Innospec's (IOSP) CEO Patrick Williams on Q4 2015 Results - Earnings Call Transcript

| About: Innospec Inc. (IOSP)

Innospec Inc. (NASDAQ:IOSP)

Q4 2015 Earnings Conference Call

February 17, 2016 09:00 AM ET

Executives

David Williams - General Counsel

Patrick Williams - President and CEO

Ian Cleminson - EVP and CFO

Analysts

Jon Tanwanteng - CJS Securities

Katya Voronchuk - Sidoti & Co.

Debra Fiakas - Singular Research

Ivan Marcuse - KeyBanc

Chris Shaw - Monness Crespi

Bill Dezellem - Tieton Capital Management

Gregg Hillman - First Wilshire Securities Management

Operator

Good day and welcome to the Innospec Conference Call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Mr. David Williams. Please go ahead.

David Williams

Thank you and good day, everyone. My name is David Williams and I’m Vice President, General Counsel and Chief Compliance Officer of Innospec, Inc. Thanks for joining our fourth quarter and year-end 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 December 31, 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 everyone 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 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.

Patrick Williams

Thank you, David. And welcome everyone to Innospec's fourth quarter and full year 2015 conference call. 2015 was a good year overall for Innospec with record sales and EBITDA. During the year, we increased our dividend, put in place a significant stock buyback program and focused our Performance Chemicals strategy directly on our Personal Care business after the successful divestments of non-core Aroma Chemicals business. We continue to execute and align with our strategic plan and we are pleased to note that our sales exceeded $1 billion for the full year. We achieved all this against the backdrop of volatile market, lower crude oil and gas prices, and adverse movements in exchange rates.

The fourth quarter proved to be a huge challenge for our Oilfield Services business and our customers. In the face of continuing and dramatic trust in custom investment plans, we were ultimately unable to sustain a superior performance of the first nine months. Volumes were done in the fourth quarter both sequentially and against the same quarter last year broadly reflecting market conditions.

Nevertheless, we recorded good results in Performance Chemicals driven by new products and Personal Care which we are partly offset by a lower quarter in Polymer segment and of course the impact of currency. Fuel Specialties continue to perform to plan despite a softer quarter in the Americas principally the result of order phasing and a warm start of the winter. Our [indiscernible] product line delivered broadly according to plan both for the quarter and for the full year. Finally, we completed the latest order of Octane Additives as planned.

Our gross margin performance continued strong in our businesses benefiting from both favorable raw material costs and sales mix. Overall, we posted adjusted earnings for the quarter broadly similar to last year during the full year to a record $4.36 per share, up 19% over 2014. Despite these very challenging market conditions, Innospec continued to generate cash. During the quarter, operating cash inflows were $27.1 million before the capital expenditures of $7.2 million helping us end the full with a positive cash balance of $5.6 million.

Now I will turn the call over to Ian Cleminson who will review our financial results in more detail. Then I will return with some concluding comments and after that we will take your questions. Ian?

Ian Cleminson

Thanks Patrick. Turning to slide 6 in the presentation, the Company's total revenues for the fourth quarter were $246 million, a 15% decrease from $290.7 million a year ago. Overall gross margin increased from last year to 35.1%, driven by improvements across all of our businesses. EBITDA for the quarter was $39.8 million, a 20% decrease compared to last year. Net income for the quarter was $31.5 million. Our GAAP earnings per share were $1.28 including special items. The net effect of which increased our fourth-quarter earnings by $0.04 per share. A year ago, we reported GAAP earnings per share of $1.11 well that included negative impacted from special items of $0.17.

Excluding special items in both years, our adjusted EPS for the quarter were $1.24, a 3% decrease from $1.28 a year ago. As part of the Independence acquisition, we are required under GAAP to fair value the contingent consideration that we expect to pay in 2016 on a quarterly basis. Any adjustments to fair value is charged to the income statement is non-cash and adjusted out for EPS purposes. In this quarter, primarily as a result of an expected lower contingent payment in 2016, the adjustment resulted in net $9.1 million credit to the income statement and $0.23 adjustment to EPS.

