NewMarket Corp (NEU) 2004 Q3 法說會逐字稿

Good morning and welcome to your NewMarket Corporation-sponsored third quarter 2004 financial results conference. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions following today's presentation. At this time, I would like to turn the floor over to your host for today's conference, Mr. David Fiorenza, VP, Treasurer. Sir, you may proceed.

Thank you. Thanks for joining me to discuss our third quarter performance. With me today is Teddy Gottwald, our CEO and President. 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 our statements are based on reasonable expectations and assumptions within the bounds of what we know about our business. 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 most recently filed 10-K.

Following the establishment of the holding company structure, we completed an internal restructuring of our subsidiaries, as a result of which NewMarket became the parent of two operating companies, each managing their own assets and liabilities. Those companies are Afton Chemical Corporation, formerly named Ethyl Petroleum Additives Inc, which focuses on petroleum additive products, and Ethyl Corporation, representing certain manufacturing operations and the tetraethyl lead business or TEL.

NewMarket also became the parent company of NewMarket Services Corporation, which provides various administrative services to NewMarket, Afton Chemical and Ethyl. Our segment reporting remains as Petroleum Additives and TEL.

As part of the move to the holding company, we changed our method of charging our segments for the services they were using from the corporate support groups. That changed results in more of the service charges being billed to the two operating companies, the result of which can be seen on segment operating profit -- presentation is that the corporate unallocated and other portions are smaller charges. And the profits for the segments are likewise lower.

We have adjusted prior periods so that the comparison you see is on a similar basis. I'm going to focus my comments in the segment presentation of performance that is included in the press release. That is attachment 1 of 4.

Petroleum Additives' net sales in the third quarter were 223 million, which is 29 million or 15 percent higher than last year's third quarter. Shipments driven by the engine oil additives product line were 14 percent higher.

For 9 months, net sales were 656 million, which is 111 million or 20 percent higher than the same 9 months last year. Shipments were higher across all major product lines, resulting in the 21 percent increase in shipments.

The components of the petroleum additives increase in net sales of 29 million between the two third quarter periods included approximately 5.6 million due to price increases and favorable currency, with the remainder being due to increased shipments.

Petroleum Additives' third quarter operating profit was 9.4 million compared to 16.5 million for the third quarter 2003. The third quarter 2004 decrease was across all product lines. Although net sales were about 15 percent higher and shipments increased 14 percent, the rising costs of raw materials as well as higher selling, general and administrative and research and development expenses resulted in the reduction of operating profit when comparing this third quarter to the strong third quarter of last year. Last year's third quarter included a very favorable plant cost effect when comparing the 2 quarters.

The 2004 results include a small favorable foreign currency impact. While the impact of higher prices also favorably impacted operating profit, the price increases we have achieved do not cover the increase in raw material costs.

We spent more on R&D between the two third quarter periods, mainly in the engine oil and specialty additives product lines. This is in support of new product specifications, our growth, and our continuing commitment to enhance the value of our products for our customers.

Selling, a general and administrative expense was higher across all product lines, and includes higher commissions which are a result of increased business.

For 9 months, the segment operating profit was 39.6 million as compared to 39.7 million last year. The 9 months 2004 operating profit reflects improved results in both the specialty and engine oil product lines and lower results in the fuel additives product line.

The 9 months 2004 operating profits include the benefit of higher net sales in shipments. Foreign currency again was favorable, as was pricing. However, as discussed just a minute ago, the rising cost of raw materials and higher SG&A and R&D expenses offset these factors when comparing these periods. Again, our efforts in price increases have not covered the increase in raw material costs.

Turning to tetraethyl lead -- the profit from our marketing agreements with Octel was 8.9 million for the quarter, which is 900,000 lower than the third quarter last year. The 9 months marketing agreement results of 26.9 million compare favorably to the 9 months last year of 20.6 million. Both the third quarter and 9 months' results reflect improved pricing when comparing the same periods.

Volumes were 20 percent lower for the third quarter compared to the third quarter, but were flat when comparing the 9-month periods.

Amortization for prepayment for services was about 500,000 lower for the third quarter 2004 and 1.6 million lower for the 9 months than the same period last year, reflecting the declining balance method of amortization that we used.

As a reminder, this segment is characterized by large swings in profitability due to time in shipments. As we all know, the TEL market will continue to decline as customers discontinue the use of this product around the world.

Other TEL operations not included in the marketing agreements decreased 2.5 million from the third quarter last year and 900,000 when comparing 9 months. These results in both 2004 periods reflect a timing of shipments, which vary greatly from quarter to quarter.

