NewMarket Corp. Q3 2008 Earnings Call Transcript

| About: NewMarket Corporation (NEU)

NewMarket (NYSE:NEU)

Q3 2008 Earnings Call

October 31, 2008 10:00 a.m. ET

Executives

David S. Fiorenza – Principal Financial Officer and Treasurer

Thomas E. Gottwald – Chief Executive Officer

Analysts

Ivan Marcus – Keybanc Capital Markets

Robert Felice – Gabelli & Company

[Rich Book] – First Investors

Ian Zaffino - Oppenheimer & Company

Mike Judd – Greenwich Consultants

Amy Levine – Shenkman Capital

Bob Robotti – Robotti & Company

Ian Zaffino – Oppenheimer & Company

Operator

Greetings, ladies and gentlemen and welcome to the New Market Corporation Third quarter 2008 financial results conference call. (Operator Instructions) As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Mr. David Fiorenza, Vice President, Treasurer and Principal Financial Officer for New Market Corporation. Thank you, Mr. Fiorenza, you may begin.

David A. Fiorenza

Thank you for joining us to discuss our third quarter performance. With me is Teddy Gottwald, our CEO. I have a few planned comments, after which we'll open the lines for any questions. As a reminder, some of the comments we will make today are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We believe we based our statements on reasonable expectations and assumptions within the bounds of what we know about our business and operations.

However, we offer no assurance that actual results will not differ materially from our expectations, due to uncertainties and factors that are difficult to predict and beyond our control. A full discussion of these factors can be found in our 2007 10K. We have released earnings last night as you saw and we also published our 10Q last night. I encourage you to read the 10Q for more details.

Income from continuing operations was $16 million or $1.07 a share for the third quarter, compared to $20 million or $1.19 a share from last year's third quarter. Income from continuing operations was $54 million or $3.48 a share for nine months, while income from continuing operations for nine months last year was $52 million or $2.99 per share.

Earnings-per-share from continuing operations in the third quarter and nine months include the benefit of share repurchases made both in 2008 and 2007. (Inaudible 00:09:21) net sales in the third quarter of $437 million were up $85 million or about 24% from 352 million in last year's third quarter. The increase in sales was the result of higher selling prices, favorable foreign currency exchange rate and higher volume. We shipped about 4% more products in the quarterly comparison.

The increase in shipments was widespread. When we break the 24% increase in revenue into its component parts about 6 percentage points was due to shipments, about 3 percentage points were due to the exchange rate, and the remainder or 15 percentage points due to higher pricing and mix.

The nine months petroleum additive sales of 1.2 billion were also about 24% higher compared to last year's nine months of 997 million. Similar to the third quarter results, the increase between the nine-month periods reflects higher selling prices, favorable currency and an increase in 12% in product shipments.

When we break the 24% increase in revenue into its component parts, about 12 percentage points was due to shipment, about 3 percentage points due to exchange rates and the remainder or 9 percentage points was due to higher pricing and mix.

Petroleum additives segment operating profit decreased to 28 million from 35 million in the quarterly comparison. The operating profit margin was 6.4% for the third quarter this year compared to 10% for the third quarter last year. The change in operating profit between the quarters was the result of several factors. A continued reduction in margins due to increased raw material costs and other manufacturing costs partially offset by raising prices, the negative impact of Hurricanes Ike and Gustav, increased spending in S&A and R&D, a favorable impact from higher product shipments and favorable impacts in foreign currency.

During both the third quarter and nine-month period there have a significant compression of operating margins due to the increased cost of raw material ,energy costs and other manufacturing costs. The cost of crude oil reached record highs during the 2008 nine-month period, reflecting and increase in base oils in the United States of about 50% from the end of '07.

While the cost of crude oil has decreased, the cost of base oil, a major raw material, did not decline during the third quarter. We have been increasing selling prices in an attempt to recover these increases in costs. The timing of these actions did not show their full benefit in the third quarter.

The quarter also included negative impacts on both costs and volume due to Hurricanes Ike and Gustav. Our plants in Houston and Port Arthur were damaged and were not in production for several days. We recognized about $700,000 of expense during the third quarter for repairs to the facilities. In addition to that, we estimate that our operating product for the quarter was approximately $3 million lower due to the time that we were not in production as well as the time period that our customers, who were also impacted by the hurricanes, did not accept shipments of our products.

The storms also disrupted the U.S. base oil supply and costs were negatively impacted by supply disruptions in that market. S&A expenses of the segment were about 5% higher in the quarterly comparison and about 12% higher for the nine months. The increase primarily resulted from higher personnel related expenses.

