Innospec Inc (IOSP) 2016 Q2 法說會逐字稿

Good day and welcome to the Q2 2016 Innospec Inc. earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. David Williams, General Counsel. Please go ahead, sir.

Thank you, and good day, everyone. My name is David Williams. I am Vice President, General Counsel and Chief Compliance Officer at Innospec. Thanks for joining our second-quarter 2016 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, 2016. 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 everyone that certain comments made during this call might be characterized as forward-looking statements under the Private Securities Litigation Reform Act of 1985. 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 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 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 the Innospec second-quarter 2016 conference call.

We had another good quarter for Innospec. Our focused strategy has continued to deliver as anticipated, and this is reflected in our results. The feedback we are receiving from customers suggests that the underlying markets are more positive than they have been for some time. Our cash generation for the quarter was strong, which continues to show that we not only have an excellent balanced portfolio of businesses, but we are capable of converting a high percentage of our earnings into cash flow. Our GAAP EPS was $1.18, and our adjusted EPS was $1.03. The adjusted EPS exceeded the performance in the second quarter of 2015, despite the inclusion of the divested aroma chemicals business in the comparative quarter. Adjusted for this divestment, our EPS was up 8%.

Our model and management focus allows us to navigate through some soft through market conditions and gives us the flexibility to react to changing customer needs. We have continued to be very disciplined with our financial approach through our business, and this has resulted in a further strengthening of our balance sheet to the point where we are almost net debt free.

The performance in fuel specialties was pleasing as revenues improved. Demand in this market is far from strong, but when combined with our new product offerings, this has allowed us to grow, especially in EMEA and AsPac regions. While the Americas revenues were below a strong comparative quarter, we have seen a slight improvement in this region. As CEO of a technology driven company, it gives gives me great pleasure to report that the new product pipeline of innovative technologies in performance chemicals has yet again delivered strong growth. Revenues are up over 9% with good margins. Our investment in additional manufacturing capacity to meet the demand of our customers in skin care, hair care, and suncare is coming on stream at just the right time. We have signaled our intent to acquire in this market, and earlier today we announced that we had committed to acquiring the European differentiated surfactants business of the Huntsman Corporation. The acquisition process is subject to a period of consultation with the employee representative bodies and clearance from the regulatory authorities. The transaction is expected to close early in the fourth quarter.

We are very excited about this opportunity. This would take our performance chemicals business to over $350 million in sales revenue globally, and our target is to position us as a much more significant supplier to the customers in this market. We expect to fund this acquisition with a new term loan, which will be supported by our existing banking group and current Innospec cash.

In addition, oil field services continue to be quite a challenge. While the business is heading in the right direction and there are certainly some signs of increased customer activity, it remains well below the prior year. We will need to see further improvement in commodity prices sustained over a significant period before this business can resume its previous growth trends. However, each month in the quarter was an improvement on the one before, indicating that there are positive trends in the oil field market.

While we have been undertaking a significant cost reduction program, which is clear from our results, we are taking care to ensure we still maintain our technology development and our outstanding customer service. We also want to ensure that we will retain and build the skill base, which will be needed for future growth as the market turns.

In octane additives we delivered the latest order as previously indicated, although the final portion will be shipped in the third quarter. Our customer has indicated that they will potentially require further supplies through 2017, but we have no confirmed orders at this stage.

Overall, we're very well positioned for future organic and acquisition growth. Now I will turn the call over to Ian Cleminson, who will review our results in more detail. Then I will return with some further comments on the quarter and our outlook. After that, we will take your questions. Ian?

Thanks, Patrick. Turning to slide 6 in the presentation, the Company's total revenue for the second quarter were $228 million, a 6% decrease from $242.9 million a year ago. The overall gross margin increased by 1.5 percentage points from last year and 37.5% driven by good underlying performance into all our businesses and a favorable product mix. EBITDA for the quarter was $44.3 million, a 28% increase over last year. Net income for the quarter was $28.9 million.

It is worth noting that the comparative period included the aroma chemicals business, which was divested in July 2015, which represented $11.6 million of sales revenue and $0.07 of EPS.

Our GAAP reported earnings per share of $1.18 included several special items, the net effect of which increased our second-quarter earnings by $0.15 per share. A year ago, we reported GAAP earnings per share of $1.40, and that included a positive impact from special items of $0.38. Excluding special items in both years, our adjusted EPS was $1.03, slightly higher than the $1.02 reported in the second quarter of 2015, which also included $0.07 of earnings from the aroma divestments.

