NewMarket Corp (NEU) 2005 Q3 法說會逐字稿

Welcome to the NewMarket corporation third quarter 2005 results earnings conference call. [OPERATOR INSTRUCTIONS] It is now my pleasure to introduce your host, Mr. David Fiorenza, Vice President, Treasurer and Principle Financial of NewMarket Corporation. Thank you, sir. You may begin.

Good morning. Thank you for joining us to discuss our third quarter performance. With me today is Warren Huang, President of Afton Chemical Corporation, which is our petroleum additive Company. I have a few planned comments, after which we'll be happy to answer your 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.

Third quarter 2005 earnings, excluding certain special items, was $10.3 million, or $0.61 a share. Representing a significant improvement over earnings on the same basis for the third quarter of 2004 where we made $0.26 per share. Net income for the third quarter of 2005, including all items, was 13.4 million, or $0.79 per share, compared to net income for the third quarter of 2004 of 13 million, or $0.76 per share. For the first nine months of this year, earnings excluding certain special items were 25.6 million, or $1.51 per share, compared to earnings for the first nine months of last year on the same basis of $1.28 a share.

Including special items, net income for the first nine months of this year was 31.2 million, or $1.84 a share, compared with $1.78 a share last year. During the quarter, operations and effective working capital management provided strong cash flows, which enabled us to pay off the remaining $30 million that we had drawn on our bank facility. As you know, we evaluate our business in two subsidiaries. Our petroleum additives business, which is Afton Chemical Corporation and the tetraethyl lead business, which is part of Ethyl.

Looking at petroleum additives first, net sales in the third quarter were $267 million, which was $45 million, or 20% higher than the third quarter of 2004. Shipments during the quarter increased about 7%. The increase in shipments was the result of significantly higher shipments in the engine oils product line, as well as increases in the fuels product line. Shipments in the specialty additives product line for the quarter were generally unchanged. Higher selling prices, as well as a favorable foreign currency impact, also resulted in higher sales between the two quarterly periods. Of the $45 million increase, roughly 25 million was due to price in mix improvements. With the remainder being due to shipments in product mix.

Petroleum additive's third quarter operating profit was 17.4 million, compared to 9.4 million for the third quarter of '04. The profit improvement was across all product lines, with most of the increase being in the engine oil additives and fuel product lines. Third quarter '05 includes an expense of $800,000 related to damage from Hurricane Rita. As a reminder, the third quarter of last year included a gain of 800,000 from an environmental insurance settlement.

Selling, general and administrative expenses, were 1.7 million higher when comparing the two third quarter periods. The increase in SG&A was mostly in support of our selling and support efforts. Offsetting this increase, R&D expenses were $2.4 million lower. We are making some progress in recovering rising raw material costs and price increases for our products. And continue to seek increases as raw material costs continue to rise. The nine months for this year, sales were 774 million, which is 118 million or 18% higher than nine months last year.

Total shipments increased 7% in the first nine months. Again, higher shipments resulted from an increase in engine oil additives product line. Shipments in the other product lines were down less than 2%. Similar to the third quarter results, higher selling prices, favorable foreign currency also resulted in higher sales. Of the 118 million increase, roughly 65 million was due to price movements. With the remainder being due to shipments in product mix. For nine months, petroleum additives operating profit was $44 million, compared to 40 million for the first nine months of last year.

On a combined basis, SG&A and R&D expenses were 1.1 million higher for nine months of '05 compared to '04. We have had some success increasing selling prices during the nine months of '05, but raw material prices have continued to go up. We will continue to attempt to recover the ongoing increase in raw material costs during the remainder of the year.

Looking at tetraethyl lead. Our tetraethyl lead sales for the third quarter and nine months of this year were higher than the same periods last year. These changes were caused substantially by variation in timing of orders and increases in selling prices. Results of our TEL segment include the operating profit contribution from our marketing agreements with Octel. As well as certain TEL operations not included in those agreements. The operating profit from our marketing agreements for the third quarter was 6.4 million, which was 2.5 million lower than the third quarter last year. Similarly, nine months 2005 marketing agreements operating profit results were 19.6 million, which was 7.3 million lower than nine months last year.

Both '05 periods reflect improved pricing. However, this was more than offset by a 22% decrease in volume for the third quarter and a 28% lower volume for nine months. As you may recall, one of the major TEL customers under our marketing agreements discontinued the use of TEL earlier than we had been previously expecting. The TEL market will continue to decline as other customers discontinue the use of the product.