R&D expenses for the quarter increased 1 million from last year's level, and increased 5 million on a year-to-date comparison. We continue to spend to support our customer's programs and to develop the technology required to remain a technology leader in this industry. The increases in S&A and R&D for this year also include an unfavorable currency impact.

Partially offsetting these unfavorable impacts were the favorable impacts of higher product shipment and favorable foreign currency. Total shipments were about 4% higher for the nine months and about 12% higher - I'm sorry, for the three months and about 12% higher for the nine months.

Petroleum additives operating profit benefited from foreign currency impact. We believe foreign currency benefit was about $4 million to operating profit in the quarterly comparison and about 9 million year-to-date.

Interest in financing expenses were roughly the same in the quarterly comparison. We did borrow $32 million on the revolver during the third quarter of this year. Other income net was $200,000 for the third quarter this year, compared to $1.2 million in the third quarter last year. The amount in these categories are primarily the interest investment income that we earn on our cash.

Our effective tax rate on income from continuing operations was 28% for the quarter and 35.6% for the third quarter of last year. The lower effective rate in the third quarter of 2008 includes the benefit of $1 million related to the completion of the review of certain years by the IRS, as well as the benefit of increased foreign earnings at a lower statutory rate.

The nine month effective tax rate for this year has been 32.7% compared to 35.5% last year. On a go-forward basis, we believe 32% to 33% is a good effective tax rate to use for the corporation.

Turning to cash, cash flows, cash at the end of the quarter was $33 million which is a decrease of $38 million since the beginning of the year. At the end of the quarter, we had borrowing capacity remaining under our revolving credit facility of $58 million.

A recurring theme this year has been our cash flow situation. Our businesses continue to generate good cash flow, about $83 million per nine months, however, we had quite a drain on that inflow. Our working capital increased $72 million this year, predominantly from receivables and inventories being up, and some offset from accounts payable. The increase in accounts receivables inventories in accounts payable reflect the growth of the petroleum additives operation, as well as higher product costs.

We used $22 million for capital expenditures, another $29 million for our Foundry Park project, and $15 million for the acquisition of the fuels business from GE. We project that total year capital expenditures will be in the $30 million range and spending in Foundry Park will be in the $45 million range. We plan to continue to finance our normal capital spending through cash generated buyer business and borrowing on our revolver. The Foundry Park needs will be provided by the construction loan facility and some of our cash.

Other major uses of cash this year was funding $12 million of dividends and the repurchase of $27 million of our stock.

We had total debt of $214 million on September 30th, representing an increase of about $57 million since the beginning of the year. The increase resulted from draws of $32 million on our revolving credit facility and $25 million on the Foundry Park construction loan.

Our debt to EBITDA ratio for the four quarters ending September 30th was 1.6 times. Excluding the Foundry Park debt, the ratio was 1.4 times. We give both measures since it is our intention to ultimately have the Foundry Park debt as non-recourse to new market.

The Foundry Park project continues to progress on schedule and within our cost estimates. It is our expectation that this will continue for the remainder of the project until its completion.

During the third quarter we purchased 316,000 shares of common stock at an average price of $63.26 a share. We have about $80 million remaining on our $100 million authorization.

Now taking a look forward. As we approach the end of 2008, our business is performing well in an uncertain economic time. Our facilities are operating at high rates and we are meeting our customer’s demands about continuing to invest in research and development. Our view of the petroleum additive industry has not changed. It is a low-growth industry. We experienced good demand during the first half of this year and some growth in the third quarter. We are, however, beginning to experience some slow-down in demand for our products. Accordingly, we are somewhat concerned that we may experience lower demand in the fourth quarter than we have experienced during the first three quarters of the year.

A reduction in the 5% to 10% range versus the third quarter would not be out of line with what we are seeing. We now expect 2008 petroleum additives operating profit will be at least as much as 2007. We believe we have taken the necessary steps in the marketplace to recover the increases in raw material costs that we experienced this year and expect the favorable impact of these actions to be more fully reflected in operating margins in the fourth quarter.

The significant uncertainty in achieving our profit projects is the overall demand for our product. As we have communicated in the past, we intend to leverage our financial strength to increase shareholder value by growing the business, with acquisitions being an area of primary interest.

Our primary focus in the acquisition area remains on the petroleum additive industry. During the third quarter, we purchased the fuel additive business from GE. This was a small acquisition, but expands our presence in the finished-fuel additives market, one in which we intend to continue to expand.

That is the end of my prepared comments. I’d like to open the lines now for any questions.

Question-and-Answer Session

Operator

Thank you ladies and gentlemen. At this time, we will be conducting a question-and-answer session. (Operator instructions) Our first question today comes from the line of Ivan Marcus with Keybanc Capital Markets. Please proceed with your question.

