NewMarket Corp (NEU) 2009 Q1 法說會逐字稿

Greetings and welcome to the NewMarket Corporation's first quarter 2009 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, David Fiorenza, Vice President and Treasurer and Principal Financial Officer for NewMarket Corporation. Thank you, Mr. Fiorenza, you may now begin.

Thank you. Thank you for joining us to discuss our first quarter results. With me today is our CEO, Teddy Gottwald. Following our normal format, 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 2008 10-K.

You know, I read that statement at the beginning of most presentations, and I'm sure your mind is wandering around as I go through that boilerplate, just like mine is when I'm reading it. But I have to tell you, in this economic environment, it really is something to consider. I have never seen such volatility and uncertainty, which makes it extremely difficult for us to get a good view on how the future may turn out. I'm talking about volumes, margins, financial sector conditions, the whole ball of wax.

With that being said, we will be filing our first quarter 10-Q next week. I encourage you to review that filing for more information on the performance and financial condition of the Company.

As you saw on Wednesday, we reported our first-quarter results. Net income for the quarter was $28.7 million or $1.88 a share. This was an improvement of 45% over net income for the first quarter last year, which was $19.8 million and $1.27 a share. The first-quarter results reflect strong improvement in petroleum additives operating profit, which increased to a record of $50 million, a 33% increase over last year's first quarter. We did not repurchase any stock during the first quarter.

Digging deeper into the petroleum additives results, it was a quarter of many moving parts, having offsetting influences. Our overall volumes were down 26% in the quarterly comparison, a lot of which we attribute to de-stocking activities by our customers. We believe the de-stocking was more related to the lubricant additives, since fuel stocks tend to follow a more just-in-time business model. We also believe that the de-stocking event is essentially completed.

Even within this drop, it was not uniform around the globe for our business. Our Asia business dropped significantly, while our North America business fell to a lesser extent. The overall volumes for the first quarter were very much in line with our expectations. On a sequential basis quarterly volumes were down 6% from the fourth quarter of last year. February was better than January, and March was better than February. We expect that overall demand as measured by volumes may be down 10% to 12% for the year 2009 as compared to 2008.

We believe that, excluding the effects of de-stocking, that the underlying market demand may be off 5% to 8% for the year.

Petroleum additives net sales for the period were $335 million, which is $46 million lower than the first three months of 2008. The $46 million reduction included a reduction of about $87 million due to the volume decline, a reduction of about $11 million due to foreign exchange rates and an increase of about $50 million due to higher selling prices and customer mix.

As you recall, we increased prices several times in 2008 in order to attempt to recover declining margins due to rapidly increasing raw material costs.

Our operating profits were very good for the quarter. This too is a story of offsetting factors. The increases in profits from the fuels business were quite significant. Profits increased due to improvements in our product portfolio, increased market coverage and stability in market demand in an environment of rapidly declining raw material costs. Profits from lubricant additives were essentially flat.

At a high level, the drop in shipments were more than offset by better margins as raw materials dropped rapidly and cost control measures which were implemented at the plant and GS&A level. Our margins, at about 15%, were quite good for the quarter. As you all know, had been chasing escalating raw materials for most of 2007 and the first three quarters of 2008. During this period our margins were below the long-term levels we believe are necessary to continue to invest in this business to support our customers. We have often mentioned 10% is a good measure for the margin driven by our current business. We actually do not have a specific number target, but more of a range.

As we manage our business for the long haul, we know that we suffer margin compression in an environment of rapidly escalating costs, and we enjoy margin expansion when those costs drop. While this quarter's performance is most gratifying, when you look at the trailing four quarters that ended March 31, 2009, you will see an operating profit margin of 9.1%, still below what we believe this business needs to earn.

Throughout the quarter we have adjusted the selling prices of many of our products to reflect market conditions. This was not a uniform across-the-board change but one that was reflective of the products and regions where the products are being sold. Many prices declined, some stayed flat and some went up. Our team is very aware of managing the balance of earning sufficient returns to continue our investment in R&D and services while keeping our customers competitive in their marketplace with our products.

No one knows for sure, but we believe we may have seen raw material prices bottoming out during March and early April.

Turning to cash flow, it was a fantastic quarter. Just as the rapid rise in the business activity level we experienced in early 2008 required a lot of working capital commitment on our part, a good portion of that investment returned to us this quarter. Our team managed our inventory levels down to be more reflective of the demand levels that we now experience. The team did an equally outstanding job of managing our trade receivables, keeping our bad debt write-offs to essentially zero. That is also a testament to the high-quality customer base we serve.

The reductions in inventories and improvements in other areas of working capital was a source of about $50 million during the quarter. Our total cash flows for the quarter allowed us to repay all of the $42 million we had drawn on the revolver at the end of last year and to build an additional $38 million of cash on our balance sheet. We believe that near-term economic conditions would indicate that we should keep this working capital benefit.

