NewMarket Corp (NEU) 2008 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the NewMarket Corporation first quarter 2008 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, this conference is being recorded.

It is now 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.

Good morning. Thank you for joining me to discuss our first quarter performance. With me today is Teddy Gottwald, our CEO. I have a few planned comments, after which we will open the lines for 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 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 and beyond our control. A full discussion of these factors can be found in our 10-K 2007.

As you saw in the earnings release on Wednesday, we had an excellent quarter and a good start to the year. Income from continuing operations was $19.8 million or $1.27 a share, compared to $14 million or $0.80 per share for the first quarter last year. This quarter results included a gain of $3.2 million, resulting from a legal settlement relating to raw materials. This $3.2 million is included in the petroleum additive segment results, which I will discuss more in a minute. Last year we exited the TEL business outside North America, and classified that former operation as discontinued business. There was no effect from that business in our first quarter results this year, although it made $2.2 million in the first quarter of 2007. Total income for last year's first quarter was $16.2 million, or $0.93 per share.

Turning to our segment performance, petroleum additives' net sales in the first quarter were $380.6 million, up $74 million or about 24% from $307 million in the first quarter of last year. Shipments were up about 18%, which accounts for the majority of the increase. The increase in shipments was across all product lines, but predominantly in the lubricant additive section. The other component of the increase includes price changes, customer mix, and a favorable impact of foreign currencies, translated into U.S. dollars; our sales benefit when U.S. dollar is weak. The petroleum additives' operating profit improved to $37.7 million from $29 million when comparing the two first quarter periods. The improved profit is reflected primarily in lubricant additives, with some offset in fuels.

The 2008 first quarter includes the gain of $3.2 million from the legal settlement that I just mentioned. Excluding this one-time gain, petroleum additives' profit increased $5.5 million in the quarterly comparison. Our operating profit margin for this quarter was 9.1%, if you exclude the one-time gain. The higher operating profit resulted from several factors. Total shipments were approximately 18% higher, which contributed significantly to the increase. As an offset, however, we continue to experience challenges with our key raw materials. There was a significant compression of operating margins due to the increased cost of raw materials. The cost of crude oil continues to reach record highs, while at the same time the supply of several of our other key raw materials is tight and cost-increasing. It is a common event to receive multiple notices of cost increases during a quarter. We are in the marketplace implementing price increases to attempt to recover those increases in costs. This chase of raw materials is likely to continue for the near term and put pressure on our margins, until the costs are fully recovered. Our profits also include the favorable benefit of a weaker dollar.

Both selling general administrative and R&D expenses were up when comparing the first two quarter periods. They increased about 10%, as we continue to invest to develop and deliver the goods and services our customers need. Beginning the first quarter of '08, we are going to report our real estate development -- our real estate development activities in segment operating profit. Because of the current immateriality of the real estate development segment, its results will go in the "all other" category The real estate development segment represents the Foundry Park 1 activities, which is constructing an office building for MeadWestVaco. The project is well along its way, the building is now above ground and we are on schedule and on budget. The building phase in the project will last until late 2009. The building is now above ground and we were on schedule and on budget. The building phase of the project will last until late 2009. For 2008 and most of 2009, we will be capitalizing the majority of the costs of project and financing expenses.

The "all other"category also includes the result of our TEL sales in North America and certain manufacturing services performed by our subsidiary category also includes the results of our TEO sales of North America and certain manufacturing services performed by our subsidiary, Ethyl Corporation. The results for the first quarter include the normal operations and an increase in our provision for future cleanup obligations at an old site. Interest in financing expenses for both first quarter '08 and '07 were $3 million. While we did not borrow under our revolving facility during the first quarter of '08 - while we did borrow, excuse me, under our revolving facility during the first quarter of '08, average debt and average interest rates remain substantially unchanged. We did end the quarter without any borrowings on our credit facility.