Ivan Marcus – Keybanc Capital Markets

Hi, thanks for taking my call. Real quick, I think I missed it. Volume was up 6%, what was FX and price in the additives business?

David A. Fiorenza

For the quarter?

Ivan Marcus – Keybanc Capital Markets

Yes, for the quarter.

David A. Fiorenza

12% was shipment, 3% was FX, 9% was pricing.

Ivan Marcus – Keybanc Capital Markets

Got you, thank you. And then so you said that you’re seeing volume fall off in the fourth quarter. Are you seeing it more in your international business, or in North America, or is it pretty equal? Can you give a little bit more color on where you’re seeing that volume come up?

Thomas E. Gottwald

Yes, this is Teddy. It’s not isolated to any one place. We’re seeing it in North America, we’re seeing it in Asia. Those two markets probably more than other places. We expect this quarter to be lighter on volume, as David mentioned. We think that this will be a near-term kind of phenomenon and we don’t expect any longer term issue on volume. I will also say that there’s a silver lining in the light of volume for us because our plants have been running flat out, and we have some maintenance and expansion tie-in’s coming in a couple of our plants in the fourth quarter and early in the first quarter of next year. So a little relief on the volume side is not a bad thing for us.

Ivan Marcus – Keybanc Capital Markets

Great. Teddy, you’ve been in the business for awhile. How has your business lube additives happen simply perform in a recession, the past recessions, and how has, if we are in a recession now, how is now different than in the past couple that we’ve gone through for Afton?

Thomas E. Gottwald

Those are really good questions. Historically, the additive business has been less dependent on the economy than most other industries. I think that’s still true today. There’s pushes and pulls on both sides of that equation. Currently, in a slow-down, people don’t buy new cars as much and the new car factory fill market is important to us, but it’s a small portion of our total and we’re seeing some weakness there throughout this year. So that’s a negative. And people will delay changing their oil a bit, stretch it out some, but after awhile you can’t delay changing your oil. Gas prices being high has impacted demand somewhat, but as you know, gasoline prices are coming back down and I suspect that people will return to their normal driving habits. So there’s pushes and pulls, but all things considered, I think our industry is less dependent than most on economic conditions. And, at this point, I don’t really expect the current situation that we’re in to be any different from gasoline from a demand standpoint.

Ivan Marcus – Keybanc Capital Markets

Got you. And you said driving was down, so the margins were down a bit this quarter. Was there maybe a different product mix than you’ve seen in the last few quarters, maybe Pace Oil, which is, I believe, is a little bit lower margin versus maybe Drive Line additives? I mean, was there a different product mix than usual, or is it just the fact, or more a matter of just higher raw materials?

Thomas E. Gottwald

Any product mixed difference is dramatically overshadowed by the increase in raw material.

Ivan Marcus – Keybanc Capital Markets

Okay. And then one last question. Pace Oil, I know it dropped a little bit, I don’t know 5% to 10% depending on which one, this past week. How long will that take before you see the benefit from that decrease and will there be any pressure on your pricing if prices continue to fall? For base oil.

Thomas E. Gottwald

Right. Base oil is about 20% of our raw material purchases. You mentioned a 5% to 10% drop in base oil and we’ve seen a number of announcements in the marketplace that support that, but we’re not seeing it as a company. The changes we’ve seen so far is considerably less than that. Crude’s dropped a lot and while there have been some base oil announced reductions, we’ve seen tightness in certain base oils that we need. The disruptions in the Gulf Coast to the base oil market in the third quarter from the hurricanes impacted our costs quite a bit and our whole supply system.

Ivan Marcus – Keybanc Capital Markets

Knowing what you know now in that and seeing that volume is quiet for the industry and are probably going to be off a little bit. Would you expect Day Fill to still stay at these historically high levels in this quarter, or would you, with crude plummeting, there’s got to be some downward pressure on baseball pricing, right, or do you expect probably we won’t see it until maybe the first quarter of ’09, if anything. What’s your costs on that?

Thomas E. Gottwald

No, we do expect base oil to drop. We expect some more dropping in the fourth quarter and in the first half of next year also because of overall supply and demand in the base oil market, both from a weakening of demand and increase in supply. So we do expect to see some drop. You know, crude is down quite a bit, too, but on a number of our petro chemicals, it is still tight and we’re not seeing any impact, any substantial impact, on the other 80% of our purchases yet. Ultimately, though, with economic conditions being what they are and with crude dropping, we do expect relief on the broader raw materials front. We’re just not there yet.

Ivan Marcus – Keybanc Capital Markets

All right. And then this will be truly my last question, I said a few questions ago. But what’s your sense of customer’s inventory? Do you see them, are they high, or do you think they’re keeping their inventories pretty lean right now? We’re still seeing pat auto bills being down and just going maybe into people driving less, or do you think that their inventories are high? I mean, what’s your sense?