Moving down the presentation of 1 of 4 that I mentioned, you'll notice that other expense of $800,000. This is a new item. This is the intra-entity profit that Ethyl Corporation charges to the Petroleum Additives business for certain services it provides, mainly the manufacturing of product. This is not considered part of the TEL segment, but it is a cost to Petroleum Additives. This was not a cost to petroleum additives last year.

A corporate unallocated expense is up 1.1 million this quarter compared to last year's second quarter. The major factors involved here are legal expenses and costs associated with compliance with the Sarbanes-Oxley 404.

Other net expense is 1.1 million lower than last year. This category includes a relatively long list of small items, so the year on year comparison is not particularly instructive.

The nonrecurring items listed in each of the Petroleum Additives and TEL totaled $13.2 million and represents the gain on an environmental insurance settlement that we concluded in the quarter. Third quarter interest and financing expenses were 4.3 million, compared to 5.2 million last year. Lower average debt was the main driver for this.

For 9 months, 2004 interest and financing (ph) experiences of 13.9 million were lower than last year's 16 -- were also lower than last year's expense. Lower average debt resulted in a reduction of 2.9 million, while lower amortization and fees was 1.7 million. There was an offset because of higher interest costs associated with our bonds.

Third quarter 2004 income taxes including the taxes on the insurance settlement gain were 5.5 million, for an effective rate of 29.6. The lower tax rate reflects the benefit of certain favorable tax adjustments recognized upon the completion of our tax return.

This brings us to net income. Our net income for the third quarter was $13 million, 76 cents a share, while the third quarter last year was 10.3 million or 61 cents a share. The 9 months of 2004 was 30.1 million or $1.78 a share as compared to the 9 months last year of 32.3 million or $1.93 per share.

The 9 months, as well as the third quarter, includes the gain from the settlement with the insurance as we just discussed. When we take out the nonrecurring items from our earnings, we see that earnings from continuing operations for the quarter was 4.6 million or 26 cents a share. On a comparable basis, we earned 61 cents per share last year.

During the first 9 months of this year, we made contributions of $10 million to our pension plans around the world and 3 million to our U.S. post-retirement plans. We expect to contribute about another $2 million in the fourth quarter, bringing our pension contributions to $12 million. These contributions greatly exceed the payments made from the funds for the year, and should improve our year-end funding statistics.

During the quarter, we paid down $16 million of debt, bringing our total debt reduction for the year to 21 million. Included in the cash flows from operating activities was 7.7 million related to the environmental insurance settlement. The terms of the settlement provide for a total payment of 15.6 million. In addition to the amount we received this quarter, we will receive 3.7 million in the first quarter of '05 and the remaining 4.2 million in the first quarter of '06.

Our working capital at September 30 was 209 million compared to 184 million at the end of last year. The increase in working capital is primarily due to increase in receivables due to higher sales. And additionally, we've been having an increase in inventory as we transition our Viscosity Index Improver supply.

When we look out to Petroleum Additives, we see we made many improvements in shipments during the year. The future profits of the segment will continue to be influenced by those same factors we've been discussing all year long. Those factors include our ability to recover the ever-increasing cost of raw materials in the marketplace.

With crude in the $50 per barrel range, our basket of raw materials continues to escalate. We've been somewhat successful in a recovering a portion of this increase through raising our prices, and are in the process of another price increase this quarter. As a general rule, we are squeezed on margins when raw materials are rising rapidly, as our ability to raise prices lags the impact of the raw material increases.

In addition to crude being high, many of the commodity chemicals we purchase are in tight demand, which means that even if crude comes down from these high levels, many of our raw material costs will remain high.

Another factor in the ultimate earnings of Petroleum Additives is the relative value of the dollar to foreign currencies, predominantly the Euro. With our mix of business, our results are favorably impacted on when the dollar is weak relative to the Euro. We have enjoyed increased profits this year due to this relationship.

And the final determinant is our ability to continue to deliver solutions to our customers to help grow their business, and the resultant need to spend research dollars to support those efforts.

Current business factors will lead us to expect that the fourth quarter for Petroleum Additives is likely to be closer in profit to the third than either of the first two quarters of this year.

In tetraethyl lead, there have been no major changes to the factors that influence the profits we'll earn from year to year in this business. The product continues to be phased out around the world. We have been somewhat successful in reducing the profit impact for the volume decline with improvement in prices, as we price to economic value of the product. We continue to expect the second half of this year will be lower than the first half.

On cash flow, we expect our total debt reduction for this year will be in the $25 million range. This is somewhat lower than we achieved in the past few years, mainly due to the -- having significantly more cash tied up in our working capital. This concludes my planned comments. Karen, can we open the lines for questions, please?

(Operator Instructions). Bob Rivatti, Rivatti and Company.

