Innospec Inc (IOSP) 2006 Q3 法說會逐字稿

Good day and welcome everyone to the Innospec Inc. Third Quarter 2006 Earnings Results Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Kate Davison. Please go ahead, ma'am.

Thank you. Good day, everyone. My name is Kate Davison and I am Group Legal Advisor and Head of Investor Relations at Innospec. Thanks for joining our third quarter 2006 financial results conference call. Today's call is being recorded.

As you know, last night we reported our third quarter 2006 earnings. The press release is posted on the company's website, www.innospecinc.com. An audio webcast of the call and the slide presentation on the results are also now available and will be archived on the website.

Before we start, I would like to remind everybody that certain comments made during this call might be characterized as forward-looking statements under the Private Securities Litigation Reform Act of 1995. Generally speaking, any comments regarding management's beliefs, expectations, targets or other predictions of the future are forward-looking statements. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from the anticipated results implied by those forward-looking statements. These risks and uncertainties are detailed in Innospec's most recent 10-K report, as well as other filings we have with the SEC. We refer you to the SEC's website or our site at innospecinc.com for these and other documents.

In our discussion today, we have also included some non-GAAP financial measures. A reconciliation to the most directly comparable GAAP financial measures is contained in our earnings release and in the presentation that follows, a copy of which is available on the innospecinc.com website.

With us today from Innospec are Paul Jennings, President and Chief Executive Officer; Ian Cleminson, Executive Vice President and Chief Financial Officer; and Patrick Williams, Executive Vice President and President, Fuel Specialties.

And with that, I'll turn it over to Paul.

Thank you, Kate. And thanks to everyone on the call for taking the time to join us. I'd like to make a few high level observations about our performance, before Ian takes us through the numbers.

Most importantly, we are very pleased with these results. We think they highlight today the transformation we have achieved in the company's operating and financial profile in the past year.

Our GAAP results are impressive compared with both, a year ago and the second quarter 2006. Earnings per share were $0.84 on a diluted basis, versus a loss of $0.74 a year ago and earnings of $0.08 in this year's second quarter. The reported earnings do include gains on the sale of real estate, which added approximately $0.55 per share; but as most of you know, they also include substantial charges, mostly for non-cash goodwill impairment, which more than offset the gains.

Overall, these items have a net negative impact on earnings this quarter of $0.33 per share. In last year's third quarter, goodwill impairments, restructuring charges and other items, reduced earnings by $1.24 per share. After adjusting for these, our EPS more than doubled over the same period last year confirming that results in our core businesses are improving significantly.

EBITDA for the quarter was $38.2 million, compared with $4.9 million a year ago. Even if you back out our $9.6 million in real estate gains this year, it was still a very strong performance. It's important to understand that these improvements have been achieved in the face of significant headwinds from a continuing decline in our legacy Octane Additives business. Fuel specialties, which now accounts for over half of our operating income, had another exceptional quarter. And as we expected, Performance Chemicals turned in a much effective performance compared with the first half.

And with that I'd like to turn the call over to Ian Cleminson, our Executive Vice President and Chief Financial Officer, who will review the numbers in greater detail.

Thank you, Paul. On a consolidated business basis, revenues [increased] 2%, representing considerable improvements from our 10% year-over-year decline in revenues in the second quarter. We achieved that 2% gain in revenues despite the 39% decline in octane additives.

Our ongoing growth businesses, Fuel Specialties and Performance Chemicals, both generated revenue increases of more than 20% for the quarter year-over-year. The company's overall gross profit percentage was 36.6%, a 2.7 percentage point increase from last year. Again, this represents a huge improvement from the second quarter, when our consolidated gross profit percentage was slightly below a year ago.

Fuel Specialties continues to perform very well, with an increase of more than 3 percentage points in its margin. But we were particularly pleased with the margin improvements in Performance Chemicals, where gross profit percentage widened by more than 7 percentage points, gross profit dollars nearly doubled and operating income swung from a slow loss to a significant profit.

Consolidated operating income; excluding goodwill impairments, restructuring charges and disposal profits was $21 million, up 10% from a year ago and up almost 50% from the second quarter of 2006. And as Paul noted our EBITDA comparison was very impressive.

