NewMarket Corp (NEU) 2007 Q3 法說會逐字稿

Greetings ladies and gentlemen and welcome to the NewMarket Corporation third-quarter 2007 financial results 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 at this conference is being recorded. It is no my pleasure to introduce your host, Mr. David Fiorenza, Vice President, Treasurer and Principal Financial Officer for NewMarket Corporation. Thank you, Mr. Fiorenza. You may begin.

Thank you. Thanks for joining me to discuss our third-quarter performance. With me today is Teddy Gottwald, our CEO. As normal I have a few planned comments after which we will open lines for questions. As a reminder some of 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 balance 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 of factors that are difficult to predict and beyond our control. A full discussion of these factors can be found our most recently filed 10-K and an update in our 10-Q which we filed yesterday.

Our net income for the third quarter was $21.2 million or $1.25 per share. This compares to net income for the third quarter last year of $18.9 million or $1.09 per share. Nine months of 2007 had net income of $68.3 million or $3.96 per share compared to $3.05 per share last year. The periods of last year included the benefit of special items and all period including discontinued operations.

During the second quarter, we settled all of our disputes with Innospec and terminated our marketing agreements with them. Both the gain on that settlement and the previous operations under the TEL marketing agreements are now reported as discontinued operations. The gain on the termination of the business was $14.6 million after tax for nine months this year (technical difficulty) $1.1 million after-tax benefit recognized this quarter.

Income from continuing operations was $20.1 million or $1.19 per share for the third quarter compared to $16.8 million or $0.97 per share for the third quarter of last year. Income from continuing operations for nine months was $51.5 million or $2.99 per share. This compares to income from continuing operations for nine months last year of $2.81 per share.

If we look a little deeper at our results for the quarter, we note that last year's third quarter included a special gain of $0.28 per share. If we exclude that gain in the quarter comparison, our net income for the quarter was $20.1 million compared to $11.9 million last year or a 69% increase.

We had a few items of note since our last conference call that we will be discussing in addition to our excellent earnings reports. Those items include securing the construction loan financing for our Foundry Park activities, repurchasing $50 million of our common stock at an average price of $44.76 a share, receiving Board authorization for an additional $50 million to repurchase stock and the Board declaring a $0.20 dividend for this quarter up from the last dividend declared of $0.125 per share.

Turning to the petroleum additives segment, net sales in the quarter for petroleum additives were $352 million which is an increase of $29 million or about 9% over the third quarter last year. The combination of somewhat higher selling prices and favorable currency impact accounted for about one-third of the increase. The other two-thirds was due to the mix of products sold and an increase of (inaudible).

Nine months 2007 petroleum additives net sales were $999 million which is an increase of $50 million or 5% higher than the nine months last year. Higher selling prices which included a favorable foreign currency impact were the predominant factor in the increase in net sales when comparing the two nine-month periods.

Petroleum additives operating profit improved to $35.2 million from $30.4 million in the third quarter comparison. The 2006 period included a gain of $2.6 million associated with a legal settlement related to transportation charges. Excluding that onetime gain in the comparison, petroleum additives operating profit was up 27%; another excellent quarter.

The higher operating profit resulted from several factors that we have been reciting all year long. We are recognizing the benefit of improved margins on certain products through the introduction of more cost-effective product formulations for our customers. We are also recognizing the benefit of price increases implemented during 2006.

In addition to the improved pricing, we're selling the product mix with higher profit margins. We continue to experience challenges with our raw materials however. The cost of crude continues to set record highs while at the same time to supply of several of our other key raw materials is tight and increasing in cost.

There is really nothing to discuss in the total GS&A spend category for the quarter. As a percentage of total sales, GS&A was 12.1% this quarter compared to 11.6% last year's third quarter. We continue to spend in R&D in support of our customer base.

The story for nine months is very similar. Operating profit increased significantly for the nine months to $100.7 million up from $83.2 million for nine months last year. Like the third quarter, the higher operating profit reflects the introduction of more cost-effective product formulations for our customers as well as the benefit of price increases implemented in 2006.

We are also selling product mix of higher margins. The nine-month comparison was also impacted by higher costs and tighter supply of key raw material I just discussed as well as a favorable foreign currency impact. S&A expenses were essentially flat in the nine-month comparison while R&D expenses were about $6 million higher than nine months last year.

There are no special income items this year. The special income items of last year are detailed our press release in our 10-Q and I have nothing to add to that disclosure. The third quarter '07 interest and financing expenses were $3 million compared to $3.9 million last year. This is due to the fact that we refinanced our bonds last year at a lower effective rate. We continue to have no debt drawing under our revolving credit facility.

