NewMarket Corp (NEU) 2008 Q4 法說會逐字稿

Greetings and welcome to the NewMarket Corporation Fourth Quarter 2008 Financial Results Conference Call. (OPERATOR INSTRUCTIONS.) It is now my pleasure to introduce your host, David Fiorenza, Vice President, Treasurer, and Principal Financial Officer for NewMarket Corporation. Thank you, Mr. Fiorenza. You may begin.

Thank you, Ryan. Thank you for joining me to discuss our fourth quarter and year-end results. With me today is our CEO, Teddy Gottwald. Following our normal format, I have a few planned comments after which we'll 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 based 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 2007 10-K. We will be filing our 2008 10-K toward the end of February. I encourage you to review that filing for more information on the performance and financial condition of the Company.

As you saw yesterday, we reported our fourth quarter and year-end results. To recap the year, income from continuing operations for the year was 73 million, an increase of 6% from earnings on the same basis for 2007 of 69 million before special items. Earnings per share on this basis for the year 2008 were $4.75 a share, an improvement of 17% over earnings per share on this basis for '07, or $4.07 a share before special items. The earnings per share percentage increase is more than the net income percentage increase due to the stock repurchase activity during each year. We did not purchase any stock in the fourth quarter of 2008.

During the year 2007, discontinued operations and special items net income for the year was 95 million, or $5.62 a share. The discontinued income was associated with the termination of the TEL Marketing Agreement. We are very pleased with this year's performance.

We also announced our fourth quarter results. Income from continuing operations for the fourth quarter was 19.4 million, an increase of 26% from earnings on the same basis for the fourth quarter of '07 of 15.4 million before special items.

Earnings per share for the fourth quarter of 2008 were $1.27 per share, an increase of 32% from earnings per share the fourth quarter of $0.96 a share before special items.

Including fourth quarter 2007 special items, net income for the fourth quarter of last year was 27 million or $1.68 a share. You may recall that the special item in 2007 fourth quarter was primarily associated with the reversal of taxes previously provided for on the undistributed earnings of certain of our foreign subsidiaries. You'll find this topic and details on the discontinued operations reflected separately for clarification in the Summary of Earnings schedule at the end of the press release.

Our petroleum additives operation had another good year with annual sales increasing 18% on an improvement of 4% of shipments. The remainder of the improvement in revenue was due to our raising prices during 2008 to recover the rapid increase in raw materials that we experienced during the first 10 months of 2008. Operating profit for the year was 130 million, a small improvement over 2007 performance.

For the fourth quarter, petroleum additives net sales were 366 million, which was a 1% increase from the comparable period last year. In this comparison, volumes shipped were down approximately 19%. Operating profit for the fourth quarter of this year increased to 32.5 million, an improvement of 13% over last year's fourth quarter's operating profit of 29 million.

We did experience some improvement in margins in the fourth quarter with operating margins of 8.9%, compared to 6.4 for the third quarter. The operating margin for the fourth quarter of '07 was 8%. Our petroleum additives business experienced two radically different business environments in 2008. During the first three quarters, our plants operated at very high rates and crude oil prices continued to escalate from $70 to over $140 a barrel. The entire commodity chemicals market was one of tightness of supply and rapidly escalating prices. We managed the demand that these factors placed on us during this period. We maintained uninterrupted supply to our customers and implemented multiple price increases to recover the rapidly escalating raw material and other cost increases.

This growth period had a significantly negative impact on our cash flow position as our working capital needs consumed 72 million during these three quarters. The last quarter of 2008, and more specifically the last two months, were significantly different from the first 10 months of 2008. Our business during October was excellent, but beginning in November demand decreased dramatically. During the last quarter of 2008, the cost of crude oil plummeted to under $50 a barrel and commodity chemical companies began idling facilities and reducing their workforces. We believe that there are two primary factors that resulted from such a dramatic decrease in demand for our products in the last two months of 2008. We believe our customers were lowering their inventory levels, using their existing higher priced inventory in anticipating price decreases since the price of base oil had fallen. The second factor was the worldwide economic slowdown.

