NewMarket Corp (NEU) 2009 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the NewMarket Corporation second quarter 2009 financial results conference call. At this time, all participants are in a listen-only mode. A 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, Treasurer, and Principal Financial Officer for NewMarket Corporation. Thank you, Mr. Fiorenza. You may begin.

Thank you for joining us to discuss our second quarter and first half results. With me today are, Teddy Gottwald, our CEO and Warren Huang, the President of Afton Chemical Corporation. We have a few planned comments after which we will open the lines for any 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 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 and factors that are difficult to predict and beyond our control. A full discussion of these factors can be found in our most recently filed 10-K and 10-Q. We filed our 10-Q yesterday. Please read it for a more detailed explanation of the company's performance.

We had a very good start to the year. Net income for the second quarter improved to $30.7 million or $2.01 a share compared to net income for the second quarter last year of $17.6 million or $1.13 per share.

Net income for the second quarter of this year included a charge of $7.4 million from recording a fair value in the interest rate swap agreement related to financing on Foundry Park. Excluding this charge, second quarter earnings were $38.1 million or $2.50 per share.

For the first half, net income increased to $59.3 million or $3.89 per share, compared to $37.4 million for the first half last year or $2.40 per share.

Excluding the second quarter charge of $7.4 million, the earnings for the first half amounted to $66.7 million or $4.38 per share or an increase of 79% compared to the net income of the first half last year.

Turning to petroleum additives. Net sales for the second quarter were $368 million, which is a decrease of $53 million or 13% from the second quarter of last year. The decrease in sales reflects reductions in product shipments of 18% across all major product lines, but predominantly in the lubricant additives.

Also included in the reduction in net sales is an unfavorable foreign currency impact of about $14 million. This unfavorable impact from foreign exchange reflects the strengthening of the US dollar versus other currencies in which we conduct our business in the specific time periods that are being compared. Partially offsetting the unfavorable impacts from lower product shipments in foreign currency were higher selling prices, which were implemented during 2008.

Six months 2009 petroleum additive sales of $703 million or approximately 12% lower than six months results for last year. Similar to the second quarter, the decrease between the two six month periods reflect lower product shipments and unfavorable foreign currency impact of $25 million, which was partially offset by higher selling prices which were the results of action taken throughout last year.

Product shipments were approximately 22% lower for the six months, compared to last year. This decrease was primarily in the lubricant additives product lines. The decrease in net sales for both periods reflects the impact of the worldwide economic slowdown and some destocking by our customers late in 2008 and early in 2009.

We have seen some improvement in demand for our products. Product shipments increased 16% between the second quarter and the first quarter, with the majority of the improvement happening late in the second quarter. Petroleum additives operating profit increased $36 million when comparing the second quarter this year to last year, an increase of $48 million when comparing the two six month periods.

Operating profit margin was 18.4% for the second quarter and was 16.8% for the six months.

I will point out as I discuss the quarterly comparisons, that last year was the most unusual year in itself. Oil was racing up to $140 a barrel. Customers were pre-buying in anticipation of cost increases which raised our sales volumes, and our margins were uncharacteristically low as we continued to raise prices to recover the raw material cost increases.

The last six months 2009 results are significantly higher across the lubricant and fuel additive product line. The majority of the increase when comparing the second quarters was in the lubricant additives product lines.

The change in petroleum additives operating profit, when comparing both the two second quarter periods and the two six month periods was a result of several factors. The most significant favorable factors included, lower raw material costs and higher selling prices. The key unfavorable factors were lower shipments and foreign currency impacts. The overall increase in selling prices for the 2009 second quarter and six months periods was a result of actions we took throughout 2008 to raise selling prices in response to higher raw material costs, and actions that were taken this year to reduce prices in some areas.

Foreign currency results in an unfavorable impact of about $10 million when comparing the profit of the two second quarter periods and about $13 million unfavorable when comparing the two six months periods. Our P&L shows decreases in both S&A and R&D in the quarterly comparisons, but these decreases were substantially a result of favorable impact due to foreign currency exchange rates. We continue to invest in S&A and R&D to develop the technology we need to support our customers program and to remain a leader in our industry.

The existence of the advanced that led to the recording of the special item was disclosed in an 8-K that was filed in late June. We entered into an interest rate swap with Goldman Sachs in the notional amount of $97 million with the maturity of January of 2022.

We entered into this swap in connection with the termination of a loan application and related lock agreement between Foundry Park One and Principal Financial Group. Goldman Sachs both assume Principal's position and we entered into an interest rate swap with NewMarket. Under the terms of this interest rate swap, new market will pay fixed rates of 5.3075%, and government will make variable rate payments based on three month LIBOR. This transaction effectively preserves the impact of the original rate lock agreement for the possible application to a future loan in the amount of $97 million of a similar structure.

We will not be using hedge accounting for this swap, but we will be marking its fair on our P&L. This period we recognized the charge of approximately $12 million pretax. In subsequent periods, we will be adjusting the initial position to its then current value. All of those adjustments will also go through the P&L.