Other TEL operations, not included in the marketing agreements, were 9.1 million unfavorable when comparing third quarter of '05 to third quarter of '04. And 6 million unfavorable when comparing the nine months periods. Nine months '05 results include a special item of 3.9 million before income taxes, or insurance settlements gains related to our premises asbestos liabilities. Both the third quarter and nine months of '04 included a gain of 12.5 million from an environmental insurance settlement. Included - - excluding those special items, other TEL operations profit was higher in both the third quarter and year to date comparisons. As I mentioned earlier, this is due to timing of shipments and lower expenses, partially offset by an increase in environmental cleanup costs.

During the third quarter, we had two items that we considered special items. The first was a pretax gain of 2.9 million on the sale of corporate property. And the second was a settlement of some old tax years, with the IRS, which resulted in a gain of $1.3 million. Third quarter interest and financing expenses were 4.1 million, just a little lower than last year's third quarter. Nine months '05 interest and financing expenses were 12.9 million compared to 13.9 million for nine months of last year. Lower average debt resulted in improvements of 700,000. Or higher interest expenses resulted in an increase of 300,000 and we had 600,000 less fees and amortization of financing costs.

Income taxes for the quarter were 4.3 million, compared for 5.5 million for the third quarter last year. We had a lower overall effective tax rate of 24.5% for this quarter, compared to 29.6 for the third quarter last year. If you eliminate the special settlement with the IRS, I mentioned just a minute ago, the effective rate for this quarter would have been 30.7. Nine months 2005 income taxes of 12.2 million was an effective tax rate of 28.1. Same period last year's effective tax rate was 32.1. Once again, removing the settlement, this year's year to date effective tax rate would be 30.6.

Turning to cash flow, we had $40 million of cash on hand at the end of the quarter, which is 11.5 million more than the end of last year. Cash flow from operations for nine months were 54 million. We used these cash flows, as well as 4.2 million proceeds from the sale of corporate property, to fund our capital expenditures of 14 million and pay down 30 million of debt. Cash flows from operating activities for '05 included higher working capital requirements. We had about $10 million more tied up in working capital, excluding cash, at the end of the quarter as compared to last year. The increase in working capital, primarily reflects higher accounts receivable. These were offset somewhat by a decrease in inventory as well as an increase in income taxes payable.

The accounts receivable increase is due to higher sales levels, reflecting both increased volume shift and higher prices. The decrease in inventory is mainly the result of planned reductions in our viscosity index improver inventory levels, which we built last year to transition a change of supplier. The increase in income taxes payable is due to current year taxable income, predominantly at our foreign locations. We had total debt of $154 million at September 30 this year. Representing a 30.5 million decrease in our debt level since the end of the year. The decrease resulted from a payoff of all of our outstanding borrowings, as well as a reduction of $500,000 on a capital lease. As a percentage of total capitalization, our total debt ratio decreased from 44.3 at the end of the year to 37.3 at the end of September. As I mentioned earlier, we had $14 million of capital expenditures through nine months.

As we look at the fourth quarter, and then the year, petroleum additives segment has performed well in the marketplace during the first three quarters. As evidenced by its significant revenue and volume gains when compared to 2004. Like we said in the other conference calls, unfortunately many of the gains had been obscured by our inability to fully recover the costs of rising raw materials. We continue to expect that the operating profit from petroleum additives will be higher in '05 than in '04.

When TEL - - this segment had relatively good performance during the first nine months. We believe the profits in the fourth quarter will be significantly lower than the fourth quarter of last year. The anticipated decline in profitability is volume driven and we expect that TEL will earn less in '05 than in '04. As we have continually stated, this segment will continue to decline in profitability as its usage is phased out around the world. That concludes my planned comments.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Bob Robotti of Robotti and Company. Sir, please state your question.

Hi. Actually, pretty good quarter. Great cash flows, great working capital management.

Thanks.

At the beginning of the year, of course you talked about cash flows and potential debt repayment. And then through the mid year, I guess a lot of working capital had consumed a lot of capital and was the reduction was - - what's the current estimate in terms of cash flow and debt repayment? Obviously you paid it off. But money that you think you're going to generate in the '05 year?

Yes, Bob, this is David. I expect that we'll end the year - - we obviously can't pay off anymore bank debt because we paid it all down. We have $40 million of cash on our balance sheet. I expect the fourth quarter will probably be cash negative relative - - just cash negative. We're going pay off those income taxes. We had a soft end of the third quarter due to Rita, which actually helps receivables. So bad news sometimes on the profit side is good news on the working capital. So, long way of saying we'll end the year right where we are on debt. And probably 10 million or so less cash than we have right now.