We immediately took action upon recognizing the change in conditions. We reduced production at our plants in order to manage inventory levels. To support the existing business levels during the first 10 months of 2008, our inventories had been at higher levels than were necessary to support the demand for our products that we saw in the last two months. We took internal actions to control spending and increased our focus on managing customer accounts and the related accounts receivables.

We have taken measures to control costs and spending and are not adding to our workforce. We believe we have taken the appropriate actions needed at this time. We will continue to monitor demand and take further actions as necessary. We know that modern machinery requires the products our industry produces to function properly. We are uncertain when the destocking at our customers will cease, as well as what the ultimate level of business activity will be.

It is our current expectation that the first quarter will be relatively low in demand, similar to November and December. We also expect a gradual recovery over the following three quarters under the assumption that the destocking phenomenon will have ended. We will be reporting on this topic throughout the year.

Turning to the balance sheet and cash flow, we generated cash from operating activities of $21 million in 2008, compared to 110 in 2007, quite a significant change. The single largest component in this drop in cash generated was the working capital requirements in 2008. During 2008, working capital consumed 89 million of the cash that our operations generated, accounts receivables increased 14 million, inventories increased 36 million, and accounts payable decreased 42 million. So it was a highly unusual year with respect to the demands of working capital.

The increases in accounts receivable and inventories were due to the rapid increase in business during the first 10 months, while the drop in accounts payable resulted from us slowing our plants and reducing our purchases significantly during December. We ended the year with $42 million of debt under our revolver credit agreement, our $150 million of bonds, and 43 million drawn under the Foundry Park construction loan.

Our total capital expenditures for 2008 were $75 million with 43 million being used for Foundry Park. We expect the capital expenditures for 2009 will be around 63 million for Foundry Park and 30 million for the remainder of our business. We also expect that working capital will be a source of cash during 2009. With the price of materials dropping and demand slowing, we will be able to run with lower inventory and should see our accounts payable levels increase to support our purchasing activity. We expect that some significant portion of the working capital use of cash last year will return to us this year.

You'll also notice in our balance sheet a significant increase in long-term liabilities. This is related to the poor performance of the equity markets where the majority of our pension assets are invested. And we believe we're not unlike any other company. Everyone has experienced this and as our controller said when he opened his 201(k) statement this year, it had quite a drop. The increase hit our books about $42 million, the increased liability. We've gone from an overfunded situation to an underfunded situation with respect to our accrued benefit obligation. We expect we'll make a modest increase in our contributions in 2009 to the pension funding and expect our pension expense to increase about $2 million in 2009 over 2008.

In the petroleum additives segment, we're beginning 2009 with a great deal of uncertainty for the demand of our products due to worldwide recessionary impacts and how our customers may manage their inventories. The products that our industry produces are not discretionary as modern equipment requires a sophisticated level of lubrication. We believe the demand will improve from the very low levels seen in November, December, and continuing into January.

We have every expectation that our business will perform well in this difficult time. We have a solid business base, a good technical product offering, and an excellent team who is dedicated to our customers and our business. We believe the destocking may last through the first quarter and that the underlying market demand will be within 5 to 8% of historic levels.

Those are all the comments I had planned. I'd like to open the lines now for questions.

Thank you. (OPERATOR INSTRUCTIONS.) Our first question comes from the line of Saul Ludwig with Keybanc Capital Markets.

Good morning. This is Saul.

Hello, Saul.

And my 201(k) is performing about the same. When you say demand will be within 5 to 8% of historical levels or you talk about end market, what do you mean by that? That means down 5 to 8% versus last year? I mean, what do you really mean by that?

Yes, Saul, it's Teddy. That's what we're saying. We expect market demand in '09 to be 5 to 8% weaker than 2008.

And assuming that projection was exactly reality, given the additional volume decline that you expect to experience in the first quarter, then your volume decline would be somewhat greater than that. Is that correct?

Yes, something toward the high end of that range.

Okay. And then, David, as you cut back production in the fourth quarter and you ran your plans at lower than full utilization, to what extent did your fourth quarter earnings--were they impacted by unabsorbed overhead that normally would have gone into inventory, but probably went into period costs?