Other income net was $1.2 million income for the third quarter of this year compared to $900,000 last year's third quarter. Nine-months 2007 is $2.4 million while nine months last year was $6.5 million. Last year's data included a $4.4 million gain on an interest income settlement (technical difficulty) income tax related. All periods include short-term investment income.

The effective tax rate was 35.6% for the third quarter compared to 36.6% for the third quarter last year. But there's nothing worthy to elaborate in that area.

Turning to our cash position and cash flows, our cash and cash equivalents at the end of the quarter was $82.9 million which is an increase of $22.6 million since the beginning of the year. Cash flows from operating activities for nine months were $80.7 million and included a $12 million reimbursement of our TEL working capital gains. We used these cash flows as well as $28 million from the termination of the TEL marketing agreements and net borrowings of $5 million on Foundry Park to fund our $50 million repurchase of common stock, to spend $25 million on capital expenditures -- non-Foundry Park related -- to pay $5 million worth of dividends and to fund $10.8 million of Foundry Park related items.

In August, we entered into a construction loan agreement with a group of banks which will enable us to borrow up to $116 million to support the construction of the office park by Foundry Park One. The construction loan bears an interest at LIBOR plus 140 basis points. The term of the loan is 36 months and is guaranteed by NewMarket Corporation.

Low principal reduction payments are due during the construction period. As a condition of the construction loan, and concurrently with closing that loan, we obtained an interest rate risk protection in the form of an interest rate swap.

The objective in obtaining the swap was to manage our exposure to interest rate movements and add stability to capitalize interest expense. The fixed-rate payments are at a rate of 4.975. The notional amount of a swap was about $5 million at the end of September and increases to about $94 million over the term of swap.

As I said previously, we spent $25 million during the first nine months on capital expenditures not related to Foundry Park. We expect that that spend will be around $30 million for the year.

We have working capital of the end of September of $338 million compared to $302 million at the end of last year. The increase in working capital primarily reflects higher cash, higher receivables and inventories as well as lower accrued expenses partly offset by an increase in accounts payable.

All of these movements are in support of our business. The increase in accounts receivable reflects higher product sales while the increase in inventory reflects a small build of inventory and a foreign currency impact.

Turning to the outlook, we have delivered excellent results through nine months this year and that performance has strengthened our financial position. As we communicated in the past, we intend to leverage our financial strength to increase shareholder value by growing the business with acquisitions being in area of primary interest.

Our primary focus in the acquisition area remains in the petroleum additives space. It is our view that this industry will provide the greatest opportunity for good return on our investment while minimizing risk. In the past, we've grown the business through strategic acquisitions such as Amoco Petroleum Additives Company and Texaco Additives Company. We remain focused on this strategy and will evaluate any future opportunities. Nonetheless we are patient in this pursuit and intend to make the right acquisition for our Company when the opportunity arises.

We believe we have many internal opportunities for growth in the near-term both from a geographical and product line extension. Until an acquisition materializes we will build cash in our balance sheet and we will continue to evaluate all alternative uses for that cash to enhance shareholder value including stock repurchases and our dividend policy.

Early in '07 we announced our plans to develop some of the downtown property by constructing a multistory office building from Mead Westvaco. The project is proceeding on schedule. Our team is in place as is our financing. We will be capitalizing the cost and interest throughout the building project. Total expenditures on this project this year will be about $12 million with $6 million from cash on hand and the rest from borrowing on the construction loan.

Petroleum additives had excellent performance again this quarter. As I said earlier there are many factors that account for this; our efforts and focus to deliver the services and products in support of our customers marketing initiatives, our focus on delivering more cost-effective products which benefits both us and our customers and the benefit from price increases that we instituted in 2006.

On a sequential basis our volumes have improved this year but are relatively flat with the volumes of last year. Petroleum additives market however continues to face challenges on many fronts. There has been some softness in demand in the Finnish lubricant markets which is our customers marketplace and it may ultimately have an impact on us.

We anticipate that our raw material costs may increase in the next few months as crude oil prices continue to reach record highs. We're monitoring this situation closely and will attempt to recover any margin erosion due to increased raw material prices in the marketplace.

Despite these challenges going forward we believe we have a solid business space, strong technology and a good team to continue to build upon the successful performance of this year. That concludes my planned comments. I would now all like to open the line for any questions.

(OPERATOR INSTRUCTIONS) Robert Felice, Gabelli & Co.

Just a couple of quick questions. First I guess congrats on a nice quarter; really quite strong. More recently one of your competitors announced that they were raising prices by 4 to 6% due to continued cost pressures and I was just wondering if you have informed your customers of a similar increase and if so by how much you plan on raising prices?