As part of the independent acquisition, we are required under GAAP for fair value contingent consideration that we expect to pay in 2016 on a quarterly basis. Any adjustment to the fair value as charged to the income statements is non-cash on adjusted (inaudible) for EPS purposes.

In this quarter, as a result of our expected lower payouts in 2016, the adjustment resulted in a $2.4 million credit to the income statement and a $0.06 adjustment to EPS.

Moving on to slide 7, with reference to previous results, please remember that we have changed the reporting format. The information covering the realignments of our results for 2015 until the first quarter of 2016 were outlined in a Form 8-K which we filed with the SEC on May 13, 2016.

Revenues in fuel specialties for the second quarter were $129.3 million, 6% higher than the $121.8 million reported a year ago, driven by a good performance in the core business and strong demand in aviation. Volume improvements of 8% and a positive currency impact of 1% was somewhat offset by the price mix reduction of 3%.

Sales performance was excellent in EMEA and Asia-Pacific. In the Americas, the business was down against a very strong comparative quarter. As we predicted, gross margins of 33.8% was similar to the first quarter of 2016, but slipped by 2.3 percentage points from last year due to a weaker sales mix in the core business. Operating income for the quarter was $24.2 million, down slightly from $25.6 million a year ago.

Moving to slide 8, my comments on performance chemicals exclude from the comparative period the impact of the aroma chemicals business sold in July 2015, which had sales of $11.6 million and contributed $2.3 million of EBITDA.

Revenues in performance chemicals for the second quarter were at 9% against 2015's second quarter with $35.3 million. Volume growth of 11% was slightly offset by 1% lower pricing and an adverse currency impact of 1%. Gross margins expanded over 4 percentage points to 32%, benefiting from a significantly richer sales mix, and operating income of $4.7 million was up 81% from the same quarter last year.

Revenues in the Americas grew by 6% from a year ago, driven by excellent growth in personal care products, which also contributed to an increase in the gross margins. In the rest of the world, sales grew by an impressive 17%, and the impact of our new product development pipeline is rolled out.

Turning to slide 9, in oil field services, sales were down 34% in the second quarter of 2015 to $46.5 million driven by a reduction in cost of activity, especially in well completion. Overall volumes declined by 16%, and there was an adverse price mix of 18%. However, as expected, sales were up 28% sequentially over the first quarter of 2016.

Favorable sales mix helped drive an improvement of 3.6 percentage points in gross margins in the quarter, and operating expenses in this business were down 8% compared to prior year, driven by our cost reduction programs. The business made an operating loss of $1.6 million compared to $5 million profit in the same quarter last year. However, as anticipated, this represents good progress on the operating loss of $5.5 million reported in the first quarter of 2016.

Moving on to slide 10, as expected, net sales and (inaudible) for the quarter were $16.9 million compared to $6.5 million a year ago. Gross margin was 62.7%, benefiting from the increased production volumes. The segment reported an operating income of $9.6 million during the quarter compared to $2.8 million in last year's second quarter.

Turning to slide 11, corporate costs for the quarter were $12.4 million compared to $7.4 million a year ago. In the current quarter, there were $1 million of acquisition-related costs. Therefore, the underlying corporate costs were broadly within our expected range of $10 million to $11 million. The comparative quarter also included a $2.4 million recovery of legal costs.

The effective tax rate for the quarter was 20.6%, and the expected tax rate for the full year remains at 20%.

Moving on to slide 12, we closed the quarter with net debt of just $4.7 million, down from [$41] million at the end of last quarter. Net cash from operations was, again, very strong at $50.4 million compared to $36.9 million a year ago. As of June 30, 2016, Innospec had $153.3 million in cash and cash equivalents and total debt of $157.9 million. In the second quarter, the Company paid $8.1 million to shareholders as the semiannual dividend.

Now, I will turn it back over to Patrick for some final comments.

Thanks, Ian. I am very pleased to report that Innospec's strategy continues to deliver good results, and despite the continuing challenges in some of our markets, we have had another strong quarter. This performance reflects the benefit of having a range of businesses in a balanced portfolio. Fuel specialties made good progress, while performance chemicals continued its excellent growth based on a further innovative product development in personal care.

