Brian Paliotti – Vice President and Chief Financial Officer Teddy Gottwald – Chairman, President and Chief Executive Officer.

Dmitry Silversteyn – Longbow Research.

Greetings, and welcome to the NewMarket Corporation First Quarter 2018 Financial Results. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brian Paliotti, Chief Financial Officer for NewMarket Corporation. Thank you. Mr. Paliotti, you may begin..

Thank you, Doug, and thanks, everyone, for joining us this afternoon. With me today is Teddy Gottwald, our Chairman and CEO. As a reminder, some of the statements made during this conference call will 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 discuss the non-GAAP financial measures 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 filed our 10-Q this morning, and it will contain significantly more details on the operations and performance of our company. Please take time to review it.

I will be referring to the data that was included in last night’s release. Net income was $61 million or $5.14 a share compared to net income of $64 million or $5.39 a share for the first quarter of last year. This is an earnings decrease of 5.2% and an EPS decrease of 4.6% from last year’s performance.

Petroleum additives operating profit for the quarter was $84 million, which is an $11 million or 12% lower than last year. Petroleum additives sales for this first quarter of 2018 were $586.9 million, up 8.7% versus the same period last year.

The increase in net sales is across all regions with most – with almost half of the increase from our European region with the other regions contributing about equal amounts of the remaining increase. Of the $47 million increase in revenue, shipments and product mix contributed $22 million; FX, $16 million; and price was $9 million.

Petroleum additives saw record shipments in the first quarter of 2018 with a slight improvement over the same period last year, which are –which was our prior record for quarterly shipments. The increase was primarily due to increases in lubricant additive shipments, partially offset by decreases in fuel additives shipments.

Latin America and Asia Pacific were the main regions contributing to higher lubricant additive shipments. Europe and Asia Pacific were the primary drivers of the decrease in fuel additives shipments, partially offset by an increase in Latin America. Regarding profitability in the first quarter, the story is the same as the last several quarters.

Raw materials have been rising faster than our selling prices. Raw material costs have been on a prolonged rise throughout the last six quarters, and our margins have been compressed as a result.

Typically, we are able to pass on the increase and recover margins, but there’s a two- to five-month lag between when we see the cost increases and when we’re able to implement margin recovery. This lag will continue until we see a period where raw material costs stabilize in the marketplace.

We have partially addressed these increases in costs through pricing actions and will continue to address them. Margin improvement will remain our top priority throughout the rest of the year as we’ve been committed to reversing the impacts of the margin compression we have seen over the past several quarters.

We believe there are no fundamental changes to our industry dynamics, and we are looking forward to continue to recover our margins. The effective tax rate for the first quarter was 25.5%, down from the rate of 27.5% in the same period last year. The rate in the first quarter of 2018 was lower, primarily due to U.S. tax reform.

For the full year, we expect to have an effective tax rate in the 24% range. On the cash flow for the quarter, items of note include CapEx of $23 million, funding our dividend of $21 million and using more cash to fund the normal variations of working capital.

We continue to operate with very low leverage with a net debt to EBITDA remaining below 1.5 times. I’m happy to report that Phase 2 of our Singapore manufacturing plant is complete with some commercial production started and more on the way this year. In addition, we’re pleased with the integration of our Mexican acquisition into our system.

Both of these investments should be contributing more to our bottom line as the year progresses. And together, they will provide us with the capacity and capability to serve the growing needs of our customers around the globe.

For 2018, we expect to see a significant decrease in our level of capital expenditure versus 2017, reflecting the completion of our Singapore plant. CapEx will be in the $100 million to $125 million range, our lowest level since 2014. Over the past several years, we’ve made significant investments to expand the capabilities around the world.

These investments have been in people, technology, technical centers and production capacity, and we intend to use these new capabilities to improve our ability to deliver the goods and services that our customers value and to grow our shareholder value. Doug, that concludes our planned comments. We’d like to open up the line for questions..

We will now be conducting the question-and-answer session. [Operator Instructions] Our first question comes from the line of Dmitry Silversteyn from Longbow Research..

Yes, thank you for taking my question I just want to clarify what you said about the fuel additives shipments being down year-over-year. But when I look at your 10-Q, it tells me that it’s $3.3 million contributor to your revenue number..

Yes, that’s mix and shipments combined..

Okay. Okay, got it. It’s actually mix that went up, and volumes went down. Okay, that explains that. Secondly, just looking at your P&L, you had a pretty hefty $4.9 million in other income. Usually, this is sort of plus or minus $0.5 million per quarter.

So what were what I would assume to be onetime or at least unusual charges or benefits income that went into that? And how should we think about that line item for the balance of the year?.

Sure, Dmitry. One of the accounting changes that we implemented is the standards change on pension. And so in other income, you see some of that to move out of the petroleum additives operating profit and into other income, and that impact was in the $3 million to $4 million range. And that will persist from this point forward..

Okay. So that was one of the reasons why your EBIT dollars were down as much as they were in additives. Part of it was reclassification..

That’s correct..

Okay. Okay, that’s helpful. Secondly, your debt went up quarterly, versus the fourth quarter, not something that happens typically. It does happen from time-to-time with you guys as I look back.