Robert this is Teddy. Thank you for your comments. As David said, we are concerned about the raw material costs. We have seen some erosion of margins due to the recent increases in raw materials and we use that and our expected view going forward to make decisions on pricing. And that is really all I can say right now.

So it doesn't sound like you have actually raised prices or informed your customers yet that you're going to raise prices?

That's correct. We have not made any announcements at this point.

But that decision is under review?

Yes it is.

And if you did so choose to make that decision would you announce that to be a press release? Just curious to know how us investors would be informed.

No generally we don't announce that through press releases. We have those conversations directly with customers.

But I guess I'm wondering given the tightness of the supply demand balance and the fact that Lubrizol has announced an increase -- I guess what would prevent you from following suit with a similar kind of price increase?

We will take all those factors into consideration as well as our view on where raw materials are headed with the tightness that you referred to and the run-up in crude.

Fair enough, turning to the volume side. You know volumes were pretty strong during the quarter but I if I look at the first nine months they were as you said relatively flat. As I look to the fourth quarter when I think that volumes are similar to the third quarter such that for the full year as you kind of average them out you end up in that one to two percentage type range?

Fourth quarter is typically is a little lighter than the third quarter. But that one to two range you talk about is fine, reasonable.

I guess that would imply volume growth in the fourth quarter probably in the range of three or four percent-ish.

Compared to what --

Compared to last year.

That's reasonable.

And then also it seems on the acquisition side that given the (inaudible) that you cited in the potential acquisition -- in the pipeline it really wouldn't require a lot of leverage. So I guess why not get more aggressive with the buyback? It seems to me that you could probably leverage up a little bit and still have plenty of debt capacity to do any potential acquisition and maybe just some comments on that?

As you have seen, as we announced we do have a do another $50 million authorized for purchasing common stock. We will certainly take all the factors into consideration on deciding how aggressive to be in buying in additional stock. Certainly our view on acquisitions and our desire to maintain financial flexibility to make acquisitions is a chief concern of ours because that's our primary objective -- to grow through acquisitions.

But it's a balancing act. And we will just continue to look at all of these factors while we continue to say we're patient with our acquisition strategy. I think you can also expect patience in all of these options available to us and no big changes.

I guess what I am wondering is if you continue to build cash on the balance sheet and business continues to be strong as it has been and -- it doesn't sound like we should be surprised to wake up in the morning and find that you repurchased some or stock or should we?

All I can say to that is we have a $50 million authorization so --

You've mentioned some of the factors that go into it and we will just balance all of the factors and make decisions as to go.

Fair enough and just one last question -- really a clarification question. When you discuss the mix impact on your business are you referencing a shift in mix from say engine oils to driveline, something that has a little higher profitability or are you really talking more broadly about the mix impact of reformulating some of the product or both?

Its really both and then some. In some cases it's a shift from let's say a more dilute product to a more concentrated product. It might show -- might impact our overall volumes but improves the health of the business.

In some cases it is improving the product mix within a particular area, within engine oils for example. So it's really all of the above. It's a conscious effort on our part and we are pleased with our progress in each of those categories.

Teddy as you look out over the next say 12, 18 months do you see further evolution in this mix effect and as such I guess some further margin benefit that you can garner from it?

That's certainly our intention and it's been our strategy over the last five plus years. So yes I would hope that we continue to see improved mix in our business.

Mike Judd, Greenwich Consultants.

Good morning. A question about -- what was the share count on a diluted basis at the end of the quarter, please?

We're looking it up for you.

And while you are looking for that I'm just curious to tax rate in the fourth quarter should be pretty similar to that in the September quarter?

Yes. The shares we used in the calculation of the 69 (multiple speakers)

Right but at the end of the -- there's probably a balance at the end of the quarter which is a sort of jumping off point for the December quarter, right?

On the front of the Q it shows how many shares we had outstanding. 16, 180.

A couple of other things here. In the past you've indicated directionally which way you think the EBIT margins are heading. The margins are about 10.8% in the June quarter, around 10% in the September quarter. Do you think that those margins will stay fairly steady in the December quarter?

You know if you hadn't said December I was going to answer you. We always have a softer margin it appears in the fourth quarter. But absent that as we said the 10 number is a good number for our mix of business that we have right now, absent obviously raw materials running up.

My understanding is that there's a fair amount of lube that -- lube additives -- but the base oil capacity coming on that that's perhaps the reason we haven't seen a significant increase in prices for a lot of the lube oil stocks. Do you have any thoughts about that or any commentary?