Moving onto slide 7, revenues in Fuel Specialties for the fourth quarter was $186.3 million, 14% lower than the $216.8 million reported a year ago. The decrease was driven primarily by reduced volumes in our oilfield services business and also by a softer quarter including specialties due to order patterns and the very warm start of the winter. Adjusted for the acquisition in November 2014, revenues fell by 19%, driven by 10% reduction in volume, a 5% reduction from a combination of lower pricing and a weaker sales mix, and adverse currency impact of 4% in the quarter.

By region, excluding Oilfield Services, revenues in the Americas were down 12% year-over-year driven by reduced volume. EMEA was down 2%, but this include a substantial adverse currency impact and Asia Pacific was broadly in par with last year.

Gross margins in the segment remained stronger at 35.3%, 3.1 percentage points higher than a year ago. The gross profits of $65.7 million and operating income of $25.6 million both include the negative one-off impact of our $3.7 million fair value acquisition related accounting adjustments in the quarter. For the full year, sales in Fuel Specialties increased 11% to $758.3 million and operating income was broadly in par with last year at $103.9 million.

Turning to slide eight, adjusting prior year comparisons for the disposal of Aroma Chemicals, revenues in Performance Chemicals for the fourth quarter were up 6% compared to last year at $39.2 million. Volume growth of 14% was somewhat offset by lower pricing of 3% and adverse currency impact 5%. By region, sales in the Americas were up 6% while in EMEA, sales were similar to last year with volume growth of 14% offset by adverse currency impacts of 12% and a 3% reduction in pricing. AsPac sales was slightly down due to sales mix.

Gross margins were 27.3% in the fourth quarter which was 4.3 percentage points up on the same last year benefiting from a richer sales mix with increased sales of higher margin Personal Care business. Performance Chemicals operating income for the quarter was $4.2 million more than double last year’s fourth quarter on a like-for-like basis.

For the full year, net sales of $194.5 million is down from $223.5 million a year ago and operating income was $23.5 million compared $25.6 million in 2014. Adjusting both years for the disposal of the Aroma Chemicals business, revenues grew 3% and operating income increased by 23% year-over-year.

Moving on to slide nine, net sales in Octane Additives for the quarter were $20.5 million in line with expectations. This segment’s gross margin was 48.3% and operating income for the quarter was $8.8 million. For the full year, this segment recorded net sales of $59.5 million, up 8% year-over-year and operating income increased by 9% to $24.7 million compared to last year.

As Patrick noted earlier, the fourth quarter sales represented the conclusion of that order. We now have a confirmed order for the first half of 2016 which is of similar magnitude to Q4 2015. This order is to be completed over the first four months of the year. Beyond that, we have limited visibility.

Turning to slide 10, corporate cost for the quarter was $13.5 million, higher than our expected range due to the phasing of some charges. In 2016, we expect our corporate cost to normalize at approximately $11 million to $12 million per quarter. There was a minor pension impact in the quarter compared to a charge of $0.8 million a year ago. In 2016, we expect the full year pension credit to increase to approximately $7 million.

The effective tax rate for the quarter was 10.5%. As we expected, the fully year effective rate of 21.5% was lower than last year’s 24.2%. For 2016, we expect the full year effective tax rate to be approximately 27%.

Moving on to slide 11, we closed the quarter with a net cash position of $5.6 million. There were no share repurchases during the quarter, but we paid the previously announced $7.6 million semi-annual dividend of $0.31 per share. This brought the total dividend for the full year to $0.61 per share, representing an 11% increase year-over-year.

For the full year, net cash generated from operations was $117.7 million compared to $106.3 million during 2014. As of December 31, Innospec had $141.7 million in cash, cash equivalents and short term investments and total debt of $136.1 million. The second payment of $42.2 million for the Independence acquisition was made in early January 2016.

I will now turn it back over Patrick for some final comments.

Patrick Williams

Thanks, Ian. In conclusion, 2015 was a successful year of Innospec both in terms of results the progress we made towards our strategic goals.

The consolidation of our Oilfield Services business has gone according to plan. In spite of the market turmoil, the divestment of Aroma Chemicals has successfully allowed us to focus our resources on our Personal Care business.

