NewMarket Corp (NEU) 2003 Q2 法說會逐字稿

Good afternoon. My name is Stephanie, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Ethyl Corporation second-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (CALLER INSTRUCTIONS). Mr. Fiorenza, you may begin your conference.

Thank you for joining our quarterly conference call to discuss our performance. I'm David Fiorenza, and with the today are Teddy Gottwald, our CEO and President and Newton Perry, our Senior Vice President of Strategy. I will be covering the majority of the planned comments today, and then we will open the lines for any questions. Some of the comments we will make today are forward-looking statements within the meeting of the Private Securities Litigation Reform Act of 1995. We believe our statements are based on reasonable expectations and assumptions within the bounds of what we know about our business and operations.

However, we can offer no assurance that the actual results will not differ materially from our expectations due to uncertainties and factors that are difficult to predict or beyond our control. A full discussion of these factors can be found in our most recently filed 10-K. Second-quarter 2003 combined segment operating profit of $22.9 million didn't include any nonrecurring items. The segment operating profit for the same period in 2002 was 15.7 million.

When you exclude the small nonrecurring item in that prior period, we have the combined operating profit for the second quarter of this year being $7.2 million higher than the second quarter last year. This reflects increases in both of the petroleum additives and tetraethyl lead segments. The six-month comparison of combined segment operating profit, excluding nonrecurring items, is 36.1 million for this year and 29.4 million for last, an increase of 6.7 million or 23 percent. This increase was totally attributable to the petroleum additives business as TEL was flat on a six-month to six-month comparison.

I want to look at the petroleum additives segment first. The net sales in the second quarter of 178.8 million were up 10.9 million or six percent from the second quarter of 2002. Total shipments were down slightly in this comparison. That reduction was the result of less engine oil products being shipped and higher volumes across all other product lines. Volumes were lower overall, but when combined with product mix it resulted in sales being higher 5.7 million of the 10.9.

The remaining increase in sales was primarily from (indiscernible) foreign currency, predominately the euro, and some improvement in prices. Petroleum additives second-quarter 2003 operating profit, was 16.6 million compared to 12.6 million for the same period last year. Excluding nonrecurring items, petroleum additives operating profit for the second quarter of 16.6 million was 34 percent higher than the second quarter last year on the same basis.

The improved second-quarter profits this year were primarily in the fuels product lines area. The higher profits also benefited from improved production costs associated with increased levels of running and inventory builds during the period and favorable foreign exchange, again predominately from the euro. On the negative side, raw material costs were up between the two quarters as energy and raw material prices remain high. These higher prices had the effect of compressing gross margins as price increases were only able to offset a push in of the cost increases. Both R&D and SG&A were higher on a quarterly comparison basis.

This was a result of planned actions on our part to support our overall program and these line items were negatively impacted by the same euro that had a benefit in our revenue in our overall profit. When we look at six-months for petroleum additives segment on a comparative basis, net sales were 38.2 or 12 percent higher than six-months last year. Similar to the second-quarter, shipments were higher across all product lines except engine oil products. Factors that contributed to the increase were the same, higher volumes, favorable foreign exchange and somewhat higher selling prices.

Excluding nonrecurring items, petroleum additives operating profit for six months of 28.3 million increased 31 percent from six months, 21.6 million on the same basis last year. The improved six-month profit this year were across all major product lines. Looking at tetraethyl lead, tetraethyl lead sales in the second quarter and six-month of this year were somewhat lower than the same period last year. You may recall that we only record the sales of lead into North America. The remainder of the sales are recorded on Octel's books which are covered by our marketing alliance agreements.

The operating profit from our marketing alliance agreements for the second-quarter 2003 was 7.9 million, which was 3.5 million higher than the same quarter last year. On a six-month basis the marketing alliance agreements produced 10.9 million of profit this year and 10.2 million for the same six-months last year. This segment is characterized by large swings in quarterly profitability, and these results reflect the timing of shipments. Moving on to interest and financing expenses, the second quarter of this year's interest and financing expenses were 6.4 million compared to 6.6 million last year.

Lower debt resulted in that being decreased by 1.2 million, higher average interest rates increased to 300,000, and we had 700,000 higher fees in amortization of finance costs as we exited our old loan and moved to our new loan structure. Interest and finance expenses of 11.2 million for six months are 2.5 million lower than the same period last year, basically the same factors involved however in this comparison we had somewhat lower fees.

