Greetings, and welcome to NewMarket Corporation Second Quarter 2018 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. I would now like to turn the conference over to your host, Brian Paliotti, Chief Financial Officer for NewMarket Corporation. You may begin.

Thank you, Rob, and thanks to 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 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 the 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 filed our 10-Q this morning that will contain significantly more 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 $53 million or $4.53 a share compared to a net income of $63 million or $5.29 a share for the second quarter of last year. This is an earnings decrease of 16% and an EPS decrease of 14% from last year’s performance. Petroleum additives operating profit for the quarter was $72 million, which was $20 million or 22% lower than last year. Consolidated sales for the quarter increased 9.5% to $599 million compared to sales for the same period last year of $547 million. The increase in revenue in petroleum additives in the quarterly comparison was driven primarily by price and shipments. Petroleum additives shipments for the second quarter of 2018 were up 2.3% from the same period last year, and were up 1.3% year-to- date. Shipments for the lubricant additives increased for both the second quarter and six-month periods. The increase in lubricant additives shipments was in our European, Middle…

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Dmitry Silversteyn with Longbow Research. Please proceed with your question.

Good afternoon. Thanks for taking my question. Couple of things that I’d like to get a little bit more detail on. First of all, you have been putting up pretty good growth in the fuel additives part of the business. And as far as volume mix is concerned, it was double digits up this quarter again, way out of the range of your typical guidance for what the market is growing. So can you talk about how much of that is sort of shared gains versus just your customers doing better? Have you picked up any new customers? Or is this the impact of the Mexican acquisition? If you can give us a little bit more detail on the source of the strong growth and how likely it is to continue?

Dmitry, it’s Brian. From a fuel additives perspective, we’re not seeing any fundamental differences. And there is no immediate driver, differential driver that’s driving the growth from a year-to-year perspective. We’re just out there conducting business and continuing to execute on our long-range strategy.

And for the year?

Can you say that again?

So you would expect this double-digit growth to continue for the balance of the year?

Our 1% to 2% growth across all PA is kind of how we look at the market. And so I would expect that, that would be the growth rate over the long-term. As you know, we’ve talked about in the past, this is – last year and this year, the first year that we’re seeing growth over the last four. And our growth rate combined over the last three to four years is just a little bit above the market. So nothing fundamentally different.

All right, Brian. Thanks. You’ve gotten about, if my math is correct, you got about almost 2.5% of price and you had about a 2% of foreign exchange contribution to your revenue growth for the petroleum additives segment. You mentioned that, that margin recovery is your main priority. Does that imply that pricing component is going to continue to improve quarter-to- quarter in terms of the year-over-year growth? And we should see margins – pricing perhaps ending up somewhere closer to 4% by the end of the year in terms of the exit rate?

Well, as far as pricing is concerned, Dmitry, as you know, yes, we are continuing to take action to recover the morales. You can see it reflected in the bottom line operating margin. So the answer on prices, we are determined to continuing to work towards getting the margins up. And we’re continuing to see raw materials impact them and we want to return to the mid- to high- teens range that we’ve normally operated in.

So, let me see if I can ask this – another question in other way. Do you expect pricing to go up sequentially in the second half of the year versus the levels you achieved in the first half?

I would say yes.

Just kind of looking at margins again. I mean, 12% petroleum additives margin and we haven’t seen that level of profitability for you guys since the 2008, 2009 margin reset, when crude oil and base oil pricing collapsed and your margins opened up to the mid-teens level for the first time. I mean – I guess, what raw materials beside base oil is giving you these types of problems? I mean, base oil is off certainly, but we just don’t see that level of impact in margins of other companies using base oil. So I’m just wondering it – maybe it’s perhaps some of your other, I don’t know, metal alkyls or oxides or something else outside of base oil that’s giving you these problems?