Looking at cash flows, our cash at the end of the quarter was $48 million, which was a decrease of $24 million since December 31. The primary use of cash included in increase of $39 million in certain working capital requirements. This included higher accounts receivables in inventories, as well as lower accrued expenses, offset by the increase in accounts payable. The increase in accounts receivable inventories and payables reflect the growth of the petroleum additives operation, as well as higher product costs and timing of sales orders. We use $5.5 million to fund capital expenditures to support our business. We estimate our total capital spending during 2009, excluding the capital expenditures for Foundry Park, to be 35 to $40 million. During the quarter, we also funded capital expenditures of $4.7 million for Foundry Park. All of those funds were borrowed. We expect capital expenditures in '08 related to the construction of the office building to be approximately $60 million, with $6 million of that coming from our cash and the remainder being borrowed. And finally, we used $6.8 million to repurchase 125,000 shares of our common stock, and funded $3.2 million in cash dividends. Except for Foundry Park One's construction loan, our debt position is essentially unchanged since the end of the year. We had total long-term debt of $163 million at December 31.

Turning to the outlook, we achieved excellent performance during the first quarter this year. These results were in an environment marked by continuing record high levels in crude oil costs. Sustained changes in crude oil costs eventually are reflected in the cost of many of our raw materials. We have experienced rapid escalation of our costs during the first four months of '08, and it is not known when these increases will end. We have been in the market implementing price increases, and maintaining our operating margins is a high priority of our business teams. This environment has us in a catch-up mode with respect to our margins. We understand this dynamic and are managing it to the best of our ability. We run our business for the long run and do not get overly concerned with quarterly fluctuations, as long as we know that the business fundamentals are unchanged.

The first quarter included excellent performance in volumes sold, and we have not experienced any major negative impact from the economic slowdown in the United States. Our business is worldwide in nature and a weaker dollar generally has a favorable impact on our profitability. Our focus remains on delivering the goods and services our customers need to be successful in their marketplace. This requires continually increased spending in research and development, as well as de-bottlenecking programs to provide the needed capacity. We continue to expect that 2008 petroleum additives' operating profit will exceed the excellent results that they posted last year.

As we communicated in the past, we intend to leverage our financial strength to increase shareholder value by growing the business, with acquisitions being an area of preferred interest to use our cash. Our primary focus in the acquisition area remains in the petroleum additives industry. It is our view that this industry will provide the greatest opportunity for a good return on our investment, while minimizing risk. 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.

It is also our policy not to comment on any particular company or specific opportunity. We believe we have many internal opportunities for growth in the near term, both from geographical and product line extensions. Until an acquisition materializes, we will build our cash and our balance sheet, and will continue to evaluate all alternative uses of that cash.

Yesterday Our board declared a quarterly dividend in the amount of $0.20 a share, which will be payable on July 1 to shareholders of record to close the business on June 13th. We will be filing our 10-Q next week, and I encourage you to read that.

That's the end of my presentation. I will now open the lines for any questions.

(OPERATOR INSTRUCTIONS) Our first question is from Ivan Marcuse with KeyBanc Capital Markets. Please proceed with your question.

Hi, guys, how you doing?

Great.

Could you give me a break down of the volume price in currency for your revenues that that are up 24%? What was the FX?

Rounded numbers, if we are up 24%, 18% or so from shipment, 3% from FX and 3% from price and mix.

Price and mix? Great. The raw materials, base oil, it looked like the - even though crude has been flying, but base oil has been fairly flat throughout the quarter. How much of that is up for you guys year-over-year?

We've seen a lot of base oil increases. If we look at the first quarter this year compared to the last quarter of last year, our purchasing guys are seeing high single digit increases across the board. I don't have an exact answer for you on base oil specifically.

Got you. A couple more questions. Next question was, a real quick one, what is the lawsuit, is there a little bit more color on that? Was that in regards to --

No, it was an just old suit where we thought we had some pricing issues and we got a settlement from it. There is nothing -- no story there.

Great. And then have you -- it sounds like you are putting through price increases. What is the range of those price increases, and were you able to put any price increases back in the December area, January or when do they take effect?

They - we started our discussions early in the first quarter. They will kick in across the board. But not a major kick in, in the first quarter.

Okay.

And the percentage is different at every customer. So there is no one number I can give you.

Great. And then you guys said that you feel like you are playing a little bit more catch-up. Then in regards to the market, other competitors in the market putting through price increases ahead of you guys, or the fact that the escalation of the raw materials are going so fast, that is more of the catch up?

The latter. It's just they're moving so quickly. Every time we raise prices, we find out they have gone up again.

Got you. And one last question. It looks like you guys are -- with your volumes being up, you are taking some market share from some of your other competitors. What do you think is the catalyst for that?