On April 30th, as you know, we entered into our new long-term debt structure. Interest under that structure varied from our former credit facility. The interest on the seven-year 157 -- $150 million senior Notes is fixed to 8.75, and the term loan is at 450 basis points over LIBOR. You may have noticed in a press release we issued recently that all of the private notes were tendered for new publicly treatable notes whose terms and conditions are essentially the same as those in the private offering.

When you are looking through our results I will just remind you that when you see something labeled, discontinued operations, those are the numbers associated with the antioxidant business that we sold earlier this year. The net income from the second quarter was $5.7 million or 34 cents a share. Last year in the same quarter we had a loss of 2.5 million or 14 cents a share.

If you leave out the nonrecurring items last year second quarter, was $800,000 in income or five cents. Since there were no significant nonrecurring items for the same period this year, we made 34 cents this quarter compared to five cents last year. Take a look at our cash flows for a minute. One of the things you'll notice on our balance sheet is that our cash position is up about $11.4 million since the end of the year. This increase is a temporary one and was related to some transitional issues with moving our letters of credits from one facility to the new one. Those issues are behind us now, and I expect cash to return to the year end tight levels as we move forward. This quarter cash flows included the final payment of $3.2 million to Octel and roughly offsetting cash out that it took to put the new loan in place, and cash in from the sale of Brattnol (ph) in Oregon Hill properties.

Capital expenditures were low this quarter and have been low for the first six months. I still expect we will finish the year in the 12 to 15 million range. As I mentioned earlier, the new debt structure will incur us to -- will cause us to incur higher cash interest expense than the other one, the other facility. But it provides us the long-term capital structure we need to manage our business. Our debt was 255.8 million at the end of June and was 290 million at the end of December, a reduction of $34 million.

We had an increase in working capital this quarter. The increase in working capital was primarily a build of inventories and receivables, offset by smaller movements at accounts payable in income taxes. The increase in inventory is the results of forward planning within our manufacturing system to provide for some new business demands we expected in the second half of the year. For those who track EBITDA, the first quarter 10-Q will contain all the information to calculate that statistic by business segment.

The total EBITDA for the second-quarter for the company was 27.1 million, which brings the total for six months to 42.9 million. We plan to file the 10-Q tomorrow. I encourage you to read the filing for a more complete discussion of the items I have covered today, as well as other statistics that are included, that are not covered in the press release or this call.

Thanks, David. As the numbers and details David has just reviewed with you should suggest, we are very pleased with our performance in the second-quarter and our midyear results. Going forward we continue to follow the plan we presented to our shareholders last year, continue to reduce debt, focus on the profitability of our current businesses and then at the appropriate time when our debt ratio is satisfactory and when the right opportunity is developed, we can and will consider growth or expansion activities both inside and outside our current business. David.

That's the end of our prepared remarks. Stephanie, can you open the line for questions please?

(CALLER INSTRUCTIONS). John Smith, a private investor.

You mentioned in the second-quarter this year, you had increased inventory, it (indiscernible) going after some new business in the second half of this year. Can you give us a better sense of what that new business is and how sustainable would that be?

We are running our plants we believe to 75%, 80% kind of mode, where we look at (indiscernible) business that happens, we have to stage that in advance because we can't push the rates up on the plant. So this is business in our lubricant side of our business predominately that we expect will ship in the second half of the year.

Mike Beale (ph) with Davenport.

Dave, can you talk a little bit about the lead business? Is there any reason to think that the decline rate that has been pretty high the last two years, I guess, is that flattening out at all, or what would you be willing to say about that?

I think what we would say to you is the same thing we have said for years that the decline rate will be in the range of 15 to 20 percent. You should expect large quarterly swings within shipments because of the nature of the business itself, we don't see the decline rate changing outside that bandwidth.

All right. Hytech 2000 MMT, are we selling much of that? What sort of prospects do we have for selling more, or is it sort of a dead issue?

We're pretty pleased with the progress we are making with MMT. It is steady progress. I think most encouraging to me is the number of customers that we have and the number of different countries around the world where it is being sold. The acceptance of the product is growing, and that's very important to the business. We are making money in the product line, and we expect it to continue to grow at a modest rate.

You mentioned considering growth opportunities when you get the balance sheet right and when you saw what you want. Remind me where we think we need to have the balance sheet before we feel more comfortable pursuing that.

I like to see the debt down in the 200 million level or lower. I expect we'll hit that sometime in the second half of next year and at that time, we will start to consider more options.

You just went through that last thing, went through a debt restructuring and this is all good. I was just curious your banks and your bondholders, when they look at the lead business, do they give you any credit for that when they calculate what sort of debt levels are appropriate or do they intend to just discount that or what can you say about that?