Turning to individual business segments, Fuel Specialties is now our biggest business unit. We had another very strong quarter with 26% revenue gain to $75.3 million. The gross profit percentage was 34.4%, up 3.1 percentage points from a year ago. The segment's operating income increased 78% to $13.5 million

The US business continues to benefit from a strong market leading position in diesel fuel additives. Strong growth in these products was the primary factor behind our 25% revenue gain in the Americas for the quarter. In the Asia-Pacific region, growth remains very strong off a fairly small base, with a revenue increase for the third quarter of 54%. We continue to benefit from our new contract wins early in the year such as Petronas in Malaysia. We reached this quarter at the start of commercial sales of new magnesium products into China, which is an example of another successful Innospec R&D innovation.

In the Europe, Middle East and Africa region, we saw a strong acceleration of our revenue growth from 6% in the second quarter to 28% in the third quarter. Fundamentally, it was a good performance, but about half of the regions' revenue increase came from orders relating to one customer. There will be some additional revenues from this customer in the fourth quarter, but we believe this business is unlikely to reoccur in 2007.

Earlier this year, we projected Fuel Specialties would generate revenue growth of 5 to 10% and after the second quarter we stated it will be at the higher end of this range, we now estimate that revenue growth in this segment will be between 14 and 18% for the year. We continue to believe the gross profit percentage will be in the range between 32 and 37% for the year.

Performance Chemicals reported a 23% revenue increase, a significant acceleration from the 6% increase in the second quarter. Sales were stronger across the board with increases of more than 20% at both Aroma Fine Chemicals and Finetex, the segment's two biggest businesses. The segment's gross profit percentage was 21.7%, up more than seven points from 14% a year ago. Gross profits nearly doubled for Aroma Fine Chemicals which benefited from price increases and improvements in its manufacturing efficiency. Margins also were up sharply at Finetex which serves the detergents and personal care markets.

Our Performance Chemicals UK business also saw a sharp improvement as better net sales volumes and reduced raw material costs strengthened the bottom-line.

While these results were very strong, they were also pretty much in line with our expectations. As a result, we've not changed our outlook for Performance Chemicals for the year. We still expect the segment to produce an 8 to 10% increase in revenues with gross profit percentage in the 18 to 22% range.

In the Octane Additives business, as projected, results again were down significantly. The big year-over-year declines continued to reflect the loss of South Africa as a major customer last year. Revenues for the quarter were down 39% with operating income of 41%. However, the segment's gross profit percentage was actually up 10 percentage points, reflecting changes in the mix of customers and their margin profiles.

Sequentially, the results were improved in the second quarter -- from the second quarter when revenues were at $21.6 million and operating income was 8.1 million. What this reflects is really a function of changes in the timing of shipments. We now expect revenues to decline 35 to 40% for the full year which is a slow decline than previously advised. In addition, the segment's gross profit percentage will likely be somewhat above our previous expectations, probably 50 to 55%, about 5 percentage points above our earlier range.

In 2007, we expect a decline in Octane Additives revenues to be in the region of 20 to 30%.

Corporate costs, $5.3 million for the quarter, were down slightly from 5.5 million a year ago, and are starting to flatten out after the sharp deductions we saw earlier in the year. Restructuring charges were minimal with only $400,000 compared with over $10 million a year ago. Goodwill impairments was $10.4 million, up from 7.4 million last year. We are required by GAAP to spread out the rights off the remaining goodwill over the expected remaining life of our Octane Additives business which is roughly another 5 years.

There will only be approximately $23 million in goodwill remaining at the end of this year. Goodwill is a non-cash charge, and the Octane Additives business continues to generate significant positive cash flows although its contribution is obviously declining. The disposal profits of $9.6 million is from the sale of surplus real estates in the UK. Other income includes foreign currency gains of $1.4 million compared with 4.2 million in foreign exchange losses a year ago.

Balance sheet has improved further during the third quarter as cash and cash equivalents rose to $94.2 million, an increase of 21 million from December 31st, and 26 million since the end of the second quarter. This is due to a very good underlying performance, a stable working capital position, and of course the $9.6 million of disposal proceeds. You should also note in the quarter we spent $5 million on share buybacks. Net debt has fallen since the year-end, and as of September 30, was $56.1 million, compared with stockholders' equity of $320.4 million. With our strong cash flows and substantial borrowing capacity, we are clearly well positioned to consider strategic acquisitions, as well as additional organic growth opportunities.

