Innospec Inc (IOSP) 2015 Q1 法說會逐字稿

Good day and welcome to the Q1 2015 Innospec, Inc. and earnings conference call. Today's conference is being recorded, and at this time I would like to turn the conference over to David Williams, General Counsel. Please go ahead, sir.

Thank you and good day, everyone. My name is David Williams, and I'm Vice President, General Counsel, and Chief Compliance Officer at Innospec, Inc. Thanks for joining our first-quarter 2015 financial results conference call. Today's call is being recorded.

As you know, late yesterday we reported financial results for the quarter ended March 31, 2015. A 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 ICC. We refer you to the SEC's website or our site for these and other documents.

In our discussions today, we have also included some non-GAAP financial measures. 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 Innospec website.

With us today from Innospec are Patrick Williams, President and Chief Executive Officer, and Ian Cleminson, Executive Vice President and Chief Financial Officer.

And with that, I will turn it over to you, Patrick.

Thank you, David, and welcome all of you to Innospec's first-quarter 2015 conference call.

Despite the political and economic turmoil we have had to deal with, we are reasonably satisfied with our performance in the first quarter. We have maintained the momentum we built through the second half of 2014 in our core businesses.

It will be no surprise to any of you that we have been dealing with tremendous market pressure in our Oilfield Specialties business. We started 2015 positively, with revenues and EBITDA up 22% and 35%, respectively, year over year. Our Field Specialties business had another strong quarter, delivering 21% increase in sales, supported by acquisition growth in Oilfield Specialties. I'm pleased to say that this business continues to perform to our expectations despite intense headwinds.

Operating income for the Fuel Specialties business was off slightly year over year, primarily from an unfavorable phasing of AvTel sales. Cost containment is particularly important in these volatile markets, and we continue to pay close attention to controlling expenses.

Fuel Specialty sales in EMEA were negatively impacted by foreign exchange as well as continued sanctions affecting Russia in the Ukraine. However, we had seen continued improvement in gross margins in EMEA. In Asia-Pacific, sales grew 11% year over year, with steady improvement in volumes. The Americas region had another strong quarter as our strategy in this region benefited from solid economic growth, with sales improving 8% before our recent acquisition.

Sales of AvTel in Q1 were down compared to both Q4 in 2014 and the comparable period last year. We expected this, and our order book indicates a much stronger second quarter for this product line. The collapse in oil prices and consequent reduction of rig count has clearly had a negative impact on customer activity, but overall, our Oilfield Specialties business was close to expectations in the quarter. Our Production [and practicing] businesses are developing to plan, but our much smaller drilling business suffered as rig count fell dramatically.

We believe that our business model, our customer service, and our innovative technology are well-placed to allow us to weather the storm and puts us in a good position for future growth.

We are also comfortable with the strength of our balance sheet, which will allow us to capitalize on opportunities as they arise. We have a diverse and high-quality range of products and a strong pipeline of new developments. However, we continue to be vigilant and very customer-conscious in this increasingly competitive market.

I will now turn to Performance Chemicals. As we indicated in our last call, we had the expected rebound in personal care and our product pipeline looks very promising for future development. Growth has been strong in the Americas and EMEA performed well despite a sluggish economy. Asia-Pacific had a softer quarter but we do not think this is indicative of any trend, and we expect this to rebound. In addition, our silicones product line contributed nicely to our personal care growth in Q1.

During the quarter, we continued to experience some softness in our Performance Chemicals markets as we had forecasted. In Octane Additives, the first half remains on track to deliver as we expected.

While there are no additional confirmed orders for the second half of 2015, there's always a possibility of additional volumes and perhaps even into 2016.

I will now turn the call over to Ian Cleminson, who will review our results in detail, and then I will return with some further comments on the quarter and our outlook. Then we will take your questions.

Thanks, Patrick. Turning to slide 6 in the presentation, the Company's total revenues for the first quarter were $269.2 million, a 22% increase from $220.7 million a year ago. The overall gross margin increased from last year to 30.4%, driven by a strong quarter from Octane Additives. Our GAAP earnings were $0.72 per share compared to $0.69 per share reported in last year's first quarter.

