NewMarket Corp (NEU) 2003 Q4 法說會逐字稿

Good afternoon. At this time, I would like to welcome everyone to the Ethyl Corporation year-end results conference call. (OPERATOR INSTRUCTIONS). Mr. Fiorenza, you may begin your conference.

Thank you for joining our year-end conference call to discuss performance. I am David Fiorenza, the Principal Financial Officer, and with me today are Teddy Gottwald, our CEO and President, and Newton Perry, our Senior Vice President of Strategy. I will make some opening comments and then Teddy will also, after which we will open the lines for questions. As always, some of the comments we will 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, although we cannot have any assurance that the results will come out as we believe. Many of the factors that may affect these results are listed at the end of our press release, and a full discussion of these factors can be found in our latest 10-K.

The year 2003 was a year in which we continued our progress on improving earnings and reducing debt. We also established a long-term debt structure early in the year that provides us with the platform to continue to build for the future. Petroleum additives net sales of $747 million was 15 percent higher than sales last year. This was the result of improvements in all product lines. Total volumes shipped in 2003 were higher across all lines, and this, along with product mix, resulted in about 80 million of the improvement in sales. The remaining increase in net sales was due to favorable foreign currency and changes in selling prices. In tetraethyl lead, as you know, most of the marketing activity is through arrangements with Octel and its affiliates, under which we do not record sales. Therefore, the sales we record by those made by us in the areas not covered by the agreement, as well as sales made to Octel. These sales are very minor compared to the sales made through the marketing agreements.

When we look at operating profit, we evaluate the performance of the petroleum additives in TEL based on segment operating profit. Corporate departments and other expenses outside the control of the segment managers are not allocated to segment operating profit. Depreciation on segment property, plant and equipment and amortization of segment intangibles and prepayment for services are included in those operating profits. Petroleum additives operating profits, excluding nonrecurring charges, improved to $60 million in 2003 from 51 in 2002. This is the best operating profit in this segment since 1999 and represents an increase in profit of 18 percent. The improvement is the result of many factors. Volume shift increased 10 percent, with the most significant improvement coming in the fuels product line. In addition, the higher profit reflects improved product costs and favorable foreign exchange, mainly from the weakness of the dollar relative to Euro. Offsetting these favorable factors was raw material unit costs that rose in our inability to recover those increases in the marketplace. Total R&D, of $57 million, was 6 million higher than 2002. In addition to an unfavorable foreign exchange impact on this line, the increase in R&D, compared to 2002, is the result of higher personnel costs, supporting the development and testing of new products, primarily in the specialty additives lines. All of our R&D expenses are related to petroleum additives. SG&A for this segment was about 10 million higher than last year. As a percentage of sales, SG&A combined with R&D, was 15.5 percent in 2003 and 15.4 percent in 2002. So while SG&A and R&D expenses were higher, the increase in our business resulted in the ratio remaining substantially unchanged. The results of our TEL segment include the operating profit contribution from our marketing agreements, as well as certain TEL operations not included in the marketing agreements. The operating profit contribution from our marketing agreements was $30 million in 2003 compared to 26 million in 2002. Volume shift declined, as we expected, but this was more than offset by improved pricing. Other TEL operations, which are not part of the marketing agreements, were $4 million higher when compared to 2002 in profits. The year 2002 included certain expenses that did not recur in '03.

Our interest and financing expenses were $21 million in 2003 compared to 26 million in 2002, predominantly due to lower debt levels. Amortization of financing costs and fees were 2 million lower than 2002 and our rates were somewhat higher as a function of our new debt structure.

Our income tax rate was virtually unchanged year-to-year. In 2003, the rate was 29.7 and in 2002, it was 28.3. I will remind you again in our data, we show discontinued operations. Those were the results associated with the business that we sold early in the year to Albemarle.

Our total net income was $37 million or $2.21 a share in 2003 as compared to 10 million or 59 cents a share in 2002. Both of these periods included onetime events that are detailed in our release. On a continuing basis, we made 20.7 million or $1.23 a share in 2003 and 12 million or 72 cents a share in 2002. 2003 represents a substantial improvement over 2002.

Looking at cash flows for a minute, during '03, we generated 19 million from the sale of the antioxidant business and 13 million from the sale of certain other assets. We used these proceeds, along with the cash generated from our business, to pay $13 million in debt issuance costs, fund our capital expenditures of 12 million and make the final $3 million payment to Octel for TEL marketing services. In addition to this, we repaid our debt $81 million and increased cash on our balance sheet by $14 million. Our cash from operations included a $5 million settlement from an old lawsuit. We also used $5 million of our cash from operations to fund our pension plans. The debt reduction of 81 million in '03 and 46 million in '02 comes after having reduced our debt 107 million in '01. Our debt position has improved substantially since 2001 and we are now in the range where we are comfortable with our leverage ratios. We will continue to make debt repayment a priority while reviewing other opportunities. Ted.

Thanks, David. 2003 was a very good year for Ethyl and for our shareholders. Petroleum additives had the best year it's had since 1999, and our lead business had the first up year in over five years. We strengthened our market position in key areas; we saw double-digit revenue and volume growth in most of our major product lines; we paid down a lot of debt and finished the year with debt net of cash, or net of the increase in cash, adjusted EBITDA ratio of 2.0. All of these factors give us a lot of momentum going into 2004, and we expect 2004 to be a good year are also.