Capital expenditures through the first nine months of the year was $3.4 million. We continue to expect capital expenditure to be approximately $10 million for the full year. However, some of the project spend may go into the following year. Capital in 2007, we would expect the capital spending to be somewhat higher potentially as much as $15 million.

And, now I would like to turn it back over to Paul for some concluding comments.

Thanks, Steven. As I noted earlier, 2006 must have coupled with key turning points for Innospec. First, it represents what we call the inflexion point, where the growth in our ongoing businesses is actually offsetting the declines in our Octane Additives business. So the earnings from operations overall are growing.

The other key point is illustrated by this chart. It shows what the business looks like with Octane Additives completely out of the picture, as we know it will be in just a few more years. Until last year, we have not faced that reality head-on and reduced our cost price to an appropriate level.

The first column in this chart shows that without Octane Additives, we actually would have had a small operating loss from our ongoing business in the first nine months of last year. This year, combined operating profits of Fuel Specialties and Performance Chemicals are approximately $41 million, nearly double the $21 million a year ago.

In addition, we reduced our corporate cost by almost 30%, the result is $25 million profit for the nine months, compared with $1 million operating loss a year ago. By the way, if you did this calculation on a quarterly basis, our ongoing operating profitability for the third quarter was $10.7 million, compared with $1.9 million a year ago, and $6 million in this year's second quarter. This analysis undisclosed the progress we have made and the strong underlying earnings momentum of our core businesses.

I had a few more points I wanted to touch on. First, we were the only independent additives supplier ready with a complete product line for the implementation this year of the ultra-low sulfur diesel regulations in the US, which reduced the permissible sulfur content in diesel fuel by 97%. With our legal diesel package of products, we truly had a superior products offering as our customer struggled to meet the new regulations, which were phased in over the last few months and were effective at the retail level in October.

Secondly, we are particularly pleased with the turnaround in Performance Chemicals. As you may recall, we reorganized this segment during the second quarter and all its business units now report directly to me. The segment had a difficult first half, reporting a small operating loss in the second quarter due to margin pressure, production bottlenecks and other problems, especially at the Aroma Fine Chemicals.

On our last conference call, we stated that we expected the results to improve in the second half, and I think you have seen that in our third quarter performance. Needed price increases were implemented and we have begun to work on some of the production inefficiencies. There is still plenty of room for improvement, but we are obviously pleased with the momentum that we see there.

Thirdly, I wanted to make an important point in our innovation. When we changed our name last January, we chose Innospec because it combines the words innovation and specialty chemicals. This was not just wishful thinking, and to demonstrate that I wanted to point out some statistics we recently developed in our Fuel Specialty segment.

One-third of our Fuel Specialty sales so far this year are of new products developed within the last five years. The 20% of sales are of products developed in the last two years. I think that speaks volumes about the commitment to research and innovation at Innospec.

Fourthly, I suspect some of you have been tracking our progress over the last year, maybe looking at these financial results and agreeing that they are pretty good, but wondering what's next, what is this company going to do to continue growing. We do accept to accelerate our investments in organic growth as we have mentioned with increased capital expenditures next year. We see a number of opportunities to expand our current businesses by adding more plant capacity, expanding our geographical distribution to additional countries in some cases, and so on.

In addition, we've made no secrets about the fact that we may be interested in strategic acquisitions, but only if the fit is right in our existing market sectors.

There are plenty of opportunities in Fuel Specialties and the markets we have chosen within Performance Chemicals. So, if anything, we would be interested in fields that compliment our existing strengths and add value for our shareholders. But, we are not in any rush or under any kind of pressure to do a deal.

Finally, from our press release dated the 3rd of October, you'll be aware that we have issued three arbitration actions against Ethyl Corporation under the rules of the London Court of International Arbitration, arising up to disputes with Ethyl under the Company's marketing and supply agreements with tetra ethyl lead. Under these actions we are claiming damages and the right to terminate the agreements. We are confident and determined in our position on these matters and hope to bring them to a satisfactory conclusion as quickly as possible.