On an adjusted basis, our earnings were $0.91 per share, up 40% from $0.65 per share reported a year ago. This quarter, for the first time, we are adjusting for the amortization relating to the acquisitions, which will provide better visibility and reflect the underlying performance of the business and EBITDA growth.

EBITDA for the quarter was $36.7 million, a 35% increase over last year. Net income for the quarter was $17.9 million.

Moving on to slide 7, revenues in Fuel Specialties for the first quarter were $199.4 million, 21% higher than the $164.2 million reported a year ago. The increase was primarily driven by strong contribution from the recent Independence acquisition. Excluding the acquisition, which added 24% to revenues, volumes increased by 4%, offset by an adverse currency impact of 7% in the quarter.

By region, excluding acquisition growth, revenues grew by 8% in the Americas and 11% in Asia-Pacific, due to improved volumes in both regions. In EMEA, sales fell 12%, primarily due to the adverse currency impact and continued sanctions.

AvTel volumes were down 53% from the year-ago period, largely due to [water] phasing, and we expect a stronger AvTel performance in the second quarter. Gross margins in this segment were 30.8% during the first quarter and gross profit was $61.5 million, up 18% from last year's $52 million. Operating income was $23.5 million.

Turning to slide 8, revenues in Performance Chemicals for the first quarter grew 3% to $57.6 million driven by volume growth of 16% focused in the core Personal Care business, partially offset by an adverse currency impact of 8% and 5% weaker pricing in our other markets. By region, sales grew by 10% in the Americas and 3% in EMEA, due to continued growth in the Personal Care volumes, or fell by 22% in Asia-Pacific.

Gross margins improved to 25.2% in the first quarter, as Personal Care expands its segment share. Performance Chemicals operating income was $6.4 million compared to $6.5 million in last year's first quarter.

Moving on to slide 9, revenues in Octane Additives for the quarter were $12.2 million compared to $0.4 million a year ago. Sales in the quarter were higher than anticipated, but with Q2 expected to generate a further $6 million of revenues in the first half of 2015, will be in line with expectations. The segment's gross margin was 47.5% and gross profit was $5.8 million. The segment's operating income for the quarter was $5.1 million compared to an operating loss of $1.2 million a year ago.

Turning to slide 10, corporate costs for the quarter were $8.1 million, down significantly from $12.3 million a year ago. The decrease was primarily due to reduced legal and compliance-related costs. We expect our corporate costs to normalize at approximately $10 million to $11 million a quarter. As expected, the pension charge was nil. The first-quarter adjusted tax rates were 24.7%, slightly lower than expectations, due to the high contribution from Octane Additives.

Moving on to slide 11, we closed the quarter with net debt of $90.4 million, a decrease from $95.3 million in the fourth quarter of 2014. The Company retired 111,000 shares for $4.9 million as part of the Board authorized share repurchase program, and announced a semiannual dividend payment of $0.30 per share for the first half of 2015. Net cash generated from our operations was $18.2 million. As of March 31, we had cash and cash equivalents of $51.7 million and total debt of $142.1 million.

And now I will turn it back over to Patrick for some concluding comments.

Thanks, Ian. In summary, we closed the quarter with sales in line with our expectations and a 49% year-over-year increase in operating income. Our businesses continue to deliver strong cash inflows and our balance sheet remains in a very healthy position, with net debt down to $90.4 million. Fuel Specialties continue its strong performance in the Americas and our Oilfield Specialties business held steady, despite a very challenging and volatile environment in the oil patch.

Our AvTel business was down due to order pattern, but we expect this to correct in Q2. Personal Care rebounded well, as we said it would, while our other performance chemicals businesses were softer but in line with our expectations.

We continue to contain costs and manage our cash. We are pleased to be able to reduce net debt and also retire additional shares under our share repurchase program.

In addition, we have announced yet another increase in our dividend for the first half of 2015. We look toward the future with confidence and appreciate the support of our customers, investors, and employees worldwide.

Now I will turn the call over to the operator and Ian and I will answer any of your questions.

(Operator Instructions). John Tanwanteng, CJS Securities.

Now that WTI has edged back up in the $60 range, what's the outlook for the combined oilfield business? And do you feel like you can go back up to that $0.40 of accretion that you had previously targeted?