The fundamentals in the lead business have not changed. Volume will continue to decline. We expect profit to be down this year also, more back on the long-term trend. In petroleum additives, we should see continued momentum -- the momentum that we carried over from the second half of '03. We will see some growth in petroleum additives. We will spend more in R&D to meet the new specs and develop next generation products, particularly in the engine oil area. We're concerned about higher raw material costs. Contrary to our best view of 2003, raw materials continued to climb throughout the year. And we saw a new round of base oil price increases just last week. This trend has put a lot of pressure on our margins.

When I look at where Ethyl is today, I am excited by what I see. We are a lot stronger company today than we have been in a number of years. Our revenue, our volume, our earnings are all growing. We have strong market position. We have a broad cash flow base with cash being generated across a wide range of product types. Our debt is down. Our balance sheet is strong. A lot of good things are happening in the Company, as we have laid out here. But as we have continued to explain over the last several years, this is a very tough industry that we are in. That fact has not changed. The rising costs -- raw materials costs -- make it even tougher. But we continue to look for ways to add value to our customers by helping them increase their market share or by lowering their cost. With the team we have in place today, with existing products and ones we are developing and with our sales momentum, we expect to continue to grow shareholder value. David, I will turn it back to you.

Thank you, Ted. We are ready to open the lines for questions now.

(OPERATOR INSTRUCTIONS). Nina Sheller, Morgan Stanley.

I was just wondering if you could comment on what the volume and price trends were for petroleum additives in the fourth quarter itself?

The fourth quarter volume, Nina, I don't have that in front of me. I have the year-end numbers. I will get back to you on it.

On GF-4, what are your expectations, as it is introduced, in terms of how it might help volumes and pricing?

It's a little early to tell. I am not sure how well developed the commercial discussions are, regarding pricing. Volume wise, again, it's a little early to be specific on that. But we expect to see a modest increase in tree grades coming out of GF-4, single-digit type increases.

What kind of things or areas are you looking at in terms of for acquisitions, now that your debt, as you mentioned, is at a comfort level?

We have a lot of activity going on to help determine that. Our priority, certainly, is with what we know. What we know best, fuels and lubricant additives. We are going to work outward from there. We start with where our strengths are and work outward. We will look at other industries, where there are strengths that we have that could be utilized, whether they be manufacturing strengths, whether they be safe handling of hazardous materials, something that we have been involved in for 75 years. And we will look at completely unrelated areas, as well. But certainly, our highest level of interest is in what we know best. We are going to be patient, though. And I want to make it clear to our shareholders that it may be some time before we announce an acquisition. Our guidance to you is to be patient because we are going to be patient. We are not going to take the first opportunity that comes along. We are looking for the right opportunity. Meanwhile, we have a lot of opportunities within our core petroleum additives business to continue our growth. And as time clicks by, our balance sheet is only going to get stronger. The stronger the balance sheet is, the more financing options we have available to us when the acquisitions come along.

What size are you looking at?

We have no size goal. Our preference would be probably for larger acquisitions than smaller ones. But if the right small one came that added to our technology or to our product portfolio, we wouldn't ignore it just because it was small.

Robert Rivatti (ph), Rivatti & Co.

Of course, in the quarter, you had a really good sales number 202, up 22 percent quarter-over-quarter and the best quarter of the year. And you have made announcements over the last couple of months about new product and new businesses that you are getting against the Conoco Philips and the new additive line. I imagine also those programs have not kind of hit the revenue line yet. But I am also thinking you're probably generating expenses associated with new product introduction. Are you capitalizing any expenses? Is everything being expensed? Does that have an impact? Because the EBITDA margin in the quarter was only 10 percent, which was the lowest EBITDA margin for the year, a year you had the best sales. And of course you have identified rising raw materials. But I also we want to confirm, were there start-up costs in some of these new programs? Are they fully expensed? Is anything being carried forward?

This is David. Everything was expensed, nothing was capitalized. You are right, the margins were lower in the fourth quarter than the third quarter. Raw materials was a contributing factor. Another factor that we discussed in the third quarter conference call that you may recall or not, is we built a fair amount of inventory in the third quarter which gave us a very good production cost in the third quarter. In the fourth quarter, the inventory levels were held flat so we didn't have that benefit. So on a quarter-to-quarter comparison, that is what you're seeing there.

Of course, next year, I calculate that cash flow might be 65 million and if you spend 50 million on CAPEX, you are going to generate 15 (ph); you are going to be patient in making acquisitions. I imagine you are probably looking at some kind of dividend payment. Is that true? What do you think CAPEX next year? Is my estimate of 15 million reasonable?

I look at 15 to 20 for '04. Our number is generally, and still sticking with it, 40 to $50 million of free cash flow. With respect to the dividend, I will let Ted answer that.

Dividends and stock buybacks are certainly uses of cash -- uses of free cash -- that we used extensively in the past. And we will continue to evaluate those, along with the acquisition picture.

Thanks, a lot. And by the way, great quarter, great year. And a great five years for getting debt from 700 million to 200 million.

(OPERATOR INSTRUCTIONS). David Wilson, Private Investor.

Could you tell me on the TEL number for next year, does it look about the same for the volumes going down, prices going up, so we could pencil in about the same number for next year, for marketing agreement?

Our guidance to you on the lead business is that it won't be as good, profit wise as 2003.

Do you have any idea how much lower a number to --?

No, no specifics there. But we expect the long-term trend to be -- to continue in the direction that it has.

At this time, there are no further questions.

Thank you, very much, for attending the call. See you next quarter. Good bye.

This concludes today's conference call. You may now disconnect.