Earlier this year, we said we were going to deliver increased shareholder value by running our core businesses better, increasing awareness of the company and improving our capital management. I believe we are delivering in each of these areas. Clearly, our financial results demonstrate that we have improved the performance of our core businesses. We have refocused the company on our chosen markets in fuel specialties and performance chemicals. Most of the ongoing businesses are leaders in their market segments with strong market shares, above average growth prospects and relatively high profit margins. Meanwhile, in Octane Additives, we are maximizing its cash flows and managing its long-term decline responsibly. And we have significantly reduced corporate costs but without eliminating any supports that our businesses really need.

With our name change and NASDAQ listing, we have created a new brand and new awareness of our company. We have much more proactive media and Investor Relations programs and they are working. In terms of capital management, we expanded our credit facilities earlier this year to enhance our financial flexibility. We also increased our cash dividends to stockholders by 14%. During the third quarter, we repurchased an additional 182,000 shares of Innospec common stock, bringing total repurchases for the year-to-date to almost 600,000 shares as at a cost of $14.8 million. That's about 5% of the total shares outstanding at the beginning of the year. The results of all of these actions we believe are apparent in the stock price, which has risen 83% this year, as of September 30th. Innospec was also the second best performing stock in the Chemical Week 75 Index over that period.

And now, we'll be happy to take any questions that you may have.

[OPERATOR INSTRUCTIONS]. I will pause for just a moment while we assemble our queue. And we'll go first to [Olga Geutaneba] with J.P. Morgan.

Good morning everyone.

Good morning Olga.

Good numbers and congratulations.

Thank you.

I have a question on Fuel Specialties. So, could you get into more details about this one-time contract gains may be in this quarter?

Yeah, sure. Olga this is Ian. It's possible with historic supplements, we provided the customer with technical solution regarding their fuel requirements. Once this order is completed the customer is free to sales of the products as well as ours, to provide the solution they require. And we will of course be working as hard as we can through payment business in the future. But at this point, we don't see it reoccurring in 2007.

But will you have it in the fourth quarter this year?

Yes, we'll have some sales revenue in the third quarter and we'll have some sales revenue in fourth quarter. Total company shares will be about $10 million of sales.

So, 10 million in the fourth quarter?

No, 10 million for the full year.

And what was the number in the third quarter?

3.7.

3.7, okay. So, it means that year-over-year your sales in the Fuel Specialties will be flat or a little bit up to get to this number.

I'm sorry, can you repeat that again Olga?

So, to get to the projected annual growth of 14% to 18%, it means that your sales year-over-year should be flat, even including this contract?

In the fourth quarter?

In the fourth quarter, yes.

We expect the fourth quarter to be better than the fourth quarter back in 2005; however we don't sequentially expect it to be as strong as the third quarter this year.

Okay, and do you expect the same operating margin as in the third quarter -- in the fourth quarter of this year?

In just Fuel Specialties, we expect again it to be improved over 2005 in the fourth quarter, but we don't expect it to be as strong as the third quarter.

And how sustainable this margin going forward, say for 2007?

In terms of the gross profit percentage?

Both gross profit and operating profit. You know, I saw that your SG&A cost or actuarial cost, if you wish for the quarter was kind of low as a percentage of sales, or is it like one-time event or expense reduction, so, why your operating margins improved?

Okay. I'll take the question about gross profit percentage first, Olga, and I think we do expect a strong fourth quarter. I guess the challenge will come in 2007 when comparisons will become more difficult for us. And we are expecting and assume margin erosion at the gross profit level. As we go out to SG&A, and we have -- very hard in the fuel specialties business to keep it as flat as we possibly can, and we are only adding cost where we need to, and we'll always look to make that costs into the sales and marketing area to drive the top line.

And besides this one-time contract, what was good in the quarter?

Well, it is Patrick Williams, how are you today? It's been a variety of products. If you look at the Americas, they're really driven by [awful lots] of producing fuel additives, primarily lubricity, connectivity improvers, and cold flow improvers. If you look at Asia-Pacific, it's a variety of products, primarily our new magnesium products, magnesium soaps, and if you look at Europe, it's really all across the product lines.

