NewMarket Corp (NEU) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the NewMarket Corporation fourth-quarter 2004 and year-end financial results earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Mr. David Fiorenza, Vice President, Treasurer and Principal Financial Officer of NewMarket Corporation. Mr. Fiorenza, you may begin.

Thank you for joining us today to discuss our fourth quarter and year end. With me today is Warren Huang who is the President of Afton Chemical Corporation, our petroleum additives subsidiary. As a reminder, some of the questions we will make -- 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 and operations. However, we offer no assurance that the 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.

Our press release and this call are summaries of our performance. Please read our 10-K which we expect to file in early March for a more complete explanation of the year. As a reminder, 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 company of two operating companies, each managing its own assets and liabilities. Those companies are Afton Chemical Corporation, formerly named Ethyl Petroleum Additives, Inc., which focuses on petroleum additives products; and Ethyl Corporation, representing certain manufacturing operations and our tetraethyl lead business. NewMarket also became the parent of NewMarket Services Corporation, which provides various administrative services to NewMarket, Afton and Ethyl. Our segment reporting remains the same, petroleum additives and TEL.

I'm going to follow down the segment statement that was included in the press release. Petroleum Additives net sales in the fourth quarter were 229 million, which is 17 million or about 13 percent higher than last year's fourth quarter. Shipments driven by the engine oil additives product line were about 9 percent higher. The components of the increase in net sales of 17 million between the two fourth-quarter periods included approximately 12 million due to price increases and favorable currency, with the remainder being due to increased shipments. For the year, net sales were 885 million, which is $138 million or 18 percent higher than last year. Shipments were higher across all product lines and, coincidentally, they were 18 percent higher also.

Petroleum Additives fourth-quarter operating profit was $4.7 million, compared to 9 million in the fourth quarter of '03. The fourth-quarter decrease was widespread as this particular comparison is the one where the margin reduction due to raw material increases is most apparent. Although net sales were about 13 percent higher and shipments increased 9 percent, the rising cost of raw materials as well as higher R&D expenses resulted in the reduction in operating profit when comparing these periods. 2004 results include a small favorable foreign currency effect.

While the impact of higher prices also favorably affected operating profit, the price increases we achieved did not cover the increase in raw materials. Similar to last quarter comparisons, we spent more in R&D between the two fourth-quarter periods, mainly in the engine oil and specialty additives product lines. This was in support of new product specifications, our growth and our continuing commitment to enhance the value of our products to our customers. For the year, recurring operating profit was 43.5 million as compared to 48.6 million for 2003. 2004 operating profit reflects a small improvement of results in engine oil product lines and lower results in the other areas. The 2004 operating profits include the benefit of higher sales and shipments. Foreign currency and pricing were favorable. However, as I just outlined in discussing the fourth quarter, rising cost of raw materials, higher SG&A expenses, more than offset these factors when comparing the two years.

Looking at Tetraethyl Lead segment, the profit from our marketing agreements with Octel was 6.3 million for this quarter, which is 2.7 million lower than the fourth quarter last year. As we have discussed, quarter-to-quarter comparisons of this business are not particularly meaningful. The 2004 marketing agreement results of 33.2 million compared favorably to the 2003 results of 29.6 million. Both the fourth quarter and the year results reflect improved pricing over the same periods last year. Volumes were about 15 percent lower in 2004 compared to 2003.

Amortization of certain marketing agreement costs was 2.1 million lower in 2004 than in 2003, reflecting the declining balance method of amortization that we've chosen. As we have discussed in the past, we expect that the TEL market will continue to decline as customers discontinue the use of this product. Other TEL operations not included in the marketing agreements improved about $500,000 from the fourth quarter last year, and were about flat on a year-to-year comparison.

You'll note $900,000 of other expenses recorded for the quarter -- other income, excuse me. This is the inner entity profit that Ethyl Corporation charges to the petroleum additives business, primarily for contract manufacturing. Since this is not considered part of the TEL segment, it is shown in this fashion. This was not a cost to the petroleum additives business last year. The 2004 amount of 1.7 million is for the two quarters that we've been operating under this corporate structure. Corporate unallocated expenses is up about 3.4 million for the year comparison. The major factor in this increase are legal expenses associated with the establishment of the holding company and costs that we have incurred to comply and implement Sarbanes-Oxley Section 404.