I think we will have to see if it stays there for a period of time, John. It just started creeping up. It's up again a little bit this morning on pretrading. The $60s is probably a nice range that you will start to see activity pick back up. There are a lot of wells that are behind pipe right now that have not been fracked.

So we feel very confident that in the $60s, if it holds pretty steady for a period of time, that you will see increased activity in the market.

Okay. And any idea how close you can get to the previous target?

I think we're probably pretty close to it. We still feel very confident with it.

Okay, great. And then could you provide the margins in the oilfield in the quarter at all, or are you close to breaking out that information?

Yes, John, this is Ian. Probably towards the end of this year, early into 2016, we'll probably be splitting out the oilfield business. But in quarter one you seeing gross margins in oilfield in the high 20s.

Okay, thank you.

Ivan Marcuse, KeyBanc.

How much did oilfields contribute to this quarter, first quarter, on a year-over-year business, if you look at the full business?

Yes, Ivan, this is Ian. Yes, it's certainly positive. We are very pleased with the frac stim business, which is the Independence acquisition. That was certainly on target with our expectations. The drilling business was down due to rig count, and the production business held its own.

So, in terms of the revenue growth, you are looking here probably in the -- about $60 million of revenue for the quarter.

Okay. And then if you look sequentially, which may or may not be the right way of looking at this business, your sales fell in Fuel Specialties by $20-some million. And I understand there's some seasonality in that, but you've also had an acquisition. Yet your operating costs arose quite a bit sequentially.

So what's the difference there? And explain the margin fall-off. I understand AvTel is a little bit weaker, but that's a pretty small business from what I understand.

Yes, Ivan. I think last year we did about $165 million of sales in the Fuel Specialties segment. This year, this quarter, we've done just short of $200 million. A lot of that is from the acquisition growth, which we highlighted. It added about 24% year over year.

The other part of the decline about was really down to currency impacts. We had about 7% negative currency impact, and we managed to grow volumes 4% year over year. So that's sort of the basis of what we've seen. AvTel was down year over year. That's quite a profitable business for us, but we do expect that to bounce back in Q2. That was all down to order phasing.

No, I understand that, but I was looking at it more sequentially. Trying to take apples to apples. So in the fourth quarter you had $270 million in sales. In this quarter you had $200 million in sales, so there was a $17 million reduction yet your operating income went from $37 million, roughly, down to $24 million.

So, if you looked at it sequentially, was it all currency, or was that delta all AvTel? How would you gauge those moving parts?

Yes, I think most of it, Ivan, is really down to the way our business operates. You always see a very strong Q4 due to the winter products that we sell. You are very much aware of the cold flow kick that we have in Q4, so a lot of it is the expected drop-off in activity in the business. Definitely you get a kick up in the winter products.

Yes, I think just to add to -- I would just add to that. If you look at Q4 2013, Q4 2014, and then compare that to Q1 2013, Q1 2014, now rolling into 2015, you'll see that differential. Q4 is always one of our strongest quarters.

But I think second to that, if you look at obviously you have some FX issues, and although AvTel sales are not a large revenue quantity, they are a very large operating income with a very good profit margins with low SAR costs. And so that's part of the answer.

The other is if you look at the SAR costs for the Oilfield Specialties business, it's generally higher. It's a very high intense personnel business at the wellhead. It generally has a higher SAR cost than any other businesses that we have.

Okay. Last quarter, I think you commented back in March -- or whenever the fourth quarter was reported -- that you expect that the oilfields to be in the $260 million sales range. Is that still within your expectation?

That's still within our expectations.

Then, what was the cautious commentary that you have in the release? What's that built around? If it sounds like the earnings contribution is going to be roughly the same of what you expected last quarter and then sales are going to be about the same, but a little bit more incrementally negative quarter to quarter, how do you think about that? Or how should I think about it?

Sure. I think we always look at it and are fairly I would say cautious in what we say. We have seen oil spike back up in the $60s. It's a very volatile market going on. We have a lot of market dynamics as to where it's going and why it's there, but I think for us we would rather be cautious in the wind. But we still feel comfortable with 250. I think if oil can sustain itself into that mid-$60s to low $60s we could go beyond that. But I still feel confident 250.