Okay. And if I may, the last question about the former TEL business, so I remember like in the beginning of the year, you projected much lower gross margin, and fuel margin is high due to favorable mix. Do you expect this mix to have the same mix going forward, or your margin should go down?

Olga, this is Paul. You were saying Octane Additives and do you think -- are you thinking about quarter four or 2007?

Both, fourth quarter and going forward?

Okay. We've said in quarter four as far as -- well certainly as far as the full year, we've actually reduced the rates of decline from what we've said before down to sort of 35 to 40%, but we have actually increased the percentage margin to reflect what we're now seeing as far as the business is concerned. I think as far as the future, as Ian mentioned on the call, I think he mentioned the number of 20 to 30% decline in revenues for 2007 versus 2006, and I think you could well see some pressure on the margins in 2007, given the cost of actually producing the product. But at this stage, we still expect it to be a very profitable business for us as we manage that decline responsibly through at least the end of this decade.

So your margin increase is explained by the mix of your clients basically?

Absolutely right.

Do you have some volumes moving from the third quarter to the fourth quarter of this year?

Generally speaking as you know, you tend to find a situation where it can get quite lumpy, but we haven't seen that in this particular quarter. I think the numbers that we've given as far as quarter three and then what we see for quarter four, a broadly realistic and we don't expect to see -- we haven't seen volume shift from one quarter to the other.

And that's the last question, what was the EPS effect of real estate sale --

I think that -- in my presentation I think I've said that the actual tax impacts on EPS of the sale of real estate was about $0.55 a share in the quarter. But most of that was offset by the non-cash goodwill impairment. So, when you combine the two you actually saw a net negative impact on the earnings this quarter of $0.33 a share. And that compares with last year was a net negative impact of $1.24 per share.

Right. Thank you. I will get back in queue.

Thank you, Olga.

And we will go next to Rich Murphy with Cross River Partners.

Hey guys, how are you doing?

Great Rich. How are you?

Good. Good last quarter I have seen since we have been building the stocks for a couple of years. The gross margin in Octane Additives, if you do the 35 to 40% new guidance decline this year. I come out to around 36 million potential for octane in December. What kind of margin were you looking at on the gross level?

I think what we've said on that in terms of the projection for that particular business, Rich you said, is just in terms of -- we are looking at gross profit percentage is likely to be a little bit above our expectations and we've said it's between 50 and 55% for the full year.

Okay.

So I think if you are in that sort of range --

Okay.

You will be broadly right.

And that obviously will split out some nice cash at business this year. From a capital allocation standpoint, what continues to be your thought process, Paul, on allocating that cash flow? Does it go? How much is needed to go back into that business versus into the fuel specialties, performance chemicals and then the stock buyback?

That's a good question, Rich. I mean, I think -- because the whole question about cash is really important. We've covered it on the press release. So we've actually had I think -- quite good cash generation during the year, especially considering that we bought back nearly $15 million of stock and we've increased the investments in capital in the business.

On -- as far as we take it forward, we are not reinvesting significant amounts of money at all into Octane Additives. If we do so, it will be to get very quick pay-backs and also to support the sort of longer market of Avtel there. So, a lot of the investments that we are making as we've previously released is going to Fuel Specialties, it went into our Ferrocene plant in Herne, which we announced and some of it's going to Performance Chemicals as well to support the capacity growth there and to support some potential opportunities we have. So, we are reinvesting in what we believe is the sustainable business for the future, and we are looking very closely and on a very short term window with regards to capital reinvestments in Octane Additives.

Okay. So is that -- okay so we continue to see that kind of almost a piggyback -- piggy bank for the company, so --

Yes, I mean what we've always said with this business is that the future of the company is about Fuel Specialties and Performance Chemicals, [which as we take up our corporate costs] is how we see in respect going forward. So, whilst with all that's happening we're still generating some cash from Octane Additives and it is our job to make sure we invested that wisely, and we can see through increasing the dividend, through buying back stock and through reinvesting in capital and organic growth in our two growing businesses.

Okay. And in the Fuel Specialties, how much -- you talk about acquisitions and you know always gets some of us nervous because of the history, how much do you have to do on the acquisition front to be competitive or is it just like niche, tuck-in stuff that would be immediately accretive and -- would that be the space, Fuel Specialties seems like the space where you would put some acquisition capital to work?