I think there's certainly some supply demand impact in the base oil side. Recently we have seen some pronounced movement in base oil and we're just monitoring that real closely to see what happens.

Just finally, I was wondering if you could help me out a little bit in terms of the third quarter that the price and volume components in the foreign exchange -- can you break out those three components in terms of percentages on a year-over-year basis or sequential basis? And then just one last question on mix which is that how much of a contributor was that on either on an absolute basis or a percentage basis in the third quarter?

Well I don't know if I can answer all of those but I can answer one or two of them for sure. Of the $10 million change in selling price that we talk about in our 10-Q on revenue, about 40 to 50% of that is currency.

That's on a year-over-year basis?

That was third quarter to third quarter.

Okay; year over year.

And then on shipments, taking out shipments and mix I can't do that the way -- I have a hard time separating that so I can't answer that question right now.

Okay, and the currency benefits if you could just provide a little bit more color on that in terms of location or --

We sell everywhere in the world. But in western Europe the predominant selling currency is the euro and you know what has happened to the euro strengthening. So euro and to a much lesser extent the yen.

Ivan Marcuse, KeyBanc Capital Markets.

What is your -- what sectors are you seeing the most growth and slowing in lube additives in your business or areas?

What sectors are seeing the most growth?

Yes.

Well, overall this industry is not seeing substantial growth. Certainly from a geographic standpoint we are seeing what a lot of industries are seeing -- growth in Asia-Pacific, flat overall in North America and declining somewhat in Europe. And as I look across product lines, I don't see a real significant difference from one to another.

On acquisitions -- this is a follow-on to that question. I realize that you're being patient but what you think is patient -- sometimes in '08? And are you looking more at North America or something international would be what you're leaning towards?

Our business tends to be international and we prefer acquisitions in the higher growth regions. We will take acquisitions anywhere in our petroleum additives space. I really can't say when that will be. It takes a willing seller as well as a willing buyer and you know plenty of factors to make an acquisition happen and I just can't say when those conditions will all align.

One last question -- if you do, when you guys typically raise prices if and when or even if you do, how much of a price increase do you or does the industry typically capture?

I don't think there is any typical price increase. The last 24 months has seen really unprecedented rise in our raw material costs with all that's happening with petrochemicals and crude oil. It's hard to say there's any typical increase that's come out of that or before. Generally I would say that overall increases can be in the low-single digits, low to mid-single digits.

Actually I said that was my last question but I guess I lied. I'm going to ask you one more. Looking out over the next couple of years do you see any legislation or environmental laws coming in that positions you guys in a stronger position than maybe you think more so than on the industry where you would be able to take advantage and maybe grab some marketshare?

I don't see any legislation that would favor us over our competitors if that's your question.

Like more in technology -- do you think that you're positioned well for -- I know that with new laws coming out with environmental, with trucks and such and cars in '09, in '08 -- do you feel that you're in a stronger position or probably just as anyone else in the industry?

I think we're probably positioned as well as anybody in the industry. Just some general comments on environmental -- on changes in the environmental picture and the laws. Those changes -- we tend to be on both sides of those equations. Tighter environmental restrictions on emissions tend to create demand for our products as oil companies and OEMs look to additives and additive manufacturers to help them meet those challenges.

At the same time, broad sweeping environmental regulation like REACH in Europe means a lot higher costs for all players in the industry. So we will see the impact of that over the next two years as will everyone in the chemical industry.

Ross Berner, Weintraub Capital.

A couple of quick questions. You had a really nice Q3 volume quarter and I was just curious one of your competitors talked a little bit about October being a continuation of the strong previous three-months and I just wondered if you were seeing the same thing just generically speaking?

Yes, we are seeing the same thing.

And I guess seeing shipments up 5% really does point to the fact that even though you really weren't losing marketshare I guess that's kind of what you maintained and that really proves out your point I guess. Any comments on that or it --?

No, I think you said it better than I could.

And then you said on your last $50 million share repurchase authorization for over a year and then you really just acted pretty swiftly did it -- the 1.1 million shares and it must have been a week or something like that. And then you had a really nice quarter so obviously it's justified. But what prompted the dramatic change and the suddenness? And then you just did it so quickly -- what kind of internal conversations prompted that?

Well, we look at a wide range of factors. I think you can figure out what all those are. Certainly current and [factored] share price is a factor along with availability of cash and expected used of cash. We don't try to game it.

When we decide that it's a good value and a good use of our cash we make that decision for the long-term and don't try to take advantage of any short-term factors in the stock market. Honestly, we were pleased and a bit surprised at how quickly the buyback went once we pulled the trigger.