The cautious is, let's not get overexuberant because oil prices have jumped up in the $60s. We're happy where we are. We think the 250 is a solid number, but let's be cautious on putting anything above that.

Okay. I'll jump back in queue. Thanks.

Christopher Butler, Sidoti.

Not to beat a dead horse here, but as you look at the production side of your Oilfield Services business, part of the reason that we are seeing that oil coming back up is that production has come back down. Could you speak to how your business is going to handle that? Whether you are seeing pricing pressure from customers who are trying to lower their cost, and what kind of impact that might be as well?

Yes, there's no doubt, Chris, you are seeing pricing pressures. And we have to be very understanding of what our customer needs, because obviously when prices have come down where they are today, your expectations are to go back to your suppliers and come down on pricing as well.

So, we have been cautious about that. It has driven our GPs down a little bit in the oilfield side. If you look at a lot of companies that are in this sector, they have revenue off in the 20% to 30% range and GPs off even higher than that.

For us, I think you have seen production come down. That's for multiple reasons. A, it's a declining curve; when production goes on, 60 days you get steep declines in production. The other is that it takes a period of time for these wells to come on, and nobody has really gone out there and continuously fracked. There's been a big slowdown in fracking. There's obviously been a big slowdown in drilling.

So, there is a period of time when that will catch back up, but you have definitely seen a slowdown in production, but that's not necessarily because people aren't producing all the wells. They have cut back on it, but a lot of it is because it's just a typical decline in the oil wells.

And as we look at the impact of the oil on your business, could you talk to any benefits that you saw in the raw material costs side in the quarter or to come?

Yes, good question. We are starting to see quite a bit of price -- I guess price relief, in raw materials. And I think we would get the benefit of some of that in Q2, probably quite a bit of it in Q2.

And looking at the performance chemicals business, you expanded your gross margin about 100 basis points year over year yet the operating income declined over that time as well. Could you talk to what overhead costs have been put into that business to cause that?

Yes, Chris, this is Ian. This business is all focused on Personal Care. We've been really pleased with the way we've seen that part of the business grow. But you are also aware that there are some other markets there which are as strong and aren't as core to us. So we've seen some dynamics in the revenue line.

In terms of margins, you are absolutely right. Expanding personal care means that that's a higher margin business to us. That's going to pull itself up. But certainly operating income is certainly on a par with where it was this time last year, so we're pleased with that.

And just finally, what are you expecting for capital spending this year?

That will be in the $20 million to $25 million range.

I appreciate your time.

Debra Fiakas, Crystal Equity.

I'd like to switch timeline and talk a little bit more about the long term and also switch to the balance sheet. If you could give us some comments on where you see your optimum leverage level. And then along with that, if you could comment on your view about additional acquisitions or your acquisition pipeline, if you've got one.

Sure. Hi, Debra. I'll take the leverage question and I'll pass it over to Patrick for the acquisitions piece. There's no doubt about it, our balance sheet is very strong right now. We have low levels of debt, given our EBITDA generation, and we're certainly below 1 times levered. We've got the capacity to go much higher than that for the right acquisition. We would go above 3 times, but we want to see ability to generate cash and delever to that 2 to 2.5 range, which is I think where we would feel comfortable.

I think adding to that, Debra, is that if you look at our balance sheet and listen to what Ian just said, we like to have a balance of buybacks in dividends as well. And as you can see, we bought back stock in Q1, we bought back stock in Q4, we increased our dividend this year. It goes along with our balance capital management program. We will be looking at acquisitions. It will be in personal care, primarily. There will be some stressed assets in the oilfield sector. They are not there yet to the level that we want them to be. And I think for us we would really like to shore up our business and sit tight and watch this market shake itself out.

Low crude price is not a bad thing for us for a sustainable period of time. It really -- this market needs what we call a redirection, and I think for us with a lot of the stressed balance sheets out there, we'll just be very cautious but have an open eye as to acquisitions.

Excellent. And if I could ask just one follow-up question. In your earlier comments, you made mention of the fact that you see the oil wells that are in production just following their natural decline over time. Is it your view that we have not yet seen wells being taken out of production? And now that we've seen this little pop-up in pricing, and granted that might be simply because of the reduced production, what do you think the reaction is going to be? To take wells out of production or actually try to put them into -- more new wells into production?