I guess I had one question about tetraethyl lead. You know the profit participation in the alliance was 8.9 million. That of course meant that the direct profit associated with the TEL business would be actually a loss of 4.2 million. Is that right?

That's correct.

That's correct.

Could you give us any more color on that 4.2 million and what you think it might be in the fourth quarter?

Bob, if you went back and looked at every quarter, you would see the feature that you just described -- namely that the non-alliance participation is a loss. That's the money we make in North America where we compete. It's also the cost -- legacy cost that we have from this business. And it will repeat in negative 2 or 3 every quarter.

Of course the year-to-date number -- the alliance did 26.9 million and the segment profit is 20.2 million. So the difference is 6.7 million.

It varies. We've had our big quarters already, so -- (multiple speakers)

And are there many extraordinary items, because obviously it's a lumpy amount of losses that are in that business. So is there relatively minimal P&L? But then is it even legacy costs instead of coming into that line item?

Yes, it is legacy costs. It is some cost of cleaning up sites that have been on our books forever. It is a collection of things.

And then, I do apologize; you did some adjustments in accounting. So I guess you allocated more expenses down to the actual operating P&L of the two divisions (multiple speakers) this quarter.

That's correct. We recapped (ph) the last years' period the way we are doing it now.

That is line items that came out of G&A and the other expenses that will push down to the divisions. And I guess mainly that was pushed down into the Additives business. Is that right?

That's predominantly correct, although the lead business did get some more also. But the lion's share went to the additives.

Okay. So I get guess part of the 4.2 million, obviously, the direct loss picked up some expenses that were reported below the line in the past.

Right.

And then, did you actually indicate what the volume increase was in revenues for the third quarter versus what the components and the breakdown of the increase in the revenues was?

I guess we would have to back into that. The third quarter sales were 29 million higher and about 5.5 was due to price in revenues. So the difference would be volume.

Kurt Havnaer, Columbia Management.

Could you just briefly talk about your liquidity over the next 12 months? It looks like you've got about $600,000 of debt maturing. I don't recall what sort of credit facility you have. Could you just talk about that briefly?

Sure. We have 150 million of bonds that don't mature for awhile. So those will sit there. We have a $100 million bank facility of 33 million drawn on that 100 million. As we look out, we would expect that sometime next year will be able to discharge all of that drawn debt. So we would have most of that facility available to us.

Alex Goldman, Morgan Stanley.

Just a quick question. When do you expect to catch up to the raw materials curve? Do you think it might be in the first half of next year, or sometime after that?

My answer is the following. If it stops, we will catch up first quarter of next year -- early next year. If it keeps moving around, it's a lot more difficult answer. But the first quarter next year, to answer your question.

Okay. And you also mentioned that some of the materials you purchase are in tight supply. Can you give some examples of those?

I can't. But we buy a whole range of commodity chemicals. And it seems like everything is tight right now.

Are there any where you think there might be a problem getting the material at all or --?

No. No, right now we feel we have supply in good shape.

And finally, can you give an update on your acquisition stance at this point?

Sure. This is Ted. We have a number of people actively involved in examining our world for acquisition opportunities. We said before that we're going to be patient in this regard, and that is still our stance. Our preference would be to make acquisitions in the fields that we're currently in -- the ones that we know the best, the ones where synergy is most likely to the highest. And that's where we stand today. We are examining a lot of possibilities. But we're going to be very patient in our approach.

Ravi Kamav (ph), WestLB Asset Management.

A couple of questions. Q3 looked like there was a big working capital as a source of cash. What is your outlook for the fourth quarter for working capital? And also, if you could give us a CapEx outlook for the fourth quarter and for 2005 --? Thank you.

Sure. Second one first -- about 15 million CapEx this year. Next year would be 15 to 20, no major changes on CapEx. In the third quarter, you are correct. Accounts payable did go up, but so did inventories and receivables. What I am expecting the fourth quarter is a relatively neutral working capital effect.

And looking into 2005, should it also be fairly neutral? (multiple speakers)

No, you may recall we built about 10 million, maybe even as much as 12 million of inventory this year, as we're transitioning a supply point. And so that will come back to us next year. So next year might be somewhat favorable in working capital requirements.

And then just in terms of the fourth quarter, could you give any sort of directional outlook relative to -- in terms of EPS versus year-ago fourth quarter versus Q3 -- up flat or down?

Now, I mean the outlook of the business discussion I had is all we give. We are not in -- don't give guidance on EPS. Sorry.

(Operator Instructions). Mr. David Fiorenza, there appear to be no further questions coming from the phone lines at this time, sir.

Well, thank everyone for participating. Goodbye.

This concludes today's conference. Thank you for your participation.