NewMarket Corp (NEU) 2007 Q2 法說會逐字稿

Greetings ladies and gentlemen, and welcome to the NewMarket Corporation second quarter 2007 financial results conference call. (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. Thank you, Mr. Fiorenza, you may now begin.

Thank you, Jackie. Thank you for joining us to discuss our second quarter performance. I'm David Fiorenza and with me today is Teddy Gottwald, our CEO. We have a few planned comments, after which we'll open the lines for 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 we base our statements 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 from our expectations, due to uncertainties and factors that are difficult to predict or beyond our control. A full discussion of these factors can be found in our most recently filed 10-K and the update in our 10-Q which we filed yesterday.

There are quite a few items to discuss this quarter, including the earnings themselves. There are three messages in our earnings release; total net income, net income from continuing operations and net income from continuing operations excluding special items.

Total net income for the second quarter was $30.9 million or $1.78 a share compared with net income from the second quarter last year of $20.4 million or $1.17 per share. While this is an impressive improvement of 52%, this comparison includes the gain on the termination of a marketing agreement, an event that will not occur again.

Net income from continuing operations this quarter was $1.00 per share, compared to $1.10 per share last year. But last year's second quarter included two special income items. Those items were the sale of a piece of property and the settlement of old issues with the IRS. These two items added $0.28 per share to last year's results.

So when we remove that benefit, the comparison shows that income from continuing operations for the second quarter of 2007 was $17.4 million or $1.00 per share, an increase of 22% over the comparative income from continuing operations for the second quarter last year, which was $0.82 per share, excluding special items. The 22% improvement is the main way that our Management looks at the performance of our business, since it represents ongoing operations.

On June 15th, Ethyl Corporation and Innospec resolved all pending arbitrations between the companies pertaining to the TEL business. In addition to settling the arbitration issues we also terminated the marketing agreements that governed the business outside of North America. As compensation for this termination, Ethyl received $28 million in cash. Innospec also returned approximately $12 million of working capital that we had tied up in the business.

The marketing agreements were terminated effective April 1st, so none of that business' operations are reflected in the second quarter results.

Since we will no longer be participating in the TEL market outside of North America, we have chosen to classify the previous marketing agreement activities as discontinued operations. This means that both the gain on the settlement as well as previous operations under the TEL marketing agreements is now being reported as discontinued operations on our P&L. The gain on the termination of the marketing agreements was $13.5 million after tax, $21.2 million before tax. The difference between the $28 million that we received and the gain reported was the prepayment for services that we were carrying for this business. That prepayment was being amortized against this business and is a non-cash item.

As we go forward, we will present all comparative figures using this format. The profits of the marketing agreements will be shown as discontinued operations. If you look at our previous filings, you can anticipate the magnitude of this change. On the GAAP P&L below gross profits you can find operating profit from TEL marketing agreement services. The after-tax amount of this figure will be reclassified as discontinued operations for previous periods.

The June 30 balance sheet does not include any significant assets or liabilities for the discontinued operations. The balance sheet at the end of last year included the assets and liabilities of the discontinued operations and has not been reclassified.

At December 31st, the assets which were disposed of through this transaction included $8.2 million for the TEL prepayment for services and $12 million for the working capital that had been advanced. Both of these are recorded in Other Assets and Deferred Charges on the consolidated balance sheet.

Another consequence of the termination of the marketing agreements is that the remaining portion of the TEL business is no longer considered a significant segment. We will report only one segment from now on, the petroleum additive segment. Our TEL business in North America, along with the contract manufacturing services that Ethyl performs will be shown in total as All Other in the segment presentation of our business.

Previously reported results for our TEL North American business have been reclassified into All Other for reporting and comparative purposes.

Our consolidated net sales for the second quarter of 2007 amounted to $344 million, which represents a 4% increase from last year's level. Six months consolidated net sales were $653.8 million as compared to $632 million for six months of '06, representing an increase of 3%.