Yes, that's [fact]. There were several millions of dollars in that and there'll be some of that in the beginning of the first quarter.

You mean maybe like 5 millionish?

That's fair.

I mean, is that too high, too low?

No, that's in the ballpark.

Okay. And then, finally, I suspect that in the fourth quarter your price increases that you had put in place prior to that, you probably got to keep most of that in the fourth quarter yet you benefited. You're on LIFO, right?

We're in LIFO in the United States and a conglomeration of methods around the world.

So you benefited as your raw material costs came down in the fourth quarter and you had the widening margins, as you expected when you issued your third quarter outlook at the end of the third quarter. What do you think is going to happen to pricing relative to cost, I mean, with base oil plummeting again this week? Do you see your see your selling prices trending lower, but maybe not as fast as raw material costs are coming down? And how do you--no one knows for sure, but how are you handicapping the margin outlook for this year?

Saul, we are seeing our costs come down. You mentioned base oil. Base oil has dropped quite a bit. Some of our other raw materials are also seeing some pretty good decreases. And our customers will see the benefits of this low raw material cost as we work the cheaper materials through our system. It's certainly our goal to maintain decent margins. And that's about all I can say on that.

David, I wonder if you could address the tax rate - favorable. It was very nice in the fourth quarter. And how should we be thinking about the tax rate this year?

Yes, use 33% is how you should think of '09.

What happened so good in '08 that's not going to happen again?

Well, I think 33 is a good number. What happened in the fourth quarter, when Congress waits to pass the R&D tax credit, you can't anticipate it. So effectively, we're taking a whole year's benefit in one quarter because Congress took that long--I'm not being negative--they just took that long to pass the bill saying we could do it.

And are you assuming you're going to get the R&D tax credit again?

Yes, I am.

We are in that 33%. You're just assuming it's going to be more equally balanced.

No, I don't know when it will pass again. It's already been--yes, I've just been told it's already been passed. So, yes, it will be equally balanced.

Okay, great. Thank you very much. Nice quarter, guys.

Thank you.

Our next question comes from the line of Robert Felice with Gabelli and Company.

Hey, guys. Congrats on the very nice quarter. I just wanted to follow up on Saul's question regarding raw material costs and pricing, maybe ask it a little differently. Given the decline in volumes that you've seen so far, have you seen any change in pricing rationality amongst you and your competitors? In other words, has the supply/demand balance loosened to the point where you'll be forced to give back on price in any kind of meaningful or rapid way? And to that end, have you had to give back on price yet?

We're--we are in discussions with essentially all of our customers about the change in the cost structure and price structure. And yes, we are seeing some lowering of prices. As an industry, I would say we aren't seeing any significant change from the dynamics of 2008.

So as I think about your margins for 2009, should I think that you'll be able to hold onto your pricing long enough given the drop in base oil costs, that your margins will revert back to more historical levels? So in other words, should you capture a decent portion of that price cost gap?

Well, I have to say I certainly hope so. We got burned on the way up through the better part of nine months of 2008 as the costs were going up. So, yes, I would hope that we would see some improvement as it comes down.

So as I try to balance the dual dynamics we have here - lower volumes, but favorable price costs - should I expect that '09 operating income for petroleum additives will be greater than that earned in 2008?

We don't give that kind of guidance. And in the tumultuous world that we're in today, I'm glad that we don't give that kind of guidance. I think it's safe to assume though that the first quarter from a profit standpoint will be weak.

Okay. Thanks for taking my questions. I'll hop back in the queue.

Thanks.

Our next question comes from the line of Ian Zaffino with Oppenheimer.

Hi. Thank you. Just wanted to get a sense of the pricing right now. What are you--the prices that are in place right now, how much are they up year over year?

Percentage wise, I don't have that number.

Okay, because I guess--.

--It will be in our 10-K. We'll be able to calculate that for you.

Okay. I guess I'm just trying--the point I'm trying to get it at is what do the revenues in the first quarter look like, if we assume volumes are down 20%, prices were probably enough to offset that. Is that the right way to look at it?