So what was the driver of that other than funding working capital? And what are you – what do you think that, that will end the year at? Do you have plans for paying down a particular amount or getting to a particular net debt-to-EBITDA level?.

Your – well, it was the normal variation. Certainly, working capital as you can see in the results was the use of cash. We have $600 million of fixed debt in the business and so nothing of note. From the perspective of where we went net debt-to-EBITDA, we’re at 1.4 times. We want to operate in that 1 to 1.5 times.

So the way we look at it, we’re at the typical range where we want to operate. Obviously, with the rise in raw material, that impacts inventory and the increase in sales impacts receivables in the first quarter..

Okay. So basically, you had the slight up and then you’re probably going to end up down somewhere along the same time where you had it..

And to add to that, Dmitry, we’re going to be down on CapEx this year as well..

Okay, so that should help.

What was your full diluted share count? I didn’t see that in the press release or in the 10-K – or 10-Q, I should say?.

From an outstanding share or what we bought back in the first quarter?.

From what your fully diluted share count is at the end of the quarter or average for the quarter, whatever you use to calculate your EPS?.

I can get you the exact amount. It is $11,878,000..

$78,000. Okay, cool. Your price was up about 1.6%, I think if I calculate the $8.5 million price increase that you had delivered. It’s a little better than it was in the fourth quarter, obviously. Looking at margins, it’s not nearly enough to offset the raw material dilution.

From everything I’m reading, there’s a lot of price increases announcements out there, so I’m assuming you’re continuing to sort of try to get pricing to offset raw materials. How should we think about the progression of your prior realization as the year unfolds? I mean, everybody seems to be onboard with the price increases.

So is it just a matter of time to renegotiate these contracts or the contracts to reset at a particular date?.

Dmitry, this is Teddy. It’s very much on top of mind for us right now. It’s our number one priority to recover those margins. We’re working at it. As we said in the comments, it continues to be a moving target because the raw materials keep moving up. We’re doing the best we can, and we’re going to continue with it.

And as Brian mentioned, until we see costs leveling out, we’re going to continue to play catch-up..

Okay.

But if I’m looking at sort of progression through the remaining three quarters of the year and given what you’ve done in the fourth and first quarter, I could expect you guys to finish the year somewhere north of 2% price realization?.

I would certainly hope so..

Okay, good. Okay. If I’m kind of looking at your raw material inflation, and obviously, base oil is the most visible one, but obviously you guys buy metals and some hydro – hydrocarbons beyond base oil.

If you can point to two or three key raw materials for you, whether it’s – if they’re different for fuel additives versus the lube additives, what would they be?.

Well, we listed in the K the top 10 raw materials that we buy. And so base oil obviously being one of them, PIB being one of them. We by a multitude of other solvents and whatnot. Those are the big ones. I would take a look at that list, and those are obviously the major drivers because of the major spend items..

Yes, okay.

And is there anything you can provide me either in percentage or in dollar terms what the raw material inflation did to you, either percentages or dollar terms on a quarterly basis or year-over-year basis?.

I can take a look at that, Dmitry, and get back to you..

Okay. That would be helpful, Brian. And then final question before I jump back into the queue. If I’m looking at the organic growth that you guys put up in terms of shipments. And obviously, I understand now that there’s mix impact in there. But you had a pretty decent growth and continue to have good growth in volumes on the lube additives side.

How much of that was contributed by the Mexican acquisition? And I think that anniversaries in the third quarter, if I’m not mistaken.

Can you provide any granularity for that?.

It was positive – it was a positive impact. So the San Juan del Rio facility is just an integrated plant into the organization now, and we’re not going to break it apart. But it’s positive. And as I made in the comments, we’re happy with the integration and how it’s going..

Okay, alright fair enough, I will get back into the queue..

Okay..

[Operator Instructions] Our next question comes from the line of Trey Snow with The London Company..

Brian, I think you said your optimal leverage target is in the 1 to 1.5 time frame.

Is that right?.

That’s correct, net debt to EBITDA. That’s correct..

Is that – along that level? And is that sort of cycle dependent? Or is it based on your new level of assets? Or just how do you get to that?.

This is Teddy. We’ve had that 1 to 1.5 times range for quite some time now. It’s a balance. We want to keep it comfortably conservative, I would say, to weather any storms that come ahead as well as to ensure we maintain a good credit rating for borrowing costs.

We’ve indicated a willingness to go beyond that range for periods of time when it’s for a particular reason, such as in acquisition. Staying in that range gives us a lot of flexibility to handle any reasonable acquisitions that might come our way. And if –we don’t want to go much lower than that because it’s not a good use of the balance sheet..

Right. Okay, that makes sense.

And then with Singapore Phase 2 being behind you, what will be sort of your maintenance level of CapEx now?.

I think we’ve said that we’ve traditionally operated in the –before the Singapore plant, we operated in the level. Obviously, we’ve had a couple of new plants from them. So I guess, you could look back and know that we’re going to be higher than that because we have more assets on the ground..

Great, okay. Alright thank you..

You are welcome..

There are no further questions in queue. I’d like to hand the call back over to management for closing comments..

Okay. Thank you, Doug, and thank you, everyone, for calling in. We’ll talk to you next quarter..

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day..