We do get credit for those cash flows, but it is not regarded in the same light as cash flows that are stable or growing. We wouldn't get the same kind of multiple on that as we would on the rest of the business.

Last thing, could someone just comment from a (indiscernible) business in general? This is a business that, I know you shifted your emphasis, but has been plagued with overcapacity and requirement to spend a lot of money and not get paid for it. Is that still the case? What can you talk about in terms of just the macro environment you're working in?

I would say the macro environment of the petroleum additives industry has not gotten any better over the last couple of years. It's a very tough industry. There's a lot of overcapacity, very large and powerful customers. And we're getting squeezed on the raw material end of things. The investment required in the business is quite high, as you mentioned, and oftentimes the returns on that investment are marginal.

There are good places within the petroleum additives industry, and there is some that are not so good. We've put more of our focus in the areas where our technology is strongest and where we can add the most value to our customers. But we are playing in all segments, and we will continue to play in all segments. They are all important to us.

Thank you.

Bob Robotti (ph) with Robotti & Company.

On the lead business, I know that it is volatile quarter to quarter and so therefore there is that abnormality (ph) but I also understand of course that Venezuela didn't take deliveries in the first quarter but did in the second-quarter. Were there anything abnormally high about deliveries to Venezuela or other customers that caused the TEL business in that quarter to be abnormally high?

No, there weren't. They were back on a standard pattern that we would have expected when Venezuela began to take product again.

And in that business, I guess David you mentioned in the Q that you're going to break out the DD&A by segment. I don't think you did that in the first quarter. Is that a different thing in the second quarter?

They had some request to break it out, so we are doing that from now on.

In the additives business itself, you do mention that first half of the year volumes are still down a little bit in the engine oil business. I guess other than engine oil businesses kind of growing, I guess I went back and looked over the couple of years and it's kind of like low double-digit rates actually of the dollar basis anyway. What is kind of the trend in the nonengine additive business, and what kind of growth did you actually have in the first half or quarter-over-quarter in the non-engine oil business?

You know I don't have that data handy. I would be happy to follow up with you on that one. Engine oil tends to be such a large volume, it kind of swamps good volume movement in the other ones, but we make all of our money in the other one. So I don't have any answer handy.

And I guess I heard on the call for Lubrizol, they talked about next year the formulation for engine oil potentially being positive in terms of -- the ad rate would be greater and potentially I guess that would mean right for every same barrel -- of course if oil is sold there will be more additives in it and that could potentially lead to higher volumes. Is that the case? Is that what you are seeing also? Are there some fundamentals in the engine oil business that should help that business some, given its volume?

I think it's a little early to say what the impact on trade rates is going to be. The final (indiscernible) I don't think have been agreed on yet for the next round. If I had to speculate, I wouldn't expect it to make a significant change from the current situation.

Separate from the sale of the segment to Albermale there were also proceeds in sale of business of 12.5 million in the first six-months. I guess it was really in the quarter, and I'm assuming there was really no gain or loss on those sales and what were those sales, what were the proceeds?

That was mentioned in the opening comments, it was a sale of the piece of property in England and in Richmond, Virginia. There was a $1.5 million gain that's going to be amortized over time so you can't see any of it in this quarter's results, very little gain.

And by properties, is that something that was productive that was generating revenues or was it really kind of excess properties?

The property in Richmond you could call it excess property. The property in England we're going to lease back for a period of time. It's a larger site that we occupy part of it on for some of our office facilities in England.

So that's why you're going to amortize the gain back in because it will be part (multiple speakers) time.

That's correct.

Okay, thank you.

Bill Hoffman with UBS.

A couple more questions. You mentioned the MMT business still growing, I was just wondering if you're seeing more MTBE in some of the international markets from a competitive standpoint and what you're hearing from some of those international markets in regards to their fuel additives.

In a general sense MTBE is still a proposition that is up in the air. So my best answer to you would be that we haven't seen any unusual activity on MTBE out there. Still a product accepted internationally under great pressure in the U.S.

With regards to this inventory build for a product that you expect to sell second half of the year, is that ongoing seceding (ph) contract business or is that just spot business that will run off in the second half of the year?

Our business we talk about lead not being smooth, well some of our other business isn't smooth either. A lot of this business will be sustained. We may wind up at some higher inventory levels. But I would expect inventories to moderate some by the end of the year.

Can we expect, should we be building in a little more aggressive topline growth, then, expecting some higher volumes here?

I guess that would be a good conclusion.