Thomas E. Gottwald

My sense is purely anecdotal, but I think that we’re seeing customers reducing inventory, I think for a number of reasons. The uncertainty in the economic conditions for one, and the fact that we’re through the hurricane season, there would typically be some destocking going on from that anyway.

Ivan Marcus – Keybanc Capital Markets

All right, I appreciate you taking my question, thank you very much.

Thomas E. Gottwald

Sure.

Operator

Thank you. Our next question comes from the line of Robert Felice with Gabelli & Company. Please proceed with your question.

Robert Felice – Gabelli & Company

Hey guys, a couple of quick questions. I guess first when historically we’d expect to see 4Q get a bit weaker on the volume side, just giving some of the seasonality, but over the last two or three years we’ve seen a dynamic change a bit around the hurricanes with build in 2Q and a draw-down in third quarter, and they’re rebuilding the fourth quarter. Are we seeing reversion back to what we would normally expect historically, or I’m just curious to get a sense as to what happened around the hurricanes from a volume perspective?

Thomas E. Gottwald

Well, we’ve spent a fair amount of time internally discussing that issue and the first half of this year didn’t meet the typical pattern. The first quarter was a lot higher than it normally is, and the third quarter was weaker than it usually is. We’re not really sure if the typical pattern has changed for the future or this is more short term. We just don’t know at this point.

Robert Felice – Gabelli & Company

Now in terms of the volume pattern you’ve seen so far in the fourth quarter, has it been consistently weak, or has it been lumpy? I know we’re only a couple of weeks in, but any clarity?

David A. Fiorenza

No, I don’t, I mean the 5% to 10% was based on what we’ve seen. It was just kind of general.

Robert Felice – Gabelli & Company

Okay. And then in terms of your price/cost GAAP, where did that stand during the quarter and on a year-to-date basis?

Thomas E. Gottwald

We basically have been playing catch-up for eight months out of the nine in 2008, and in September we finally caught up.

Robert Felice – Gabelli & Company

And on a year-to-date basis, what’s the GAAP? Just trying to get a sense for that, seeing what the headwind was this year and potentially what the tailwind might be next year?

David A. Fiorenza

I don’t quite know how to answer that, but we still believe that 10% operating profit is representative of this business, so whatever data you’re looking at, our year-to-date numbers will be south of that for sure.

Robert Felice – Gabelli & Company

Would you expect the fact that that 10% level in 2009?

David A. Fiorenza

Yes.

Robert Felice – Gabelli & Company

Okay. And I know you said that your operating income should be at least as great as last year’s level, and that would imply a sequential improvement. What kind of magnitude are you looking at?

David A. Fiorenza

Well, that’s why we said at least as. It’s going to be a sequential improvement.

Robert Felice – Gabelli & Company

Okay, and I heard you in the first quarter, you had a one-time legal gain. Excluding that number, would you say you’d still be as gray as last year?

Thomas E. Gottwald

I don’t know. I don’t know, Robert. I haven’t looked at it that closely. But I was including the $3 million we made when we made the statement.

Robert Felice – Gabelli & Company

Okay. And then in terms of Foundry Park, how are things progressing there? And maybe you can give us an update on the financing situation.

Thomas E. Gottwald

Sure, the project’s going along fine. We are on schedule and little better than budget, or below budget. And the building is now out of the ground, the structure is up, and the skin is going on so that whatever uncertainties there are with constructing are becoming smaller as we go forward, so we expect to finish in that position. The short term financing is in place, as you know. We have three banks that are providing the construction loan. The longer term financing does have a question around what it might look like because the loan that we were anticipating was in a market that’s not functioning right now.

So we are talking to the group that we have a loan application with. And we’re also talking to other folks about what alternatives if they are. The good news here is that we don’t need this financing for another 15 months. As a matter of fact the construction loan is not due until August of 2010. So you can even look at that as kind of needed for two years. So, we’re working on that and that’s the situation right now.

Robert Felice - Gabelli & Company

Okay, great. Thanks for taking my questions.

Operator

Thank you ladies and gentlemen, our next question comes from the line of Rich Book with First Investors. Please proceed with your question.

[Rich Book] – First Investors

Hi there. I have a question on your volume gains year-to-date and also on the quarter. What do you attribute those two? Is it market share gains? Is it new products or how would you look at that?

Thomas E. Gottwald

It’s a combination of those. Its market share gains and new products, but I would say that certainly in the first half for this year, industry wide demand was a lot higher than historical patterns.

[Rich Book] – First Investors

Okay. Would you attribute it to it? Did you buy the share by not raising prices as quick as your competitors or how do you feel your pricing actions have been versus your competitors?