Well, Rich, maybe first of all I need to allay some of your fears on this one and I understand where you are coming from.

And I say that because you guys have done a great -- though -- I mean -- stocks up 80%, although your stock is still up, I would say it gets cheaper every call even though you guys -- it keeps going up.

My perspective on this what we needed to do is to show people that we've actually got a very solid businesses that's got the potential to grow organically, and I think we've shown that now for the number of quarters that we've been actually running the business. I think that's really positive. I think that shows that we have got some credibility about what we are doing. I think, but equally, given our position in some of the businesses that we are in we have to be alert to potential acquisitions as they make sense in those areas. And I think I've also gone on record as saying, which I strongly agree, is that we are not interested in going out and spending 5, 10, $15 million on little businesses that are difficult to integrate. If we are going to do something we have to make sure it's of the right size and it's going to bring some shareholder value to the company, and quite frankly, I have to make sure that it's the right acquisition because I have to make sure the first one is absolutely right to make sure that we continue building on the credibility of the management team. But we are under no pressure to do it --

Okay.

But it's something that we need to stay alert to, and I think given our performance and given what's happened with our stock and the sort of recognition and understanding of the business, they are not something that we need to be alert to in the future.

Alright. Well great job Paul and your team has done a great job the last couple of quarters and keep producing the cash.

I appreciate it Rick. Thanks.

Take care.

And we'll go next to Gregg Hillman at First Wilshire Securities.

Good morning gentlemen.

Good morning.

Could you talk about -- the growth rate for Fuel Specialties in the quarter, is that sustainable going forward? And then also I wanted to ask Patrick about legal diesel and what's going on in Texas and California and what regulations are driving in general, whether they are state or federal?

Hi, good morning, Gregg, this is Ian. I'll answer the first part of your question, then pass it over to Patrick. And as regards to the growth rate in Fuel Specialties, we said earlier on the call that we expect a strong fourth quarter. It will be ahead of 2005 in terms of sales revenue growth. Longer term, looking through 2007, we would expect a performance closer to our longer term target of 10%.

Okay.

Gregg, its Patrick Williams. If you look at the regulations in the U.S., as you know we've been dealing with fuels with low sulphur reg at 15 PPM. Texas has done their own thing with TxLED and I believe we've discussed this many a times in the past as well as CARB has their regulation, the California Air Resources Board. TxLED is still in market that we are looking at. We are in process of testing a new product to go into TxLED market, but right now most of the majors have, what they call tax credits. So, it's not as large a market as we originally anticipated. When they run out of their tax credits we feel we will be in marked position to sell products in TxLED.

For CARB, it's the same issue as always. We've always treated CARB diesel, we'll remain to treat CARB diesel, there has been no changes there from our standpoint.

Okay, then what states are you in right now?

In regards to [selling fuels]?

Yes.

We're in every state.

Okay.

If you're talking TxLED in specific, that's only Texas related.

Okay. Well, thanks very much.

Yep.

[OPERATOR INSTRUCTIONS]. And we will go next go [Gustavo Ohm] with First Wilshire Securities.

Yeah, hi, good afternoon fellows.

Good afternoon.

My -- I had question regarding dimethyl ether, are you guys looking into any additives for DME, lubricity improvers and so on and so forth, I think, in Asia?

We have a variety of lubricity improvers in the marketplace, whether it's a mono asset, whether its ether based, whether it's fully synthetic. We feel the position we have in each of the three regions is in market leadership position and I can tell you with the three parts that I just discussed early, those are the parts that we're going with right now in the market. The only other issue we need to look at is, whether it's FAME or rape seed; from a biodiesel standpoint, what that does to the lubricity market.

I was just trying to --the DME, it's got property similar to LPG.

Right.

And they are using that in China as a replacement for diesel, I don't know if an additive would be in the automotive market or would be in like the domestic heating market. Have you guys looked into that?

Yeah, it's all a function of where the fuel goes, but as of right now there's not a big market for that fuel. It's really in the infant stage. And more so, it's going to be a blend component. So, you will have similar products that will treat that application.

In the fuel and like this, in fuel for automotives?

That's correct.

And, have you, can you give like a timeframe or a size for the market in the future?