The fourth quarter has brought very challenging market conditions. These have adversely impacted not only our customers, but all related companies supplying and servicing the oil and gas industry. We performed exceptionally well in the first three quarters of the year as predicted, but Innospec is not immune from these pressures, and we have seen the impact of this in our fourth quarter results. In the face of this, we are focused on continuing to work closely with our customers to help ensure that we are able to align our cost structure with their investment plans.

While crude oil and gas price remained abreast [ph] with these levels, we believe this market will remain challenging through the coming year. Again, it’s fairly important to providing our customers with the best technology at cost-effective prices. We would therefore continue to focus our resources on delivering new products, while taking advantage of our lower raw material cost. As always, providing our customers with high level service is imperative in all of our businesses.

We are very happy with the growth of our Personal Care business and we are excited by the prospects created by the flow of new technologies, more R&T pipeline. We expect this growth track to continue throughout 2016 and we will continue our vigilance on external growth opportunities in Personal Care as well.

Our Fuel Specialties business remains a market leader and our leading technology makes us confident that this business will continue to deliver positive results in the coming year. We have a broad and balanced portfolio of businesses and a very healthy balance sheet, both of which will help us meet our customers and shareholders’ needs and continue to grow and prosper in the future.

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

Question-and-Answer Session

Operator

[Operator Instructions] We will now take our first question from Jon Tanwanteng from CJS Securities. Please go ahead.

Jon Tanwanteng

Good morning, guys. Thank you for taking my questions. The margins in Fuel Specialties continue to be pretty impressive despite the revenue headwinds. Was that all from input prices or should we expect more of the same now going forward, I think you exceeded your prior guidance of 32% to 34% range of the gross margin side by quite a bit?

Ian Cleminson

Yes, Jon, I probably used that 32% to 34%, yes the input costs enabled us to get those margins and maintain those margins, albeit we had to give some of that back in Q4, which obviously affected the revenue line as well. But yes, I would expect a 32% to 33% range, probably a good number for 2016.

Jon Tanwanteng

Okay, thanks. And are you making changes at all to the cost structure given the expected pressure from Oilfield, either in the oil business or in that particular segment?

Patrick Williams

Yes, we are making changes to the cost structure, and we sit down with customers and look for CapEx programs moving forward in 2016 and make cost structure, appropriate changes along the way. You will see those continued through the year, we had depressed oil prices. So you will see that cost come down.

Jon Tanwanteng

Okay. And just on the chemical side, can you provide a little more color on the sequential decline there, I believe it’s Polymers business, but what’s causing the decline, do you expect those trends to continue in any way?

Ian Cleminson

Yes, Jon, as we said earlier in the call, we excluded the Aroma’s business, we have actually grown year-over-year. The Polymers business is mainly European and industrial-related, and those markets are just a little bit flat and slightly depressed at the moment. We don’t really expect much change into 2016. But as you know, that asset is important to us, because it’s a fundamental part of our Fuel Specialties strategy and we do have the Polymers business [indiscernible] Performance Chemicals for now and that’s where we record those numbers. So, little changes to 2016 in our view.

Jon Tanwanteng

And finally, just any idea of when you’re shipping that new Octane shipment, is it Q1 or Q2 or undetermined at this point?

Patrick Williams

It would be majority in Q1, Jon, with a little bit of fall over but likely get a little bit fallen into the second quarter.

Jon Tanwanteng

Great. Thank you very much.

Operator

We will now take our next question from Katya Voronchuk from Sidoti & Co. Please go ahead.

Katya Voronchuk

Good morning. Can you talk a little bit about possible acquisitions, considering that, especially in oilfield market, you could possibly get some cheap deals or can you provide some clarity on that?

Patrick Williams

Yeah. No problem. I think as we stated in the last two quarterly conference calls, we felt we’re very well situated in at least the North American market. And so right now, I think we’re watching where the market changes fall out. Capital markets have dried up a little bit. I think you saw a very overleveraged oilfield market, whether it’s E&P or whether it’s service companies. We think there is more to come. From the outset that we've seen that have come on to market to date, really don't fit our portfolio. So really, our focus right now is to stay in personal care and look at personal care assets that’s in our portfolio. I would probably say we’re trending away from oilfield acquisitions at this point, unless there is something like a new technology or a geographic expansion that fits our portfolio.