You know, I'm not sure you can conclude that from our data. First quarter last year was a weaker quarter than normal, and we even were puzzled on why it was so weak. Now this quarter is a nice strong quarter. If you look at this quarter's shipments compared to the third and fourth quarters of last year, you don't see this big percentage jump like you do in this little time slice that we are comparing right now. So yes, we did pick up some business last year, but -

Got you.

I think it's just the timing test that we are looking at.

All right. Also, are you guys going to be with the stock -- well, it's been flying this past quarter but it's come down a bit. Will you still be buying back stock this quarter?

We have a $10 million authorization left, and we tell you when we were finished. We don't ever tell you if we are in the market or not.

Great. Thanks a lot, guys. Good luck.

Our next question comes from Ian Zaffino from Oppenheimer and Company. Please proceed with your question.

Thank you very much. Two questions here. First one would be, building on the last question about playing the catch up, how much do you need to raise prices to offset your raw materials costs right now to keep your margins the way you -- reach your targeted margins?

I don't have a number for you. I can they will you that - we told you and others the 10%-plus percent margins you saw in the second and third quarter of last year were representative of our current business. We still believe that. We intend to raise prices to get back to that kind of range. But it changes every day. If costs keep going up, we'll keep raising prices if we can.

Because the way I look at it is, if you are seeing high-single digit increases in your raw materials, your pricing needs to go up more than the 3% you reported this past quarter. Did I get that right?

That's correct.

Okay. And second question would be - is what do you view your debt capacity at right now, and what type of leverage ratio are you actually targeting If you were to do something on the M&A side?

We don't have a specific target for our debt ratio. The closer the business is to what we do, the more aggressive we would be in the leverage side. If we can make acquisitions in the petroleum additives area, if it's business that we know, then there is likely to be a fair amount of synergy ,and so the risk associated with that would be lower than reaching out further. So we would be comfortable with a pretty high debt ratio. I would like to see it above where it is right now. I don't think that we are utilizing our capital fully when it's beyond - in the one-time or less range, where it is today.

And do you have a targeted EBITDA leverage ratio? What's the max you would really put on this business?

It's a tough question to answer. Think on an ongoing basis, we could certainly support something in the 2 to 2.5 range. But if it's an acquisition that provides a lot of synergy, our experience has been that we've been able to get synergy fairly quickly and like deals, so we would be very aggressive levering up if it looked like that would be a short-term factor.

And what type of synergies are you talking about? Where would recognize those synergies?

A lot is in duplicate activity. If we were to buy -- there is a number of niche players in some of them more specialty areas. If we were to add one of those, you probably are looking at duplicate sales forces, duplicate back office activities just a lot of duplication.

Okay. All right, thank you very much. I will let the next person go on. Thank you.

(OPERATOR INSTRUCTIONS) Our next question comes from Don Cobin with Kennedy Capital. Please proceed with your question.

Good morning guys. David, you mentioned that you have, I think, you said many internal opportunities of growth. Can you guys expand on that a little bit?

Yes, this is Teddy, I will expand a bit on that. Our strategy over the last several years has been to expand geographically. Historically our market share in North America and Western Europe has been higher than in some of the other regions. So geographic expansion has been a big part of our strategy and will continue to be so, and product line extension also has played a role, and we will continue to play a role. We have expanded our product lines in the industrial lubricant additive area. We have expanded in the drive line area as well, with some new product, a lot of it in the off road category, and that’s where we see the greatest opportunity for us in continuing to broaden our product lines and penetrate into Asia/Pacific, Eastern Europe and Latin America.

And do you feel you have the capacity currently to expand into those markets? Or do you need to invest more to get there?

Our volume growth ambition is pretty modest. That's because we don't see great opportunity to be aggressive on the volume side or see a benefit from that kind of market disruption. But the other side of the equation, as you point out, is capacity, and we are quite limited today. We have been de-bottlenecking our plants and we will continue to de-bottleneck, spend the money to do that. You should think of our volume growth ambition as being pretty small, low single digits.

Okay. We all heard about the potential sale of your competitor here, and the talk has been about whether you would be a potential acquirer, and I understand that is not something that you should be addressing on a public forum here. What about turning that around the other way? If the valuation implications of that purchase, if it goes through, show that your stock is significantly undervalued, does that merit a strategic review on your part or how do you think about that?