We had about $8 million of capital expenditures this quarter excluding our real estate project. We expect the spending for the year in this area will be in the $30 million to $35 million range. This is somewhat higher than our normal spending due to some planned improvements to reduce plant emissions. Our normal sustaining capital is probably in the $20 million to $25 million range on an annual basis.

I'm also happy to report that we increased the capacity of our revolving line of credit during the first quarter and added another lender to our group just this week. We now have $129.25 million of capacity on this facility with no drawn debt. We do have $12 million of letters of credit written against this facility. We find it a solid vote of confidence from our banking partners to extend this extra support during these turbulent financial times.

I have nothing new to report on our Foundry Park activities. The project remains will run. It will finish on schedule and will cost about $130 million. We project it will have $105 million of debt on our books at the end of the project. We expect the tenant to take occupancy late this year and the rent stream to start in January of 2010.

The financial markets are still uncertain with respect to long-term financing. We continue to investigate all alternatives. The construction loan is due in August of 2010.

We've begun the year with good results for our business. The results of the past two quarters highlight our ability to manage our business during challenging periods and demonstrates the value of diversity in our product lines, customer base and the geographic areas in which we operate. Our performance also demonstrates the value of our entire team who acted quickly to manage rapidly changing market forces. Despite the success of the first three months of the year, there continues to be uncertainty related to the ultimate demand for our products. While our products are necessary for modern machinery to operate, the worldwide economic slowdown has lowered overall demand, especially in the lubricant additives product line. Times like these reinforce our decision not to give earnings guidance.

For the remainder of the year we will continue to manage our business by staying focused on long-term goals but also recognizing and addressing the challenges of the market in which we operate. Our margins are recovering, which allow us to continue our investment in R&D programs and to deliver measurable value to our customers as well as to reward our shareholders.

And as a final note, I hope you noticed that the Board of Directors increased the dividend for the next quarter to $0.25 per share yesterday. This was an increase of $0.05 per share.

Thank you for your attention. Chris, I would now like to open the lines for any questions.

(Operator instructions) Saul Ludwig, KeyBanc Capital Markets.

Thank you, good morning, very impressive quarter. Two questions -- you gave us what the volume change was from the fourth quarter to the first quarter. What was the change in your selling price, so you might say if there's such thing as an average selling price from the fourth quarter to the first quarter? And based on where prices were, let's say, at the end of the quarter, what might be the change in selling prices from the first quarter to the second quarter?

Prices went down during the first quarter compared to the fourth quarter; we said that. I don't have an exact number. It didn't go down uniformly, as we said, Saul. It was across the board. The action happened during the quarter, so you will see some follow-through of that in the second quarter results. That's the best answer I've got for you.

There's always mix, regions, you know -- it's not a homogenous product that we sell.

Robert Felice, Gabelli & Co.

Congrats on a very nice quarter. I guess first question, on an absolute basis, how much were you raw material costs down year-over-year during the first quarter?

When you say absolute basis, I'm not sure I follow your question.

Just the absolute dollar amount on a year-over-year basis that raw material costs were off. You mentioned that price was up $50 million. I'm just trying to get a sense as to what that price/cost variance was during the quarter.

I don't have that number with me, Robert, because the margins expanded so that the raws wouldn't have gone up as much as that $50 million we talked about.

Okay. I guess what I'm trying to get at or trying to understand is how we should think about your price-cost variance through the balance of the year. Base oil prices took another step down in March. They look like, as you've mentioned, they've bottomed out. I guess I'm trying to get a sense as to, as I look to 2Q, whether there's potential for you to, I guess, match your first quarter performance, operating income performance in the second quarter, versus that which you posted in the first quarter.

The preamble I gave about the uncertainty -- I want you to keep that in mind. We've reduced price. Raw materials seem to have bottomed out. Arithmetically, I could come up with the same margin. It would be tough, in the second quarter, to match the first quarter's margin, given the actions we have taken.

Okay, so, as I think about the balance of the year, should I think that the -- when I think about the absolute average margin for the full year, should I think that the goal is to finish off somewhere in the 10% to 11% range? I think that you would be able to balance it out to fall somewhere in the 11% to 12% range. Just your rough expectations, understanding that there is a lot of uncertainty out there?

Yes, and you've made my answer for me. There is a lot of uncertainty, but the ranges you quoted wouldn't be unusual.

Okay. And then I guess, just wondering, I guess on a sequential basis you mentioned that March volumes were better than January and February. Can you give us some data points as to the magnitude of the pickup in March versus January and February?

I think a better way to look at it, Robert, is we believe that the de-stocking impact that we saw fourth quarter into first quarter was very significant, and a big part of that 26% drop that we saw. We think, once that's over, then we are looking at volume in the marketplace being off in the 5% to 8% range, and we believe that the de-stocking is essentially over.