Katya Voronchuk

Okay. And personal care, what would you be focusing on?

Patrick Williams

I'm sorry, personal care?

Katya Voronchuk

Yeah.

Patrick Williams

Yeah. I would probably say similar to the business that we’re in right now, which is shampoo, shower gel, soaps, body lotion, antiperspirant as well as we could venture into the active side of the market as well, but pretty much a fairly broad line, but right within our strategy.

Katya Voronchuk

And just one more question, the effective tax rate expected for 2016?

Ian Cleminson

Yeah. At 27%, we think it will be in that range.

Katya Voronchuk

Okay, thank you very much.

Patrick Williams

Thank you.

Operator

We will now take our next question from Robert Maltbie from Singular Research.

Debra Fiakas

Good morning. This is Debra in for Robert. Thank you for taking a few questions. I wanted to return to the previous discussion about reducing cost structure. Could you elaborate a little bit on what kind of levers you have available to pull there? Is it a matter of new sourcing supplies, adjusting the plant, adjusting labor, how do you propose to make those adjustments?

Patrick Williams

Debra, it’s a combination of all three quite frankly. It's a low raw material cost, its labor cost, it's a manufacturing cost and we have a very good plan and a plan moving forward, not only upward movement on crude prices, but obviously downward movement if we see further pressure. And so it's really a combination of both. I think you’ll see that along the way, as we see where crude prices start to fall out for the year.

Debra Fiakas

Okay. And then turning to the field specialties, you indicated that the softness in the quarter was somewhat weather-related. How do you see that playing out in the current quarter or we've also seen some unusual weather patterns?

Patrick Williams

Yeah. It's interesting. When you look at Q3, Q4 of the previous years, you had pretty similar winter patterns. This year wasn’t enough winter and I think you saw that globally that we had a fairly warm winter, albeit it's a late winter. Typically, what happens when you’re talking about the specific product line, which is basically ethylene vinyl acetate, which we call copolymers, late in the winter, you see a falloff in the order pattern anyways. What the hope is, is that you see because we’ve had such a strong late winter push and very mild inventories or low inventories that we’re hoping to see in Q1 some of that order pattern return. And somewhat of a rain to be seen, we're starting to see some of that. We’ll see if it holds tight through the remainder of the quarter.

Debra Fiakas

Okay, very good. And then my last question again, maybe returning to your previous comments about the polymers business and what you see as needing to happen in order to sort of firm up the demand for the polymers products?

Ian Cleminson

Yeah. The end markets there, Debra, are automotive, house building, industrial. If you think about how those end markets are currently reacting to the economic conditions, primarily in Europe, we need some developments. It's more of a commodity end product for us and not the sort of momentum we need to see a shift in the volumes there and the pricing there.

Debra Fiakas

So, is most of your demand for that product originating in Europe and that's where it's soft or are you seeing softness in the US and Asia and your other markets?

Patrick Williams

It's primarily a European market for polymers.

Operator

We will now take our next question from Ivan Marcuse from KeyBanc. Please go ahead.

Ivan Marcuse

Your Oilfield Chemical business held up pretty good through the first nine months, when did you see -- despite the market been weak for year now. So when did you start seeing the weakness in your business, was it more in the December month, or was it pretty much average you know was it down this much through the quarter equally or just sort of a deceleration?

Patrick Williams

Yeah good point, good question Ivan. We started really to see it in the fourth quarter. We didn’t think it would be distressful, when you look QonQ, we had a good a Q4, we had a very strong start to [Technical Difficulty] because as we alluded to in the previous calls that we have a pretty good idea of what our customers look like and what their plans look like moving forward. With that drastic movement from crude going from 42 to 43 down to the low 30s and even touching the high 20s, is where we sit today, those plans change quite drastically.

I think with the customer base that we had with crude in the mid-to-high 30s; we are able to sustain at least a pretty nice portion of business. Since it’s dropped lower than that, some of the cost bases have dropped and I think that they have pulled back as you can see in their programs moving forward. This is truly dependent on crude prices. I think if we can get the crude prices back up in the high 30s or 40, we could get back into somewhat a normal cycle, not a growth cycle but a normal cycle. I think this was adversely affect to low crude prices dropping that fast.

