Innospec Inc (IOSP) 2015 Q2 法說會逐字稿

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

As you know, late yesterday we reported our financial results for the quarter ended June 30, 2015. 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 for these and other documents.

In our discussions today, we've also included some non-GAAP financial measures. A reconciliation to the most directly comparable GAAP financial measures is contained in our earnings release 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 everyone to Innospec's second-quarter 2015 conference call. We are very pleased with the improved performance of our core businesses in the second quarter. Our fuel specialties and personal care business have delivered very solid growth, despite the sluggish economies in Europe and the substantial foreign exchange headwinds as the euro remains weak.

Low oil and gas prices have continued to depress demand for chemicals, and yet our oilfield specialties business has held up particularly well. Most notably with the delivery of innovative products and services to the completion and production market.

We have a great reputation, and we are gaining traction with new customers every quarter. This has translated to a very strong financial performance with operating income up 22% over the comparable period in 2014 and a broad margin improvement across all our key businesses with our overall gross margin up a full 5 percentage points over last year. This was driven by a combination of raw material price improvements, richer sales mix and a higher-margin new business.

Our move in this richer sales mix is a reflection of the new products and technology our combined companies bring to the market. Entering the second half of 2015, we remain optimistic that we can maintain our business momentum and deliver a solid full-year performance.

Within fuel specialties, sales revenue in the fuels business was depressed by foreign exchange headwinds, but profitability improved significantly. Business was flat in the Americas, but our business in EMEA performed extremely well in both sales and profitability against the backdrop of a very slow economic growth and continued geopolitical issues.

Meanwhile, our Asia-Pacific business, despite some quarterly fluctuations, is steadily improving and on the right track for sustainable growth.

As we anticipated, our AvTel product line returned to more normal order patterns in the second quarter.

Our oilfield specialties business has performed well, driven by a sound performance in frac stimulation and production chemicals. We believe that we are outperforming the market in these businesses, although in common with other companies, our drilling business continues to suffer from depressed rig count. We are confident that our target to maintain our oilfield business revenues through the downturn is still valid, which would be a significant achievement. Overall, we're very well-positioned to resume our rapid growth in both sales revenue and profitability when the upturn comes.

Although our performance chemicals business reported a 9% year-over-year decrease in sales, this was due to currency issues and anticipated weakness in the polymers and fragrances markets. However, our strategic personal care business grew 10% during the same period, continuing strong performance from both existing and new products. We saw good growth in this business, and all regions and prospects in the second half look promising.

As we previously reported, we agreed to the sale of aroma chemicals business to Emerald Kalama Chemicals during the second quarter and closed this transaction on July 6, 2015. We had indicated for some time that this business was not core to our strategy. This is a good move for Innospec in that it allows us to focus more of our resources on future technologies for personal care, a market that provides us with greater opportunities for sustainable growth and higher margin growth.

In octane additives, we delivered the remainder of the first-quarter order, completing the first half sales as we had indicated. We now have an additional order for the only remaining customer, which we expect to fulfill in the third quarter. It is possible that there will be further sales in Q4 and even into 2016, but we have no confirmed orders at this time.

Now, I'll turn the call over to Ian Cleminson who will review our results in more detail, and then I will return with some further comments in the quarter and our outlook. After that, we will take your questions.

Thanks, Patrick. Turning to slide 6 and the presentation, the Company's total revenues for the second quarter were $242.9 million, a 10% increase from $221.3 million a year ago. The overall gross margin increased substantially from last year to 36%, driven by improved margins in the fuel specialties business, as well as an uplift from our recent acquisition.

EBITDA for the quarter was $34.7 million, a 10% increase over last year. Net income for the quarter was $34.5 million.

Our GAAP reported earnings per share of $1.40 included $0.65 for the adjustment to the fair value of contingent consideration, $0.14 in foreign exchange losses and $0.13 of amortization of acquired intangible assets. Overall, the net effects of these special items increased our second-quarter earnings by $0.38 per share.

A year ago, we reported GAAP earnings per share of $0.75, and that included a negative impact special items of $0.13. Excluding special items in both years, our adjusted EPS was $1.02, a 16% increase from $0.88 a year ago.