I think we are just got to sit and watch it develop.

Okay. Alright, thanks.

You are welcome.

[OPERATOR INSTRUCTIONS]. And we will now go to David Wilson with Smith Barney.

Good morning guys.

Hello David, good morning.

Could you talk a little bit more about the suit that you have with Apple, any time line and what's the possible gain on it, whatever else you can tell us about it?

Sure, David. This is Paul. I mean obviously these -- we have been trying to engage in discussions with them for some time now to try and bring these matters to a conclusion, but unfortunately the only way that we could sent this forward is to actually go through arbitration proceedings and that's what we have decided to do. We have already said in our press release the sort of damages that we are looking at there and we are just going to have to wait and see with regards to the timing of them. But it's not stopping us running our business, it's not getting in the way of that, and we just really have to see how the arbitration process turns out.

Okay. And on the tale of the tail here, you talked about five more years left in it, could you give us an idea of the size you think is going to be the residual market and do you think it will be more than the five years, is that just a figure you used for writing down the goodwill?

It is the figure that we used when are looking at goodwill because that's based on our latest sort of forecast for the market. We said that we are looking at 20 to 30% decline in '07 versus '06 at the revenue stage and then after that, it's probably going to be a more gradual decline, as it gets towards the end of the decade. But we have to sort of put a stake in the ground and say, well this is when we expected to go, but we're obviously working very hard to see if we can extend it some more with the customers that remain in it. But broadly is to roundup that sort of end of the decade by five-year time horizon, David.

Okay. On the other side where you moved Avgas to the other division, any signs that's -- is that staying about the same is it as or increasing a little bit and what kind of volume you are doing there?

Yes, I think that particular market, as we've said in terms of size of that market, we've always said it is between a 20 to $30 million business. In terms of how it goes down in the future, what we hear is that there are more new plans doing on board, there is no replacement obviously 100LL, and we can probably see that market in revenue terms staying flat or maybe increasing slightly. The volumes might start to decline, but this moment in time we're not predicting or suggesting any particular end date for it and what we've already gone on record as saying and I strongly believe it, is that we will continue to make that product or [inaudible] to market there, but we can support to make money in. So, we don't want people concerned about doing any knee-jerk reaction there. And at this stage, we don't really have an ending site for that particular market.

Could you tell us where the property was sold, on another topic here?

This is Ian. We sold two properties in the U.K. and one was the -- well actually sites, which is the sites of our former fuel technology center. We actually relocated the guys to -- out to azimuth portside from the UK. I knew these sites was the sports and social club close to the azimuth portside of game.

Okay, thank you. Good quarter, thank you guys.

Thank you David.

Thank you.

And we will take a follow-up from Gregg Hillman with First Wilshire Securities.

Yes. Maybe Patrick, could you talk about the three Ps in Asia, what the addressable market is? And including Malaysia oil company and just basically what the potential is there?

Yes, no problem. The one good thing about Asia is that there really is the technical partnerships along with long-term marketing agreements, and we have really focused on not just looking at how you sell products in Asia, but how you solidify your position in Asia long-term. And the only way to do that really is to look at long-term technical partnerships for the base stock that they get on crude and how we turn that into finished fuel to be shipped out of not only the Asian market, but into US under US regulations, and into Europe in European regulations. So it's a more infant stage market, where we really feel we can make a big difference long term.

Do you think you are going to be the sole supplier to some of these organizations?

No. You would hope and wish that, that would be the case. But there is going to be instances, of course, where you will not be. But our goal ultimately, yes, is to be the sole supplier in many instances.

Okay. And then you have no idea of the addressable market or how big it is?

If you look at the rate of increase in GDP rate, I would kind of attach that to GDP rate in China, as well as they have a lot more capacity coming on, and they are starting to ship in, again, like I said into Europe and into US. So, it will be higher growth market for us than the other two, which are a little more mature albeit, again, as I said earlier still an infant stage market.

Okay. And then finally, could you talk about your -- the question of lubricity improvers for oil recovery either with PRIMAX or somebody else, what's going on there?

Yes. It's actually not lubricity improver. We continuously look at our R&D and where our current products could fit other applications. One of them is using a current technology we have that actually goes into downhaul applications for offshore rigs.