Thomas E. Gottwald

We don’t discuss our pricing strategy. I will say though that we did not have an aggressive market share growth strategy.

[Rich Book] – First Investors

Okay. Back to Foundry Park for a minute, is there—we’ve seen companies back out of, you know, new headquarters and things like that recently in the market, is there a way, a way for MeadWestvaco to get out of this contract or yes, what’s your thoughts there?

Thomas E. Gottwald

That is a solid contract with a very reputable large corporation.

[Rich Book] – First Investors

Where are their current headquarters, or is it a consolidation headquarters or what’s their strategy in moving to this location?

Thomas E. Gottwald

They’re in short terms space here in the area.

[Rich Book] – First Investors

Okay. And kind like overall picture, what’s the strategic rationale of, you know, real estate development on a company that’s mainly a petroleum additives business. How does these two businesses tie together?

Thomas E. Gottwald

We’ve got some very choice real estate here contiguous with our headquarters. We’ve literally built the real estate position here over a hundred year period. This is not a new leg in our business. It’s not something we intend to grow in. This is a way for us to maximize the value of the property that we have right here.

[Rich Book] – First Investors

Also, given—you know, what your stand in real estate financing market, your stock re-purchase agreements, you know, now’s probably the time when people are looking to sell businesses, do you feel any of your actions recently, that have kind of limited your financial flexibility, going forward, look at acquisitions or you know be interest in your thoughts there?

Thomas E. Gottwald

We’re still adductive as we’ve been on the acquisition analysis and pursuit side. Any decision we made on repurchase of stock or capital spending, takes into account the availability of acquisitions that fit our strategy, really, if the market today, not our financial capability that limits our acquisition. There’s money to be had for acquisitions out there is very expensive. So we’re just as active as we’ve been.

[Rich Book] – First Investors

Okay. And could give a little more color on the recent GE acquisition, you know, sort of pump primers and how much revenue you see it adding and things along those lines?

Thomas E. Gottwald

It’s a very small business in the scheme of things and relative to the eyes. It’s a nice business and that it extends our presence in the --- we finished fill additive area, the downstream portion of the fill additive market beyond the refinery gate. That gives us broader distribution in the U.S. for these products and it’s a market that we think fits very nicely with our technology and we plan to continue to grow in this area.

[Rich Book] – First Investors

Do these facilities come along with this acquisition or is the business just give you integrate into your market’s existing facilities?

Thomas E. Gottwald

No manufacturing facilities came as part of the deal

[Rich Book] – First Investors

Okay, thank you very much for your time.

Operator

Thank you, our next question comes from the line of Ian Zaffino with Oppenheimer. Please proceed with your question.

Ian Zaffino - Oppenheimer & Company

Great, thank you. Just a question here for David, the prices says 4% volume and you mentioned 6% in the call. Which is the right number?

David A. Fiorenza

The one requirement we have is to report how much tons moved, that’s 4%. Then the other requirement is when we break it down, is you try to figure out how much each ton was worth that’s the 6%. So I apologize for the two numbers and pop a line and I can show you more detail, but every ton is that of the same value from the 4% and the 6% one.

Ian Zaffino - Oppenheimer & Company

So you mean 6 is 2% of mix.

David A. Fiorenza

Yes, you can look at it that way.

Ian Zaffino - Oppenheimer & Company

The other question would be when you talk about disruptions in base oil, is that included in that $400 million estimate of what the hurricanes cost you?

David A. Fiorenza

Yes, but not much of it in that that disruption would have continued some into the fourth quarter. But the answer is yes. Some of it is in the 400 million?

Ian Zaffino - Oppenheimer & Company

Okay how is these disruptions manifest itself? Is it in surprising prices?

David A. Fiorenza

Its in the supply and the disruption of the transportation network also. I’ll give you simple example. When we might have taken product by a barge, we might now have to be tracking products, which has higher transportation cost. And then in fact, we might be even limited on how much that supplier can give us that we have to go and get some supply at a spot price that are higher price to keep our customers home. That’s the kinds of ways that manifest itself.

Ian Zaffino - Oppenheimer & Company

Okay, and then on the pricing increase side, I have two questions here that I’ll throw out is: Number one is from your price increases have been below your competition, is there something structural going on here? If you kind of elaborate on that, and then the other one would be, I know Teddy had mentioned that the third quarter buying definitely increase in raw materials. These have a – you see margin improved. Base oil actually was relatively flat to my near best estimate, was something else going on there and even if I adjust the hurricane I still don’t get there, so if you can help me out there. Thanks.