Part of the Independence acquisition, we were required under GAAP to fair value the contingent consideration we expect to pay in 2015 and 2016 on a quarterly basis. Any adjustment to the fair value is charged to the income statement, is non-cash and adjusted out for EPS purposes.

In this quarter, as a result of our expected lower payouts in 2015 and 2016, the adjustment resulted in a $26.6 million credit to the income statement and a $0.65 adjustment to EPS.

Moving on slide 7, revenues in fuel specialties for the second quarter were $182.3 million, 26% higher than the $145.1 million reported a year ago. The increase was boosted by a strong contribution from the recent acquisition in oilfield specialties, which added 29% to revenues. Excluding the acquisition, volumes increased by 4%, offset by an adverse currency impact of 6% and 1% weaker pricing in the quarter.

By region, excluding oilfield specialties, sales in the Americas were broadly in line with last year, or to the EMEA, it grew by 6% year over year as volume growth more than offset the adverse currency impact. In Asia-Pacific, sales fell by 9%, driven by a reduction in volumes and adverse currency impacts.

Oilfield specialties grew revenues by 3% from the first quarter and as expected after (inaudible) pattern was recovered.

Gross margins in this segment rose sharply in the second quarter to 37.8%, driven by a combination of raw material price improvements, including the positive impact from foreign exchange, a richer sales mix and higher margin new business wins. As a result, gross profit was $68.9 million, up 57% from last year's $43.9 million, and operating income was $27.8 million.

Turning to slide 8, revenues in performance chemicals for the second quarter fell 9% to $54.1 million as volume growth of 4% was offset by 5% lower pricing and an adverse currency impact of 8%.

By region, sales in the Americas were broadly similar to last year or fell by 17% in EMEA and 11% in Asia-Pacific, driven primarily by foreign exchange impacts and weaker pricing in fragrances and polymers.

Gross margins were 27.4% in the second quarter, up from 25.8% last year. Performance chemicals operating income for the quarter was $7.5 million compared to $7.8 million in last year's second quarter.

Moving on to slide 9, net sales in octane additives for the quarter was $6.5 million and $18.7 million for the year to date, in line with expectations. The segment's gross margin was 58.5%, and operating income for the quarter was $2.8 million. As Patrick noted earlier, we have secured a further order and expect to deliver [$19] million of revenues in the third quarter.

Turning to slide 10, corporate costs for the quarter were $7.4 million, unchanged from a year ago. This includes a $2.4 million recovery in legal fees. Excluding this recovery, corporate costs are broadly within our expected range of $10 million to $11 million per quarter. There was also a slight pension credit of $0.1 million compared to a charge of $0.9 million a year ago.

The effective tax rate for the quarter was 33.4%, higher than expected as a result of the adjustments to the fair value of contingent consideration. We anticipate the full-year adjusted effective tax rate to be around 26%.

Moving on to slide 11, we closed the quarter with net debt of $71.1 million, an improvement from $90.4 million in the first quarter of 2015. The Company retired just over 114,000 shares for $5.1 million as part of the Board authorized share repurchase program and paid a semiannual dividend of $0.30 per share at a cost of $7.3 million.

Net cash generated from operations was very strong at $36.9 million, and as of June 30, we had cash and cash equivalents of $70.9 million and total debt of $142 million.

And now I'll turn it back over to Patrick for some final comments.

Thanks, Ian. To conclude, we delivered above our expectations in the second quarter in both sales and profitability. This was particularly notable in the state of the markets in which we operate. We are very pleased with this performance.

We have continued to launch a range of exciting new products to meet developing customer needs. Many of these carry substantial international patent protection. Continued development of new technology remains a core competency of our organization.

We are aware that many of our customers are currently operating in very tough market conditions. We will continue to support them through this period by providing high performing products and a cost effective price backed by excellent service.

Our business continues to be a healthy cash generator, and even with substantial cash outflow for dividend payments and stock repurchases, we closed the period with a very strong balance sheet. We are very well-positioned to cease new growth opportunities both via organic growth and further acquisitions to continue to return shareholder value.

