NewMarket Corp (NEU) 2006 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the NewMarket Corporation first quarter 2006 financial results conference call.

At this time, all participants are in a listen-only mode 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 and Treasurer of NewMarket Corporation.

Thank you, Mr. Fiorenza.

You may begin.

Thank you for joining me to discuss our first quarter performance.

With me today is Steve Edmonds, our General Counsel.

I have a few planned comments after which we'll open the line for any questions.

As a reminder, some of the comments we'll 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 actual results will not differ materially in our expectations due to uncertainties and factors that are difficult to predict beyond our control. A full discussion of these factors can be found in our most recently filed 10-K.

I'm going to focus the majority of my comments on the segment presentation of performance that was included in the press release. As an overview, the first quarter reflected improvement in net sales as well as operating profit across all Petroleum Additives product lines. We believe the improvement in earnings reflects our continuing success in growing our Petroleum Additive product line by supplying our customers with a strong and diverse portfolio of products to meet their requirements.

We maintain our efforts to improve profitability in this very competitive marketplace, which continues to experience rising raw material costs and in certain areas, a tight supply demand balance of key other materials.

Our balance sheet remains strong, and we have no outstanding bank debt. Reflecting our improved financial condition for the first time since 2000, the Board of Directors declared a quarterly dividend of $0.0125 per share in our common stock. The dividend was paid on April the 3, to NewMarket shareholders of record at the close of business on March the 16. Yesterday, the Board announced the next dividend of $0.0125 a share, which is to be paid on July the first. We did not repurchase any shares under our $50 million authorization during the quarter.

As you know, NewMarket evaluates the performance of the Petroleum Additives business of Afton Chemical Corporation, or Afton, and Ethyl's TEL business based on segment operating profit. NewMarket Services Corporation departments and other expenses are billed to Ethyl and Afton, based on the services provided under the holding-company structure. Depreciation on segment property plant and equipment and amortization of segment intangibles and the prepayment of services are included in the operating profit of each segment.

First, we'll look at the Petroleum Additives.

Net sales were about $300 million for the quarter, which is 62 million higher, or a 26% improvement, over the first quarter of last year. Shipments increased about 10% in this comparison. The increase in shipments was across all major product lines.

While the improvement in shipments between the first quarter of '06, and the first quarter of '05, is significant, this quarter's shipment levels shows a less significant improvement when compared to the levels that we experienced during the last three quarters of 2005. Higher selling prices, which were partially offset by an unfavorable foreign currency impact, also contributed to the higher net sales between the two first quarters.

When we look at the $62 million improvement in sales, approximately 27 million was due to increased volumes and product mix, with the remainder due to selling prices, foreign currency movement, and mix.

Petroleum Additives had a significant improvement in operating profit when comparing this quarter to the same quarter last year. The first quarter of 2006 operating profit was 25.7 million, as compared to 9.1 million for the first quarter last year. The increase was widespread across all major product lines. The increase of shipments accounted for about half of the improvement in operating profit.

The other positive factor influencing operating profit for the first quarter was on the price margin side of our business. We were able to make some improvements through price increases to restore margins that have been under pressure since the increase in raw material cost began in mid-2004. We've also recognized additional improvements in operating profit by introducing more cost-effective products in the marketplace, as this continues to be a very competitive business.

Selling, general, and administrative expenses were 1.6 million higher in this comparison. Additionally, R&D expenses increased a $0.5 million from the first quarter of last year.

As a percentage of net sales, SG&A combined with R&D, decreased from 14.6% for the first quarter of last year, to 12.3% for the first quarter this year. This decrease is a function of the higher sales, partially offset by the 6% increase in these expenses.

I'll now turn it to the TEL segment.

As we've discussed on virtually every call, most of the TEL activity is through marketing agreements with [Inospect], formerly Octel, under which we don't the record sales transaction. The sales we record are those made by our wholly-owned subsidiary, Ethyl, in areas not covered by the marketing agreement. The sales made in the areas not covered by the [Inospect] marketing agreements with small compared to the TEL sales made through those agreements.

The TEL sales in the first quarter of '06 were slightly higher than the same period last year. The results of our TEL segment include operating profit from our marketing agreements, as well as certain TEL operations not included in the marketing agreement.