Ivan Marcuse

Is Oilfield Chemicals profitable in the fourth quarter?

Ian Cleminson

On an EBITDA it was Ivan, we returned about 12% EBITDA margin.

Ivan Marcuse

What was your EBITDA margin in the first 12 months or first nine months, I’m sorry?

Ian Cleminson

It was probably about 16%.

Ivan Marcuse

So the first quarter is pretty much you know we are almost in the books, we are halfway through I don't see oil going to 40. So should this be -- what kind of drag should Oilfield Chemicals look like in the first quarter or first half on a basis I imagine the EBITDA margins have deteriorated as we move through the fourth quarter, I can imagine they've gotten any better in the first quarter?

Ian Cleminson

Yeah, I think that’s a fair point Ivan. As Patrick was saying earlier on, as the quarter progressed our Oilfield business deteriorated and what we see is as we finished the year in December, our business in January has continued in that vein, it's not gotten any worse but it's not really got that much better. We continue to be confident that we’ll still generate positive EBITDA margins and our expectation is that the operating income level that we hope to be able to break even. So it's going to be a tough first quarter for us but we are well set, we’ve got plans to reduce our cost base where we need to be, we've got good technology in the right fields with the right customers. So we are ready for the upturn as well as the downturn.

Patrick Williams

And I think to add to that Ivan, if you look at our customer base, we haven’t lost a customer, which is key and adversely to that we've actually added to our customer base. The true issue was that they just cut back the program. So if and when they kick back up, whereas we will be sitting in a really, really strong position. Our advert right now is to go out and gain market share, albeit obviously fracking and drilling have pulled way back, we are still going to go add market share and that's our plan all along and we’ll continue to do that.

Ivan Marcuse

Okay and then I guess the good news overall, it’s impacting gross margin, I know you just said sort of look at the 32 to 34. But as the first quarter oil continues to slide down, so should you at least in the first half maintain to sort of elevated 35%, 36% gross margin and normalize into the back half or how are you thinking about or are we going to see a big step down in pricing?

Ian Cleminson

That's a good way to look at Ivan the way you just said it.

Ivan Marcuse

Okay great. And then my last question in terms of – so you said you had the $42 million payout for Independence Oil in January. I guess on your balance sheet it looks like you owe another $40 million, if the markets continue to go as they where does that continue to be -- does that payment get less or how to think about it, the final payment payout?

Patrick Williams

Yeah, the final payment will be towards the back end of 2016. It depends how the business performs because it’s EBITDA and a cash flow calculation. Right now, we've got 42 into this [ph] payment and we’ve got about another $10 million slated into the end of this year. We will have to see how that goes into business performance, but there will be more and if the business deteriorates, it will be less. We hope it’s more.

Ivan Marcuse

So there is only $10 million left?

Ian Cleminson

Correct.

Patrick Williams

Yeah, we purchased 51s and 27 and we got a 22% remaining.

Ivan Marcuse

Okay, great. Thank you.

Ian Cleminson

Thanks, Ivan.

Operator

We will now take our next question from Chris Shaw of Monness Crespi. Please go ahead.

Chris Shaw

Yeah, good morning, everyone. How are you guys doing?

Patrick Williams

Good morning, Chris.

Ian Cleminson

Good morning, Chris.

Chris Shaw

I guess some more questions on oilfield, exactly what your customers, you say they are cutting back their programs, I mean are they just not pumping anymore or are they just cutting back on the chemicals they buy or they are buying things different? I mean, how does that work? And have they stopped pumping or any of these oil wells are going to be permanently closed you think?

Patrick Williams

Yeah, I mean, if you look at drilling and you can [indiscernible] drilling has obviously come way off [indiscernible]. I think if you look at barrels produced obviously it’s come down a little bit too. The real big effect is just drilling in frac stimulation. There is some draw back in the production side, albeit once you put the wells on production, you have to keep producing. You have to – it’s really the asset integrity at that point as well. So we haven’t seen really affect the production side of business as much as obviously it would affect the frac stimulation in the drilling.