Foam additive sales for the quarter were $338.8 million. This is $13.8 million or approximately 4% higher than last year's second quarter. When we try to isolate the components of this change in revenue we conclude that almost all of the net improvement is due to higher prices as compared to the second quarter for 2006. We also note that while shipment units are up in the second quarter compared to the first quarter, total shipments are down approximately 6% on a unit basis from the second quarter of last year. The net effect of this drop on our revenue is virtually zero, as we are selling a mix of higher priced products.

Petroleum additives operating profit improved significantly to $36.5 million from $27.1 million when comparing the two second quarter periods. This is a 35% improvement and is reflected across most product lines. The higher operating profit resulted from several factors. We're recognizing the benefit of our progress in restoring margins on certain products through the introduction of more cost effective product formulations for our customers. These improved formulations lower both our costs as well as our customers' costs.

We are also recognizing the benefit of price increases achieved during 2006. In addition to improved pricing, we are selling a product mix with higher margins. Selling, general and administrative expenses were roughly the same when comparing the two periods, while R&D expenses increased $2 million from the second quarter of 2006, as we continue to invest in R&D to support our customers' plans.

Second quarter interest and financing expenses were $2.8 million, whereas last year's second quarter was $3.9 million. The decrease reflects lower interest rates and lower fees resulting from the restructuring of our debt. As you may recall, in December of last year, we retired substantially all of our 8.875% senior notes and replaced them with 7.125% senior notes. We continue to have no drawn debt on our revolving facility.

Turning to cash flow, cash at June 30 was $108.4 million, which is an increase of $48.1 million since December the 31st. Cash flow from operating activities for the six months were $46.9 million, which included the $12 million reimbursement of our TEL working capital advance.

The major items of note for uses of cash for the quarter were capital expenditures, Foundry Park expenditures and contributions to pension plan funding. Our capital expenditures were quite high again this quarter. For the first half capital expenditures were $19.7 million. We estimate our total capital spending this year, excluding the capital expenditures for Foundry Park, will be approximately $30 to $35 million.

Additionally, we spent approximately $5.8 million on our Foundry Park development activity and for the first half of the year, we made contributions of around $9 million to our pension plans. We project that we will contribute $15 million to the pension plans in total for this year.

There have been some changes in our level of debt since the beginning of the year, but it almost exclusively relates to our Foundry Park development activities. We have a $7 million bridge loan that we are using to fund this project. At the end of June we had $5.6 million drawn on this line. This accounts for almost all of the change in our debt level since the beginning of the year. We're in the final stages of obtaining a construction loan for the project, which we expect to cover approximately 85% of the total project costs. The balance will come from our assets and cash on hand.

We continue in a strong financial position today. Our overall strategy remains the same. It is our intent to leverage our financial strength to grow our business with acquisitions being an area of primary interest. Our focuses on the acquisition area remains on the petroleum additives industry. We believe that in the current mergers and acquisition environment this industry will provide the greatest opportunity for a good return on investment while minimizing risk. As we've repeatedly said, we remain patient in this pursuit.

We believe we have many internal opportunities for growth in the near-term, both from geographical and product line extensions. We will wait and intend to make the right acquisition for our company when the opportunity arises. Meanwhile we will build cash on the balance sheet and continue to evaluate all alternative uses for that cash.

Earlier this year, we announced our intention to develop some of the downtown Richmond property that we own by constructing a multistory office building for MeadWestvaco. We have now begun the construction phase of that project. We've assembled an excellent team to assist us in the development of the construction. Total expenditures on this project for this year are projected to be approximately $13 million, with $6 million coming from cash on hand and the balance being borrowed. We anticipate the project will be completed at the end of 2009, in which time we expect this business to be accretive to our earnings.

Looking at petroleum additives, we had excellent performance from this segment again this quarter. We continue to focus on growing our business by helping our customers be successful in their marketplace. We're following a two-part strategy. First, cost management in those areas that are commodity-like in their characteristics through the introduction of more efficient formulations and second, growth through product differentiation in other areas where that approach is valued by our customers.

This business has done very well in the first half of the year. We believe this success is from the combination of improved product mix, new product introduction and margin restoration associated with previous pricing activities. Our volumes compared to the previous two quarters have improved.

The petroleum additives market, however, continues to face challenges on many fronts. With crude oil prices at record high, while material costs are trending up and supply is tight for several of our key raw materials. In addition, R&D costs continue to rise.