Okay, so as I look to the second quarter and I think about your revenues or at least the volumes, you should show a significant sequential improvement?

I think that's fair, sequentially. Whether it matches last year's second quarter or not we'll wait and see. So, compared to first quarter, that's true.

Ian Zaffino, Oppenheimer.

As far as the underlying demand that you are pointing to, how are you arriving at that? Is that just looking at miles driven, or is that something you are actually seeing or discussions with your customers?

It would be a combination of all of the above, but certainly it's the field we are getting from the marketplace, from our customers. And again, I just need to reinforce the uncertainty of it because it's not in uniform. It varies quite a bit by region (technical difficulty)

Excuse me, Mr. Fiorenza, your phone line right now is fading in and out. I don't know if you're using speaker equipment.

We've just put it a little bit louder. See if that's better.

Much better, thank you.

Sorry about that. The weakness in market demand is certainly larger on the lubricant side than it is on the fuel additive side. And within the lubricants area I mentioned the geographic differences. There's also product line differences where, on the industrial lubricant side, there's a greater impact than there is on the more consumer-oriented passenger car/motor oil side. I hope that answers your question.

Todd Vencil, Davenport.

When you talk about making adjustments to your prices relative to demand, as you look in the first quarter, as you went through there, were those actions sort of accelerating, or has the rate of sort of having to make those changes decelerated? What's the trend there?

Well, we've mentioned that the raw material picture seems to be stabilizing, which would imply deceleration. But it's just hard to generalize, since we are in a wide variety of products and regions, each with their own unique set of cost issues as well as market pictures.

Fair enough. Turning it around and looking at it from another angle, do you have a feeling as to how much longer -- assuming that -- you said it looks as though raws have begun to stabilize. So if that does in fact turn out to be the case, how much longer do you think you may be looking at cutting prices? Is that a good way through the second quarter, or do you think you would not be cutting much more price if raws have stabilized? Or where do you shake out on that?

We are going to keep our eye on the market. We are going to watch our cost picture, but we are not simply in a commodity chemicals business. We are in the specialty chemicals business, and we are solving customer needs. We understand that we need to keep our customers competitive so that they can grow in their business, and we're in a very competitive industry that's not growing a lot.

Given that, though, we are coming off of quite a number of quarters where we were playing catch-up. And if you look at our margins over a longer period of time, they are still, on average, not where they need to be to reinvest and stay competitive in the marketplace. So it's a mixed bag, and it's driven, certainly, by market conditions. And we will stay on top of those market conditions.

That's excellent, thank you. And then, thinking about your costs just a little bit, to drill down a lot, obviously base oil is a big deal and has fallen off a lot. What are the other key items there that you guys are seeing an impact from?

A lot of our products move with the whole petrochemical space. Some don't, but we list those different products in our 10-Q. It's PIB, it's olefins, it's all these different products. When the sustained movement is down in crude and sustained lack of demand, those products moderate also. But each and every one of them doesn't. We always use base oil as kind of the proxy, just to make it simple for people to understand.

Last question I guess, kind of on the same topic, but what kind of a lag are you seeing in spot prices in base oil that we can see reported flowing through into your costs at this point?

I wouldn't pay too much attention to spot pricing in base oil right now. If you do, try to look at regional differences in that. The movement in base oil has been considerably different in Europe than it has been in the US, so it's hard to draw a direct comparison between any posted spot price and what we are seeing, honestly.

That's fair enough. So, that having been said, when you say that you feel like the raw materials are stabilizing, is that in terms of what you are buying or what you are running through COGS, and what would that lag look like? Is that pretty tight?

Yes, it would be pretty tight, since we are on a LIFO cost system.

When we talk about things to stabilizing, it's what we are experiencing today and our best view on what the near future holds.

Bob Goldberg, Scopus Asset Management.

I was curious, first of all, what's the historic increase in volumes from the first quarter to the second quarter on a seasonal basis, if there is such a thing as a normal seasonal increase?

Historically, the second and third quarters have certainly been stronger than the first and fourth, to the tune of 5% or so, sometimes more. That pattern hasn't held up too well lately, lately meaning the last couple of years. When you're making comparisons, keep in mind the environment we were in, in the first half of last year, where we were seeing rapidly increasing raw materials. Crude was racing from, let's say, $90 at the beginning of 2008 to almost $150 in July.

So, just as we've seen de-stocking in the fourth quarter into the first quarter, we were seeing abnormally high volume in the first half of last year, as we believe there was some pre-buying going on, on our customers' part, in anticipation of rising costs. It makes that historical hump in the second and third quarters kind of difficult to measure or expect.

But for this year, could you see a little bit more of a seasonal uptick just because the first quarter was so heavily impacted by de-stocking?

