn’t tend to work that way.

Okay. All right. Great quarter, guys. I’ll see you this week.

Look forward to it.

Yes.

Thank you.

[OPERATOR INSTRUCTIONS.] Peter Lieu with Lieu Capital Management.

This is a very, very sophisticated financial presentation with more information than I’ve ever seen from you, and I thank you for providing the detail. But, I’d like to look at you on a summary basis. What I’ve seen in the past years is fantastic increases in cash flow on a quarterly basis. And currently, we’re seeing negative cash flow. And I’d like to get your feeling. At what time will we see a positive inflection point where the cash flow will turn positive in the future?

Well, maybe if I could just quickly jump on that. I mean, for the full year, we got close to a $40 million cash inflow for the business, which is-– it’s down from the $60 odd million in 2004, but we still generated in a lot of cash. And that’s something that is a key goal for us, particularly in our Octane Additives business. So, driving cash flow and improving it is a key goal. And for 2005, we did show a $40 million cash inflow.

Just to build on Paul, I think the other perspective you should have is you can see the improvement in working capital that I referred to, historically $11 million. Also, please keep at the back of your mind that we intentionally built up TEL inventories so that we could make the manufacturing changes in an effective manner. You can understand that, as those inventories decline in 2006, we start to see the benefit there. So, I hope that gives clarity around your question.

Okay. The other thing I’d like to-– acquisitions have been part of your strategy to diversify your business. Going forward, what opportunities do you see in acquiring small fragmented companies to help you, and how important is that as part of your future strategy?

Peter, that’s a good question. This is Paul. We took the decision during 2005 to really focus on the business that we have, to make sure that it was delivering the performance that we believe it could actually deliver. So, I’m quite pleased with the results from our existing business, and that focus will obviously continue into 2006.

However, as I’ve mentioned before, our ability to grow-– we can grow organically, but I do believe we have the opportunity to grow through acquisition. But, that would principally be in the very focused markets that we’ve chosen to participate in, which would either be Fuel Specialties or in the markets that we’re in, in Performance Chemicals.

And as far as when that’s likely to occur, we believe there’s still the opportunity to drive business organically. We do believe that there might be some opportunities in those areas, but we will look very closely and very hard at those to make sure that they do bring the sort of shareholder value that you would expect.

We’re not interested in necessarily participating in relatively small acquisitions because they, unfortunately, don’t always bring the increase in value vis-à-vis do something else with that capital. So, if we do something, it’s likely to be a little bit more significant, and it will be in those two areas of fuel specialties and in performance benefits.

Okay. I think you’ve done a terrific job in managing the profitability of the declining TEL business. And as you’ve suggested, going forward, the rate of decline will subside some. But is there a minimum level that you can expect to maintain going forward, or are you expecting a decline to zero at some juncture?

Another very good question. Let me just [fly] by some of the points from that particular one. We are expecting this might be a larger decline in 2006 due to the exits of one of our major customers, which was as planned and as forecasted at the end of 2005, and that’s within the octane additives segment that you see reported. In that particular area, after 2006, we expect to see steady decline, probably taking us through the end of the decade or maybe a little bit longer. But the key aspect, obviously, in the [operation] is our ability to supply the aviation gasoline market with TEL, and that’s the business that we see remaining quite stable.

It is reported within our fuel specialties area. We do have the ability to maybe grow the top line on that. And one strategy I’ve always said is that I never really want to sit around and look a customer in the eye and say, “I’m sorry I can’t supply you with TEL because I closed the manufacturing site down.” I don’t think that that would be a good decision by me or a very responsible one. Obviously, what we’re trying to do to manage our capacity so that we can effectively supply it and still make good returns on it, and that’s how we see that business in the future.

Have you disclosed how much that aviation portion of TEL represents?

Yes. I mean, that’s really shown up in-– the difference between the reported numbers for the previous petroleum specialties business and the new fuel specialties division that we have. And Jeff Zekauskas, earlier on in the call, said it was around about just over $20 million in sales and just under $10 million of profit that have moved between those two businesses.