Thomas E. Gottwald

Yes. First of, they denied…I’m in no way to comment on our competition. We’re very pleased with the pricing actions we take and we have recovered the raw materials. The problem here in, if you look at the quarters worth of data and we never, I hope we never said we would be as fully recovered for the whole third quarter. When you see the data that we see, which is more of a monthly data, we see that we are recovering the margins towards the end of September moving in to October.

Ian Zaffino - Oppenheimer & Company

Okay.

Thomas E. Gottwald

So that’s the difference from what you said and where we set.

Ian Zaffino - Oppenheimer & Company

Okay. Thank you very much.

Thomas E. Gottwald

You’re welcome.

Operator

Thank you, our next question comes from the line of Mike Judd with Greenwich Consultants. Please proceed with your question.

Mike Judd - Greenwich Consultants

Hi. Thanks for taking my question. Your foreign exchange on a year-over-year basis has been averaging about 3% of the last three quarters or so. What are your assumptions for the December quarter let’s say just took the exchange rates where there are today. Would it result to the negative number on a year-over-year basis? I would imagine it would, right?

David A. Fiorenza

While year-over-year for the fourth quarter I got to say I don’t have fourth quarter ’07 exchange rate in front of me. There might be a push with the last year’s fourth quarter I supposed to be a negative, if that was your question.

Mike Judd - Greenwich Consultants

A push, meaning that it’s actually a positive number versus a –

David A. Fiorenza

No, meaning, zero.

Mike Judd - Greenwich Consultants

Zero, okay, all right. So I just kind of want to go back to the last question also. I’m a little bit confused because, you know, we’re going to have volumes down, foreign exchange probably flat, and maybe this could help me out here, is that, you had a 15% year-over-year increase in pricing for petroleum additives. Shall we be expecting a larger number than that or a lesser number than that than the December quarter?

Thomas E. Gottwald

I don’t really know how to compare the two, but I will say that the price increase instead, we implement it to make up for the cost increases that we think did not come in on at the very beginning in the third quarter. They rolled in through the quarter. You did not see the full impact of price increases in the third quarter numbers.

Mike Judd - Greenwich Consultants

Okay, I understand that you guys provide numbers for us each quarter and we have those numbers on our models, I think what we want to try to do is have some consistency in our earnings model, so I find to ask you to think about it from the perspective of the information that you give it from a quarterly basis, but also the type of way that we would like at it in our earning’s model. So, let me just go back and ask the question again, but you said, you know, you had a 3% year-over-year improvement in pricing the first quarter, I’m not sure I got the right number the second quarter, but might be 6.3% in the June quarter, it was around 15% in September quarter. What do you expect that number could look like potentially and realize it’s early in the quarter.

David A. Fiorenza

I’m actually not prepared to give you a decent answer Mike, why won’t you call me and we’ll talk about the line.

Mike Judd - Greenwich Consultants

Okay, and then, you know, lastly as I look at the margin numbers, in order to flat year-over-year, maybe we should just make sure that we’re all in the same bases here. The EBIT number that you’re talking about for last year, can you just give us that number, so that we can make sure that maybe they were some percentage and changes and you know, due to acquisitions. When you say that you expect the four year earnings to be at least is it seemed a level of better than last year, what is that base number in terms of EBIT?

Thomas E. Gottwald

Trying to look at that—I would be frank that petroleum additives –

Mike Judd - Greenwich Consultants

Right. That’s what I’m talking about, sir yes.

David A. Fiorenza

Operating profit.

Mike Judd - Greenwich Consultants

Sure, no problem. I’m talking about the same thing.

David A. Fiorenza

Right, I’ll find it, just a second.

Thomas E. Gottwald

Now, for the whole year of last year.

David A. Fiorenza

129.

Mike Judd - Greenwich Consultants

Okay, great. So, this is just the last piece of this question, which is that, you know, conceptually, I’m having a difficult time understanding how volumes can basically, essentially decline here, but margins could increase. I mean, it seems to me that what’s going on and I covered 46 chemical companies as the broad based weakness in terms of demand. I would imagine that if you attempt to push to through higher prices in this type of environment that your volumes could actually be significantly even weaker than the range that you’ve driven us.

David A. Fiorenza

Mike, sorry for we hadn’t been clear. All the pricing discussions have happened past attempt in what you’re basically going to see is the follow-through in the fourth quarter.

Mike Judd - Greenwich Consultants

Okay, but I believe, the customers, are they committed? Do they have to contractually agree to purchase the volumes or not?

Thomas E. Gottwald

I guess, no customer has to purchase the volume, but these are large standing customers and we expect that they will.

Mike Judd - Greenwich Consultants

Okay. I think someone else asked a question about your customers’ inventories, you know what level of visibility do you have into those inventory levels?

David A. Fiorenza

Not at a lot, I believe that’s why Teddy described it as anecdotal.

