Getting The Lead Out

In the space of three months, the firm now known as Innospec changed its name and the market where its shares are traded. Paul Jennings, Innospec's President and Chief Executive Officer, says the changes were a long time in coming.

In January, the company then known as Octel, the world's only supplier of the fuel octane enhancer tetraethyllead (TEL), changed its name to Innospec. The name is derived from the combination of the words innovation and specialty chemicals.

The name change was meant to emphasize that the firm, which had sales of $528 million last year, now gets two-thirds of its sales from nonlead fuel additives and other specialty chemical businesses it has built over the years. "Lead is a declining product" that was associated with the Octel name, Jennings says. The bulk of sales for the firm are now in innovative specialties, he adds. "We have a future now."

Toward the end of March, Innospec switched its stock listing from the New York Stock Exchange to the National Association of Securities Dealers' electronic trading market, known as NASDAQ. The change not only reduces listing costs for Innospec but also puts it in a marketplace that includes up-and-coming technology firms of the type with which Innospec would like to be associated, Jennings points out.

Octel was spun out of Great Lakes Chemical in 1997 with a mandate to manage the declining business of making and supplying TEL. The global market for TEL during its heyday in the 1970s approached $2 billion, Jennings says. Other TEL suppliers included DuPont and Ethyl Corp.

Also in the 1970s, carmakers began to equip vehicles with catalytic converters to cut down on air pollutants. TEL interfered with operation of the catalytic converters. Then regulators became concerned over the health effects of lead dust from automotive exhaust. The U.S. and Europe have since banned lead gasoline additives for most uses. Today, Innospec sells $182 million of the additive annually, mostly in industrializing countries that do not yet have strong environmental protection laws.

At the time of its spin-off from Great Lakes, Octel owned five plants that manufactured lead fuel additives, Jennings says. Only one now remains, in Ellesmere Port, Cheshire, England, where Innospec also has its headquarters. It has acquired a number of other businesses over the years, including DuPont's petroleum additives business in 1994 before the spin-off, Aroma & Fine Chemicals from Close Brothers Private Equity in 2004, and surfactants firm Finetex in 2005.

TEL sales in 2005 were down 20% from the previous year, largely because Venezuela suddenly canceled its $63 million annual lead purchase order in May. Innospec expects another 40% drop in TEL sales in 2006 and then annual declines of 10% in the years following, Jennings says. But TEL is still a very profitable business. Gross margins on the additive were 50% last year, according to the firm.

In contrast to TEL's continuing decline, Jennings projects 10% annual sales growth for Innospec's fuel specialties group, which produces detergents, lubricity improvers, corrosion inhibitors, and cold-flow improvers for oil- and bio-based fuels. Sales for the group, which competes against firms such as Infineum, Lubrizol, and Afton Chemical, were $241 million last year. And Jennings predicts similar growth for the firm's performance chemicals, which include fragrances, surfactants for personal care products, and chelants for detergents. Performance chemicals sales were $105 million in 2005.

But profits for specialty chemicals are not nearly so good as for TEL. Gross margins in 2005 were 34% for fuel specialties and just 13% for performance chemicals. And although the firm's operating income last year was $96 million, restructuring and corporate costs combined with a $134 million charge for downsizing and remediating TEL assets resulted in a net loss of $118 million.

Securities analyst Jeffrey J. Zekauskas of JP Morgan tells his clients to "underweight" Innospec in their stock portfolios. Among his reasons in a February report are that TEL profits are unlikely to continue to be strong in the future and that Innospec "faces the challenge of streamlining production and overhead costs" in fuel specialties.

Jennings counters that the firm has a strong balance sheet with low borrowing levels and $70 million in cash on hand. "My job is to educate people and get them to believe in our businesses as I do." Jennings says he is looking at spending as much as $50 million on acquisitions to complement core businesses. "We are small but beautifully formed. I'd like us to be bigger," he says.