NewMarket Corp (NEU) 2004 Q2 法說會逐字稿

Good morning everyone and welcome to the NewMarket Corporation second quarter earnings conference call. (OPERATOR INSTRUCTIONS). I would like to turn the floor over to your host, David Fiorenza, VP, Treasurer and Principal Financial Officer. Sir, the floor is yours.

Thank you for joining us to discuss our second quarter performance. With me today is Teddy Gottwald, or CEO and President. I have a few planned comments, after which we will open the lines for any questions. As a reminder, some of the comments we will make today are forward-looking within the meaning of the Private Securities Litigation Reform Act. 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 offer no assurance that actual results will not differ materially from those expectations. A full discussion of these factors can be found in our 10-K.

On May 27 at our annual meeting the Ethyl shareholders approved the transition to a holding company. The formation of the holding company, NewMarket Corporation, was completed on June 18. Each share of Ethyl stock automatically converted into one share of NewMarket stock. The NewMarket stock began trading on the New York Stock Exchange on June 21st under the symbol NEU. Following the establishment of the holding company structure, an internal restructuring on July 1, formed 2 subsidiaries with NewMarket being the parent of those subsidiaries.

The subsidiaries are Afton Chemical Corporation, formally named Ethyl Petroleum Additives, Inc., which focuses on petroleum additives products and Ethyl Corporation, representing certain manufacturing operations and our tetraethyl lead business. These changes have not changed our segments for SEC reporting. They remain unchanged as Petroleum Additives and TEL.

The second quarter was a good quarter for each of our segments. The quarter did not include any special items, so the analysis is fairly straightforward. Petroleum Additives improved in both net sales and profits when compared to the same periods last year. Sales were $218 million, which is an improvement of 39 million from the second quarter of 2003. Shipments were higher in both lubes and fuels, and reflect about a 26 percent improvement in shipments.

The impact of higher shipments accounted for 37 of the 39 million improvement. The remaining increase was due to favorable foreign exchange. Revenue for 6 months is increased $82 million to 433 million as compared to 6 months last year. The impact from increased shipments was about 74 million of the 82 million, with prices and mix of products sold slightly lower, and a favorable foreign exchange contributing about 10 million to net sales.

Petroleum Additives' profit for the second quarter was $19.3 million compared to 16 million for the second quarter of 2003, which is a 20 percent increase. The factors that contributed to this improvement are the 26 percent improvement in shipments that I just mentioned, favorable foreign exchange, and negative impact of escalating raw materials which continued to pressure our margins. R&D expenses were essentially unchanged comparing the second quarter of '04 to the second quarter '03.

S&A increased 0.7 million which includes an unfavorable currency impact of about $400,000. As a percentage of net sales SG&A, combined with R&D, decreased from 16.6 percent for the second quarter of '03 to 14.4 percent for the same period this year. In summary for Petroleum Additives, a good quarter in revenue and profit, improvement across all product groups, with raw materials continued to pressure margins.

Turning to TEL. As you know, most of the TEL marketing activity is through our agreements with Octel wherein we do not record the sales transactions. Therefore the sales shown in our numbers are those made by us in areas not covered by those agreements.

TEL sales for the second quarter and 6 months of this year were higher than the same periods last year. This increase was caused substantially by variation in the quarter to quarter timing of sales orders. The operating profit from our marketing agreements for the second quarter of this year were 10.8 million, which was 2.8 million higher than the second quarter last year.

Similarly, the 6 months marketing agreements result of 18.1 million compared favorably to 6 months of 2003 of 10.9 million. Both the second quarter and 6 months reflects slightly higher volumes as well as improved pricing. As you know, this segment is characterized by large swings in profitability due to timing. The TEL market continues to decline.

Other TEL operations not included in the marketing agreements improved 900,000 from the second quarter last year and 2.5 million as compared to 6 months last year. The improvements in both 2004 periods reflect timing of shipments as well as a price increase. Both the second quarter and 6 months periods in 2004 include lower environmental expenses, partially offset by higher legal face.

Moving down the segment view of performance that is attached to the press release, the second quarter 2004 results include an increase of about $900,000 in corporate unallocated expenses compared to 2003. This increase is primarily an increase in legal expenses and holding company formation costs.

Second quarter 2004 interest and financing expenses were 4.5 million compared to 6.4 million in 2003. Lower average debt resulted in a decrease of about 1.1 million, while higher interest rates resulted in an increase of 600,000. The higher average interest rates results from $150 million of our total debt being fixed and our bond at 8.875 percent. Fees and amortization of finance costs were 1.4 million lower.