As we predicted, oil field services continued the improvement trend as we anticipated and has made a small profit towards the end of the second quarter. Conditions in this market remain difficult, but we believe the outlook is better than it has been for some time. We have maintained our focus on cost control, but we will be well prepared when customer activity improves.

Our cash generation was excellent in the quarter, which has further strengthened our balance sheet. With net debt down to only $4.7 million, we consider ourselves to be well placed to continue our balanced capital management program. This will allow us to continue our strategy of managing buybacks, increasing our dividend, and pursuing the pipeline of acquisitions opportunities throughout the rest of the year.

The proposed acquisition of the Huntsman European surfactants business is progressing very well, and it is already in consultation with the employee representative bodies. We expect the transaction to close in the fourth quarter. We anticipate that this acquisition will provide us with an excellent European footprint for our personal care and home care business, further extending our product and technology offering to our customers globally. This acquisition would be accretive immediately, and on a full year basis, it would add $0.41 to EPS after funding costs. We enter the second half of the year with a very positive outlook, and we believe there are clear signs that our strategy is right on track. Our continued focus on leading edge technology to support our customers' development plans will deliver further growth and shareholder value.

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.

The first one in the fuel business. You talked about Americas showing some improvement, and that has been down. Where are you seeing improvements? Is it more in the trucking and miles driven, or is it just the comparisons will get easier as we move through the year?

And I guess in your outlook statement, you said that your markets are improving better than they ever had or something to that effect. Was that just generally an oil fields business, or was that also talking towards the fuel specialty?

I think it is generally all markets. And if you look at specific to fuel specialties, it has been a difficult market due to the fact that you have higher seats in crudes, which obviously has hit the fuels market and the application of such.

Our belief is that you are seeing Americas at least settled. You are correct about it on a comparative quarter basis. We will get better as well. But I think you are starting to see some general improvement in the Americas market. But, overall, if you look at oil field, personal care and the fuels market, we have seen general improvement, at least in our specific applications to that market.

Okay. And then, touching on oil field real quick, oil has obviously taken a little bit of a turn here to down. Have you seen -- is that an immediate impact on your business, or have you seen general fundamentals just continue to sort of improve, and how should we think about where oil needed to be before this thing sort of -- before this business can consistently be in the black?

Yes, I think we have seen general improvement. Sometimes you look at some of the CapEx programs, and oil starts to trend up over $45 in the $50 range, and everybody decided to start re-addressing their programs.

My view is that I think we will have a pretty good third quarter. I wouldn't shock me to post a positive number in the third quarter in oil field, and I think we just have to be very cautious moving forward. A lot of what has happened because drilling shut down for quite some time and rig count dropped off quite significantly, that there still has to be some drilling, and I think we are starting to see it in this quarter due to the fact that you have to HBPed some of the properties that have not been HBPed and you don't want to lose lease.

But I think outside of that, in some of the basins like the Midland where you have got the Wolfcamp and the Sprayberry and you have got the scoop, all the way up to probably the Niobrara, you are still in that $40 range where you can make money. So we are seeing activity in that area, and we are even seeing some area activity in the Bakken, which kind of surprised us, quite frankly. But to where it gets stable, I would probably say into the mid-$50s would be a very good number where you would see the growth trends pick back up.

Okay. Good. And then moving over to the acquisition, congratulations getting the deal done. If you look -- do you have any sort of manufacturing or any sort of presence currently in your personal care business in Europe, and do you see -- is there any potential? If there is, is there any synergies to sort of think about in terms of -- I understand it is going to be $24 million in EBITDA, but over time do you see an ability to add to that?

And I guess the second part of that question -- and I will jump back in the queue -- is the margins and returns on this business would suggest that it is not as differentiated as your other business. It's probably about 500, 600 basis points below. So do you improve that over time or how to think about the returns and I guess as sort of the EBITDA of this business going forward or, I guess, the strategic reasoning for it?

Yes. Good questions. Let me start with the first one. If you look at our manufacturing footprint, we really didn't have a good manufacturing footprint in Europe. To be a global business, especially with our specialty products, we had to have a global footprint.

If you recall on our strategy, which we really stressed over the last three years -- and we have stuck to that strategy -- is to have a balanced portfolio. This really balances our portfolio, not only from a business perspective, but I think from a products perspective specific to the personal care business.

Yes, moving along to your second question, some of this business is quite commodity. But the fact is, the goal is to bring our noncommodity business that we have in the Americas and grow that in Europe. And I think if you look at typically what happens in and where we have been very successful is we have taken companies that are manufacturing driven with a sales force that is margin driven, and we have been able to get margins up over time.