No, sir. We were comfortable with our strategy, with our performance over the past few years, and we think we have a lot of momentum going forward.

When I look at where we are, one of the things that gives me great comfort every day is the continuity of our management team. It's essentially the same team that's been running the company for the last ten years. We know each other. We have a high level of trust with each other. And I think with the broader team that we have, we just have a lot of opportunity to continue to grow, and I'm excited about that.

Okay, thanks, guys.

Our next question comes from Saul Ludwig with Keybanc. Please proceed with your question.

Good morning, guys. I was late tuning in. I apologize if I repeat someone else's question. To what extent do you have a capacity outside the U.S.? Do you have plants in Europe or Asia, and to the extent that you want to expand more into the - maybe Asia or Latin America where you said you have lesser market share, do you need to make investments there to be able to compete with the guys who do have plants there?

Well, it's a global business we've got. And we do have capacity in Europe and in Latin America. We don't have a fixed deal in the ground in Asia/Pacific. But we manage our supply like we manage the rest of our business, and that's on a global nature. We are tight on capacity, and we're doing all we can to debottleneck because the industry overall, let's not forget, is not a growth industry. And the demand for finished lubricants is not something that just grows rapidly. The industry does not need a lot of greenfield additional capacity.

How were you able to ship 18% more volume in the first quarter, and you actually grew your inventories from the end of December to the end of March, that's pretty remarkable.

Thank you.

I mean, but do you have more capacity than you think you have?

Maybe you missed the discussion. On a sequential basis, we're not seeing that kind of a growth.

Your inventories from last year were up from 180 to about $206 million, so your inventories were up better than 10%, and your volume was up 18%. That suggests you produced more units than you sold. That's why you grew your inventory. That would suggest you have more capacity than you think you have?

Inventories are actually, on a unit basis, slightly down. You're seeing the fact that we value it obviously at current prices, and we have enough capacity to satisfy our current demand. That's what you are seeing.

How much was your unit raw material cost up first quarter to first quarter?

We believe it was in the 13 to 15 kind of range.

13 to 15%. And only 3% more on price. So that explains the margin contraction?

Well, the 3% was on -- I'm comparing apples and oranges here. Unit basis of raw materials went up a fair amount first quarter to first quarter.

And price was up 3% first quarter to first quarter?

Right.

Okay. I'm with you there. With this 18% increase in volume that you had, Teddy, was that due to just the timing of when you ship more of your traditional products? Or to what extent did that reflect some success in this longer term strategy you talked about, for product line extensions, some new products, new opportunities geographically, were they in the first quarter or are they things that are going to help you longer term?

I think you really shouldn't focus too much on that 18%. That's comparing first quarter to the first quarter. First quarter last year.

You were down 10%.

It was unusually light. If you compare first quarter to fourth quarter, you are not looking at that same kind of growth. It's more like 4%.

Got you. So did you -- are you starting to benefit yet from the strategic initiatives that you enunciated before about the geographic expansion, particularly outside of North America and Europe, and product line expansions in industrial drive line off the road?

Absolutely. And we have been seeing that benefit the last several years, because this strategy has been in place for awhile. And that would explain most of our volume growth and success over the past two to three years.

And you have price increases in effect such that your second quarter prices are going to be higher than your first quarter prices?

Yes.

What type of increase might we see?

That's a customer and customer thing. We're out there enough to recover raw materials, but raw materials keep moving. And you're on [LIBOR], right? Predominantly. We do have several pretty good-sized subs around the world that are not, but predominantly [LIBOR].

Final question, what's the mix between fuel and oil additives?

In the world?

Your sales. Your sales, are they half fuel, half oil --

The market is maybe 85/15, and we wouldn't be radically different than that.

85 oil, 15 fuel?

Additives, yes.

Great. Thank you very much.

Good day.

Our next question is from Matthew Lawson with KBP Investment Advisors. Please proceed with your question.

I was wondering if you could size out the restricted payment basket that's available under your current bonds?

I don't have that with me. I will be happy to follow up with you on that one.

We will follow-up offline then. Thank you.

There are no further questions in queue at this time. I will turn it back over to management for closing comments.

Thank you, everyone, for joining and we will speak to you next quarter. Have a good day.

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