Well, the underlying seasonal hump from increased miles driven -- I think that pattern is still there. But yes, we would expect it to be more pronounced as that de-stocking impact gets behind us.

In terms of -- you mentioned a couple of times that the trailing 12 months operating margin of 9% is below the level that is required for reinvestment. What is that level? Do you want to give us some guidance as to where you think margins need to be, to be at reinvestment levels? Obviously, I imagine 15% is above that level, but I'm just trying to gauge where you think the margins can be held sustainably.

Well, we don't really have a target, as David said. We certainly believe that double-digit margins, operating margins, are necessary. There are other factors that play in, like what's volume going to do, what's the multiplier on that margin?

I apologize if I missed this, but did you talk about the different geographies and whether the de-stocking is ending uniformly around the world, or are we talking more about North America, where the de-stocking seems to have mostly run its course?

I can comment on our experience, what we are seeing, and it may be different for others. We are seeing de-stocking ending and less of an impact in North America than other regions. We're seeing it extended in Asia-Pacific, Western Europe to some extent; Middle East, yes; Latin America, no.

Again, it's what we are seeing. And part of it is a function of our supply lines. We've produced in Europe and North America. We don't produce in Europe, so our supply lines are longer -- I'm sorry, in Asia. And so, because of that, you would expect that any changes in stock levels would take a little longer to play out for us in those regions.

Lastly, I'm just curious, again, in terms of your revenue, normally your revenue would be much higher in the second quarter than the first quarter. But do you think that holds true this year, given that you will have sequential price declines from the first quarter to the second quarter? Or, is it more likely the case that the volume increase exceeds that impact from lower prices?

I honestly don't know.

Ivan Marcuse, KeyBanc Capital Markets.

On an absolute basis, do you think SG&A and R&D will be lower in the second quarter year-over-year, or at the same rate as it was in the first quarter? Or do you think that will go up a little bit more?

I don't know, probably about the same level in the second quarter.

Versus the first quarter?

Yes. We're take a look-and-see, cautious approach. As the year unfolds, things get clearer to us that it might tick up. But just for talking purposes, I'm thinking of it being sequentially the same, as good as any.

Also then, in the first quarter, did you guys experience any unabsorbed overhead? And how much of an impact do you think that was?

We did, but it was macro, about the same as the fourth quarter last year. And I don't have an exact number for you. But as we said --

What do you think, a couple of million, ballpark?

Well, it's some number, some number a-million, but I don't have a number.

What was your D&A for the quarter?

Let me look it up.

And then while that, also, how much did acquisitions add to the revenues in the first quarter, that one acquisition?

Very little.

What do you think, ballpark? $5 million, $6 million?

Single-digit million; oh, yes, certainly, very small number.

D&A was 8.

8? Great.

7.7.

That's all I have for you. Great quarter, and -- oh, real quick. On a unit basis, what was raw materials up?

Percentage, I'll have to follow up on that. I don't have the number.

Okay, great. Have a great second quarter.

Robert Felice, Gabelli & Co.

I wanted to get back to thinking about the second quarter versus the first quarter. You earned $50 million on an absolute basis in the first quarter. Your raw materials will likely be lower in the second quarter on an average basis, as you've discussed, because of the de-stocking factor. Your volumes will be up sequentially. And of course, I'd imagine you're going to try to manage the price as best you can.

So, as I sum of all of those dynamics, why wouldn't I expect second quarter to at least match the first quarter on an absolute basis? I understand that the margin will likely compress. But why wouldn't you post a second-quarter number in the same range as the first quarter? Am I thinking about that correctly?

Robert, the factors you just listed are all the right ones to be thinking about. They're certainly the ones we are looking at. There's just a tremendous amount of uncertainty in this marketplace right now. And, in the very near term, when you're looking at a three-month period and the kind of turbulence we are seeing, it's hard to say what's going to occur when. And we don't pay that much attention to -- or we try to look at longer periods of time than just the next calendar three months.

So I don't know. There's just an awful lot of uncertainty in there. We like where we are today. We think that the 5% to 8% drop in volume that is sort of the underlying number in the marketplace, as best as we can read it, is not enough to really change the market dynamics that are out there. And supply and demand remain relatively tight in our industry.

So again, we like the -- we are pleased with our performance, and we are pretty bullish when we look forward.

Fair enough. I'm just focusing on the second quarter so I can get a gauge as to how the back half of the year could play out as well and kind of the long-term implications. But it sounds like, whether or not it happens in the second quarter or the third, how volumes fall, that the outlook around managing price-cost and volume sequentially should provide for a pretty favorable 2009.

Couldn't argue with that.

Mr. Fiorenza, there are no further questions at this time. I would like to turn the floor back over to you for any closing comments you may have.

Just to thank everyone for joining us and we'll talk to you next quarter.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you all for your participation. May you all have a wonderful day.