NewMarket Corp (NEU) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the NewMarket Corporation's first quarter 2005 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]

It is now apply pleasure to introduce your host, Mr. David Fiorenza, Vice President and Treasurer. Thank you. Mr. Fiorenza, you may begin.

Thank you. Thanks for joining me to discuss our first quarter performance. With me today is Teddy Gottwald, our 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 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 can 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.

I am going to focus a majority of my comments on the segment presentation of performance that was included in the press release, it is also in the 10-Q. You may note that the first quarter of 2004 segment operating profit is different from what it was in last year's 10-Q. This is to reflect the current charging of certain costs, now that we operate as a holding company. That adjustment had no effect on overall net income.

First quarter 2005 net income was $4.8 million or $0.28 a share, compared to net income of 5.8 million or $0.35 a share for the first quarter of last year. Each of the petroleum additives and TEL segments had lower earnings. There were no special items in either this years or last year's first quarter. In the petroleum additive segment net sales were 237 million, up 23 million or about 10% from the first quarter of last year. Shipments were down slightly in this comparison, and despite this, higher selling prices in the mix of products sold resulted in higher net sales. The components of the increase of the 22 million between the two quarters were about 15 million due to change in selling prices and currency with the remainder being attributable to the mix of volume. Petroleum additives first quarter 2005 operating profit was $9.7 million as compared to 13 million for the first quarter of 2004.

The first quarter 2005 decrease was across most product lines. Even though net sales were about 10% higher, the rising costs of raw materials as well as small increases in general selling and administrative costs in R&D expenses resulted in the reduction of the operating profit in the periods compared. The 2005 results do include a favorable foreign currency impact, and while the impact of higher prices also favorably impacted operating profit, the price improvements we have achieved did not cover the increase in raw materials.

In TEL, the sales for the three months were slightly lower than the same period last year. These changes were caused substantially by the common variation in quarter to quarter timing of sales. Results of our TEL segment include the operating profit contributions from our marketing agreement with Octel, as well as certain TEL operations not included in the marketing agreements. The operating profit from our marketing agreements for the first quarter was 6.5 million which is 900,000 lower than the first quarter last year. The first quarter 2005 results reflect improved pricing, but volumes were 17% lower for the first quarter, compared to last year's first quarter. Amortization of the prepayment for services was about 400,000 lower in the same periods reflecting the declining balance method.

Other TEL operations not included in the marketing agreements were 1 million unfavorable, compared to first quarter last year. These results primarily reflect the higher environmental charges during the first quarter of this year. The contract manufacturing and other classification in the segment presentation primarily represents certain manufacturing operations that Ethyl provides to Afton, now that we operate under our holding company.

First quarter interest and financing expense were 4.3 million compared to 5.2 last year. Lower average debt resulted in a decrease of about 300,000 while we had lower fees and amortization of financing costs of about 600,000. Our total debt increased 2.4 million from the end of the year. We had an increase in working capital of around $17 million during the quarter. There were quite a few items contributing to this demand on cash. Inventories, accounts payables, accrued expenses, receivables and prepaid items. It is not unusual for our first quarter to be a drain on cash, since a major portion of our insurance is renewed in the first quarter and our rebate programs with our customers are settled in this period. Offsetting these was a receipt of 3.7 million from the collection of the 2004 environmental insurance settlement. We will receive one more payment of $4.2 million during the first quarter of next year. We had capital expenses of 3.2 million in the first quarter and we expect that our total capital spending this year will be around $20 million.

Looking forward, in petroleum additives, during the first quarter we made improvements to recover lost margins, due to the escalation of raw material costs that occurred in 2004. However, these improvements were somewhat offset by a new set of raw material increases from our suppliers. We are in the process of implementing another price increase to recapture this cost. This continual increase in raw material costs has us constantly trying to catch up. Our margins are lower today on a unit basis than they were in the first quarter of 2004 before the rapid increase in costs began.

In addition to the impact on income, this pattern of escalating raw material costs, followed by a delay in our ability to increase the selling price of our products, has an adverse effect on our working capital and thus reduces our free cash flow. The high price of oil based products and the fact that many of the commodity chemicals we purchase are in tight supply continue to pressure margins and profits. While we continue to expect that the operating profit for petroleum additives will be higher in 2005 than in 2004, the many business factors detailed in our 2004 annual report in the above mentioned margins squeeze will be major factors in the ultimate profitability of this segment.

Looking out at TEL, as has been the case for many years the factors that will determine the profits we will earn in this segment are relatively constant. Those factors are the continual and inevitable decline in demand countered by our ability to raise prices to offset the negative impact of that volume decline. We expect that TEL will earn less in 2005 than in 2004.

As we state in our 10Q, Octel has advised us that one of the major TEL markets under our marketing agreements has indicated they may exit TEL use earlier than previously expected. Octel also advises us that it is sending a senior team to the country to better understand and discuss that position.