Despite these challenges, going forward we believe we have a solid business base, strong technology and a good team to continue to build on the successful performance so far this year. We expect that petroleum additives will have a higher profit in 2007 than in 2006.

Teddy?

Thank you, David. I just want to elaborate a little bit on the uses of cash. As David mentioned, we had over $100 million of cash on our balance sheet at the end of the second quarter. Acquisitions continue to be our primary area of interest for the use of this excess cash and our main focus is in the petroleum additives area. We're not looking exclusively at petroleum additives, but it's, I think, a safe assumption that most of our efforts are going into petroleum additives and it's very unlikely that we would make any sizeable acquisition outside of the additives field. Sizeable meaning in excess of, let's say $50 million purchase price.

We are looking at all other uses of cash, including an increase in the dividend, buying back stock, short-term and long-term investment strategies with the excess cash and we do feel we have plenty of internal growth opportunities to pursue. As David pointed out, that's requiring more capital expenditures this year than we've seen in prior years. We'll continue to consider and balance all of these alternatives.

As far as anything concrete in the acquisition or other areas, we really don't have anything new to share with you at this time. Patience has been our keyword in the acquisition field. We continue to develop and pursue candidates and that's where our interests lie.

At this time we'll turn it over to you for questions.

(OPERATOR INSTRUCTIONS) Saul Ludwig of KeyBanc.

The development of the real estate project in Richmond, is that done more -- let's call it to support the local community, you know, communal issues, or is real estate development something that you would consider on a broader scale?

We've accumulated a lot of acreage around our corporate headquarters over the 100-plus years that we've been located here in Richmond. We've accumulated as much as 70 acres in downtown Richmond. Some of it, we've known for years is prime development property and we've been waiting for the right opportunity to come along and the right time to develop the site.

I wouldn't characterize it as something we're doing for the community. I would say it's something we're doing for our shareholders with an eye on being a good corporate citizen. Like I said, we've been in Richmond for over 100 years and we care deeply about the city and the direction it's headed. We think that this development is very good for shareholders and extremely good for the city.

Great, thank you. Another question, sort of combined. The 6% volume falloff in shipments in the second quarter, was that sort of surprising or expected and how would you characterize the outlook for volume in the second half of the year? And then along with that question related to petroleum additives with [base-solve] and other raw materials having increased over the last two or three months, are there going to be additional price increases or in the absence of that, would we expect some modest degree of margin compression in the backend of the year?

Taking the volume question first, I do want to point out to you that second quarter volumes were higher than first quarter and higher than the fourth quarter of '06 as well, so that decline is second quarter this year to last year calculation. I think our volumes in the second half should be at least as good as the first half, if not stronger.

On the question of additional price increases, as David pointed out, crude oil is very high. We're seeing that reflected in some price increases on the raw materials side and we continue to monitor the overall impact of rising raw materials. To date we have not announced any market-general price increases, but we'll continue to monitor that.

If you did not raise any prices, would there be margin compression from where you are today, based on the fact that if selling prices stay the same and raw material costs go up?

Yes. If raw material prices go up and selling prices stay the same, there would be margin compression. But if you snapshot right where we are now, there would not be any margin compression from our current levels.

With today's raw material costs?

Correct.

Great. And the final question is, you talked about acquisitions in the petroleum, you know, your sweet spot is petroleum additives. Is there merchandise out there? Is there much of a pipeline in possibilities of businesses that are even available for sale or that you would like to buy or is it a pretty tight market in terms of ownership of petroleum additive properties.

As I'm sure you know, there's four major players, but there are a number of smaller players in specific areas within petroleum additives. The industrial segment and the fuels area are good examples where there are some smaller players with either good market positions or interesting technology that would make good additions to our business, and that's primarily where we're focused.

(OPERATOR INSTRUCTIONS) Robert Felice of Gabelli and Company.

Congrats on a nice quarter. Just a couple of quick questions. You just mentioned that you expect second half volumes to be as strong as first half and given that first half volumes increased sequentially off of last year's back-half. Does that mean you expect the back-half of this year to be a bit stronger on a year-over-year basis and if so, could you quantify that?

