NEU
#Thank you, Doug, and thanks to everyone for joining us this afternoon.
With me today is <UNK> <UNK>, 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 measures included in our earnings release.
The earnings release, which can be found on our website, includes a reconciliation of these non-GAAP financial measures to comparable GAAP financial measures.
We filed our 10-Q earlier today.
It contains significantly more details on the operations and performance of the Company.
Please take time to review it.
Our comments today will be referring to the data that was included in last night's press release.
Net income was $64 million, or $5.43 a share, compared to net income of $59 million, or $4.72 a share, for the second quarter of last year.
Earnings for both second-quarter periods included the impact of value and interest rate swap at the fair value.
Excluding that special item from both periods, earnings for this year's second quarter would have been $65 million or $5.50 a share.
This is an earnings increase of about 13% and an EPS increase of 18% from last year's performance.
Petroleum additives' operating profit for the quarter was $103 million, which is about $8 million or 9% higher than last year.
Petroleum additives' sales for the quarter decreased 7.4%, or to $516 million, compared to sales for the same period of the year $557 million or a $41 million reduction.
Reduction in revenue was accounted for from price and shipments for the majority of the change.
Petroleum additives' shipments for the second quarter of 2016 were down 1.5% from the same period last year.
We experienced decreases in lubricant additive shipments in North America and Latin America, with fuel additive increases in North America and Asia-Pacific.
Through the first six months of the year, our shipments were down 2.4% versus 2015.
Lubricant additive volumes have been slower than expected, with fuel additive volumes being stronger than expected.
We believe the PA industry long-term growth rate of 1% to 2% hasn't changed and we don't see any new trend of the volume data year to date.
Onto the cash flow for the quarter, items of note including funding our dividend of $19 million and variations of working capital.
We continue to operate with very low leverage, with debt to EBITDA at 1.3 times.
For 2016, we expect to see an increase in the level of our capital expenditures to a level higher than 2015, which includes the anticipated spending on our Phase 2 Singapore investment, as well as improvements to our manufacturing and R&D infrastructure around the world.
For the first half of 2016, we have ramped up spending to $64 million.
Phase 1 is officially open in Q2 and Phase 2 will be commercially ready in 2018.
We expect capital expenditures to remain in a higher-than-normal range for each of the next several years in support of our growth plans.
This is no change from the position we discussed over the past several quarters.
In summary, our business continues to perform very well and we are pleased with its overall performance, as we continue to operate this business in a business climate that was marked by slower world economic growth and a strong US dollar.
We remain focused on the long term and are investing heavily in R&D and additional capacity to support our customers worldwide to meet our long-term growth goals.
We remain committed to our safety-first culture, providing customer-focused technology-driven solutions, and to a world-class supply chain to meet our customers' growing needs, and this approach will continue to be beneficial to our shareholders.
Doug, that concludes our planned comments.
We would like to open up the lines for questions, please.
<UNK>, we expect margins to be in the mid to high teens, as we have experienced.
I don't see any significant change.
<UNK>, what I am saying is that from a margin perspective, we expect the margin to be in a normal range.
From a volume perspective, we are working in a difficult economic time.
We have seen some reductions in some regions, a little bit of a sluggish nature in some of the regions.
So we don't expect volumes to be anything but over the long term a 1% to 2% growth, and we expect to do a little bit better than that.
<UNK>, this is <UNK>.
Your observations are very ---+ very real and we are very aware of this, and frankly disappointed that we are not seeing more growth in our volume.
I don't see it as being anything fundamental.
I think there is ---+ you mentioned a number of possible causes and I think we are seeing pieces of each of those, but frankly we just need to do a better job in this sluggish environment of bringing in more growth.
And that's what we are ---+
As far as our R&D investment, as you know, this is a technology business.
We invest for the long term, and obviously we are continuing, as you can see from the R&D investment, to invest heavily for new products and development solutions for our customer long term and don't see a change in that going forward.
That's not something that we track very often.
We do look at it, certainly, but if I had to tell you where I think we are compared to last year, I would think it might be down slightly because a lot of the investments we are making right now are related to industry changes that are coming over the next one to two years, significant industry changes.
So, more of our R&D dollars right now are geared toward products that weren't coming out this year, but are coming out over the next couple of years.
We've talked about keeping debt to EBITDA in the 1 to 1.5 times range, with 1.5 being probably better than 1 for a number.
Right now, we're at 1.3.
We have a lot of CapEx that <UNK> has mentioned.
We are patient in terms of looking for acquisitions.
We are also patient in terms of buying in shares.
So, we just have to look at all of those factors, weighing the outlook for CapEx, acquisitions, the current price ---+ relative price of the stock, and all of that to factor in.
So, I am telling you how we think.
We obviously don't state in advance before we do buy shares.
Sure.
The industry, as you well know, <UNK>, has certain specifications, which often are just minimum specifications for playing the game.
And anytime there is a significant change in those specifications, it means a lot of new investment in R&D, a lot of new products.
We are seeing them right now in both the heavy-duty diesel and the passenger car aspects.
They do present new opportunities, but they generally don't result in significant change in the overall competitive picture.
We don't talk about those specs a lot because we are not a spec-driven company.
We are a value-driven company and we develop products that provide value for our customers, and specs are just a ticket to the game, albeit a very expensive one that we all need to pay attention to as the changes come, because they always result in increased demands on our products.
Yes, those factors you mentioned are all baked into the 1% to 2% increase that we see.
Some of the major drivers of growth would be growth in the developing and emerging markets, China, for instance, and the growth in the transportation fleet in countries like China.
And even though the growth is slow, we are still seeing significant expansion of the car and truck fleet there.
Also, the increased demands that are placed on motor oils and other lubricants, demands that are driven by the need for improved fuel economy in particular and some of the operating conditions of these newer engines drive increases in the needs ---+ the need for additives over top of the growth of lubricants or fuels, the end markets there.
So, yes, we are seeing extended drain intervals.
We have been seeing those for some time now.
We are seeing alternative fuel vehicles.
We are seeing hybrids and so on, but all of that is factored into the equation.
All right, thanks to everyone who has called in, and we will talk to you next quarter.