Other expenses net was 3.3 million lower this year than last. This category includes a relatively long list of small items, and the year-to-year comparison is not particularly instructive. The nonrecurring item listed in Petroleum Additives and TEL for the year of $13.2 million was the gain on an environmental insurance settlement. Looking at interest expense, the fourth-quarter interest of financing expenses of 4.3 million -- were 4.3 million compared to 4.8 million last year. The main driver in this reduction is a lower debt level. For the year, interest and financing expenses of 18.3 million were also lower than last year's expense of 21.2 million. Lower average debt resulted in a reduction of 3.2 million, while lower amortization of fees was 1.7 million favorable. Partially offsetting these was higher average interest, resulting in an increase of 2.1 million.

Income taxes for this quarter include several items which we recognized in the fourth quarter. As you know, the President signed the Tax Bill during this quarter, which restore the R&D tax credit that had expired on June 30th. The restoration was retroactive to July the 1st, so we had the benefit of 6 months in this quarter. There are two other significant items this quarter. One was a favorable settlement of three old tax years with the IRS, and the second a favorable impact of our efforts with respect to the extraterritorial income credit regime. The benefit of these 3 account for virtually all of the quarterly benefit of 2.7 million shown. These items resulted in an unusual tax rate for the quarter and contributed to a 26 percent tax rate for the year. We continue to use the federal and state statutory rates and known credit such as the R&D credits as our planning base.

Our net income for the quarter was 2.9 million or 17 cents a share, while last year was 4.7 million or 28 cents a share. There are no nonrecurring items this quarter or in the fourth quarter last year. The year 2004 net income was 33.1 million or $1.95 per share, as compared to 37.1 million, or $2.21 per share last year. The total year in each case included non-recurring items; the insurance settlement this year in the sale of antioxidants and the implementation of an accounting change in 2003. When we remove those nonrecurring items, our earnings from continuing operations for this year was 24.7 million, or $1.45 a share. We earned $1.23 per share last year on that same basis. This represents about an 18 percent improvement year-on-year.

During the quarter we repaid $3.2 million of debt, bringing our total debt reduction to 24.4 million for the year. As we mentioned in our press release, this is lower than the amount we normally expect to be able to reduce our debt, due to the need to increase our working capital during the year. Working capital increased substantially. This is true of both inventories and receivables, which grew as our business grew, and our need to increase our inventory as we transitioned our viscosity index improver supply position.

Looking forward in petroleum additives. We made many improvements in petroleum additives during 2004, with shipments up 18 percent as compared to last year. The future profits of this segment will continue to be influenced by the factors we've been discussing throughout 2004. Those factors include our ability to recover high cost of raw materials in the marketplace. With crude still in the 45 to $50 per barrel range, our basket of raw materials remains very high. We have been working to recover these increases through raising our prices. 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 materials. In addition to crude being high, many of the commodity chemicals we purchase are in tight demand, which means that even when crude comes down from these high levels, many of our raw material costs will remain high.

Another factor that impacts the ultimate outcome of petroleum additives is the relative strength or value of the dollar to foreign currencies, predominately the euro. With our mix of business, our results are favorably impacted when the dollar is weak relative to the euro. We have enjoyed increased profits this year due to this currency position. And one of the last factors is our ability to continue to deliver solutions to our customers to help them grow their business and the resulted need on our part to spend R&D dollars to support that effort.

Current business factors would lead us to expect that the operating profit for the Petroleum Additives segment will be higher in 2005 than in 2004. In tetraethyl lead or TEL, there have been no major changes to the factor that influenced the profits that we will earn from TEL in any given year. The product continues to be phased out around the world. We have been successful in reducing the profit impact of the volume decline with improvements in prices we price to its economic value. We expect that TEL will earn less in 2005 than in 2004.

We expect that our debt reduction capability for 2005 will be in the $40 to $50 million range. With only $30 million of bank debt remaining on the balance sheet we would expect to be building cash for future corporate needs toward the end of 2005. This concludes my planned comments. I would like to open the lines now if there are any questions.

(OPERATOR INSTRUCTIONS) Bill Hoffman of UBS.

Good morning. I wonder if you could talk a bit about Octel (ph) and Canada? I got on the call late so I hope you didn't cover that, but could you just give us some details on what's happening there?

The details is there is nothing new to report from that, that was explained in our 10-Q that was filed last quarter.