Other income and expenses on a segment basis was $2.5 million, which was about 300,000 less than last year; nothing noteworthy in that area.

Our effective tax rate was 33.4 percent, and 6 months, 33.9. Which brings us to our net income. Net income for the second quarter was 11.4 million, or 67 cents a share, while the second quarter of '03 was 5.7 million or 34 cents a share. 6 months 2004 net income was 17.2 million, or $1.02 per share compared to 22 million last year or $1.32 a share. As a reminder, the $1.32 last year included $1 a share for the gain on the sale of the antioxidants business and the adoption of FASB 143. So on a comparable basis we have $1.02 this year compared to 33 cents last year for six months.

Looking at our cash flow, our total debt was 204.7 million at the end of the quarter, which is a reduction of 4.1 million from year end, but an increase of 10 million from last quarter. One of the consequences of an improved business is in increase in working capital. As you can see from our cash flow statement, there is quite a substantial use of funds by increases in working capital. We expect that this is mainly a timing issue and not a permanent condition our business. We project that our capital expenditures will be in the $15 million range for the year.

On June 18 we entered into an amended and restated credit agreement which consists of $100 million revolver facility. We incurred $1 million of additional financing costs which will be amortized over the next 5 years. The new facility bears interest at LIBOR plus 175 to 250 basis points and matures in 5 years. On June 30, we had outstanding letters of credit of 24 million, 50 million drawn on the revolver, resulting in an unused portion of the revolver of $26 million.

Looking at the outlook. Our Petroleum Additives segment has experienced success in its markets through increased volumes resulting from specific gains with customers, as well as some improvement due to increased economic activity. These volume improvements are across a wide range of products and world regions. These improvements are most notable when comparing the first half of 2004 to the first half of 2003. Many of these gains remained during the second half of 2003.

This can easily be seen by comparing the first and second quarter of 2004 revenues which reflect a smaller increase between the 2 periods. We expect that the profit -- the improvements made in profits through increased volumes in the marketplace to be somewhat offset during the second half by the margin erosion as raw materials price escalation have outpaced the pricing improvements that we have been able to realize.

While the first half of this year did include some of the material cost increases, we expect higher raw material prices for the rest of this year as oil prices continue at record high in the 40 range -- dollars per barrel range. Petroleum Additives profits will also be affected by foreign currency, which is currently favorable to our business mix as the euro remains in the 120 range.

In tetraethyl lead segment we continue to expect volumes to decline over time as the use of the product is phased out around the world. Improved margins will partially be offset by -- the margins will be improved as prices go up to counteract the volume decline. Historically TEL has had a high degree of variation in its quarter to quarter performance, which we expect to continue. This year may include higher profits in the first half than the second half, since the first half of this year included higher volumes than the first half of last year.

That concludes my prepared comments. I'll now take your questions.

(OPERATOR INSTRUCTIONS) Bob Rivatti (ph) of Rivatti and Company.

Of course it is great trend there. Things are looking good. Can I ask about some of the TEL questions. In the release it seemed to say that second quarter numbers would be down from the first quarter numbers, but also did it say down from the second quarter last year? Because the second half last year was a really strong half. And then of course did you also say that you think they would be down for the full year?

Yes, our view is that TEL -- we expect TEL to be down for the full year every year. So since the first half beat the first half we are expecting the second half to be less than the first half.

But not necessarily less than the comparable period a year ago, because if --?

I don't have the second half of '03 in front of me.

That would be easy because the second half you actually did about 17 million, so you did what you did in the first -- (multiple speakers).

Right. It will be down from the second half of last year.

However, if it is down for the full year -- right, because last year -- and when you say the TEL profit are you talking about the combined marketing alliance and direct business?

Yes.

Because first off on the direct business last year for the full year you lost 4.9 million.

Right.

And this year it is really been a breakeven operation.

Right.

And on the direct business, it was -- 24 million is the total segment earnings. And since the earnings this year is 17 million, that would actually implied only 7 million or less than 7 million in the second half of the year. Is that right? That seems almost too low.

In total that is what we're seeing. But you did the arithmetic correct.

And of course that is a little bit of variance to what Octel said just as they said full year numbers they thought would be slightly even higher than last year. And is that just kind of an interpretation issue I imagine?