We are very positive about our near-term prospects for Innospec in its core strengths of fuel specialties, personal care, and oilfield specialties and look forward to the future with confidence. We appreciate the continued support of our customers, shareholders and employees worldwide.

Now I will turn the call over to the operator, and Ian and I will take your questions.

(Operator Instructions) Ivan Marcuse, KeyBanc Capital Markets.

Hi, nice quarter. Thanks for taking my questions.

The first one is, if you look at your gross margin expansion of 500 basis points or I guess more than that, if you look at your fuel specialties gross margin expansion up to 38% versus I don't know, whatever it was a year ago, 30%, what would you -- how much of that would you say is raw materials percentage of that gross margin improvement, the price cost spread versus new product versus timing or etc.? Like how would you parcel it out?

Ivan, we're really pleased with that expansion in fuel specialties and our other businesses actually. We have also the perfect storm in Q2 in fuel specialties. We have got a lot of new business wins at higher margins, and the sales mix we had has been particularly impressive as well.

On the raw materials, as you know, in fuel specialties we have a price escalator and a price de-escalator. So there's normally a lag of three to six months with raw material prices going up and coming down. So you will see some of that come off in the third and fourth quarter.

In terms of the actual amounts, I think longer-term as we go into the third and fourth quarter, we would expect our gross margins to be returning to probably around about 32%, 33% in that segment.

So if you look at the -- assuming the new business doesn't go anywhere, you know on a longer-term basis, does your gross margin run rate sort of stay in that 32% 33% versus the, I don't know, 30%, 31% that it was in?

Yes, I would probably, Ivan, I'd use 32% to 33%. We indicated in the first-quarter conference call as well that we felt like our margins were going to be going up. We saw the relief coming, we saw the richer sales mix, and I think we're pretty confident moving forward that we ought to be able to do probably 32%, 33%.

Great. So it sounds like your oilfield chemicals business, was that a contributor to earnings this year for this quarter?

Yes, it was. We saw some slight improvement in revenues over Q1. We saw an expansion of gross margins as well, and despite the lower oil prices and lower demand for chemicals in that segment, we are very pleased with the performance of that business, and it contributed nicely.

Okay. Great. Thanks for taking my questions.

Jon Tanwanteng, CJS Securities.

Good morning, guys. Very nice quarter. What does the chemicals business look like without fragrances in terms of run rate growth and margins?

It's an interesting question, Jon. When you remove it, we'll be looking at -- I think you're probably going to remove on an annualized basis about $54 million of sales and you can remove about $0.22 to $0.23 of EPS. So backing all that out, you are going to see a business that is going to have more positive topline growth because, as we've said earlier on the call, our personal care business has grown roundabout 10%, and you will see our gross margins more around that 27% to 28% as well.

So the dynamics of that business are going to look slightly different in the back half of this year and certainly more positive. And it was good acquisition -- a good disposal for us to get off our books.

Okay. Great. And then what's driving the outperformance in frac and stim, is it new products or demand increasing for existing wells or some combination of both or something else?

Yes, it's a combination of both. I think we have really a great strategy to enter that market. And the guys running the business have done a very good job in the sales service applications. New technologies, great service, very strong customer base, and quite frankly, we are in the best regions of the lowest lift costs.

So it's a little bit of both. Again, in this business where expectations were considerably off in a lot of our competition, we did very, very well in regards to this marketplace.

Okay. And how's that business and the chemicals business as well tracked into July and August? Have you seen a follow-through? Is there potential of those to let down in terms of energy prices and how that affects everything?

You know shockingly, we're still seeing a pretty strong quarter starting off. We just don't see the slowdown quite yet. Now, if crude prices stay below $50, that's a different ballgame, but right now we feel pretty confident going in the quarter that we're going to stay fairly strong.

Okay. Thanks, again.

Christopher Butler, Sidoti & Company.

Could you give us an indication of how much business you sell into China and what you're seeing in Asia overall?