Now what we have seen when crude dropped even down to low-30s and the high-20s is that you are seeing producers that are either, A, shutting in wells or, B, just dial back as much as they can without affecting the wellbore. And so for us it’s really just staying attuned as to what’s going on in the market, but you will see our production business did very well in the quarter. I think it will continue to do very well through the year. The big effect is again the frac stimulation business.

Chris Shaw

Yeah, because in the past you said drilling is fairly small for you guys, but how big is frac stim now?

Patrick Williams

Frac stim is probably 50% to 55% of revenue in that business, but it’s also the quickest to grow, it’s the quickest to decline, but it’s also the quickest to grow as well.

Chris Shaw

Okay. And then in fuel addictive, you have the one remaining customer, I know you said you got limited visibility beyond the most recent order, but I mean does lower crude prices would then impact their sort of I don’t want to call it investor decision, but their decision to potentially their upgrade to non-leaded gas or --

Patrick Williams

Yeah, good question. I think there is a positive and a negative effect. I think the negative effect is they are drawing less revenue of lower crude prices. So the project, the cost of the project is extremely expensive and hurtful on the economy, now the economy with government. And for us, and if you can just look at it and Google it, there has been a law suit between the group who was doing the change of refineries from leaded to unleaded and that’s obviously slowed the process down as well. That’s why we’ve seen a first quarter order. What we haven’t seen, we are trying to get more visibility. We’ve probably got the most visibility we’ve had in quite some time. So where we are seeing some visibility is that there could be some further orders moving into the end of the year, but we just don’t know that yet and you guys know how we are with this. We will not give you information that we can’t stand behind. That’s why we’ve said we have an order going into Q1. That will slow a little bit out in Q2. It wouldn’t surprise me if we got something in the latter part of the year as well.

Chris Shaw

Okay. And then I think you mentioned that you guys didn’t repurchase any shares during the quarter. Was that just because the share price is at higher levels or was there something else behind that?

Patrick Williams

There was share price at higher levels, so you can read between the lines on what’s going on in Q1.

Chris Shaw

Great. That’s it. Thanks a lot, guys.

Patrick Williams

Thank you.

Ian Cleminson

Thanks, Chris.

Operator

We will now take our next question from Bill Dezellem from Tieton Capital Management.

Bill Dezellem

Good morning and thank you. Couple of questions. First of all, relative to the reference in the press release about contract wins and organizational changes in Fuel Specialties, I think that was specifically to the Americas and Asia Pacific, would you discuss those in more details, please?

Patrick Williams

Yeah, Bill, we don’t obviously name customers and the contract wins, but we’ve had contract wins that will be a positive effect going into 2016 that we did not ship in 2015, and so that should be a positive moving forward. I think as always we are looking to control cost within our organization and we are doing that on primarily Oilfield. We think Fuel Specialties is right in line with the business. And then as we discuss oil in the call, if you look at order patterns and you look at the winter and the warm winter that we had that was a negative effect in Q1 with some carry – sorry, Q4 with a negative carry over in Q1, and we will see how the latest cold spell plays out over the next 60 days. But that’s kind of where we stand in Fuel Specialties.

Bill Dezellem

So the organizational changes that was really a cost cutting rather than leadership change?

Patrick Williams

That’s correct, purely cost cutting.

Bill Dezellem

Thank you. And then relative to the contract wins, can you talk about the magnitude of those and when in 2016, you would anticipate showing through? And then lastly, are those wins in Asia-Pacific or the Americas or both?

Patrick Williams

A little bit of both. A lot of the wins have been National Oil Companies and some have been specific to country. So you will get the benefit of all the regions. The US has had some contract wins, we don’t think we will see effect of those until Q2 and with some of the contract wins we have had, we will see effect towards the latter part of Q1. So that’s really where it stands today.

Bill Dezellem

That’s helpful. Thank you. And then can you also discuss the – I think you referenced on this high profile launches in the ingredients business and just talk around the issues as much as you are able to please?