Yes, I think you've definitely seen some wells that are not economic at certain prices be brought down from production just because of your operating costs. There's no doubt that happened, especially wells that have high water content. And you've also seen operators who have dialed back due to low oil prices.

The problem that you have, which is very typical in this market, is that you have a lot of wells in the Permian and Eagle Ford and the Bakken that decline on a very quick decline rate, steady out over time, but it's a big decline curve. And so, if you are not backing that up with continued wells behind it, that's when you see a big slow down.

So I do think it's a cause and effect. I do think you will see some dial up, bringing production back up in the $60s, but it's not near enough for the slow down and decline of drilling. So I do think you'll start seeing some drilling, but a lot more frac stim because there's a lot of wells that have been drilled but have not been completed yet. And I think you'll see a lot more wells coming on. I'm not sure it's going to catch the decline, but you will see more production coming on.

Okay. But then wouldn't that be the opposite effect of what you were hoping for in terms of seeing this capitulation in the oilfield that would allow you to do additional acquisitions in that particular segment?

It would, and that's why we put in our script that we are very cautious. Oil needs to stay in the $60s for us to see some of these wells come back on, and some of the CapExes that companies have put out to jump back into a drilling program.

I think what they will do is they will frac what's behind pipe right now versus drilling to see if oil prices sustain at $60. So not all companies in the oil sector will benefit from the oil staying at $60. You still will have a lot of stressed balance sheets, and they are stressed right now. It's a function of can they hang on for a period of a quarter or two more quarters.

All right, thank you very much.

Chitra Sundaram, Cardinal.

It's just incredibly confusing, I'm sorry, to understand how for almost a $35 million increase in Fuel Specialties revenues, you would have slightly down operating income. So would you please break down Q1 2014, Q4 2014, and Q1 2015? What the contributions on the revenue line were from oilfield and AvTel? And I think we all have a general sense of the profitabilities; we can do the math and understand what exactly has happened here.

And then secondly, what is the impact of amortization from intangibles on the fuel specialty operating line sequentially? Thank you.

Sure, Chitra, let me take that question. Overall, Q1 2015 versus Q1 2014, we've seen a 21% increase in our revenues. That is driven by a 24% increase due to the Independence acquisition. You then look at what else is in there. We've seen 4% volume increase year over year and we've seen a negative impact from exchange rates of 7% year over year. So when you look at that, that's what accounts for the increase in revenues.

When you actually look at the AvTel business, AvTel is probably in the region of about $4 million in sales behind where it was last year. And in terms of amortization, in Fuel Specialties it will be about a $3 million charge across the whole quarter.

So, if AvTel is down $4 million year over year, what was it down sequentially?

It was probably down about the same amount.

Okay. So it was down $4 million sequentially and year over year. Oilfield Services was up obviously dramatically year over year. What was the change sequentially?

I would say it's probably about a $10 million increase sequentially.

$10 million increase? So, if you take $24 million and you add back $3 million for amortization, $27 million versus $37 million in Q4 of 2014 and $4 million change in AvTel. It's just -- the math. I'm not able to understand how you can have a $7 million hit, I'm sorry, not 7 -- well, yes, still a $7 million hit, moving from $37 million to $30 million in operating income.

We covered this a little bit earlier on, Chitra. You've got to remember that Q4 is a much stronger revenue quarter, so you will expect in Q1 in our core businesses in the regions to start to fall off a little bit. And also don't forget there is the currency impact in there as well.

What is the currency impact on the cost line? You delineated it on revenues, so how does it impact you on the cost line?

Yes, the way we think about it, Chitra, is that we are broadly, naturally hedged down to operating income. So we've had a 7% negative impact on the sales line, but we'll see broadly an equal and opposite positive impact on our cost line, both in cost of goods and also in our SAR line. So, down to operating income you'll see only a minor impact at that level.

So, really, FX isn't an issue on the operating income line. You are suggesting, I think, that the majority of the reduction sequentially is because of just operating leverage from the volume differences in core products.

In core products and also in AvTel.

Yes. Okay, setting aside AvTel, but just on the core side. Now, the cold flow, though, isn't that -- I mean, we've had a very cold winter here and it went through March, so this is just simply the US. But surely cold flow is an important revenue driver in Q1 as well?