And finally, on cash flow, we expected our debt reduction capacity from cash flow for this year will be in the $40 million range. With 32.5 million of bank debt on the balance sheet, we expect to bill cash for future corporate needs once that has been reduced. That concludes my planned comments. Doug, I'd like to open the lines for questions please.

First question coming from Alex Goldman with Morgan Stanley. Please state your question.

Good morning, first of all, can you sort of outline in general terms, what factors prevented you from pushing through enough pricing to offset greater portion of the raw material price increases?

This is Teddy. We're generally able to push through the price increases to compensate for the raw material increases. Unfortunately, the cost increases come first. And I guess that's simply a function of where the power lies in the market right now, the raw material suppliers are pushing through increases quickly. We have to turn around and negotiate with some large oil companies to recover those increases, and there is just a lag in the process.

Do you have a timing in mind as to when you plan to catch up?

We will catch up just as soon as raw materials stabilize and quit going up. We thought that would have happened by now, but it hasn't, and assuming that there are no more cost increases, we would be caught up within a quarter, but we're not in a position to speculate on whether we've seen the last of the significant raw material cost increases.

Okay. And the next question, in regards to the major market that was mentioned in the Q, that is potentially going to discontinue use of the TEL product, can you give, at least in general terms, how much of your current sales come from that market?

It's never been our position to do that. But I will tell you what I can about the situation. The lead market is going to continue to get smaller, and today there is only a few major users left. All of whom will ultimately quit buying and go unleaded. The decision to go unleaded is almost always a political decision and not one based on economics.

And this means that country's time lines for going unleaded can change as the political winds shift in those countries. It also means that it's sometimes hard to get accurate and current information out of the state-run oil companies. We're in that situation now with a large user, and with Octel, our alliance partner, we're still trying to learn what their plans are, and that's about all I can say.

Okay. So, I guess there is no sort of timing, or the, the -- I guess the extent of this in terms of scale that you can give for us -- for modeling purposes when we sort of project your earnings and sales, I mean, I guess there is no help at all that you can offer in this respect?

Unfortunately there isn't. It's just a function of the business today, and this is an ongoing situation that's changing constantly, and that's about all we can say.

Okay. And, switching the topic a little bit, there was a comment that there are certain chemicals that you guys are seeing being in tight supply. Can you give some examples of what those are?

It's a pretty broad collection of chemicals from certain types of alcohols that we buy to maleic anhydride, some chemicals may be small volume purchases, but very critical to formulation, but it's a fairly broad picture.

Okay. And one last question. What do you guys see as the tax rate going forward? I think this quarter came out at 31%. Is this something that we should be modeling going forward as well?

Yeah, 33% is a good number to use.

33%?

Yes, 33, 3 -- we use 35 and we always come in a little under that, but 33 to 35.

Even though this quarter was 31 going forward --

That's right.

Okay. Thank you very much.

Thank you.

Our next question coming from [Ravi Kamat of West RB] Asset Management. Please state your question.

Just a couple of questions. One, if you can provide some color as to sequential margins in the second quarter in the June quarter compared to the March quarter on the petroleum additive side? Do you see that being up, down, flat? And then secondly, if you could also provide some color on the acquisition pipeline, are you seeing any activity there? Thank you.

On the first question, margins will be better if raw materials stop. And I'm afraid we can't be any better -- we can't be more data than that. So, if raw materials were to freeze right where they are now, I would expect our second quarter margins will be better than our first quarter, because we're getting prices increases in the market place. On the other hand, if we are talking here three months from now raw materials have gone up and that won't be the case. And Teddy will answer the acquisition question.

There is, there is no -- we don't have any acquisitions to discuss with you at this time. We've undertaken a systematic analysis over the last 6 months of the chemical industry, and have a lot better feel for which areas within the industry are attractive to us. We've also had dialog re multiple meetings with some investment bankers to get input and broaden our views. I will just restate that patience is the theme here. We're not in a hurry, and I don't expect anything major in the near term. We're going to take a disciplined, analytical approach, and not simply take the first opportunity that comes along.

Fair enough. And one last question on the working capital, would it be fair to say for the remainder of the year some of that working capital build might traverse itself?

Yes. That would be an accurate statement.

Great. Thanks a lot.

You're welcome.

Our next question will be coming from Bill Hoffman of UBS, please state your question.

Good morning.

Hi, Bill.

Just a follow up a little bit on the last question. Sequentially, we normally see a bit of a pickup in the business in the second quarter. Do we expect to see the normal seasonal patterns here? And then, just on the cost side, if you had to try to capture the trend through the first quarter, would you say that the costs were leveling out in through March, or were they still increasing through March, so going into the second quarter you would still be kind of step wise at higher costs?

Yes. We expect the normal seasonality, that you discussed, April, May, generally are seasonally strong, and I guess toward the end of March I'd see a little bit of leveling, but who knows on the cost side.