The operating profit from our marketing agreements for the first quarter was $1.3 million, which is 5.1 million lower than the first quarter of last year. The 2006 period reflects improved pricing over 2005, however, it was more than offset by the 72% decrease in volume for the first quarter of '06, compared to the same quarter of '05.

Amortization was about $300,000 for the first quarter this year, reflecting a declining balance method that we're using.

Other TEL operations not included in the marketing agreements were about $1 million favorable when comparing the first quarter of this year to last year.

The other TEL operation results for both first quarter periods include charges and reserve adjustments for environmental matters. The 2006 first quarter reflects lower charges of this type compared to last year. We expect TEL shipments and earnings in 2006 to be significantly lower than last year, and income from the TEL segment will continue to vary significantly from quarter-to-quarter.

Turning to other items in the press release, first quarter interest expense was 3.9 million, while the first quarter last year was 4.3 million. The drop was due to the fact that we no longer have any outstanding bank debt. Fees and amortization of finance costs were substantially unchanged between the two periods.

Income taxes were 6.9 million in the first quarter this year and 2.1 million for the first quarter last year. The effective tax rate this year was 33.4%, compared to 31% last year's first quarter. The effective rate for 2005, includes the benefit of a research-and-development credit, which is not reflected in 2006, as the credit has not been extended so far by Congress.

Cash at the end of the quarter was 56.5 million, which is virtually unchanged from the year--end position. The first quarter is typically one which is a use of cash as certain liabilities are settled in this quarter.

Cash lows from operating activities for the first three months were 6.3 million. We made contributions of about $2 million to our domestic pension obligations and about about 1.5 million to our foreign pensions. We funded capital expenditures of 4.3 and dividends of 2.1.

Included in the 2006 cash flows from operating activities, were collections of 4.2 million related to a 2004 environmental insurance settlement. Cash flows from operating activities for the 2006 period also included a net increase in working capital. As I mentioned, we had no drawn bank debt, but [inaudible] and have the ability to borrow on our revolver as required. The unused capacity on our bank facility is about $98 million.

As you recall, in 2003, we sold senior notes in the aggregate amount of $150 million, at an interest rate of 8.875. These are due in 2010. The senior notes are callable in May of 2007.

As a percent of total capitalization -- that is, long-term debt, shareholders equity -- our total debt decreased from 36.6% at the end of '05, to 35.5% at the end of the first quarter. The lower percentage was primarily the result of increase in shareholders equity, which was due to increased earnings.

We have working capital at the end of the quarter of 260 million, as compared to 245 million at the end of the year. The increase in working capital primarily reflects higher inventories and prepaid expenses, as well as lower accrued expenses and income taxes payable.

The favorable impact from working capital were partially offset -- the favorable impact of working capital were due to decrease in accounts receivable. The income in inventory results from higher costs, as well as an increase in volumes due to increased business.

The increase in prepaid expenses primarily results from the funding of our dividend to the disbursing agent, as well as higher prepaid insurance amounts, which will be amoritized over the year.

The accrued expenses decrease is primarily due to payments made on customer rebates in the first quarter of '06. While the decrease in income taxes payable is simply the result of having made tax payments during the first quarter.

The decrease in accounts receivable result in mostly from a reduction in miscellaneous receivables, including the receipt of the final payment of the 2004 environmental settlement.

Trade receivables were down about 3%.

Turning to outlook, Petroleum Additives business performed very well during the first quarter. Volumes were solid, and we were able to make some improvements on restoring margins, which have been under pressure due to rising raw material costs.

As we look out for the remainder of the year, we see a very high level of uncertainty with respect to those raw material costs. Crude oil is at historic high levels and could indicate our costs may rise more as we go out through the year. We monitor the situation daily and intend to attempt to manage the situation with pricing actions in the marketplace. We continue to believe that Petroleum Additives will have a higher operating profit in 2006, than in 2005.

TEL had a low first quarter as shipments were down about 70% from the first quarter of 2005. Quarterly comparisons in this business are not as instructive as looking at longer periods of time. We do not expect the annual drop in volume to be as large as this quarter's drop, however, this segment will experience significantly lower operating profit this year and will become a less significant contributor to the overall profits of the Company. The reduction in operating profit is a function of lower demand around the world, as this product is being phased out for quite a while.