It is, but if you look at cold flow typically, Chitra, they will order in Q4 and then hoping that that's the last couple of months of winter winds down so that they use their inventory. So you typically see a bigger order pattern in Q4 for cold flow, and it starts to melt away as winter goes away in Q1.

So, just jumping back then to the Oilfield Services. The fact that you are able to -- you still feel comfortable with the $250 million to $260 million revenue number. I haven't done the math -- thank you for all the data you've given me -- but it would appear that the profitability of the Oilfield Services business -- obviously the drilling was a lot more profitable -- is impacted. What is the -- you said it is kind of tracking against plan. When you look at that $27 million, let's say of adding back the amortization, the embedded profitability of Oilfield Services. How does it look sequentially and how does it look year over year? Even if you give yourself credit for of the Independence acquisition of Q4.

Sure, Chitra. I'll take part of that and turn it over to Ian. But part of that is, as we alluded to earlier, is that we are starting to see some raw material relief, which is why we still feel very confident. And so that is part of why we're feeling confident in not only revenue but also getting margins back up where we think they are sustainable.

Yes, and in terms of the -- sorry, go ahead?

No, sorry, please.

In terms of the profitability, the production -- the production side remains profitable. The frac stim is highly profitable and growing. It's the drilling business that is negative right now, and we have seen some price erosion and price pressure, which is impacting the gross margins in the oilfield. No doubt about it. But overall, the oilfield business generates a positive return for us.

And on the performance chemical, so you all were kind of flat on the revenue side and the operating -- but you all did see some gain on the gross profit side. I know this question was asked earlier, but I wasn't -- I still quite didn't understand why the operating income was then flat. What is the cost between -- it's got to be something in SG&A that's causing you to give up profitability.

Yes, what we've seen is that we've probably added about $1 million of SG&A year over year. That's driven by a couple of things. We've obviously got some higher R&D costs in there. We've put in some additional headcount to build for the growth in that business. And also, it's a little bit of phasing with some of the expenditure year over year, so there's no explosion in cost base. It's all controlled and expected.

So is it just a building up of costs and then there wouldn't be much more to accrue for Q2, Q3, and therefore the profitability kind of catches up? Is that how we should think about it?

Sure. Obviously, when you're growing a personal care market in the midteens, we've got to support that growth, and that's some of the cost that we built in this quarter.

Yes, but we want it to be profitable growth, right, so that's why I'm trying to understand. So is it just that you all are building out an infrastructure so we take the hit somewhat in Q1. We get the gross profit growth, but we don't get any operating income growth, and then in the outer quarters and it all kind of catches up. Is that how we should think about it, or is it just that will continue to see year over year -- and then sequentially, maybe, continued increase in costs?

Yes, I think you've got it about right there, Chitra. We're building cost. You will see that leveraged in future quarters on the revenue line.

Okay, thank you.

Gregg Hillman, First Wilshire Securities Management.

Patrick, can you talk about any future regulatory impact on the Oilfield Service in particularly requiring the producers to call out the chemicals they are putting down for frac stim, or even for drilling. And -- yes, could you comment on that? Whether that would be negative, positive for you? And also, Ian, to what extent your chemicals that you are selling are environmentally harmful.

Yes, if you look at it, Gregg, A, the chemicals that we sell are very environmentally friendly, that we put down hole. And that's part of our sales push and that's part of the reason why we've been so successful in frac stim and production. So we have very good, environmentally friendly products.

I think, B, technology is starting to change. We've put a lot of money into technology to really expand that marketplace as well as Personal Care. And the continued focus on detergents and fuels as well as sulfate-free products in Personal Care.

But specifically to Oilfield, regulations really haven't changed much over the last conference call. I think things have kind of slowed down just due to market conditions, but from a regulatory standpoint we really haven't seen a lot of change, Gregg. There is a big appetite for technology in this market and that's why we feel so confident in the future of this market. That when there is a change, that we are in a very, very good position to take advantage of that.

Speaking of technological innovation in Oilfield Service, you'd done a press release about the TruClean Water Service a couple of months ago. Do you have any idea what the addressable market is for that?