Chris, at the moment, in our combined fuels and performance chemicals business, we don't actually disclose the amounts of business we do in China. But it's certainly a market that has got a lot of potential for us in both personal care and fuels specialties. It's a region that we are starting to expand our presence in, so you're going to see us starting to open more offices there. Because there's a lot of potential in that region. But we don't actually disclose the amount of business we do in that part of the world, but it's potentially a very significant market for us.

Could you speak to sort of the demand environment over there in general then and sort of outlook for the third quarter, second half?

Yes, I think demand, Chris, is off a little bit in China. There's not a lot of regulatory driving that market when you talk to our specific businesses. But if you look at overall China market, it's in a little flux right now. Just look at the stock market and what's going on in China and their GDP. So we are seeing similar in our side of the business as to what the actual market trends are going on in actual China.

Just to add to what Patrick said there, Chris, and if your question is, are we going to see a large impact from China slow down in our numbers, and no, we're not. It's not a big enough part of our overall business to put a dent into our numbers on a go forward basis.

And shifting over to the octane additives, it looks like -- well, you right now only have one order. You sound a little bit more optimistic that there may be more coming for the fourth quarter in early 2016, which is great.

As I think about that business in AvTel, am I right in saying that having octane additives makes your AvTel business more profitable just because you're able to produce more Tel in general?

Yes, it's volume driven. The more you put through the plant, the higher margins you get. And I think as we said in the call as well, Chris, is that we had a third-quarter order already on the books. We wouldn't be surprised to get an order in Q4 and/or going into the first part of 2016.

And could you remind me what happens when this business comes to an end in terms of costs, restructuring, what's going to be the impact when it finally does come to an end?

There is sort of two parts to this answer, Chris. I mean the first part will be when the octane additives for the motor applications initiative is, and as Patrick said, that could be into next year or even beyond. At that point, we'll have a volume step down, and the remaining business will be for AvTel.

Right now we see that business running out at least to 2018, probably more likely 2020, and at that point we will close that part of the facility down. So again, you'll see some restructuring costs in there. There will be a small amount of stranded costs but not a significant amount, and we've got the plan and the structure in place for when that happens. So it's a part of the business that we've stepped down many times over the years, and we're very well prepared for when that moment comes.

Chris, it'll never be a superfund site because we have other products on that site.

I appreciate your time.

Bill Dezellem, Tieton Capital Management.

I have a group of questions if you'll indulge me. The first one is, would you discuss the meaningful new customers that you have gained in the last six to 12 months, please?

Yes, Bill, we don't disclose customers and/or volume to specific customers openly. So we really can't give you a lot of detail around it with the exception to say that the customers that we have brought on have been in good margin gains.

And I should've asked my question slightly different. Can you discuss them in a general sense as opposed to by name?

Yes, I mean if you look at it, it's really across the board. We picked up new customers in personal care. We picked up a significant customer base in oilfield and have really just have grown organically with our oilfield customers.

In fuel specialties, we had some customer gains over in Europe which helped us to offset the currency impact.

And are you feeling that this is a process that will continue, or are you starting to in some of these areas, personal care and fuel specialties in particular, not the oilfield, but the other two, that really they're becoming a bit fully penetrated?

No, I think in the other businesses, if you talk personal care and specific, we are fairly -- well, I would say we are very small in regards to the overall market. And with the market that we play and the new technologies that we have, we feel we can still penetrate and grow at that 8% to 10% as we've stated before. So we're fairly confident we have good growth and good growth mechanisms in our personal care market.

When you talk about fuels, there's probably six major players, and it's very stable market. And it's, as we've said before, it's somewhat recession free, but it's not a sexy market where you're going to get double-digit growth. It's that 3% to 4% or something above GDP, and that's really what we're seeing today, and that will continue to be that way.

Thank you. And then in your presentation, you noticed some of the -- in personal care that you had new products that were driving sales. Would you discuss those, please?

Again, we don't talk about new products and divulge that kind of information. But it's really right in line with our strategy that we set forth out years ago. The guys have done a great job in R&D, and the actual field service rep has done a great job in introductions of our new products. But it's really across the board: it's shampoos; it's body gels; it's body soaps. It's really across the board that we've seen that growth.