I guess you would have to ask them, but yes, because we're looking at the same business. We're looking at our total business and they are looking at their total business. So there is some difference in those numbers.

And when you again talk about -- one of the positive variances year-over-year is last year the amortization was like 10.7 million. This year amortization is going to be down to about 8.7 -- about 2 million or so less this year over last year. So do you mean direct profit or do mean even after the amortization? So if you had a flat year, that alone would say that actually cash profits were really down 2.2 million, the difference in that amortization number.

When we talk, we talk about the total which includes everything in the numbers.

And then in the second quarter -- right? -- the margins actually improved pretty significantly over the first quarter. And I guess you got somewhat ahead of the price increases, but I guess you're now behind them again. And it is on a running rate and difficult to project, but you're not too hopeful that you're going to be able to get in front of the price increases.

Any improvement that you see in margins is a function of mix. We have not been ahead of the raw materials at all this year at any point. So it is just mix, is what you're seeing.

When you said -- when you talked about the corporate G&A you did say that some of the items in there include increased legal, and then of course the restructuring costs for the formation of the new holding company?

Right.

How much was the restructuring cost of the formation of the new holding company? And specifically I would imagine that would be kind of a onetime thing?

Yes, it is the overwhelming majority of that number.

Of the increase?

That's correct.

And then lastly, on the direct business for the TEL, you said that you had -- of course the overall variance was positive as it broke even as opposed to losing money. And you had lower environmental costs but higher legal costs?

Right.

And of course it is difficult to predict trends there, I would imagine.

Yes, exactly. It's just the way it turned out.

Lastly, to step away from all of the specifics, and you know you did form the holding company, and you have indicated that obviously the balance sheet is repaired, and you are looking forward. Could you give us any update in terms of what you see strategically long-term? I guess you had indicated that you would be looking for acquisitions, probably of smaller size, although if a larger one would come along that would be great. What do you see as the environment? Is there any change in that plan? Although it is relatively new, I guess there's no change in the plan. So a strategic longer-term kind of where are you today and how are things developing?

This is Teddy. I don't have anything new to report on that since the last time we talked and since the annual meeting. Our plan remains in place. With the holding company behind us, we are spending more energy looking for acquisition opportunities. Our preference is the fields we know, but we will start there and work outward.

I would just remind everyone that we will be patient as we do this, because we're not just going to rush out and grab the first opportunity that we see. And we will be gaining financial strength all the time while we're building up a war chest to find that right acquisition.

Ray Lecamus of West LD Asset Management (ph).

A couple of questions. One, what are the covenants on the new revolver in terms of leverage and coverage and any other covenants that there might be? And then secondly, if you could update us on the status of the MMT and what kind of total contribution that product had over the last 12 months?

I will take the first one. In the 10-Q that we going to file next week. We effectively put the entire loan agreement in there. This loan agreement has a leveraged ratio test, as you alluded. It has a net worth test and it has a fixed charge coverage that covers interest, CapEx and any junior payments. We're comfortably ahead of all of those. I don't have those exact rules in front me, but you will be able to look at them in there.

Yes, on MMT we don't disclose the profits from that product line. But the MMT business continues to grow worldwide. We continue to add new customers and see it introduced in new countries around the world. We did get a substantial setback this year in Canada as the major consumers of MMT there decided to suspend their purchases pending a third party study in Canada of the effect of the product on vehicle admission systems.

We were disappointed in that. But we do welcome any third party study that is going to look at the science behind the product and do with a fair statistically based analysis of the data that exists. And we look forward to the results of that.

So it is a mixed bag on NMT. We continue to expand it in countries around world, but it is not without its setbacks and continued detractors.

And then one final question. Given that you're looking for acquisitions, if you could outline how you would finance such acquisitions, especially if you have any sort of goals in terms of how high you might want to leverage up the Company, what sort of -- in terms of debt to EBITDA? Right now you're at about 2 times or last. How high would you go to finance these acquisitions? Would you use equity? Just sort of general financing philosophy related to any acquisitions that you might do?

I will do my best to answer that question, but I have to say up front that we don't have any hard and fast rules. It will depend entirely on the nature of the acquisition. We are in a comfort zone right now in the 1.5 to 2 times debt to EBITDA range. We're not afraid of leverage. We will lever back up, and I guess the guidance that I will give you is that the closer the acquisition is to the businesses that we're in, the more leverage we're willing to take on to accomplish that acquisition. Because we would see the risk of acquisitions in our field being lower than the risk further abroad from our current businesses. Our choice would be to go with debt of some form. But we wouldn't rule out equity either.