For what?

For offshore rigs, and what is for us put it in situ in the applicability because you have a long pipe that goes down the bottom of the ocean, which gets very cold. So, the crude oil gets very visc, and it's almost used as a visc modifier. That's one application. The other application we are looking at is looking at the FCC units, which is called the Fluid Catalytic Cracker, to keep them from fouling. And these are current products that we have in our product line, that we've almost stumbled into these applications and we are just verifying them technically right now.

Could you explain the second application, I didn't quite understand that?

The second application is for the cat cracker, FCC unit back in the refinery.

And FCC stands for what?

Fluid Catalytic Cracker.

Okay. And what does that do?

It prevents fouling, so you get better yield.

From our refinery?

Yes, correct.

Okay. Thank you.

And we have time for one final question and that comes from [George Davis with SA Assets Management].

Hi. Good afternoon, gentlemen. Congratulations on a good set of results. I am used to looking at the company and the stock, and so forgive me, but I just want to make sure I have understood some of the numbers that you have discussed on this call correctly, and just read your question at the end of all that. For 2007, just to understand you are talking about the octane business down 20 to 30% in revenue terms, is that correct?

That's correct.

With gross margin similar to the gross margins of 2006, 50% to 55%?

We expect them to be down slightly from that level though.

Down slightly. Okay. And for the fuel business, if I heard correctly talking about 10% revenue growth next year, slightly lower margins.

That's correct.

So, putting the performance chemicals businesses to one side for a second. Does that mean if I take these two businesses and look at the gross profits in absolute terms in '07 against '06 based on the guidance you have given, the gross profits organically, assuming the acquisitions, from those two business will be down net-net on 2006?

I think -- this is Paul. Yeah, I think that you will be leaving up to yourselves to what those numbers are. We haven't actually given any formal guidance for 2007 and, yes, what we'd rather do is focus on percentage changes within those businesses. And I think its interesting that you make the point being new to the core about putting Performance Chemicals to one side, because what we actually do in the business is put Octane Additives to one side, because Fuel Specialties and Performance Chemicals are the businesses that we want to invest in and we are looking to grow, which is why we talk about the inflection points and the whole changing focus in the business. So, we leave yourself to actually save those numbers and working through in terms of how that fits. And probably let me get to next call, which will be end of quarter four. We will be in a better position to give some further guidelines on what we see for 2007.

So, on Performance Chemicals for 2007, I don't think you did comment on kind of growth rates and margins for Performance Chemicals on that --

That's exactly right.

And you are not going to comment on that now?

I wouldn't comment on it right now, no.

So, I don't want to force the point, I hope that you don't mind, if go back to the original question, you can slightly vary again if you want, but just, if I take the numbers that you've given at least for those two businesses, just in terms of the comment you've made, and just do the simple math; it shows -- let me put the question in another way. Would it be reasonable to expect decline in gross profits in some of the business in 2007 against 2006?

Is that -- for which business?

For the combined business, assuming no acquisitions.

And that's the combined business being all three businesses.

All three businesses.

I think the answer to that is probably yes, because we've talked about -- we've got some one-off businesses coming up, Fuel Specialties business and we also talked about the decline that we've see in Octane Additives. But in terms of the magnitude of that, I'm not prepared to comment on it right now. But I will be prepared to comment on it in a broad sense when we've gone through quarter four and when we release those numbers.

Great. Okay. Thanks very much.

You're welcome.

That concludes the question-and-answer session today. At this time, I'd like to turn the conference back over to Paul Jennings for any additional or closing remarks.

Thank you. I'd like to thank everybody for your questions. But I would like to leave you with some final thoughts. We think it's clear that the transformation of Innospec gained additional momentum during the third quarter with a continuing strong performance of Fuel Specialties and the turnaround in Performance Chemicals. These two businesses, our ongoing businesses, now account for almost 80% of our sales, over 60% of our operating income, and are growing rapidly. So, we're very excited as we look ahead to the future.

If you have any additional questions, please give Kate, Ian or myself a call. In any case, we look forward to sharing our fourth quarter results with you early next year. Thanks again for being with us today. Good bye everybody.

That does conclude today's conference. Again, thank you for your participation and you may now disconnect.