Okay. And then I guess the next question is just, capital spending going forward, I think earlier we're looking for 18 to $20 million number this year, maybe, do you still expect to spend that much?

Yes, 18 to 20 is our number, expect to spend that, correct.

Okay. That's it. Thank you.

You're welcome.

[OPERATOR INSTRUCTIONS] Next question coming from Robert Robotti of Robotti and Company. Please state your question.

In the 10-Q, of course you -- you made reference to two things. One is that you kind of anticipate that there will be 40 million available for debt repayment generated from cash flow this year?

Right.

And also, of course reiterate expectations that the petroleum additives profits might be higher this year? Could you give us the assumptions that you have behind that, in terms of cost increase in margins? And I guess you're giving us a lot of, kind of view here, because one of the things you are saying is, here at the end of the quarter, since the end of the first quarter costs have kind of temporarily moderated, and so the costs the line is flattening out.

You also indicated you put through another price increase, so the second quarter margins will improve, so I would assume that means the margins in the second quarter, from the view today, of course it could change before the quarter ends, is that the margin will be up really because of an increase in the revenue line, and I would guess and speculate, then, that would mean in the third quarter margins would, things being equal, which they probably won't, be somewhat higher in the third quarter, too, because you've only captured part of the cost increase with the price increases here in the second quarter. And then, effectively, do you assume stable costs and margins, then, through the rest of the year to come to the 40 million in higher margins estimates?

Simple answer is, yes. If raw materials were to stabilize right where they are now, we would expect higher margins in the second and the first and somewhat higher than the third than the second. And we know that we're going to get some of that working capital back, so that figures into that free cash flow data that we talked about.

And then, of course, you do say that with the line of credit's 33 million, so if those things were to happen, which of course they'll be different, but, you'll have paid off the 33 million line of credit and therefore you will have accumulated some additional amount of money into cash. Have you evaluated, obviously looking for acquisitions, but you're saying you're going to be judicious with that.

The cash in the alternative, are you looking at what you consider a stock repurchase? Do you have the ability to do that? Is there anything preventing that? And does that play any interest at all as a way to reallocate a piece of the capital that's relatively modest that probably doesn't affect the financing capability for acquisition?

We have some ability to buy in stock. That certainly is a consideration along with a dividend and other uses of cash, and senior management and the board are considering the full range of options, but we're not limited in our credit agreements from pursuing any of those options. There is a limit on the total amount, but not on the activity itself.

And one of the things that in a recent call, Lubrizol seems to be eluding to, is they -- you talk about having reasonable pricing power in the business, obviously, better pricing power than you had a couple years ago. Do you find that to be the case also? And I guess kind of assume if you put through a fifth round of price increases that you do have, although somewhat delayed, some reasonable pricing power. And then, is there a margin that in the past is one at which is a goal and expectation that if things do moderate you get back to -- of course of the recent past, from quarter to quarter margins have been all over the lot.

Could you give us any guidance on, is there a goal internally? And there must be some as you put through a price increase what kind of margins you're look to go get to?

Well, second part of that first. We're simply trying to recover the cost increases and stay whole on them. We do have with a fifth round of price increase, clearly we have a greater ability today to raise price than we did, as you point out, a couple years ago. The biggest reason for that is, the substantial amount of the raw materials cost increase that we see is in base oil and products that we buy from oil companies. When we go back into the oil companies to explain to them why we need a price increase, because our costs have gone up, it's not hard for them to understand the logic behind that, because they're seeing both sides of it. That doesn't prevent them from trying to do their jobs to minimize what they see.

On that point, I do recall a number of years back that, historically, which of course -- historically price -- oil price increases actually were periods of time in which it was somewhat helpful to regain margin and actually expand it a little. You haven't seen that as no particular hope and expectation of that returning, is there?

This has been such an extended period of time of cost increase, and uncharted territory, and the price of crude oil, so, I just don't know how accurately you can draw on history to determine where this will all play out.

Thanks a lot.

Thank you.

Our next question coming from Ravi Kamat Of West RB Asset Management. Please state your question.

Follow up question, in your 10Q you talked about supply of the (indiscernible) viscosity index improves and that contract is being terminated in mid-2005. Can you give any sort of color as to how big of an impact that could be, in terms of higher pricing? Is it less than 1 million or 5 million? Any sort of color would be helpful.

It's a contract that had been mentioned before, so we have to mention it. We found alternate supply. The costs won't be measurably negatively different. It's small, in the range of small.

Okay. And then, again, I'm not, I don't know the TEL market that well. Can you tell us what country it is, the big country that's talking about exiting earlier?

No, we're not discussing specific customers.

Okay. Thank you.

You're welcome.

There are no further questions in queue at this time, I would like to hand it over to our speakers to conclude.

Thank you very much more for joining us. That's it for today.

Thank you.

Good bye.