Thank you. And then circling back to oilfield, you noted that that grew sequentially, and I believe that most in the oilfield had a sequential decline. To outperform is great, but to actually go the other direction is rather remarkable. But would you discuss in a bit more detail how you accomplish that?

Yes, I mean we have unique strategy, and we obviously don't want to talk about our strategy over an open session with the public. But I think we have a very unique strategy in how we approach the market. And having a great strategy with a great product line gave us the ability to grow.

We have very good customers in that market, and we have still have a balanced drilling program. They are in the lowest cost lift basins. So we've expanded organically with those customers, and we've added a few on. And so it's really been a strong, strong strategy driven by very good people, and we feel confident moving forward that we can maintain that.

Now look, if crude drops in the high $30s and low $40s, you'll see a balance potentially go the other way. But I think you're right. We are very proud of our group for what they've done in this market, and we'll continue to push forward.

And yet you did take some of the contingent consideration off the table from an accounting perspective. So even though the growth is really quite remarkable, when they sold the organization, they were looking for a whole bunch more.

That's a fair comment, Bill, and I think when we bought this business back in October/November, I think the world was a very different place. So there has been a major realignment in oil prices, and we're just reflecting the future value we see in this business. But longer-term, we are convinced that this is the right acquisition and an acquisition that will return shareholder value to us.

Bill, you know what's interesting about this business, it's a perfect storm good and bad. We always believe, and as I tell my people, good companies become great companies in down markets. And we have a great strategy. We're very well-positioned in our drilling, frac stimulation and production markets. You know, our job is to make sure that we have good products and services to our customers, and when this market turns and goes the other way, we are going to be in a great position. So to sit here and do what we did in this quarter and accomplish what we accomplished, we are very excited about the future of this business. You know crude can't stay down as long as it is. It will come back up at some point in time, and we're in a great spot.

That's helpful, and I would like to ask one accounting question, if I may. SG&A actually was up in the quarter, and it just didn't quite fit everything else. I mean it was up as a percentage of sales versus the year ago. It was up sequentially versus Q1, even though the revenues were lower than the first-quarter revenues. Can you talk that through for us, please?

Yes, sure, there's two things really. I mean year over year our main -- actually our increases are in field specialties. The bulk of that comes from the acquisition of Independence. Outside of that, new business wins that we've had in the Americas have attracted higher SAR to service that business.

So really what you're seeing is higher sales and higher GP offset by some increased SAR. So it's just a function of our business growing.

Apologies for the ignorance, Ian, SAR?

Selling, administration, research.

Okay. So basically it just requires more -- those customers are requiring more handholding?

Correct.

Great. Thank you both.

Debra Fiakas, Crystal Equity Research.

I have just a few questions to follow-ups on some of your previous responses to other questions. About the new customers, it is excellent to hear that you are winning new customers. Would you say that when you finally inked the orders, was it a matter of the pricing of your products or the performance of your products that was helping you win these new customers?

Debra, it's typically a combination of both.

Okay. And is the case also in the particular success that you had in the oilfield services?

Yes and a lot of it is technology and service in that market. And I think knowing where crude prices are, our customers have expectations of us to deliver the best products at the lowest cost and obviously not let go of service, and we've done a very solid job of providing that in the marketplace. And I think we have to be very watchful and very thoughtful of prices in that market, but those gains have been again a combination of pricing and technology.

Okay. Excellent. And then I'd also just like to get a view -- you placed in previous conversations and in previous earnings calls, you placed a lot of emphasis on the personal care segment. How dependent are you on being able to introduce new products in order to fuel growth, or is the opportunity that you see in personal care simply a matter of further penetration of the market with your existing product base?

It's little bit of both, good question. You have to expand your market base through your current organic products and through new product technology. And we have a lot of new technology we've launched in the last two years, and we're just expanding that into a larger customer base.

Okay. So we're not necessarily dependent upon seeing you bring out new products. And if you do bring out new products, do you plan on making announcements of those, or will we just kind of hear about it after the fact?

Yes, we typically don't make a large announcement unless it's a really big market that we are playing into, and we have a very strong patent position.

A lot of the products that we introduce some new products are fairly small market share and really depending upon the price mechanisms that we are dealing with in the actual retail market, so consumer market.