So I do think a combination of synergies, a combination of new products, a combination of old products that we are bringing into the new manufacturing sites, will bring those margins up over time. And I think this gives us the ability and the credibility with a lot of the major players over in Europe that we can supply them quite significant large amount of products in a large-based product line.

Great. How much do you envision synergies being, and do you need all three plants?

No, we need all three plants. So it won't be -- this was not purchased for a cost-cutting exercise. This was more purchased for growth. So there won't be a lot of synergy costs. The more synergies will come from technology and sales and marketing. That is where the synergies will come from.

Great.

Jon Tanwanteng, CJS Securities.

Very nice quarter. Can you give us a little bit more detail on Huntsman, just the underlying growth rate of the business, and is there any particular seasonality that we need to be aware of?

Yes, there is not any seasonality, John. If you look at personal care in general, there is not any seasonality. It is pretty consistent business. And that is why we like that portfolio. And if you look at the assets that we have, those assets go all the way through homecare to even oil field.

So, as we have always said to you, a lot of our assets can make oil field products, fuels products and personal care and homecare products. There is a lot of cross generalization there.

So I think it is a very strong, strong footprint for us and really builds where we needed to build in Europe.

If you look at growth rates, I would probably say it is a GDP business for where they sit today, plus a little bit -- maybe 3% to 4%. I think when we get a hold of it and we start adding to that technology base and adding our technology in Europe, we are looking at getting that back up to the 9% to 10%, and that is our ultimate goal.

Okay. Great. And then, just in the personal care business, before Huntsman, you have got a sequential decline, call it, $9 million to $10 million from $44 million to $30 millions. How should we think about that going forward just on a sequential seasonal basis as well?

That drop was actually just completely due to the disposal of the aromas business last year. In the comments we made on the call earlier, you can see that we have actually done like for like. It was a 9% growth year over year. So we just need to be mindful of the disposal last year.

Okay. Got it. And can you discuss what you think will happen in margins for fuel specialties, given the input prices are declining again? Do you think you will see more tailwinds, or is that mostly over?

No, I think that is over. I mean, we always said in the last 2Q call that we expected our margins to come back down in the 33% to 44% range, and we are at about 34%. That is probably our expectations for the year.

Okay. Great.

Sean Milligan, Coker and Palmer.

Within oil field service, what percent of that business is US based versus international based?

Yes.

Yes, it is probably, Sean, I would probably put it at about 90% US based, US and South America.

Okay. And then, some of the frac companies or more specifically like the frac sand providers, have talked about growing volumes throughout 2Q and April trough. Is that sort of the same thing you were seeing within that business as it relates to the US in Q2, and maybe any commentary on where exit rate volumes where for you all in the quarter would be helpful?

Yes, we saw volumes increase towards the last two months of the quarter, and I think, as you said and as we said in our script, that we actually started posting a profit in the last two months of the quarter. But we have seen the general trend come upwards.

I think to add to that, one of the focuses that we have -- and if you look at global markets, obviously, the shale is probably the biggest play in regards to chemicals.

If you look at the most stable market, it is in Saudi. And so we are looking at potential expansions in oil field into the Saudi market, but I think for us, what we have seen as a company as a whole is that in the oil field sector, we have seen volumes come up the last two months of the quarter, and our expectations is we will see those come back as well in the third quarter as well.

Okay. Great. And then, when we think about your oil field service business and where shale rig counts are ramping, are there any specific plays that you are more levered to where we would need to see more activity to really drive that business higher? So are you stronger in the Eagle Ford or maybe Mid-Con scoop stack than you are in the Permian? Just any sort of color, commentary there would be helpful also.

Yes. Sean, as part of our strategy, when we looked at building oil field, it was to make sure that we were in the lowest lift cost basins. Just in case the market would turn like it did on commodities.

So, if you look at it, we are properly positioned in all the low-cost basins. We are in the Eagle Ford. We are in the Delaware, Wolfcamp, Midland areas. So we are in Permian Basin. We are set up well to the scoop.

So we are set up in every low-cost basin there is in North America. And that was part of our strategy when we looked to go out and acquire, and it is the if and when and the when hit us. And for us, now, it is just a function, if the market comes back, we want to be in a great position to grow it.