Yes, we do expect it, but no, I can't quantify it. Just what we're seeing in our particular market right now.

But you do expect back-half volumes to be up year-over-year?

Yes.

And then you mentioned that most of the 4% increase in revenue on a net basis was price and volumes were off by 6% year-over-year. Could you quantify the mix effect?

Yes. If I wasn't very clear, I apologize for that. The mix effect is zero, so while the total units, putting apples, oranges and bananas together, we're down 6%. The mix of those netted to nothing -- virtually nothing. And that's detailed in our 10-Q. You can look in there and see the quantification of that.

Okay. And I know this one might be hard to quantify, but the year-over-year improvement in operating income for the business, how much of that was due to pricing over and above cost of raws versus that shift toward more efficient, higher margin product?

Comparing second quarter to second quarter, I would say in order of importance, price recovery would be first, volume reformulation would be second and price recovery would be much larger than the other ones.

Okay. And then last couple of questions, I guess on that All Other category that you have now, how much of the contribution this quarter was for the remaining TEL business versus contract manufacturing and as I look forward, should I expect that to be a negative number going forward?

I think the best way to look at that is to look to next quarter. As you go forward, I would expect All Other to be a very small positive number.

And would you say very small positive for 2007 or will it be slightly negative?

It will be negative, given where we're starting for 2007. So look at '08, it's going to be a small couple of million dollars.

Okay. And then your remaining TEL business in North America, is that cash flow positive?

Yes, it is.

Okay. And then I guess lastly, you've got a lot of cash, your net debt to EBITDA is quite low. I would imagine even if you can find the right acquisition in petroleum additives you'll still have a lot of excess debt capacity and you're spinning off quite a bit of cash. So in terms of the other uses of cash, I guess where do you stand on increasing the dividend, the share buyback? I know once before in the past you levered up and bought back quite a bit of stock. Perhaps you can comment on that as a use of cash?

There's really very little that I can say in that regard. I mentioned, I really don't have anything new to share with you at this time. We are considering an increase in the dividend. We are considering buying back stock, as well as looking at long-term, short-term investment strategy, but we don't have anything to state publicly at this time on those items.

Okay, fair enough. And then just finally, the remaining land that you have in downtown Richmond, I know that the Foundry Park development is only a small portion of that. Any thoughts as to what to do with that land?

Well, it took us 125 years to accumulate it and find the right opportunity for Foundry Park I. We do have some feelers out for the other major development sight, but we'll be very patient with that property and find another development or two that are right for our shareholders and good for the long-term health of the city. So nothing really imminent there.

Okay, so I shouldn't expect that you would monetize the land. It sounds more like you're waiting for an opportunity when and if it comes to develop it?

That's right.

Jay Weintraub of Weintraub Capital.

Just a quick question with regards to something you talked about in previous quarters, which was inventory destocking at the customer level and can you just sort of talk about where you stand in that and what you're seeing and the impact that may have on volumes here in the near-term?

I don't think we see that anymore. I think that was something we ascribed to the first quarter and it didn't pop up on our radar this time around.

But you talked about that one of the things was that you were through that process and given that you're not losing market share that you would see a pick up in volumes. You're still not getting that on a year-over-year basis, but you're getting the good pricing, obviously. If you ever got the two in conjunction, obviously, that would be pretty powerful. Is that something that you see kind of coming back on a year-over-year basis in the next quarter or two?

I don't have the data in front of me to answer you. But when we were talking about destocking, we were talking about why the first quarter was low relative to the fourth quarter. And the second quarter picked up 7 or 8% on a unit basis from the first quarter, so the way I look at it, I see if restoring itself as we expected it to.

And what do you think that could ultimately materialize in terms of showing up on the additive side in terms of --?

Year-on-year?

Yes. I mean, could you see actually a volume pick up at that point?

I hate to answer without having looked at it that way.

But the declines that you've talked about, which I think you said were down 6% in units, I mean, at some point that will reverse itself?

That's our expectation, yes.

There are no further questions at this time. I'd like to hand the floor back over to Management for any closing comments.

Thank you for joining us and see you next time. Bye-bye.

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