So we've been very cautious to go out there and introduce a new product and put expectations out to Wall Street that we're going to go out and do an additional $50 million in sales, but it might be a $5 million market. So that's pretty much why we have not announced a lot of new product technology launches.

Okay. And then just one little laundry list item. Could you repeat the -- I think you provided a number for the octane additives sales in the third quarter. Could you just repeat that, please?

Yes, $19 million, Debra.

1-9.

1-9. That's correct, 1-9.

All right. That's actually a little bit of a surprising number for me at any rate still getting acquainted with your Company. If you anticipate additional sales, it wouldn't certainly not expected to be at that level, or would we expect it to see a number closer to the number you reported in this quarter?

You know, Debra, we just don't know. There's not a lot of clarity when you're dealing with one country. We don't -- it's a spur of the moment conversation. We get an order. We get an LC as we move forward. We don't know how much it could be. We're always very open about the Tel business, and we will always come out in the third quarter, for instance. And if we have another order for X amount, we'll let you guys know. It's a very difficult business to predict.

Okay. Thank you very much. I appreciate the answers.

Gregg Hillman, First Wilshire Securities Management.

I had a couple of questions around oilfield. Number one, Ian, what's the rules for segment reporting when you would have to break that out, or what's your thoughts on that?

We have been fairly open, Gregg. Come the new year, our intention is to start breaking out the oilfield segment into its own portable unit. We're just trying to help people by giving a little bit more visibility as we go through the year. But you'll us start 2016 in a slightly different shape, and we'll providing everybody, investors and analysts alike, with all those new numbers historically and on a go forward basis as well.

Okay. And then, Patrick, in terms of international sales for oilfield, what is -- are there zero international sales right now for oilfield, or are there any?

No, we definitely have international sales for oilfield, and we continue to grow the business internationally.

You know, your lion's share of your production chemicals or I should say frac stim chemicals are in the US. If you look at production chemicals, etc., you can go outside the US. But your biggest share of production chemicals -- sorry, frac stim chemicals sit in the United States. But we are definitely growing our market share outside the US.

Have you actually added offices internationally for that oilfield?

We use the offices and infrastructure we currently have in place in fuels, and obviously that's there to make sure we control our costs. And where we see where we need to put a blending facility or other facilities, we will look at our own facilities first and see if we can provide market share through that facility. Otherwise, we'll look outside. But right now we're using our internal infrastructure.

Okay. And Patrick, further on oilfield, is -- well, could you expand into adjacent areas such as proppants or maybe providing services or a bundled service offering along with the chemicals?

Yes, I mean we are kind of doing that right now, Gregg, but we want to stick to what we are good at, and we're very good at chemicals and the delivery of chemicals. And we don't want to really get outside our core strategy, and that's where a lot of companies fail trying to do too many things for too many people. And I think we've done a very good job of showing up drilling, frac stimulation, completion and production. And that's really the markets that we are playing in right now, which require a heavy dose of chemicals and good technology.

Okay. And then in terms of your planning, what would be your projections of the oil price, you know the price of oil per barrel, in terms of your planning assumptions going forward the next two or three years?

You know, I wish I had a crystal ball. I probably wouldn't be on this phone if I knew. We follow oil prices quite significantly. Not only from a raw material standpoint for other businesses, but as well as to really watch -- have a watchful eye on our expansion in the oilfield market.

You know, I think we're going to be depressed for a while, and there's a lot of reasons why that I could sit here and discuss for an hour. But I think it's going to be depressed for quite a while until we get into some time in 2016 when that supply/demand comes back into line.

So we're probably looking at a -- our view right now is the $40 to $55 range throughout the remainder of this year and then to start edging up into the $60s, low $60s into late 2016.

Okay. And then so that would -- can you say anything about the acquisition front in oilfield?

Yes, it's a situation right now where a lot of the businesses that are for sale, quite frankly, are not worth the look. I think it's an industry that's in deep array right now. The assets that are out there are really not what we're looking for. Really we're looking at right now organic growth. I think it's a business that needs to be stable for a while. We want to make sure we continue our organic growth. If we find the great assets that we are looking for that has really good technology back behind it, we'll go after it.