Patrick Williams

Yes, I mean, if you look at it, if you look at the markets and you look at the big wave that was pushed to body gels, the market somewhat shifted again back to body soaps, and what we call performance body soaps, and we are very well positioned in the soap market and so that’s where we have seen a lot of heavy push and lot of heavy business wins in that molecule market for new SKUs. We don’t go after business that’s already on the shelf, we go after new SKUs and that’s where we have had that success in the Personal Care market. And quite frankly, we see that growing. We have very good leadership in that area, we have very good focus from R&T, and that’s where our opposition focuses as well and we just see the Personal Care business growing substantially more so in the next few years.

Bill Dezellem

So, Patrick, are we hearing you correctly that you’re seeing an acceleration in the rate of new product introductions, which you are, I guess, just naturally benefiting from?

Patrick Williams

For our new products, yes.

Bill Dezellem

Great. Thank you.

Operator

We will now take our next question from Gregg Hillman from First Wilshire Securities Management.

Gregg Hillman

Good morning, gentlemen. Patrick, can you talk about China first and their air pollution control measures and how that might impact you? What’s the current regulatory situation there and how has it changed?

Patrick Williams

Good question, Gregg. We have obviously been part of our strategy as well and we are constantly looking at India and constantly looking at China, it seems they will come to some Euro or ULSD standard. There is a lot of pressure in that country. The issue you have Gregg with the turmoil going on right now, the geopolitical issues going on, in general, I don’t see the government changing anything drastically in the near future. I think if there was stable economic growth, stable economic growth globally, you might see those pressure take hold. But we just don’t see it happen in the next couple of quarters, maybe towards the end of the year, following year, but there is definitely a lot of, not only internal pressure from the environmentalists, but a lot of external pressure on clean up the air, and it’s just wait and see as it’s always been over the last few years.

Gregg Hillman

Okay. And then in Personal Care, you mentioned new products, but I mean, are you getting into new the bigger Personal Care companies in the world, the Unilever’s and the GP’s of the world, but are you getting into bigger names because of, I don’t know, the scale you’re getting in the industry, and will that happen in Asia too?

Patrick Williams

We are, Gregg, and that's really where you've seen a big push in our growth. But I think that’s where you'll see a big push in growth in 2016 and beyond. We've now come from a company that was really focused on a mid-tier to low-tier market, not in regards to high end shampoos, that was our focus, but with regard to customer base. Because of our technologies and because of our focus, we are now going to the Unilevers of the world, the P&Gs of the world and we've gotten a lot of new business and our view is, moving forward in ‘16 and ‘17, that will not change, that will probably even escalate itself even more.

Gregg Hillman

Okay. Thanks for your comments.

Patrick Williams

Thanks, Gregg.

Operator

We will now take our next question from Jon Tanwanteng from CJS Securities.

Jon Tanwanteng

Hi, guys. Just a quick follow-up. Can you comment on refinery inventories and how close do you expect your sales if added is to match end demand actually in the next couple of quarters?

Patrick Williams

Say that again.

Ian Cleminson

Refinery inventories, did you say, Jon?

Jon Tanwanteng

Yeah. The distilling inventories are pretty high.

Patrick Williams

Yeah. Even if you look at fuel usage, Jon, you look at refinery inventories, we don't see a direct correlation. Typically, you're treated in and out, so we don't see a negative effect on us moving forward and that has not affected Q4 by the way as well.

Jon Tanwanteng

Okay. Great. And then just returning to one of the other questions about the contingent consideration, how should we model the accrual for that as you go forward, given the various changes to what you think is going to happen.

Ian Cleminson

Yeah. Jon, we have to look at it every quarter, given that our expectation is going to be around about the 7 million [ph] mark. I would keep it out of your model, I would expect to see a 7 million cash outflow in Q4 and if it’s only changed, we’ll ramp that each quarter and we’ll adjust in our EPS as well.

Jon Tanwanteng

Okay, great. Thank you guys.

Operator

As there are no further questions, I would now like to hand the call back to Mr. Patrick Williams for any final comments.

Patrick Williams

Thank you all for joining us today and thanks to 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 at any time. We look forward to meeting up with you again to discuss our Q1, 2016 results in May. Have a great day.

Operator

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

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