Brian Paliotti - Vice President and Chief Financial Officer Thomas Gottwald - Chairman and Chief Executive Officer.

Dmitry Silversteyn - Longbow Research LLC.

Greetings and welcome to the NewMarket Corporation Fourth Quarter and Year-End 2017 Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Brian Paliotti, CFO. Thank you. You may begin..

Thank you, Donna, and thanks everyone for joining us this morning. With me today is Teddy Gottwald, our Chairman and CEO. As a reminder, some of the statements made during this conference call may be forward-looking.

Relevant factors that could cause actual results to differ materially from those forward-looking statements are contained in our earnings release and our SEC filings, including our most recent Form 10-K. During this call, we may also discuss non-GAAP financial measure included in our earnings release.

The earnings release, which can be found on our website, includes a reconciliation of the non-GAAP financial measure to the comparable GAAP financial measure. We intend to file our 2017 10-K towards the middle of February. It will contain significantly more detail on the operations and the components of our Company. Please review it.

I will be referring to the data that was included in last night's release. Now on to the fourth quarter results. Our profit before tax was $64.9 million, a 1.5% increase compared to the profit before tax for the fourth quarter of 2016 of $64 million.

With the implementation of the Tax Reform Act impact on the quarter's EPS, this profit before tax number is a good way to compare periods. The next set of numbers that I'll mention does include the impact of the Tax Reform Act, enacted on December 22, 2017, which we estimate to be a $31.4 million charge.

It also includes the impact of recording certain deferred tax liabilities associated with our Singapore plant. Net income for the fourth quarter of 2017 was $4.1 million or $0.35 per share, compared to net income of $45.7 million or $3.86 per share for the fourth quarter of 2016.

Petroleum additives operating profit for the quarter was $77.9 million, up 3% versus the fourth quarter of 2016. Sales for the quarter were $557 million, up 11.4% compared to the sales for the same period last year, primarily due to higher shipments which were up 8%.

Margins in the quarter were compressed as raw materials have continued to rise which we have seen throughout much of 2017. During this past quarter in addition to funding $21 million of dividends, we spent $28 million on capital expenditures in support of our long-term capital plans and repurchased $28 million of stock.

Turning to the full-year, our profit before tax in 2017 was $315 million, down 8% versus 2016. Petroleum additives operating profit was $360 million, down 6.5% versus the prior year. Raw material prices have been on a prolonged rise throughout 2017 and our margins have been compressed as a result.

Typically, we are able to pass on the increases and recover margins, but there is a two to four-month lag between when we see the cost increases and when we are able to implement margin recovery.

Because raw materials costs have continued to rise, we have continued to play catch up and our margins have stayed compressed and this has been the case for the last several quarters. We have partially addressed this in 2017 and we will continue to address it.

We believe there are no fundamental changes in our industry dynamics and we are looking to continue to recover our margins. Petroleum additives had record shipments which resulted in an 8.2% increase for the year. Lubricant and fuel additives shipments both showed increases.

Europe, Asia Pacific, Latin America were the regions contributing to the increase in lubricant additive shipments. And Europe was the primary driver of the increases in our fuel additive shipments.

In 2017 in line with our long-term strategy and focus on petroleum additives, we used a substantial portion of our strong cash flow to make major investments in our business. Investments that position us well to better serve our customers around the world and to provide room for future growth.

Our capital expenditures in 2017 were a record $149 million in support of our long range plan to expand our worldwide manufacturing and technical capabilities. This included Phase 2 of our Singapore plant, which is now mechanically complete.

This expanded capacity is an expression of our full commitment to better serve our Asia Pacific customers and provide room for future growth. We also completed the $184 million acquisition of AMSA, our largest acquisition in more than 20 years.

This acquisition expand our manufacturing footprint, technological capability, and strengthens our presence not only in Latin America, but in all regions. The AMSA acquisition combined with the new Singapore plant puts us in a great position to serve our customers and provide increased shareholder return.

Along with our substantial investments in petroleum additives, we returned $111 million to our shareholders through dividends of $83 million in fourth quarter stock repurchases of about 71,000 shares at a cost of $28 million.