But right now, we really want to see where this market heads over the next six months, and I think you're going to see a lot of players built around and you're going to see a lot of consolidation, and we're starting to see that right now.

And then finally, on oilfield, has your R&D department in the UK been working long enough on oilfield, new development, to come up with any new innovative products, or do you think that will take them longer since they've really been at it for two years?

Yes, I would say for coming up with some new products already. As you said, it's fairly early in the process. But I think with -- in conjunction with the Independence acquisition, the Bachman acquisition, and the technical and really the research fellas, we feel very confident that we'll continue to put out new products. And I think next year you'll see even more new products coming out of that research group.

Okay. Thanks for your comments.

Chris Shaw, Monness, Crespi.

In fuel specialties, I think in the release it said ex the oilfield business, the Americas volumes were or North American volumes were flat or sales were flat. I thought that business would be a little stronger just given where refinery rates and stuff are. You give a little color around that performance?

Yes, I mean if you look at consumption rates up, utilization rates were up. We were flat in this business, and some of it is order patterns. I think you'll see it pick back up in Q3. I'd say probably the majority of it is order pattern. And that, we'll wait until the third quarter before we really get a good handle on it. But our belief internally is that it is more order pattern than anything else.

And if you look at it, if you look at the gross margin, it went up quite significantly. So although we were flat, our gross margin went up quite significantly in this market sector.

But typically that kind of business, fuel specialty is -- traditional fuel specialty should somewhat be driven by sort of how much refineries are running and how much product they are putting out, right?

Yes and we were expecting a 2% to 3% growth in that, and we really didn't get it. But I think that we'll get it through order patterns coming into Q3.

And I think similarly, you said that May was strong. Now I assume most of that was Middle East relative to Europe, is that right?

What we saw in EMEA was a number of business wins and, you know, significant volume increases. So yes, it wasn't just Middle East. It was through the whole region. So we are very pleased with that region.

Yes and we picked up a large customer last year that started finally ordering this year. I think that the new customers that we brought on has been a benefit in EMEA.

Great. And then just around the sales of the fragrances business, did you guys either give an indication of what you sold it for? Was it multiple or net proceeds?

Yes, net proceeds -- after-tax proceeds was about $41 million.

So leading to my next question is that none of that occurred technically in the third quarter. So your net debt is going to be pretty low at this point, maybe $30 million-some odd or high $20 millions. What do you plan to do the balance sheet? Speed up any sort of share buyback or hopefully M&A? What are your priorities there?

Good question. If you look at it, we still have $4 million on our current facility, and we will be using that remaining $4 million. As you know, we always discuss with the Board and the increase of dividend and another large buyback, and that's definitely on the table and having discussions as we speak.

And obviously we want to put our money to work, and looking at a balance of acquisitions, buybacks and dividends are really what we're doing right now, and that's where we want to keep our focus.

Great. Just one quick last one, corporate expense book was around $7 million. Is that sort of the run rate, or does it fluctuate kind of third quarter, fourth quarter?

Our corporate cost and rate is about $10 million to $11 million per quarter, Chris.

Ivan Marcuse, KeyBanc Capital Markets.

A quick follow-up was on SG&A. Just asking it a little bit different: if you look at your operating expenses in fuel specialties, sort of that came in that $42 million, $41 million range with sort of the new business, do you expect that to sort of stick or sort of stay at that level? Or now that you've got the business, would you expect that to sort of tail off? And then also what are you expecting for your operating costs now ex- aromas on the performance chemicals side?

On the fuel side, Ivan, that's going to stick, that cost. So I think we need to think about that in the same way in Q3 and Q4. When you look at the performance chemicals business ex-Widnes, you're going to be looking at a SAR cost of about $30 million for the full year. That's excluding the Widnes business.

Okay. So there isn't a lot of SAR associated with it, I guess, right?

Correct.

Okay. All right. Great. Thanks.

We apologize to any participants still queued, but due to time constraints, we are unable to address any further questions. I will now hand back to Mr. Patrick Williams for any additional or closing remarks.

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