And the second thing is you talked about the pricing initiatives and all that. Want to get a sense of when the last price initiative was launched to your customers and what percentage you got through and maybe when you expect the next initiative to be put into place?

I am not going to talk about percentage but we are finished for all practical purposes with our price initiatives right now. They have all been discussed and will be rolling through as the quarter unfolds based on different contracts with different customers and what our degrees of freedom are with them.

Largely the expectations is that you will get those prices through though?

Yes.

And then you talked about your raw materials going up, just wondering if there's anything besides crude costs that are going up substantially?

I will ask Warren to answer that one.

We have a number of the basic chemical we use in manufacturing. And chemicals like polybutane, melecanhydrive (ph) polypropylene are about a dozen to 15 commodity chemicals; they are in very tight supply today.

You're having trouble getting any of them?

No. No, we don't have trouble getting them to service our current business needs. But like I say they are in pretty tight supply.

Typically are you able to pass through those cost increases as well or is it just the crude?

We have been trying. We have been out there raising price four different times now. I think we are kind of get to the point that we get very close to that balance point.

Thank you very much.

(OPERATOR INSTRUCTIONS) Robert Robotti of Robotti & Co.

Hi, I guess, you of course do make the statement that you do think in '05 that the Petroleum Additives segment will have higher profits than in '04? Could you give us a little breakdown on why you think that, and do you know what (indiscernible) about volume and obviously I am assuming that you're thinking it's about margin? And do you manage pricing kind of over time to some margin on sales and what is the metric you would use and what is your goal? Even the comment itself seemed somewhat positive because you guys of course are normally pretty hesitant to make any kind of positive statement. So the higher profits, it seems as if you have some conviction level.

Thanks for stabbing that knife in my heart; Bob, the lawyer is looking at me right now. We made a lot of improvements in shipment volumes in ‘04; we went over by 18 percent. We didn't see the benefit of that as we have explained because of this pinch on margins. So the conviction comes from the fact that we've got this business and that we are out there in the marketplace, as Warren explained, trying to recover the margins. And that's were it comes from. It's not anymore complicated than that.

In '05, do you have any, would you think the end of last year you felt pretty large conviction I remember Teddy mentioning the idea that volumes would probably be up again in '04 because the trend was really positive from late '03 developments. What kind of view do you have in terms of the volume side in '05 versus '04?

There will be some favorable follow through impact of gains we made in the third or fourth quarter but largely not going to expect the kind of increases in '04 over our '03.

Right, but definitely a flattening. You also mentioned that next year debt reduction or cash flow for debt reduction potential. What does that kind of imply in terms of a CapEx spending level for the year?

Our playing base is 15 to 20.

One of the questions I asked was, when it comes to margins in pricing is there a margin that you kind of have as a goal? Of course it is never achievable because all the parts are moving? And is so what would be the percentage and what's the metric you use, is it operating profit, is it EBITDA margin, or what is it?

We manage pretty much the operating profit but we don't have a metric like you talked about it. It's more market forces than it is a number we try to hit.

In terms of market forces, (indiscernible) had pretty good volume increases this year, too, right. And I guess they did make that announcement about shutting down one of the facilities. What do you see as kind of the supply demand industry type dynamics for '05?

We generally don't comment about our co producers activities. But I have to I say that this is really a trend had started a few years ago on planned rationalization and consolidation of the operation. We are active (inaudible) in some of that and we are happy to see that our co producers are doing that as well.

Great. Thanks a lot.

Ravi Kamat (ph) of West LB Asset Management.

If you could provide some balance sheet data as of 12/31/04 total debt and cash balance? And also you mentioned working capital was a use of cash in '04, what is your outlook for that in 2005? And then the final question, the first quarter of '05 do you expect it to be sequentially better than the fourth quarter in terms of margins?

We didn't publish the balance sheet and cash flow statements because we are not quite done with those. I'm expecting that next year's cash flow will be favorably impacted and the numbers high because working capital shouldn't use up what it did in '04, as a matter fact we expect it to reverse itself because we had built $15 to $20 million of inventory to transition a product we have been talking about all year long. And on the first quarter I would expect it sequentially to be better margins than the fourth quarter. But like I said there's various timings depending on customer contracts on when all of that will unfold.

And you don't have a cash balance of (inaudible)?

Within the $25 million range but I don't have it in front of me. But that's what it was.

Mr. Fiorenza, there are no further questions in the queue at this time.

Thank everyone for joining us. Have a good day.

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