Perfect. And one more, if you don't mind, and I will stick within oil field. One of the themes within the space has been higher intensity frac jobs, more sand per lateral foot, more fluid per lateral foot. Can you address maybe how that -- or if that creates a tailwind for your business in terms of -- it is my understanding that a lot of the chemicals you will sell there are sold on a concentration basis. So, if you're getting more fluid per lateral foot in these jobs, it should translate into a higher ticket charge for you all. Is that what you are seeing in the market, and is that offsetting some of the rig count, well count declines?

Yes, it is, Sean, and that is where we have seen our growth as well. I mean, you're starting to see more frac stages. You are starting to see more sand use, therefore more liquid used. So yes, you are spot on. That is the general trend right now.

Okay. Perfect. And then, within chemicals and oil field, are you full suite at this point, or is there a product that you think you might be able to expand into or you would be looking to expand into? (multiple speakers)

Yes, we continue to look at innovative technology, and I think, really, that is what has differentiated us and has let us post the growth from an EBITDA standpoint the last two months of the quarter. We are very technology driven in all of our businesses, and that is where we are going to keep our focus.

So do we have one product that is coming out to the market that is going to make a substantial increase? I would say no. What I would tell you is, we are consistently bringing out and modifying numerous products that will help us grow long-term.

Great.

Chris Shaw, Monness, Crespi.

To follow on the questions that were just asked, I'm trying to figure out in your oil field services business, have you seen -- has your decline matched the decline volume wise or activity wise in drilling and production, or are customers not using products for some reason or substituting in cheaper products? I haven't got a real sense of how your growth matches up with the actual market.

Yes. I think it is fairly very well matched up. I think if you look at the specific businesses that we are in, if you look at drilling, that is obviously at a standstill. If you look at frac stimulation, we have seen that pick up in the last two months as we said in the script, and production chemicals has been fairly steady all the way through. And so that is really as we anticipated what would happen.

For us, I think we are starting to pick up more business with the technology that we have put out in the marketplace. We are very customer focused, and I think that that is helping us and will really position us well for when the market turns and hopefully we get into the $50 range of crude.

But I think if you look at, from an EBITDA basis, and you look at what we have posted the last two months of the quarter, I am not so sure that many companies in our sector can say that.

Okay. Interesting. And then, the Huntsman deal, it sounds actually very good. I just wanted to confirm, did you say it was going to be accretive by $0.41 annually?

That is correct.

How are -- what are you using for funding costs on the -- I forget -- you said a term loan, I think it was that you would be doing?

Yes, Chris. We're going to take out a $150 million term loan. It is broadly on the same terms and conditions that we have got on our existing revolving credit facility, and the broad rates will be about 220 basis points on that loan.

Okay. And then, this was also sort of asked somewhat before, but did you not have any role in the personal care business in Europe prior to this deal?

We had personal care business, Chris, but a lot of that was being shipped from the US. This gives us the global expansion now to have margin improvement and, really, the product line to expand into our global customer base.

Great. Congrats on the deal.

Dustin Henderson, Eagle Asset.

The last two callers just asked my questions.

Bill Dezellem, Tieton Capital Management.

I have a group of questions. But, first of all, relative to the $0.41 of EPS accretion, I just want to make sure that that is what you are anticipating in calendar 2017.

Correct.

And so when I look at the consensus estimates, which are showing 2017 to be roughly $0.35 below 2016, that doesn't make any sense at all because fuel specialties directionally will be up. You're going to continue most likely to have the octane business. Oil fields are going to right way. Even without the acquisition, personal care will directionally be up and then we add $0.41 on top of that. Is there something I am missing just from a conceptual standpoint there?

No, I think you are broadly right there, Bill, and I have no doubt that a lot of the analysts will be realigning their models with the acquisition and the (inaudible) future growth and the positive statements that we have made on the call so far about how we see the markets developing over the next year or so.

That is helpful. Thank you. And then, let's move to the oil field business for a moment. The rig count was down in the second quarter versus the first quarter. So my question is super straightforward. How did you grow revenues 28% sequentially?

Yes. If you look -- and we have talked about this for quite some time, is there is a lot of wells that are behind pipe that have not been fracked. So they are going to frack those wells and complete those wells before they start a drilling program. And so that is really what is going on right now is the thousands of wells that are sitting behind pipe, they are now out fracking them.

So those uncompleted wells there that you are benefiting from completions, how long do you see that process unfolding and benefiting you?