Well, thank you very much. I know you’re going around to a lot of customers. My suggestion is if you could hit them with the summary points, I think most of the people that are on this conference call are extremely interested in detail, but most money managers have a much smaller attention span. So, if you could simplify your presentation.

Not a problem. Thank you very much.

Yes, good luck. Thank you.

[OPERATOR INSTRUCTIONS.] David Wilson with Smith Barney.

A couple particular questions. On our refinancing, what’s our current interest rate until 2009?

The weighted average cost of capital is 9.6% in the new financing arrangement.

Was that slightly up from the other debt covenant we had?

No, the interest rate in the new financing facility, it depends on how much we’re actually borrowing. But it’s a range of something between 150 basis points-– I think 225 basis points over the U.S. dollar LIBOR because that’s actually quoted in the release which we sent out in December, David. But it’s within that range, depending on how much we’ve borrowed at that particular time.

Yes, my apologies, David, I misheard your question. I thought you were asking for the weighted cost of capital.

Okay. Sorry, no, you scared me for a second. That’s good.

We’re not borrowing at 9.6%, David. I promise you that. I promise you that.

And how much TEL do we have in inventory now?

Broadly speaking, in terms of TEL, we have around about a 12-month supply, and that’s really to enable us to take a good look at the manufacturing capacity in [inaudible]. They’re actually running that facility now in a very quiet and [individualistic] way. It’s been operated for the last 45 years on a 7-days, 24-hours a day basis. And we’ve actually been able to clip it quite significantly. And we operate the on-site days at two shifts. And we’ve done all the risk assessments, and we believe we can operate safely at that level, which is great.

The most important thing, David, is it gives me some flexibility because we can reflect the manufacturing capacity based on the market demand. So, it allows me to bring the inventories down much faster. But at the moment, we’ve got around about a 12-month supply.

Okay. And those are carried at cost, right?

Yes.

Okay. And in your performance chemicals where you talk about being able to increase prices to reflect your cost increases over the last year or so, what’s a current run rate EBITDA on that? You said you think you can get to double figures. Are we already starting the year in double figures, or are we going to have to be increasing prices during the year to get there?

I think what you will see-- I mean, it shows for the year. I think it was just over 7% EBITDA margin for 2005. I think the run rate in 2006 will be higher than that. The goal that we’re looking to is to get that to double digit levels, but I think we’re likely to be operating at that level towards the back end of the year. But obviously, what we have seen is that most of the price changes there are on a contractual basis commenced in January the first, and they have been able to stick. So, really, it’s up to us now to manage those businesses and manage the cost flow so that as much of that flows through the bottom line as possible.

Okay. And could you recap for us where we stand with TEL goodwill for what we started with, how much we’ve paid down, and what you think we’ll have to do this year?

Yes, if you recollect from the press release, absolute TEL impairment for the year was 134.4 million. That leaves approximately 94 million on the books and--.

I mean, I would expect the sort of charge for 2006 to be in the region of about 30, David. But I’ll be very honest with you on that one. I don’t really look at that number because the long cash-– it’s the numbers that I think is slightly misleading about the overall business. But I would expect the charge to be around about 30 million for 2006.

Good.

The sooner the better in my view.

Yes, we seem to be misleading the market. So, as soon as quit misleading them by having that gone, it will be good.

Yes. Let me just reassure you. It’s not misleading. We’re just actually following the accounting conventions in the way it’s done. But I expect it is misleading, which is why we have gone to the trouble of actually mentioned the EBITDA margins pre-impairments, et cetera, in order to provide some more clarity on the numbers.

Thank you. There appear to be no further questions at this time. I’ll turn the floor back over to you for any further or closing remarks.

Thank you very much for your questions and comments. I’m now on slide 28 of the presentation. I would now like to summarize what we have gone through. Innospec is now the new holding company for three dynamic businesses. We believe that we have the opportunity to grow the fuel specialties and the performance chemicals businesses whilst at the same time responsibly managing the decline in octane additives. Under our new company name, we can move forward as one business with a clear goal of improving shareholder value. We have an exciting future ahead of us. Thank you very much for your attention.

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