NewMarket Corp (NEU) 2003 Q3 法說會逐字稿

At this time I like to welcome everyone to the Ethyl Corporation third-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarked there will be a question and answer period. (OPERATOR INSTRUCTIONS) Mr. Fiorenza, you may begin your conference.

Thanks for joining our quarterly conference call. With me today are Teddy Gottwald, our CEO, and Newton Perry, our Senior Vice President of Strategy. After a few opening comments we'll open the lines up for questions and answers. As always some of the comments we make today are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. We believe our statements are based on reasonable expectations and assumption within the bounds of the knowledge of our business. A full discussion of the factors that affect our business can be found in our latest 10-Q.

Petroleum additive net sales in the third-quarter of $194 million were up 23 million or 14 percent from the third quarter of last year. The total volumes shipped were up 15 percent for the third-quarter compared to that same period last year, reflecting increased shipments across all major product lines. The factors favorably impacting sales were the volume in foreign exchange, some price increases, and some negative factors were a function of product and customer mix.

For the nine months of this year, sales were up $62 million, 13 percent higher than the nine months of last year. Similar to the third quarter, shipments were higher across all product lines. The overall increase in volume shipped of 8 percent changes the product mix, some price increases accounted for about two-thirds of the dollar increase. The remainder was due to favorable foreign exchange.

As you know, we evaluate our business in two segments, petroleum additives and tetraethyl lead. We base these on the operating profit of those segments and we do not allocate certain costs that are not under their control like corporate departments. The total third quarter operating profit for the Company of 29.6 million was 1.6 million higher than the third quarter last year. The 6.3 million increase in operating profit of TEL was offset by a reduction of 4.7 million in the petroleum additives segment. Nine months of this year combined operating profit, excluding non-recurring items, was 8.4 million higher than last year reflecting an increase in both petroleum additives and operating -- and TEL operating profit. This increase is about 15 percent.

When we look at petroleum additives a little more, the third quarter of this year the operating profit was 19.2 million or 4.7 million lower than the third quarter last year. At the gross profit level, there are many factors that impacted the final results for the quarter. We have favorable volumes, a slight improvement in prices in some of the products, much higher unit raw material costs, favorable foreign exchange, and higher unit conversion costs this year as compared to last year. As you may recall, last year in the third quarter we reported that we built inventories for a planned turnaround. The net effect of these factors was favorable for all product lines in the period to period comparison except for engine oils.

R&D in the petroleum additives segment was about 1.8 million higher than the third-quarter last year. While this comparison includes a slightly unfavorable foreign exchange impact, most of the increase was due to planned increases in both personnel and outside testing. These are a function of us supporting our goal to continue to provide top quality products to our customers and spending in support of upcoming industry changes in product specifications.

Selling, general and administrative expenses increased 1.6 million from the 2002 level. As a percent of net sales, SG&A and R&D combined was about even when compared to the third quarter of 2003 at about 14.2 percent. For this nine months, excluding non-recurring items, petroleum additives operating profit was $47.6 million or a 4 percent increase over last year. The improvement (technical difficulty) nine months this year are across all major product lines except engine oils and reflect an increase of 8 percent in shipments. The most significant improvement is in the fuels product area.

Operating profit also improved due to favorable foreign currency, predominately the euro. Unit raw material costs were up in the two period comparison, and energy costs are higher this year than last year. R&D in this segment is up 5.6 million. The factors that I just mentioned in the current quarter also hold true for the year-to-date numbers. Finally, selling, general and administrative expenses increased 6.6 million from the 2002 levels. As combined with R&D on a year-to-date basis and a percent of sale, there was a slight increase in this nine month period over the last nine months.

Turning to TEL. TEL sales, as you know, are mainly booked on Octel. We did show a slightly higher that the third quarter last year, but the revenue is booked on Octel's books. The operating profit from our marketing agreements with Octel for the third quarter was 9.7 million which was 1.4 million higher than the third-quarter last year. The marketing agreement profit was 20.6 million for the nine months this year and 18.5 million for the nine months last year. The improved earnings in both the current year and the quarter -- current year-to-date and the quarter -- reflect higher selling prices which were partially offset by lower volumes shipped during the first nine months.