Mike Judd - Greenwich Consultants

Okay. So, thanks for the help.

David A. Fiorenza

Okay.

Operator

Thank you ladies and gentlemen. Our next question comes from the line of Amy Levine with Shenkman Capital. Please proceed with your question.

Amy Levine - Shenkman Capital

Hi, can you just talk about your stock product program? Do you plan on continuing that until ’09 or do you think it’s more prudent to maybe save the cash for any potential other uses?

David A. Fiorenza

We have $80 million left on our authorization and the only guidance I can give you is that that will be reviewed in light of the other things that are going on in our company. And it’s got another 18 months or two years on that authorization so—

Amy Levine - Shenkman Capital

Can I have your view given that change on the capital market? Do you think that view has changed?

David A. Fiorenza

No, I don’t believe so, I mean it’s still something that we will conserve.

Amy Levine - Shenkman Capital

Okay, thank you.

Operator

Thank you ladies and gentlemen. (Operator instructions). Our next question comes from the line of Bob Robotti with Robotti & Company. Please proceed with your question.

Bob Robotti - Robotti & Company

Hi, everybody. Hey, a lot more people in the call than it used to be two or three years ago.

David A. Fiorenza

That’s for sure.

Bob Robotti - Robotti & Company

So, you know, kind of going fourth quarter or first quarter next year, the movements are they–is this what you’ve said, I want to make sure, foreign currency that, you know , probably moving somewhat directionally cause it’s going to positive and what you said is that it would be probably neutral in the fourth quarter, as your best guess and of course, we only took one-third of the way through. So who the heck knows and currencies have been valuable.

And then on the volume side, of course, you said volumes, you know definite can be down some raw materials and margins could be improved cause you put through the price increases and raw materials probably can’t look just to heading positively not negatively. Capacity utilization, you’re going to be slightly rough, but you also said the capacity utilization was relatively high so that you probably don’t lose too much in terms of somewhat lower capacity utilization and of course the next, which the trends has been, you know over the less number of years, continuous to be a positive trend.

So those kind of all the forces in the short term that kind of you know, we look out the next couple of quarters are affecting or anything?

Thomas E. Gottwald

An inevitable of that would seem to me to be equally positive.

David A. Fiorenza

I agree, and I think you summarized our views accurately.

Bob Robotti - Robotti & Company

Okay. On the buy-back, of course you just said that, you know outside external market really hasn’t—you don’t see it having too much of an impact. That would seem to be since January price was at 54 and then August was 64, conversely, you know given current market its probably looks pretty attractive as when you go to the relative alternative that you’re looking at, could be one of your alternatives if the buy back is actually looks more attractive today than when you’ve done it in the past and you know, all of the things being equal, I just, necessarily any deal start to come true, so you know, the framework I guess in which you’re going to look at, what do you want to do in the buy back or not?

David A. Fiorenza

Okay, that’s the framework that we will be looking at though. I mean, do you understand, Bob?

Bob Robotti - Robotti & Company

No, no that one. And then, a really small item, the financing—the construction loan on the Foundry Park, of course the loan itself is really awful as live work, which of course has been all over the place. But you stand a spark on that, is that right?

David A. Fiorenza

Right.

Bob Robotti - Robotti & Company

And so does that mean you know the crazy movements in live war are really being absorbed through the swappy you’ve done so, you know fixed rate, how it going to affect on us really or you’re paring them?

David A. Fiorenza

That’s correct

Bob Robotti - Robotti & Company

And who’s at swack with, or should we be concern, you know, everybody is concern about, even people of slops have done smart things but then they created a financial risk of one shortened to a credit risk.. When you get on with it, kind of a party is on the slap?

David A. Fiorenza

But the counter party and the three guys are doing with the money.

Bob Robotti - Robotti & Company

The SunTrust PNC and Bank of America. So we don’t have any concerns.

Bob Robotti - Robotti & Company

And then again, on Foundry Park, how many acres were associated with the project of ground land.

David A. Fiorenza

Three and a half or something.

Bob Robotti - Robotti & Company

Three and a half. And what incremental ground land do you own that isn’t part of the Foundry Park and isn’t part of proper offices?

David A. Fiorenza

Hold on, but that the better answer is there’s probably another three or four acres that’s of the same quality.

Thomas E. Gottwald

And obviously, though we don’t tapped in there the short term, given, kind of current external event.

Bob Robotti - Robotti & Company

That’s fair. Kind of this is the last random item that you probably, you’d like to know the attitude will give – you know there was that talk six to seven, eight months ago, whatever it was that (inaudible) you know was being evaluated by Shell and Exxon, or I guess, was it mainly Shell who was doing the evaluation. Is there any scuttlebutt or anything by matter, anything happened?