You mean you were pleased at how easily you were able to buy the 1.1 million shares?

Yes.

Would be your -- given where the stock is and given what the dynamics of the business are currently (technical difficulty) stock I assume?

It is; it's also just maintaining flexibility to have the ability to do it if we so choose. If it rises to the top and our (technical difficulty) range or list of uses of cash.

And then the last thing is in terms of product reformulation driving margins can you measure what percentage of your portfolio gets reformulated on a rolling basis and a quarterly basis or annual basis? Was the last couple of quarters of really high level of reformulation time or do you anticipate more reformulation?

I almost sort of think if it as new car releases for the automakers right? They come out, you get better margins on the (inaudible) of course they build way too many of them and then they get screwed. In this case for you guys, do you have enough reformulations coming out that it's going to help you sustain or even improve margins from that basis regardless of what raw materials -- independent of what raw materials does?

I really don't have any data to say that a certain percentage of our business gets reformulated every year. There is a fairly short product lifecycle in this industry. A lot of products to tend to get reformulated every three or four years, some longer, some shorter. And it's an ongoing effort on our part.

Occasionally, we talk about it a little bit more than other times because sometimes we -- the products or product lines they get reformulated, have bigger impact either on volume or profit than other times. But we are talking about it now for a couple of reasons. It's had an impact on profits this year. It's also had a fairly significant impact on volumes mainly because of one particular line that we shifted to a more concentrated version of the product that drove volumes down.

And then my last question is that why do you think you're seeing the continued strength in the base business right now that you alluded to through October already? Anything you can attribute it to?

I'm not really sure I understand your question.

You just said that volumes and that the strength of the end markets continued. It was obviously pretty healthy in Q3 and both you and some of your peers have alluded to continued strength in that area. I'm just curious what you attribute it to.

I think we're well positioned in the industry today. I'm real pleased with the efforts of our researchers to continue to meet the challenges that are out there and with our efforts to really focus on helping our customers grow their business. I do think that overall supply and demand in our industry continues to be tight, tight by historical measures and I don't see that really changing anytime soon.

You mean so your utilizations continue to be very high?

Yes they are and I believe that's an industrywide factor today.

So would you consider yourself operating at peak utilizations in the last quarter or is there even room for improvement on that?

Well we have spent a lot of money debottlenecking facilities this year. We've got more than the works and continue plans very specific to particular components of product lines. We're trying to improve our capacity increase it all the time.

Do you think it's the lack of availability or the tightness in the base oil market that gives you confidence that no real new capacity could be announced or no significant other than debottlenecking and things like that?

Well, I think while supply and demand are tight today, and certainly security of supply is in issue for the industry with some disruptions that happened over the last year or two. There's just no way around the fact that longer-term this is not a growth industry, right?

When you don't have significant growth in the industry, the competitors in the industry typically are pretty resourceful and able to debottleneck to meet any surges in demand. Longer-term, there's just no justification for significant new capacity.

That's great. My last question, Teddy is your manufacturing process is really kind of a batch process, correct?

Yes.

So if that's the case, I guess -- so when you think about economies of scale -- and really what I'm alluding to is like the 300 basis point difference between you and some of your bigger competitors, 300 basis point difference in margins. In the past you've talked about that being a function of economies of scale but if you are batch process, if it is a batch process type of production process that would mean it's not on the manufacturing side.

If anything maybe it's more on the material purchases side or do you think ultimately you can make up some of that gap between where you are and the 10% in some of your peers are at the 13%. I know there's mix differences and end market differences but I'm making kind of a generic comment on that.

I think that's just unfortunately an extremely complex question or answer. There's so many factors involved.

Is there anything structurally that prevents you from making up some of that difference?

I don't believe so; no.

Did you benchmark your margins versus others or how do you look at that?

We don't ignore what we can see in the industry. But generally we just continue to try to improve what we have got.

Okay hey, listen guys -- Teddy, Dave, I really appreciate your time and thanks very much. Nice job on the quarter.

Amy Levine, Shankland Capital.

My question was answered. Thank you.

Robert Felice, Gabelli & Co.

Just a quick follow-up. David, if I remember correctly last quarter you had suggested that we look to this quarter as kind of a rough approximation of what the all other category would earn on a quarterly basis and I want to say came in at about $600,000 this quarter. Give or take a little bit is that kind of what we should expect going forward on a quarterly basis?

Yes.

Okay so roughly $2.5 million or so a year?

Or zero. Remember we (multiple speakers) the answer to your question is yes.

There are no further questions at this time.

Thank you for joining us. Have a good day.

Thank you everyone. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.