Yes, we’re seeing, Dmitry, across the whole basket of raw materials a sustained prolonged increase. As you know, base oil is the predominant one in ours. But across the basket that we have listed as our top 10 in the K, we’re seeing a increase across the whole basket, which is driving the pressure on margins.

I’m assuming that the pace of the increase is a little bit more than you expected setting into the year, which is why you’re a little bit behind on pricing?

Dmitry, this is Teddy. I’d say, it’s more the – not so much the pace as the length, seven quarters, and we’re still playing catch up.

Okay. So, Teddy, I appreciate you chiming in. I’m just – I’m trying to understand how to think about your margins. I mean, you have mid-single-digit volume growth at a margin leverage I’m assuming. You’ve gotten 2.5% pricing. I realized that you’re a 30% gross margin company, but I would still imagine that, that 2.5% would be enough to offset and I don’t know 5% or so of price increase on the raw material side. I think yours is significantly greater than that?

Yes, we are seeing substantial raw material increases like you said over the last seven quarters. And to your point, we are seeing the increase on the price side, but which is not enough to offset the raw material increase yet.

Brian, can you quantify in dollar amount how much your raw material pricing has gone up on a year-on-year in the first half?

I don’t have that on my fingertips, but I can get that back to you.

I would appreciate that. Thank you. Moving on to your cash deployment, your dividend has been pretty steady for the last six quarters. I’m just going back over the last 10 years or so, usually you raise it every year or so, every four quarters, for some years where you’ve raised it twice. Is the pause in dividend increase is the function of just reduced profitability? And maybe a little bit more cloudy outlook on your cash generation? Or are you saving money for a deal or repurchase program or something else? Just trying to understand how I should think about dividends and return to shareholders?

Yes, Dmitry, we’ve – our stated policy is basically around a payout ratio in the 20%, 30% – to 30% range of prior 12-month earnings, let’s say. We don’t have a policy or an intent of expressly raising the dividend every year. It’s more driven by our results. And we’ve been flat. And so we’re not going to go outside the top end of the payout ratio that we’re comfortable with simply to have another year of increased dividend.

Makes sense, Teddy. Just a really quick bookkeeping question. And maybe I’m doing the math wrong, but if – you got $52.9 million in net income and 11.9 million shares, that equates to $4.46 in terms of earnings. So where I’m missing the other $0.07 from?

Dmitry, I’ll – I got to check your math on that one to see what – where we’re coming out on that. So I can get back to you on that.

Pretty good, Brian. You have some gains on your cash statement in your investing activities. Is that sale of some assets that you held-for-sale or is it a divestiture of a business, perhaps a small product line or something. Can you give us a little bit detail on where that line item came from?

Yes, Dmitry, it’s been out there in the marketplace that we did sell off a small piece of our business portfolio, the metalworking business in the second quarter and part of that’s in there.

Okay, okay. So let me ask you this then, your revenue comparisons that you provided, are they sort of pro forma for a year ago, or do I have to sort of include this little business that you sold and therefore make your volumes growth look even better?

Yes. The closure of that activity was very near the end of the second quarter. So I wouldn’t say that there’s a meaningful pro forma that would have to be completed in order to do an apples-to-apples.

Got you. Okay, very good. Your quarter-on-quarter debt increase, is that just, I mean, your sequential working capital has come down. I know you’ve repurchased some shares and paid out a dividend, but I’m still a little bit surprised that your sequential debt has gone up. What’s that about?

Well, we’ve the – as you said, the normal variation of working capital, but we had a significant buyback activity of $123 million in the second quarter. So that’s what drove that. Dmitry, on your earnings per share calculation, the denominator of earnings per share is weighted average. So I’m sure that’s what driving the delta between those $0.07.

All right. I will go back and double check [indiscernible] and need to reach out you again, Brian. Thank you very much for taking the time.

[Operator Instructions] There are no further questions at this time. At this point, I’d like to turn the call back to Brian Paliotti for closing comments.

Thank you all for calling in. And we’ll talk to you next quarter.