Yes. That's what we said. We were up 1%, but volumes were down 19, so prices were enough to cover.

Okay. And then--.

--I was talking fourth quarter, right?

Right. I'm talking first quarter though, like what you've seen so far.

We got one month in the book and the volumes were in line with November/December and that's all we know right now.

Pricing has been relatively the same as November/December.

Well, there's--there's no easy answer to that. We have a lot of customers and we have different situations with each customer.

So is there a bias to--on pricing pressure or pricing power?

There's going to be a lot of pressure. Customers know exactly what's going on with the raw material side.

Okay. All right. Thank you very much.

All right.

(OPERATOR INSTRUCTIONS.) We have a follow up question from Robert Felice.

Hey, guys. Just to the point of clarification, would you expect your first quarter earnings to be weaker on a sequential basis or on a year over year basis or both?

Both. Because they're both about the same round numbers.

Okay. And I guess, why first quarter--why would you expect first quarter to be so weak? I understand that the volumes are off quite a bit, but imagine you're still benefiting from a significant widening, a favorable widening of your price cost gap and the volume deterioration, as you mentioned, will be at the high end of that 5 to 8% range, but not materially different than 4Q. So just some clarification on 1Q profitability would be appreciated.

Yes. I guess there are a couple of points. As I said in my [plain] comments, we had a good October and not a good November/December. And so, we're also telling you the first quarter is looking more November/Decemberish. So I've got three November/Decembers, if you want to look at it that way. And then, we are going to be working some inventories down. And so, as Saul asked earlier, we'll have some--likely have some negative impact of the unabsorbed costs in the first quarter. So all those factors together is what us lead--lead us to make the comments that we're making.

Okay, that's helpful.

Our next question comes from the line of Jim Leonard with [Sunhouse] Investment Services.

Hey, Teddy. Hey, David.

Hello.

Hi.

Teddy, how's the golf game?

Non-existent.

I understand. I--being with a bank and all the fun things we're going through right now, I just wanted to ask if you have any concerns about accounts receivable and bad debts with some of your clients?

Yes. During the end of last year, it was great to have such a first class set of customers. And the answer to that question is there's always one or two you worry about, but man, by and large, we have no concerns.

Wonderful. Well, thank you. Have a great day.

Okay.

Our next question is a follow up question from Mr. Ludwig with Keybanc Capital Markets.

He got it right.

Hey, there you go. Hey, with regard to Foundry Park, and obviously the need to get some long-term financing there, when does that construction loan have to be paid off and what are you doing about that and what's your backstop plan if credit conditions don't get a lot better than they are right now?

The construction loan is due in August of 2010.

August. Okay.

And as to your question of what if they don't get better, we're going to be chasing down alternative paths, either short-term solutions or long-term, confident that we'll find something in the timeline that we have to deal with.

Okay. You mentioned that your pension expense would be up about only $2 million.

That's right.

Why--that sounds--oh, okay. You've got the assets in your pension plan about 100 million and they got clipped by probably $30, $40 million, so it's the--I got you--7% return on that that you--that results in the additional expense. Okay. And how are you thinking about FX and its influence on your earnings this year? And how much did FX help you in '08 that may go away this year?

Yes. In our last Q, we said 10-ish million help in '08 versus '07. Third quarter was relatively zero. So the answer to the question would be $10 million if rates stayed where they are now all year.

So that goes against you?

Correct.

And then, didn't you also have--was it the first quarter of last year--this may help in the first quarter. Didn't you win a lawsuit or something that you had some income in the first quarter of '08?

Yes, we had 3 million of pre-tax benefit in the first quarter of '08 from--.

--So that's 2 million. I mean, that's $0.12 a share right there that goes away. Right?

Yes.

Okay. I think that maybe adds a little clarity to part of your first quarter expectation of directionally lower results. Okay, great. Thank you very much.

You're welcome.

(OPERATOR INSTRUCTIONS.) Seeing as there are no further questions, I'd like to turn the call back to management for concluding remarks.

Well, thank you for joining us and we'll talk to you next time. Have a good day.

Ladies and gentlemen, this concludes today's teleconference. Thank you all for your participation.