Actually in the release, one of the things that I wanted some more clarification on, I was hoping; is there is a statement in there that says the improved petroleum additives results reflect the success of our strategy to supply our customers with a strong and diverse portfolio of petroleum additive products that enables them to differentiate their products in the marketplace. Could you kind of expand on that at all in terms of - - obviously the volume gains have been good? And I guess maybe a related question is; the volume gains that you've had - - and it's been a couple years running, of course, it's more moderating this year. Do you think that that's, you've taken a little bit of market share? Or do you think that that's growth in the marketplace? What's the driver between the volume growth, both this year and in prior years?

I'll answer some and then Warren can jump in. That - - the sentence you read is real just a statement of our strategy, which is we're more interested in helping our customers make more money in their markets, to differentiate what we sell. As opposed to just selling our commodity, if you want to look at it that way. And you're right. We don't expect that these volume gains at this rate can keep going. Because some of this business, we've won during the year and now when we're starting to do year on year comparisons, you start to notice some of these percentages. Warren?

Yes, Bob, this is Warren. On the petroleum additive business, indeed in the last couple years we have grown our market share, particularly in the engine oil sectors. And when we talk about differentiating our product, it's just our approach to the market; that the way we deal with our customers, we listen, we develop our product. We [meet with them.] We look at their marketing initiative and try to align our activity with them. We also focus a lot of our activity in some of the higher margins, specialty type of product. So try to manage our product mix a little bit better.

But for this year, you actually said the specialty segment, the volumes there were really flat. Is that right, at least for the quarter? And it's actually the growth's been more in the engine oil business, which of course you do kind of historically have been kind of low margin, more commodity like. I guess I'm a little bit confused in terms of - - it would have been nicer, seems if there would have been more growth in the specialty side versus the engine oil side.

We're actually pretty excited about specialty business. We were hampered this year by the lower sales at some of our OEM customers and the load volume. But in other sectors outside of the transmission fluid, we actually are seeing a significant growth in our business. On the engine oil side, it's a large sector of the market. And we certainly would like to continue to participate in that. And the key there is to continue to provide a value benefit to our customer and continue to stay ahead of the raw material cost increases.

Okay. And then the concept that there is differentiation and you're facilitating customers, all of that would obviously be directed at the idea that those things should enable margin expansion. But yet the only comparable we kind of have really is the result as a public Company. In terms of margins, there is a reasonable margin differential between you and them. Would you - - there's probably a number of factors with rising raw material costs and a lot of things going on. Over time, would you expect those margins to kind of be more comparable?

Bob, I don't think you can compare [astralubers] all in that sense. Product mix is fairly different and then size of operations is different. If you go back over time, there's historically been a gap between our margins and the market leader's margins. And I would not expect that we would completely close that gap. Yes, we would improve ours from the strategy we're doing, but we will not get to their type of margin.

And then I guess in the fourth quarter, since you're actually going to probably have a little less cash and you're not going generate anymore money, it kind of defers the concern that - - what are you going do with the cash as it builds on up? Obviously you are continuing to make some acquisition that would kind of make sense. And as you've indicated you're going to be judicious about that process. And therefore that would tell us the likelihood of that happening in the next six months is probably not so good. Right? Because it's always going be somewhat of a longer time horizon. So at some point, there's a question of you've got excess cash. You can't pay down the debt you've got on the balance sheet of course more cash than you kind of need for capital spending going forward. And what's the timeframe in thinking about that? And do you feel under any pressure or there's plenty of time to figure that out and you don't think to think about dividends or anything other - -?

As you said at least the last two calls, the Board is fully aware of all the options available to them. They discuss these items regularly, dividends, acquisitions, whatever, use of cash. And we've communicated that we're going to be patient and we are. But we're really not patient in our looking and we are active in looking for acquisitions and opportunities. And the worst thing to do is to pull the trigger on one we don't want to do. So, that's where the patience come in. I can't give you a time line on when that will happen.

Lastly, of course, Lubrizol has made comments in both the last two quarters about business they probably have gotten due to the problems that [Orenane] has in their facility in the Far East. I would expect that there's some incremental volumes that you've gotten from that process, too? Or is there something about the geographies and things that it really hasn't had much impact on your sales?

We have not had much of an impact. We supplied them some raw materials but it wasn't significant or we would have already mentioned it.

Okay. Thanks.

All right, Bob.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our next question comes from the line of Thomas Snyder. Please state your question.

Yes, good morning. David, I was wondering, can you give us any additional information on what the sale of the corporate assets at 2.9 million pretax, what that represented, what was sold?

Sure. Hi, Tom, how are you doing?

I'm fine. How are you?

I'm pretty good. Long time, no hear. We sold our corporate airplane.

Okay. Thank you very much.

It appear there is are no further questions at this time. I'll turn the floor back to you, Mr. Fiorenza.

Well, thank you for joining and we'll see you next quarter. Good bye.

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation, and you may disconnect your lines at this time.