As I said, we had no outstanding bank debt, and our senior notes are not callable until May of '07. We expect to build cash on our balance sheet while investigating alternative uses of that cash, particularly acquisitions.

We estimate our total capital expenditure this year to be around $20 million, and we'll be able to finance that through cash provided by operations.

That concludes my planned remarks.

I'd like to open the lines now, if you have any questions.

Thank you.

Ladies and gentlemen, at this time, we'll be conducting a Question-and-Answer Session.

[OPERATOR INSTRUCTIONS]

Our first first question comes from [Seth Harvey] from UBS.

Hi. This is actually Bill Hoffman.

David, I was wondering if you could talk a little bit about the volume increase and whether you see most of that coming from market share gains and/or whether some other organic growth?

The second thing, is looking forward a little bit, give us an update on what the outlook is for new regulations, new formulations, et cetera?

Okay.

As I said in my remarks, the 10% growth is most pronounced in this particular comparison that we have to make to fulfill our obligations, and it was both some market gain, as we had picked up some business, and some general market growth. I'm not expecting market share gains to be as much in the future comparisons.

There are no new specifications that are going to hit our business this year in any of our major product lines. So, I don't see that being a factor as we go out out through the rest of this year.

If you look into '07, though, is there another round of specification changes or--?

One of the major ones I checked on this morning in the engine office, the dates aren't real firm, but it's not until '08 or '09, that the the next PCMO specification will happen.

And you said that the volume gains were split between some market share and some organic -- can you sort of -- half and half or--?

I think it's probably, in this particular comparison, more on market share gains than organic, but good organic growth.

Great.

Thank you.

Your welcome.

Can I can jump in here?

This is Seth Harvey. I had a question on your base oil price increase.

What are you seeing at this point in the quarter? I know you had a big one in February. Is that the same?

Yes.

Seth, we're been getting base oil notice increases on a regular basis, and the costs will be higher in the second quarter than in the first quarter, and different parts of our team are out trying to get prices up right now.

And you had [inaudible] down, and now they're back up, I believe, has that changed the market significantly in terms of the competitive behavior?

Not that I've noticed; no.

Thank you.

Okay.

Our next question is from [Steven Shorts] with KeyBanc National Markets.

Good morning.

Let's talk about the geographic break down of your volume growth. Was that more in the U.S. or outside the U.S.?

It was widespread but probably since we do roughly 50% of our business in the U.S. all the time, it's going to follow that and be tough for us math materially not to, but good growth all around in each of the regions.

Okay.

Is it safe to say then, that you had more share capture in the U.S. and most of your market oh volume growth came from outside the U.S.?

It would be safe to say the first statement but not the second one. The first one being the share gain.

Where do you think the share came from? You mean, who was the comparative that lost it?

Yes, basically. I really don't like -- I really don't discuss that.

Okay.

Thank you, gentlemen.

Your welcome.

[OPERATOR INSTRUCTIONS]

Our next question comes from [Robert Felice] with [DeBally & Company].

Please state your question.

Hi, gentlemen.

Just -- sequentially, Q4 '05 to Q1 '06, what was the breakdown for revenue growth for Petroleum Additives between volume and price?

I haven't analyzed that, but my guess is it's mostly price.

Mostly price--?

Yes.

Okay.

So, if we look then at operating income for the segment, Q4 '05 to Q1 '06. You had great growth. It looks like operating income increased by 5 to $6 million -- just curious to know what that was from. There was no volume growth in there and just a little bit of price. What was the majority of that increase attributed to?

Well, if it was price predominantly than charismatically, that would drop straight down, not saying that's what did happen, but the fact is, Robert, I haven't analyzed it that way.

Right.

And then, just curious to know what D&A was for the quarter?

Depreciation and amortization for the quarter--?

Yes.

I'll call you back on that because I don't have it.

Okay. Alright.

Thank you, gentlemen.

You're welcome.

Our next question comes from Adam Comora with EnTrust Capital.

Please state your question.

It's been asked and answered.

Thanks.

Gentlemen, there are no further questions at this time.

I'll turn the conference back over to you for any concluding comments.

Well, thank you for joining our call, and we'll speak to you next time.

Thank you.

This concludes today's conference.

Thank you all for your participation.