David A. Fiorenza

You probably have just as much as we know. The only thing to say about that one.

Bob Robotti - Robotti & Company

Well, I got that I know as much as you do, it’s all speculations, so–.

David A. Fiorenza

That’s true.

Bob Robotti - Robotti & Company

Thanks a lot. I appreciate it. And again by the way, this question position the company great the last couple of years, you know, things have been unfolding and seems to me is you’re well-positioned at. Right at whatever noise is going on here in the short term.

David A. Fiorenza

Thank you.

Bob Robotti - Robotti & Company

Great. Bye-bye.

Operator

Thank you ladies and gentlemen, our next question comes from the line of Robert Felice with Gabelli & Company. Please proceed with your question.

Robert Felice - Gabelli & Company

Hi, just a quick follow up. I wanted to get some greater clarity around FX, you know its been a nice tail-end for awhile as you said it will be being neutral in the fourth. If the dollar stay where it is right now, what kind of head-winds are you looking at in ’09 on the bottom-line?

David A. Fiorenza

Average in nine months to Euro was 1.53, okay? And the average nine months Euro from the previous year was 1.35 or 1.33, let’s make it simple. So that $0.20 up was the predominant reason we think we had about a 9 million gain. So, if the $0.20 goes away it’ll be 9, 10, 11 negative in ’09.

Robert Felice - Gabelli & Company

Okay. And yet the same token, you said that you still expect to achieve the 10% operating income margin.

David A. Fiorenza

That’s correct.

Robert Felice - Gabelli & Company

If I look at your trailing 12-month revenue here, to take that 10% operating income that’s you know, $160 million roughly.

Thomas E. Gottwald

That’s the number, yes.

Robert Felice - Gabelli & Company

Is this the—you know, I know you don’t give guidance, but just, you know qualitative color around that number. Is that a kind of magnitude, you know we’re looking at for next year?

Thomas E. Gottwald

Your comment about not getting guidance is the right one Robert.

Robert Felice - Gabelli & Company

I’m prying here for whatever kind of cloudy as you get.

David A. Fiorenza

Yes, I hear you.

Robert Felice - Gabelli & Company

Alright, well I appreciate you taking the questions, alright.

Operator

Thank you ladies and gentlemen. Our next question comes from the line of Michael Szafranski with Onyx Capital Management. Please proceed with your question.

Michael Szafranski – Onyx Capital Management

Good morning. Just a quick question about your buy back. Do you anticipate getting much more aggressive over here?

Thomas E. Gottwald

You know, just don’t comment on what our future plans are. Now I’m telling you is we have $80

million authorization, it’s good for another 18, 20 months and we look at every quarter.

Michael Szafranski – Onyx Capital Management

All right. Just another question, with 80 million left, would it be your best interest to buy back your bonds at around 75 instead of buying back your stock?

Thomas E. Gottwald

We look at that arithmetic too, but seven and a eighth money is pretty good money right now from around seven.

Michael Szafranski – Onyx Capital Management

Absolutely, but your—

Thomas E. Gottwald

Yes, we’re not really likely to be doing that.

Michael Szafranski – Onyx Capital Management

All right and did you say you saw margins expanding slightly during the fourth quarter or you didn’t really give any color on that.

David A. Fiorenza

No, we said we expect margins to expand in the fourth quarter over the third quarter.

Michael Szafranski – Onyx Capital Management

The margins to expand, the volumes to be down.

David A. Fiorenza

Right.

Michael Szafranski – Onyx Capital Management

Thank you very much.

David A. Fiorenza

You’re welcome.

Operator

Thank you. Next question comes from the line of Ian Zaffino with Oppenheimer. Please proceed with the question.

Ian Zaffino - Oppenheimer & Company

Okay. David, you said a 129 million of operating profit you did on normalize basis in ’07?

David A. Fiorenza

For petroleum additive.

Ian Zaffino - Oppenheimer & Company

Okay and you’re saying that ’08 is going to at least—

David A. Fiorenza

It’s going to at least $329 million.

Ian Zaffino - Oppenheimer & Company

And that includes the hurricane, including everything?

David A. Fiorenza

That is correct.

Ian Zaffino - Oppenheimer & Company

So, like the GAAP number that you print—

David A. Fiorenza

That is correct.

Ian Zaffino - Oppenheimer & Company

Okay. All right. Thank you very much.

Operator

Thank you ladies and gentlemen we have no further questions at this time. I’d like to turn the call back to management.

David A. Fiorenza

Thank you for joining us and talk to you later. Bye-bye.

Operator

Ladies and gentlemen this now conclude today this teleconference and you may disconnect your lines at this time. Thank you for your participation.

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