Other TEL operations not included in the marketing agreements improved 4.9 million from the third quarter last year, and 4.1 million compared to the nine months. The improvements in this year's periods reflect the absence of higher 2002 charges related to environmental issues and our ongoing efforts to lower our costs. While the market for this product continues to decline, TEL's business continues to supply us with good cash flow.

The third quarter of this year's interest and financing expenses were 5.2 million compared to 6.4 million last year. Lower average debt resulted in a decrease of about 1.2 million while higher average interest rates resulted in an increase of 800,000. Fees and amortization of financing costs were 800,000 lower. Interest and financing expenses of 16.4 million for the nine month period were 3.5 million lower than the same period last year. So more to the quarter lower average debt cost a reduction of 3.4 million and higher interest rates negatively impacted 1.2 million. Fees and amortization were 1.3 million lower.

When you look through the data that we supplied, I just remind you that discontinued operations was the phenolic antioxidant business that we sold earlier this year. Net income for the third quarter was 10.3 million or 61 cents a share while the third-quarter last year was 10.9 or 65 cents a share, but that 65 included 4 cents of the business as now discontinued. So 61 to 61 ignoring that. For the nine months of this year net income is 32.3 million or $1.93 a share compared to net income of 6.8 million or 41 cents a share for the same period last year. Non-recurring items and discontinued operations totaled income of 16.4 this year, an expense of 4.2 last year. Excluding these, we earned 95 cents for the nine months this year compared to 66 cents for the same period last year.

At the end of September our debt was $22 million, and the beginning of this year or the end of last year our debt was 290 million. This is a reduction of $68 million. Since we refinanced we have made repayments of $48 million on our term loan. We're very pleased with our debt reduction accomplishment so far this year. We expect to make further reductions in the fourth quarter. As those of you who follow us know, on a regular basis however, the fourth quarter tends to be lower overall demand in the petroleum additives industry. Let me turn it over to Teddy who has a few comments.

Thank you, David. Despite having continuing difficulties in the petroleum additives industry, we're having a good year. Our revenue is up, our earnings are up, our debt is down considerably. We've made good progress in growing some of the key areas of our businesses, the fuels, the lubricant specialties in particular. We've seen some modest gains in engine oils, and the lead business, the profits there are ahead of where we expected to be. This progress puts us in a good position to further advance on our goals.

We're investing more dollars in research today to meet the future demands of our industry. We continue to look for ways to help our customers grow their businesses and control their costs, and we're investing more time in examining new areas for growth. We are concerned about the rising costs in this business and the weakened demand for finished lubricants in some areas. But overall we're very pleased with where we are today. And as always, I want to thank our employees for their tremendous effort in making this possible. David, you want to take questions now?

I might have said 22 million of debt a minute ago. I misspoke. It's 222, but the drop is still the drop I said. We'd like to open it up for questions now.

(OPERATOR INSTRUCTIONS) Bill Hoffman.

Just a couple of quick questions. I wanted to get a sense as we go into 2004 what the outlook might be for some of the major contracts that you might have in some of your OEM business, whether there's anything on the horizon that we need to be watching out for? And then the second question is I want to get a sense on if you can give us a little update on the MMT business how that program is rolling out?

It's a little early for us to really be commenting on 2004. We do have momentum in a lot of product lines, cost continues to be a concern. From a contract standpoint, particularly as it relates to factory fill business with OEMs, our business there has grown so we expect that to be solid for next year as well. At the end of the year going into 2004, we'll elaborate a little bit more on this, but it's not going to be our general policy to give any kind of estimate for the year.

The question really is, you have -- if you had to sort of take the whole -- a lot of business on the OEM factory fill side, do you have any major contracts that roll next year? Sort of what percent on an annualized basis would be rolling?

I assume you mean rolling off.

They come up for bid or whatever. Whether there's 25 percent of the business comes up for bid on a year in/year out basis, or whether they're lumped in any single year?

I think we've had a flurry of activity this year. And the net result of that has been positive for us. I'm not aware of any significant percentage that we expect to come up next year that directly impact us. Your question on MMT was a general one I guess, on how we're doing there. We continue to see modest growth in MMT, that effort continues to face a lot of challenges around the world. But by and large, we continued to grow the profitability of it modestly. And I guess the most encouraging thing about that business is the expanding business base, we're selling it in about 30 countries today, and that number continues to grow.