And finally just want to get a sense from you all with regards to the OEM side of your business, especially driveline business, whether you're -- in this third quarter here whether you are seeing a dramatic pullback in the OEM side of the business on this year's car models and/or whether they're starting at much lower rates for next year's models.

It is hard for us to see the impact of the swings in part of production in our business. I don't think the order pattern is regular enough for us to see that. Keep in mind that within the driveline segment, a certain percentage of it is factory fill business, and within that a swing of plus or minus ten percent in order of production is going to be watered down a lot before it really impacts the product line for us. Now I haven't said that. I think we expect to see more of our products going into '04 models than we've seen in '03 models. So we would expect the changeover, which is occurring to benefit us. I think we probably saw some of that in the second quarter.

Thank you.

John Smith, a private investor.

Couple other questions. If we can go a little bit of a deeper dive on the petroleum additives business. Can you provide maybe a forward view on Ethyl's profitability in (indiscernible) case, ATF, and then GPA? And secondly, you have mentioned you're getting a squeeze on raw materials. Can you help us better understand what raw materials and what you do to mitigate those risks?

First off, we don't give forward projections basically at all and more specifically not on each individual product line. On the raw materials, it is our general slate of raw materials that are eventually connected to the movement in oil prices basically, even though we don't buy oil. And what we've been trying to do is recover those increases in the marketplace, and some success but not total success. Your guess is as good as mine how long those prices will stay high.

Recovering to price increases of your own, is that what you mean?

That's correct.

Joe Antrol (ph) with Davenport.

My question sort of centers on what's going to happen in a year. You mentioned that when the debt level gets down to around $200 million it is time to be looking to redeploy some of those assets, and I just wanted to explore a little bit the types of companies, the hurdle rates, the profitability ratios, the cash requirements, are they -- is there a priority as to petroleum additives, or is that something that is definitely not a priority, stay away from relative size?

I guess I'm getting at the fact that Ethyl stock has had a great run-up. At least to some degree it seems to me because of the financial aspects of the balance sheet being improved and if that is going to change in a year how are they going to change and what are we going to be left with?

Jim, I can tell you with a fair amount of confidence that our first priority is on the petroleum additives business. We are not waiting until we reach that number to be prioritizing, to be thinking about where we would spend money if opportunities presented themselves. I think within the petroleum additives segment there are a number of areas where our competitors play and have stronger positions than we do. Some of the industrial areas come to mind, for example. There are other areas where we have industry-leading positions like fuel additives where there is some interesting technology out there that would be a nice add-on to what we've got.

I think that as we look at those, certainly those are areas that we know best. They are areas that we could add technology or business onto without adding a lot of overhead. That's where we are putting a lot of our emphasis today. As far as hurdle rates, cash needs, I think my best answer to you there is any of these types of add-ons would be accretive for us, and we are just analyzing each as they come.

So we are not necessarily waiting for the $200 million mark to make a move?

Not at all, but we are very comfortable applying all of our excess cash flow today to paying down debt. Certainly if the right opportunity came along we wouldn't pass it up. But the higher our debt level is, the better the deal has got to be.

Thank you very much.

Bob Robotti (ph) with Robotti & Company.

In TEL of course you do give the profits on the alliance so therefore you should be able to back into the direct gain or loss, and of course that has been a loss and what do you lose, about 1.5 million for the quarter or 3 million for the year? And of course last year I think the number for the full year was like 9 million. Of course the sales volume was very small and clearly that is not depreciation because there are no capital assets. Is that really some legacy expenses that are really going through those statements, and is that a level that you would anticipate in the future?

I think the 3 million is a pretty good number. We do have some legacy costs that go through that, and we do have some expenses associated with supporting the alliance that don't go through the alliance, some distribution and so forth. But I think 3 million is a pretty good number.

And 3 million of course was six months, so that would be 6 million on an annualized basis.

That's right.

And of course you have other expenses, 2.5 million a quarter, 5 million for the first half of the year. Again, what's the nature of those, and is that a good recurring level on a go forward basis, and are those some legacy costs also?

That's a good go forward number. A lot in there are your post-retirement benefits that we pay to people who have been retired from Ethyl for a good while. That is also where a lot of the dribs and drabs (ph) go. But the one single item in there of any size is the post-pension obligations -- post-retirement health obligations, excuse me, not pension.

Thanks a lot.

(CALLER INSTRUCTIONS). At this time there are no further questions. Mr. Fiorenza, are there any closing remarks?

No, thank you again for participating and talk to you next quarter.

Thank you for participating in today's Ethyl Corporation second-quarter earnings conference call. You may now disconnect.

(CONFERENCE CALL CONCLUDED)