Do you have any sort of upper limit in mind in terms of leverage? Be it 5 times, 4 times, any sort of ball park number that you might want to share?

No, I really don't. That upper limit again would be based on what we would see as the risk associated with the business -- with the acquisition, and our ability to get synergy quickly. The closer it is to what we know, the greater likelihood of getting synergy and seeing a high debt to EBITDA ratio peeling off rather quickly. So that is what we will be -- that is how we will analyze such acquisitions.

And then just finally, any comments on the acquisition market? It seems like the private equity firms have been very active in the chemicals sector. And it seems that they have been willing to pay up fairly high multiples. If you could just comment on what you're seeing in the acquisition market?

We're seeing the same thing you probably are, which also adds to our view on being patient in this environment. But it also means again that the closer the business is to our existing businesses, the greater likelihood it will be that we can afford a price that would be the one to complete such detail. The further away we get from what we know, the more we're up against private equity firms and other buyers.

Margaret Dow (ph) of UBS.

It is my understanding that there's some new onion oil standards that are expected this year. I'm curious in regards to these -- to the new products associated with those standards. What share of that you have gotten so far or you anticipate -- what market share of that you anticipate having for that new business? I think it is for diesel engine oil?

There is a new passenger car motor oil specification that goes into effect a little bit later this year. We're ready to support our customers with that product. Most of us are staying with the same customers we have, so market share is whenever it was before, which we haven't disclosed.

It will have a little bit extra treat rate, 10, 15 percent range. But the macro view is we don't expect that to have much change on plant loading. As you know, the industry is in an overcapacity and oversupply position. And the way you look at that 10 or 15 percent not having a macro impact is this specification affects passenger car, motor oils in North America.

So if North America is 30 percent of the market, and the passenger cars are half of that, that gives you 15 percent. And then a 10 percent change on that would be 1.5 percent. So it doesn't have that much of an effect on the loading. But it does going to effect at the end of this year.

Alex Goldman of Morgan Stanley.

Can you comment a little bit on only kind of prebuying, if any, you're saying out there in the market, maybe as a result of an expectation of higher prices going forward? Any comment on that, please?

I don't see any of that in our data.

Bob Rivatti.

And lube results quarter they took a write-off on some R&D that they had capitalized, I guess specifically associated with Pure Knocks (ph). Do you have any policy of capitalizing R&D costs?

We do not capitalized R&D. We expense it as we go.

You made reference to a new product that you had kind of introduced. I think it was being used in Turkey. And it was an additive for diesel gasolines. And I guess it was still in early product at a relatively low level, but obviously it was something you announced that you were hopeful about. Is there anything there or is it still much too soon to tell anything about that product's acceptance?

I think it is too early to tell. And if I'm not mistaken, the customer did that release and not us. But it was an additive in diesel in that part of the world.

To beat dead horse on tetraethyl lead, the total segment profits last year were 24.7 million. The profits so far this year were 17.4 million. If the profit for the full year is less than it was last year that would imply in the second half it would only be 7.3 million. So is the guidance that you are actually giving more, don't get too excited, this is still a declining business, and so therefore it really isn't that good. Or are you actually saying the second half is going to be that bad at half a year in tetraethyl lead?

Have you done the arithmetic correct? We believe this business is forever going down. The second half may or may not be that bad, but you will just rob for some key future period. So I think we've communicated our best view of that business to you.

And that is what you do see -- there is no -- there is obviously no changes yet. You can keep our fingers crossed, but in terms of lessening the decline, but there's no reason to think that. And of course when you saw through Octel's results and them accelerating to the amortization, clearly that is saying the total quantities sold isn't going to change its doors (ph). It is clearly a sunset product. There has been no extension of any of the sales. You have just accelerated it, but there is no change to the total estimate for how much is going to be sold?

That is our belief.

Right.

I would add to that just an observation that the smaller this market gets the more volatile the swings are going to be, both in terms of shipments and in terms of step changes this country phase out. The smaller the market gets, the more dramatic the changes will be when a big user phases it out.

(OPERATOR INSTRUCTIONS). Mr. Fiorenza, we have no further questions at this time.

Thank you for joining us, and we will talk to you next quarter.

Thank you everyone. This does conclude today's teleconference. You may disconnect all lines at this time, and have a wonderful weekend.