Thank you.

Bob Roboti (ph).

I just had two quick questions on the TEL business. One of them is, of course, your base, the profit from the alliance is 20.6, up from 18.5. Of course, there's all that variability quarter to quarter. Is that suggesting that potentially this year profit will be equal to or greater than next year, or still too soon to tell because of all that quarterly variability?

There is a lot of quarter variability, as you've pointed out. We're having a very good year in TEL. Our prices are up higher than we expected. All our major customers are taking product again. And subject to the variability, we expect to have a very good year.

And then on the TEL segment line, the significant improvement year-to-date is as much the non -- the expenses and the loss related to expenses that aren't part of the alliance that you absorb or the sales that you have direct, right? It's down from last year nine months 7.6 million, this year it's down 3.4 million. Is that kind of a continuing trend that the costs that you do not put into the market alliance and have to absorb and the loss on direct sales is actually declining and getting closer to a breakeven operation?

That's a continuing trend. In part also in 2002 we had some costs that weren't repeated this year subject to some of our environment charges, but you should read from that it's a continuing trend.

And then on CAPEX, I guess year-to-date you've only spent 7.2 million, and I guess I was kind of thinking -- thought you had given guidance more like in the 15 million. Will you probably come under that number for the year or will it be fourth quarter weighted? And do you have any preliminary number on '04, is 15 million kind of a good number to model on a go forward basis?

The first three months have been abnormally low. I wouldn't be surprised if we end in the 12 range for the year, 15 to 20 is a good go forward number.

And on the additive segment, of course, the depreciation amortization numbers on an annualized basis are where, more in the mid 30s? And I'm assuming that a lot of that really does relate back to the acquisitions, right back in the mid-90s of the Amoco/Texaco business. And obviously the last number of years you've been spending more in the 15 million CAPEX range, that depreciation in that segment starts to come down. Is there any -- and I guess you probably have a pretty good handle on that number since it's all kind of in the balance sheet and you've got fixed depreciation amortization, but what does that look like for the next couple years?

Of that 35 million of depreciation and amortization, 23 is depreciation. The rest is amortization. I don't have the amortization forecast on the tip of my tongue, but it's in the 10-Q, so just look there. We do have good data on the depreciation because, as you pointed out, once it starts it follows itself. It'll go down several million a year going forward. Obviously it depends on how much we spend on what we add back. But look in the Q for the amortization and use a couple to 3 million a year drop on the depreciation side.

And by the end of the year you're clearly going to be at your goal getting debt down to what your anticipated target was at the beginning of the year, actually it looks like you're going to be ahead of where you thought that might be. And you did say when debt got down to that level and you have restructured the debt and you've got the 150 million placed, that you'll kind of look at -- clearly you've got very significant free cash flow, have had, and the debt repayment is at a point where it's definitely manageable and you've restructured the debt, it's manageable on a go forward basis. When do you think you'll have any kind of ideas in terms of capital allocation? What are you going to do with it because I guess going into the '04 you're really going to have free discretionary cash flow available to think about doing something other than debt repayment.

We've kind of used 200 million as a number that is a very comfortable number. We're getting close to that today, so we're in our comfort zone. 150 million is, obviously with our bond structure, a minimum and that's a comfortable minimum for us. Yes, we're getting closer to that range, so we're spending more and more of our time looking at opportunities to invest money in new areas for growth. We're looking now at a range of opportunities, both large and small. Our preference is to start with what we know.

We're an additive company, a petroleum additive company and we're going to stay an additive company. We'll start there and work our way out. We've identified some opportunities, we'll work on identifying more. But this is an area where everyone knows opportunities don't come up necessarily on a schedule you'd like them too. So it may be a while before we put that money to use besides paying down debt.

And of course by that in large part I guess what you're saying is capital allocation to something else is going to be as much reactive as anything else, but there aren't that many opportunities, they're few and far between, and they have to be priced right. In the shorter term it's less likely that something happens because you don't have the confluence of events.

What we told you last time, Bob, remains true, it has to be the right opportunity.

Thanks.

At this time there are no further questions.

Thank you very much.

Thank you. This concludes today's conference. You may now disconnect.