I think as long as crude stays below $50, you're not going to see rig count obviously pick up much. You're going to see more people just fracking what they have -- completing what they have.

All right. Patrick, where I was going with that question is, at some point, they will have fracked all the wells that were not completed. How long do you think at the current rate that this can continue?

Well, I think they are still a year or two years in this process. There is quite a significant amount of wells that are sitting behind pipe.

Okay. That is helpful. I didn't appreciate that magnitude. And, maybe you are starting to answer my next question, which is, how did oil field maintain throughout this whole downturn, even the gross margins at the levels that you are talking about? I mean, this is -- we follow other energy companies, and this is somewhat unheard of.

Yes. I mean, we have always -- one of the things that we have always focused as a company as a general management team and I would say as employees globally is that we really focus on margin and providing the best technology to our customer. And obviously, we can't get a good margin unless we have great technology, and both go hand in hand. And we are constantly looking at cost.

And so if you look at overall, when you pull those three together, we typically will outperform the markets in any general market that we are in, whether it is personal care, oil field or (inaudible) fields. And so that is why if you take what I have said and you look at the Huntsman acquisition and what we want to do with that margin profile, this is a great acquisition for us long-term.

But if you go back to oil field, I think we have great technology, and we have really good people who service the heck out of our accounts and we get the benefit of that. And we are very, very big into cost control.

Great. Certainly appreciate it and have a good day.

Gregg Hillman, First Wilshire Securities Management.

In the Huntsman European personal care and homecare business, what was the R&D function there? How many people did they have in R&D and how many PhDs?

I don't have the exact number, but there is about 30 between R&D, customer service, et cetera, that sit in the Belgium office. We were very impressed with basically all their employees that we met along the way. And I think, with our R&D and the focus that we have along with their PhD and the brains that they have and where their strategy has been going, it will be a great combination long-term. It will just take some time for us to blend them together, but we are very happy with where we sit with R&D.

Okay. And, also, just carrying on -- the human resources that you are getting with the acquisition, was there a divisional head of that company to begin with?

Yes, there was.

Okay. And are you going to -- well, basically, was it being run in a heavy-handed fashion by the corporate people at Huntsman, or will you be able to release a lot of energy inside the company by giving those people more authority?

Well, I think we always give our people authority as long as we have the correct strategy in place and everybody agrees upon it. And for us, now that we are able to expand our product portfolio, I think they're going to naturally feel like they are getting a nice release. I think over the next year is going to be an absolute fabulous acquisition for us.

What we are really good at, as I said, is buying companies and putting our margin profile and our strategy on top of those, and I think you're going to see the same with this business.

Okay.

[Paul Sweatt], private investor.

Actually, my question has been answered, but just a point of clarification, and maybe a quick comment, Patrick. This acquisition looks very attractive and a great step after having leveraged further your cash flow, and it is a long ways from the (inaudible) business being spit out of Great Lakes Chemical. Doing a good job.

The question is, and in Q4 when you close, you mentioned the $150 million in debt. What would be the cash impact? And so on a growth sense, what would be the anticipated balance sheet in terms of cash and debt when it closes?

I will take the question. Very broadly, we are going to take $150 million term loan of additional debt onto the balance sheet, and we're going to use our existing cash to pay the balance and fund the working capital within the opposition itself and also to form the acquisition and other capital management programs that we want to run in the existing business. Our expectation is that when we close the deal, we will do around about 1.8 to 1.9 times leverage, maybe even a little bit lower than that.

We have got no concerns about leverage. We will deleverage quickly. We generate an awful lot of free cash flow, and there is no reason why we won't continue to do that, both in our existing business and also within the Huntsman acquisition as well.

To add to that, Paul, if you look at the generation of free cash flow we had in the quarter, that tells you how fast we will delever this. We have never been a levered company nor will we be. We like to have a strong position in the market to be able to do dividends, increase dividends, do appropriate buybacks, organically grow our business, but not feel stifled if there is a market downturn. And I think, for us, when we look at a 1.8 time lever, which I think it will probably be lower than that by the end of the year by the amount of free cash we kick out, I think, for us, you could see how quick this delevers. It is a very quick deleverage business.

That is very clear and thank you.

Jon Tanwanteng, CJS Securities.

A quick follow-up on the $0.41 accretion you mentioned before. Which cost is that excluding or including, and what is the tax rate you are using when you are calculating that?