We have an idea. It's not something that we're actually exposed to. It's a large market, obviously, especially in the Permian Basin and the Eagle Ford. We just have to make sure that we continuously test this technology out and make sure it's fit for purpose before we start putting a market share size on it.

Okay. And then Patrick, and then finally, a longer term strategic question for your Company. Does it make sense for you to have another leg to stand on in terms of the segments that you are addressing, especially chemicals? In other words, like a very long term for oil and gas looks that will level out or trend down due to alternative energy taking higher market share. And would it make sense for you to eventually get into -- have another leg to stand on besides Performance Chemicals?

Yes, yes. First off, I disagree with you about alternative energy making a big dent in the carbon market; not going to happen, not while I'm alive. I think, secondly, we feel very confident in our three-legged stool. As we've said before, Gregg, the Personal Care is a very high-profitable business. It's very keen to technology, same with fuels and same with the oilfield sector.

What we don't want to do is start getting out of our realm of markets we don't know. Just because we think we know what we're doing as a management team doesn't necessarily know what the hell the market means.

So our view is we've got a three-legged stool that we will stand on we think is very strong for profitable growth, and we really don't want to get outside that norm right now. Doesn't say things couldn't change in the future, but that's where we stand right now.

Okay, thank you.

Matt Dhane, Tieton Capital.

I was hoping that you folks could discuss the market share trends in your primary oilfield basins you operate in -- the Permian, Eagle Ford, Bakken. How are those shaking out? What are you seeing that's changing among your market share in those areas?

I think, Matt, that that's probably a positive for us due to the fact that we don't have a large market share. So I think we haven't seen the negative hit on a revenue and bottom-line basis like a lot of the majors have.

Our view is we've been very select in what customers we go after. We've been very select in where we introduce our technology. We can't be all things to all people. And I think as we grow this business and get more stable and the foundation more stable, we will expand it more. But for us, that's probably the positives. We do have a very small market share in the Permian Basin and the Eagle Ford and the Bakken.

Okay, that's helpful. I also wanted to hit on, just so I'm clear, the earn-out amount adjustment that you folks are doing there. Is that now decreasing just due to the market turn-down in oilfield?

Yes, it will be. That's one of the reasons why we structured the deal that way as well, Matt.

Makes sense. Final question for you. You discussed the fact that production and frac stim are holding up well for you in the oilfield space. Drilling is obviously the struggle. If you were to break out your revenues roughly within the oilfield space, how would that play out between the three areas today? And how does that compare to, say, like three months ago?

Yes, I would say it's probably stayed about the same. It's probably 55% to 60% frac stim. The rest of that being mostly production, and then maybe 5% on drilling.

And three months ago, it was roughly 5% drilling as well?

Yes. Yes, still about the same.

Okay. Great. Thank you.

Chris Shaw, Monness, Crespi.

To talk a little bit more again about the gross margins. Just tracking raw materials I thought there would be -- we would at least see more benefit. And just when [you] talk about fuel specialties declined somewhat, was there a decent raw material benefit to margin this quarter we just can't see it because of the decline a bit, or the slowing in the oilfield and year over year and sequential AvTel decline? Maybe a better way of asking it, if you looked at the core fuel specialties, was there actually a decent margin benefit?

There was, and you just answered your own question, actually. You are spot on; that's exactly what happened.

And you think that actually -- so, do you think sequential we'll see higher gross margins for fuel specialties, given that AvTel will be u[ most likely in 2Q and raw materials (multiple speakers)?

Absolutely.

Okay.

Yes. I think you'll probably see a little bit higher oilfield, too.

Okay, great. And a similar question in performance. You had a gross margin benefit there, but I would think -- I assume the other surfactant guys had a big benefit, and should gross margins be potentially up again in 2Q in that business?

The issue you have there is now personal care is probably 55% of the revenue, ish. The issue you have there is you still have polymers, which was down a little bit. You have fragrance, which is about where we expected it to be, so you really have two businesses that are somewhat stagnant, if not down a tad. And so, you are seeing personal care really take off, and that's brought the GP up. It has also brought the revenue line up.

And I think you'll continue to see that, just due to the pipeline of personal care growth.

What's the raw material for polymers? I assume that's dropped off significantly.