We also strengthened our long-term financing, the completion of a private placement of $250 million in new debt at a fixed rate of 3.78% and the refinancing of our revolving credit facility that was upsized to $850 million and extended to 2022.

With record capital, the AMSA acquisition and some modest stock repurchases, we still ended the year with a very healthy balance sheet and with net debt to EBITDA at 1.4 times.

As we have stated before, we are comfortable maintaining net debt to EBITDA in the 1.5 range and these changes to our financing give us strength and flexibility for the future. In 2018, we expect to see capital spending ramp down versus 2017 as we commissioned the new Singapore units and close out that product.

A ballpark figure for CapEx for this year is $125 million. Also in 2018 we expect to see the benefits of reduced taxes as a result of the Tax Reform Act and we are using an estimated full-year tax rate of 24% for planning purposes, which is about a 5% point improvement.

The actual number will vary based on how the geographic mix of our sales unfolds throughout the year. Our business continues to generate significant amounts of cash and our priorities for cash remain the same.

We invest in the business for growth, find acquisitions that can strengthen our competitive position in petroleum additives, and reward our shareholders through dividends and stock buybacks.

Our stated goal is to provide a 10% compounded return per year for our shareholders over any five-year period defined as EPS growth plus dividend yield and the implication of this goal is that we may not necessarily achieve the 10% return each year.

We are well aware that we didn't achieve this goal in 2017 and we are committed to provide this level of return to our investors. To summarize, a lot of good things happened in 2017. We had our best year ever from a safety performance standpoint. Thanks to the added focus from everyone in the company. We had good cost control.

We made significant quality improvements in certain areas of our manufacturing operations. We greatly expanded our capability with investments in Singapore and AMSA and we saw strong volume growth. Unfortunately, this progress was overshadowed by rising raw material costs and margin compression.

As we look to 2018, we expect to build on the successes of last year and put added emphasis on margin recovery. It should be a good year for our petroleum additive segment in the company. And with the major investments we made, we are positioned well for the long-term.

We will continue to focus on research and development to bring higher value products to our customers and we will continue to improve quality and the cost to be more effective serving the market.

We will supplement this growth with acquisitions where possible and with the continued use of stock repurchases dividends and modest leverage to improve shareholder return. We appreciate your support as always. Donna, that concludes our planned comments. We'll turn it over for questions..

Thank you. The floor is now open for questions. [Operator Instructions] Our first question is coming from Dmitry Silversteyn of Longbow Research. Please go ahead..

Good morning, guys. Thanks for taking my call. A couple of questions if I may. First of all, you continue to deliver pretty strong volume growth. I think you said about 8%, actually a little bit north of 8%.

It's coming against one of the toughest comps you had last year in the fourth quarter, which was also very high, I think about 11% or 10% shipments increases.

So what's driving this kind of end of the year improvements that you saw both in 2016 and 2017? And is there any concern that there is some inventory building going on by your customers in anticipation with the price increases that will be pushed through - are being pushed through in the beginning of 2018..

Good morning, Dmitry. This is Teddy. I think that and if I remember right, at the end of 2016, we did see some pre-buying because of increases. I don't really think that's been going on, because the increases have been going on for a while. Our volume for the year was up 8%.

And what we've stated in the past is that we expect to exceed the industries 1% to 2% growth by a couple percentage points, 8% obviously is higher than that. But if you look at our growth over the last several years, it averages out in that range that we're talking about of exceeding the industry by a couple percentage points..

Okay. So you don't see any inventory building ahead of any price increases this year like you did last year, okay. Anything in these numbers, I know you guys don't do special charges and everything is according to GAAP. So I appreciate that.

But if I kind of look at your tax rate, even if you've been adjusting for $31.4 million of this one-time expense that you talked about in conjunction with the change in the tax law was still coming up with like 45% tax rate.

Is there anything else in these numbers that I should be cognizant of in terms of unusual or special charges or one-time items that we need to be cognizant of?.

Yes. As I mentioned - Dmitry, it's Brian. How are you doing? We did talk about the Singapore deferred tax liabilities. That's not something that reoccurs. So as we stated going forward, we expect about a 5% improvement versus where we have been from a tax rate perspective going forward, so about 24%.