I will try that one. It includes the financing costs, and the tax rate that we have plugged into that is about 24%.

Okay. Got it. So it is interest that you are going to pay on the term loan, is what you are talking about.

Right. Yes. That doesn't include any GAAP adjustments or any of that stuff. That will all be excluding our EPS when we report the business.

Got you. Okay. And then, second, are you done with M&A at this point, or is there more to do -- is the focus going to shift more to share repurchases or dividends? What is the plan for additional cash flow once you close the acquisition?

Again, I will go back to three years ago when we presented our strategy and we continue to do that, we said we wanted a balance portfolio. And if you look at this acquisition and then you take -- if oil -- when oil returns to the mid-$50s to $60, you have really got a very balanced portfolio, anywhere from $350 million to $400 million in personal care, anywhere from $250 million to $400 million, depending on the market changes in oil field, and a $500 million fuels business. That is a great balanced portfolio with great technology.

So for us, we don't really need to run out and acquire anymore. I think we have got very good strategy. We have got -- for us, now it is fund organic growth and technology and look at expansion of the dividend. If something comes along, I don't think you will see anything to this magnitude. If it is, it might be a small geographic area where we have a technology or we need growth, inorganic expansion, for instance, something maybe in Saudi. But, for us, we are really well-positioned now to really not go out and do much acquisitions.

Great. That's really helpful. Thank you and good luck.

Chris Shaw, Monness, Crespi.

Just following up on Jon there, actually. In the past, you were suggesting that there is a chance to maybe bottom feeding some oil fuel services businesses. Is that not part of the plan anymore, or they are just not -- or the multiples or valuations for those businesses just haven't come down enough to make it worthwhile?

Multiples have come down, but I think what we have seen in the market is what has been for sale has not been a business that really does anything for us long-term. It might be a consolidation of assets, and we really don't need more assess at this time.

I think for us, we will continue to look at oil field, especially if it is geographic growth. And I think there probably will be some small either geographic expansions and/or product expansions. But we are properly positioned in the right growth areas in the US market, specifically. I think it is more so just general organic growth expansion, whether it is putting more plant capacity in or personnel as we get the business. That is our focus right now.

Great. Thanks.

Sean Milligan, Coker and Palmer.

On the oil field service commentary that you made previously about the docs and how that drove quarter over quarter revenue growth, I thought that a big part of that was maybe a South American buyer or something that came back into the market for you all. So could you address maybe how the US trended versus international quarter over quarter within that business?

Yes, it was both. Sorry. Good question. It was both. It was not only growth in the US market specific, but again, as we stated in the last Q call that there is a customer that we started to deliver to in South America, and that is part of the growth as well. And that should continue.

Okay. But, just to kind of be clear, US revenues were up quarter over quarter if you back out the South American --

Yes.

Okay.

Yes, there was.

Gregg Hillman, First Wilshire Securities Management.

Just another question about the Huntsman acquisition. Did you see -- basically just in terms of how cyclical it is and the pricing and volumes for the various products that they have, has the pricing been stable over the last 20 years for their products or fairly variable? And also, how about the capacity for some of the stuff that they sell, the worldwide capacity, has it been increasing in Europe, or is there a new capacity coming online that would affect it in the future? And how hard is it to bring capacity online in Europe, in the way that it would compete with that business?

If you look at the Huntsman business, Huntsman -- they run good plants. They have good people. They have are very good operators, which is good for us. We are not picking up a business that has been destroyed or in disarray. It has been a very stable business for Huntsman. I think it is going to be a very stable business for us.

The same general competitors are out there. The good thing is that we don't have to put a lot of money of CapEx for expansion into these plants. We have got more than enough room, and I think with the additional volume in technology that we are bringing to Europe from the US should help grow that volume in those plants.

So I think overall, as a competitive situation, we sit in a good position, along with all the other competitors. I think it is a pretty responsible market.

Yes, but remember what happened to your polymers business in Europe, just recently? There was pricing competition, and at the same time, it deteriorated a little bit. Could that happen with the Huntsman business, also?

No. It is apples and oranges. If you look at that [Palmers] business, it has been like that for the last 15 years up and down. This is a pretty stable business.

Okay. Thanks.

I would now like to turn the call back to Mr. Patrick Williams as there are no further questions for any closing or additional remarks. Please go ahead, sir.

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 on this call, please give us a call. We look forward to meeting up with you later again this year.

Thank you.

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