It's [ethylene].

Okay. And then how -- not confident, I guess -- but how -- just your view of -- you sort of touched on it, but in oilfield, the potential for a distressed asset to be available. Are the oilfield chem guys or services guys, are they getting that stressed right now? Do you see those smaller players out there having some issues, either balance sheet or what have you?

A lot of issues. Yes, a lot of issues. A lot of balance sheet issues. Remember, this market was chased by a lot of private equity, a lot of start-ups. It has been an oversaturated market, leveraged balance sheets, and we are definitely starting to see the small players really struggle, if not go out of business, or look for someone to bail them out. And we're starting to see some of the mid-majors really hurting. And all you have to do is look at the announcements out in the market.

All right. And then just back to performance chemicals and specifically personal care. When you put that [16%] volume growth -- that's impressive. What exactly -- is some of it the cross-selling from the recent acquisitions? Or is it just expanding the -- yes, I don't know. Is it just product demand? That seems like a very -- that number stood out to me. Any color there?

Yes, I think it's what we've stated all along, is that we felt the product pipeline from a technology standpoint in personal care was very strong. We have a very strong pipeline of products moving forward, and that is quite frankly all it's been, is just personal care, organic growth through our pipeline of new products. And we see that continuing.

Okay, thanks.

John Tanwanteng, CJS Securities.

Can you talk a little bit more about the octane visibility? I think you mentioned in the press release that you are staying in the pocket for the first half, but what about beyond that?

I think beyond the first half, [Chris], as always, we're just waiting to see. We've got discussions ongoing, but we are waiting to see how they develop. And I think we'll have more news on the next call for you.

Okay. And then can you provide an update on the fragrances at all, if you're still planning to divest that or hang onto it for a little while?

Yes, I would say that it's continued where we stood in Q4, that it's probably a business that doesn't fit our portfolio and it will be divested more than likely at some point in time.

Any idea if that's going to be sooner rather than later?

We can't comment on that today.

Okay, thank you.

Ivan Marcuse, KeyBanc.

A couple of quickies. One, on the octane, I think you guided to that, I don't know, $14 million, $15 million for the first half of contribution for EBIT -- or I mean, I'm sorry, about $10 million. So should we imply, is that second quarter -- should we see a couple million, $1 million to $2 million, or how to think about it in terms of EBIT?

$5 million to $6 million in revenue, additional in Q2.

Yes, and $2 million of EBIT.

Yes.

Got you. And then the corporate you guided this -- I believe you said $10 million to $11 million for the remainder of the year in the quarter. But your expenses that you pointed out were lower year over year. Why would your corporate expense rise fairly sharply in the second quarter where it's already around the $7 million to $8 million range? And then I guess it would be up year over year going forward and even in third and fourth quarter.

Yes, we benefited in the first quarter, Ivan, from some recovery of legal costs, which we won't see again. So, we're much more comfortable in that $10 million to $11 million range.

How much was the recovery in legal costs? $2 million?

Yes.

Just a bit short of that.

Okay. And then just to clarify and my last question. The raw material, so will you see an expansion in your variable margin going into the second quarter? Or is your pricing a little bit more real-time?

I think you'll see a slight expansion.

Okay. And what was the raw material --? Was your basket done in Fuel Specialties this quarter and in performance? Was it down or was it pretty much flat?

It's gone down a little bit on the quarter.

Okay. Thanks for taking my questions.

Chitra Sundaram, Cardinal.

Sorry, just two little pieces of data. What was the change in Fuel Specialties volumes sequentially between Q4 and Q1 -- Q4 of 2014, and Q1? And what was the FX impact on revenue sequentially? Thanks.

Chitra, I've not got that information right now. I would've thought the FX would have been more impacted in Q1 than it was in Q4. I'm not sure on the volumes, but I can certainly follow up with you later today on that.

Okay. Okay, good. Thank you.

Thank you. That will conclude today's Q&A session. I would now like to turn the call back to Patrick Williams for any additional or closing remarks.

Thank you all for joining us today, and thanks to all our shareholders, customers, and Innospec employees for your interest and support. If you have any further questions about Innospec or matters discussed in this call, please give us a call. We look forward to meeting up with you again later in the year. Have a great day.

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.