So I would use that as the basis of what you should see from 2018 forward..

I appreciate that Brian.

I got that, but I'm actually referring to the fourth quarter and trying to understand sort of what the impact on the fourth quarter taxes were, are there any special charges?.

There was an impact from our Singapore investment from a deferred tax liability perspective, which did increase the tax rate..

Okay..

It's a one-time item, and what I'm telling you is it did impact the rate, but from a go forward perspective, our rate over the last couple years has been 30. We expect a 5% improvement versus what we would have had the rate for the last three years and that should be 24..

Okay. Got it. I got it.

So I guess I'll wait for the 10-Q to find out what that Singapore charge was? In your Mexican acquisition that you completed, I think last quarter, can you talk about sort of what you're - how that's doing and what the sales impact was of that business in this quarter as well as can you remind us what the margins in this business are in line with your corporate margin for petroleum additives are higher or lower?.

Dmitry, the impact on sales was small and I'm not going to comment on the margins. I will say that we're real pleased with what we purchased. We've got a great team there. We've got a really nice modern plant that has capabilities to make some components that we don't currently make.

In 2018 we will see the volumes ramping up there as we produce more for our internal needs and buy less of some materials on the outside. We'll see some rebalancing production among our plants for efficiencies that disallows us and it certainly positions us very well in the Latin American marketplace for continued growth..

Okay. Thanks Teddy. Switching gears a little bit and talk about geographies. Europe was mentioned as both the driver along with the Asia Pacific and Latin America of the lube additives and also of the fuel additives.

What is it particularly about the Europe that makes this region standout for you? Is the competition environment changed? Are you picking up share there? Is the industry somehow recovering or growing faster than other segments? What's driving your business in Europe in terms of execution or just end market?.

Sure. Dmitry, the one thing to remember to is our European region is more broadly defined. It does include India and Russia. So in aggregate, it's a mix of developed and markets that are growing quicker.

So I would say that from our strategy for geographic expansion, we're continuing to see progress in the developed European markets, but more progress in the emerging markets, which are included in that number..

Okay. So it's your penetration of - what I would call new Europe or whatever you want to call it as well as India that's kind of driving this strong result.

So we can expect that to continue, as we continue to penetrate the market?.

Well, we expect that the emerging markets to grow faster in the developed markets going forward and that - our European mix is a combination of both..

Okay.

In this emerging market, is in the question of just faster growth in terms of more cars on the road and growing part or is it a question of that moving up to more sophisticated products that you guys are selling?.

It's both. As the car part continues to grow that's - and miles driven continues to grow, which are two of the major drivers that's absolutely the case and the sophistication from a lubrication perspective continues to increase as well..

Okay. So having to have Europe as a good guide, what's going on with North America? It was not mentioned. That's the driver of either of your businesses. Now I understand it's a mature market.

But can you talk about maybe some of the demand dynamics or competitive dynamics in North America and what you see for this business going forward?.

We're not going to comment on the competitive dynamics. North America is certainly a big market. It's important to us and our focus on growth is just as real in North America as the rest of the world..

Okay. Your pricing - as you push through price increases at the beginning of the year, they were still comping slightly negative as of the third quarter.

I know it's going to come out in 10-Q, but can you tell us what pricing was up or down year-over-year in the fourth quarter?.

Dmitry, I can give you that offline. It'll be in the Q as you said..

Okay. That's fine. And then final question, your R&D spend was down year-over-year both in the fourth quarter and for all of 2017.

Is it just sort of normal fluctuations of spending or should we be reading something into this?.

No Dmitry that's exactly what it is. It's normal fluctuation of spending and timing. We are getting some efficiencies. From a perspective of going forward, we expect obviously to continue to invest in R&D and in 2018 we will continue to see it accelerate versus 2017, so just timing..

Okay. It sounds good. All right. That's all questions I have. Thank you..

Thanks Dmitry..

Thank you. [Operator Instructions] Mr. Paliotti, I'm showing no additional questions at this time.

Do you have any closing comments?.

Thank you for everyone for calling in and we'll talk to you next quarter..

Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines at this time and have a wonderful day..