The Foundry Park project is progressing well. The effort is on schedule, and we expect it to be completed below budget. The facility will be finished during the fourth quarter of 2009, and the tenant will begin moving into the building late this year. The rent stream will begin in January of 2010.

Our cash position has also improved significantly in the first half, ending at $112 million, up from $22 million at the end of 2008. The increase in cash of $90 million during the first half of this year is driven by excellent earnings and a significant reduction of $77 million of working capital, primarily reflecting a decrease in inventory and a return to more normal level of payables.

During the first half of 2009, we repaid $41.9 million on our revolving credit agreement, leaving this facility with no drawn debt outstanding at the end of the quarter.

Our balance sheet is in excellent position, which is a nice position to have today as the financial markets remain difficult. We did not repurchase any stock during the second quarter.

If you look out for the remainder of the year, we are encouraged by the increase in demand that we saw in June and that is continuing into July. We believe that volumes are in line with our previous discussions of a 5% to 8% decline year-on-year, excluding the impacts of destocking earlier this year.

Our plants are running at high production levels, virtually full. We are working hard to continue to earn the business we enjoyed with our customers. We are seeing some increases in certain raw materials and are experiencing some tightness of supply as we suspect that the demand increases we are experiencing is being felt across the industry. We will likely have a higher level of spend and S&A and R&D in the second half in support of our marketing and technical initiatives around the globe.

Overall, our business is performing well and the industry fundamentals are strong. We expect that margins will continue to be strong in near term, although unlikely to stay at the second quarter levels, due to the uptick in raw material prices and planned increase spending in GS&A.

Our capital spending program this year and next will also be higher than in the recent payoffs. This is a result of several programs we are working on and the investment in the Singapore facility. We expect the capital spending this year will be in the $40 million to $45 million range excluding the spending on the Foundry Park. We expect petroleum additives to have a very successful year.

In summary, I am extremely pleased with the condition of the corporation. We have performed very well through a very difficult economic and financial environment. Demand is returning, our plants are running at high levels, and we are executing our business plans. Our strong balance sheet gives us the flexibility to invest for continued business success.

I will now turn it over to Warren, who has a few comments.

Thank you David. We announced a few days ago that we are entering into a long-term agreement with Chemical Specialties, a Singapore based company to build and operate a manufacturing facility in Singapore dedicated to Afton Chemical. This facility represents a small increase in our total global capacity initially, but is scalable to allow Afton to grow with our customers.

The new plant will improved supply security, reduce lead times and allow us to provide our customers with [inaudible] products using cutting edge technology. Asia-Pacific is the fastest growing region in our market, and we are committed to grow with our customers in the region. With this investment plus an extended sales force, and the newly installed R&D facilities in Shanghai and Tokyo, we are in a excellent position to provide our customers with customized solutions in a timely manner.

I'll now turn it over back to David.

Thank you, Warren. Claudia, we are ready now to take our questions.

(Operator Instructions). Our first question is coming from Ivan Marcuse with KeyBanc Capital. Please state your question.

Hi guys how are you doing?

Hi.

The first thing for the improvement in shipments from on a sequential basis from June to --- during the second quarter and then you also stated going to July, do you think it's more restocking or is it an underlying demand that's increasing and could you quantify which one is taking place?

Ivan, we know it is both, and we have to have sometimes about it before we know the components, but the increase is widespread. So, there are probably some restocking but the underlying demand is increasing. It's widespread across the whole products in all regions.

Great, and then with raw materials, how much were they down on a unit basis percentage wise year-over-year in the second quarter or even on an absolute basis. If OpEx was up $40 million, what was the pricing or I mean, what was the pricing and raw materials actually?

Yes, I don't have that answer right in front of me, they were down obviously a fair amount because of the periods that we are comparing 2Q to 2Q.

All right, great. I will just follow up with you then on that one. And then for the Singapore plant, when will that be up and running, is that up and running now, how much is that investment going to be? And do you expect like, estimated R&D then to be higher next year due to this plant, in this expansion in Singapore?

The plant is under construction as we speak. And we expect the plant to be up and running in first half of next year.

Okay, and where do you think the cash outlay will be for it?

Ivan, that will be apparent as it starts going by. We've not disclosed in that right now, but it will show up in our filings, but it will be within that $40 to $45 million that I discussed earlier in the talk. It won't all be this year, some of it will be this year and some of it will be next year.

Okay. And then last question -- I will jump back into the queue. Your cash position is great, but a lot of it's been generated from working capital. So, how much of that cash that's on the balance sheet now is probably going to be have to go back into working capital as a result of demand increasing?

The sales team -- the whole organization is dedicated to managing inventory levels and managing the accounts receivables levels, but if the business picks up some of it we will go back.

Great. Hey great quarter, and I will talk to you soon.

Thank you.

Our next question is coming from Todd Vencil with Davenport & Company, please state your question.

Hi good morning guys.

Hey Todd.

If we think about the margins, I mean this is obviously the big question, just kind of follow up on one of the prior questions about raw materials and pricing in the second quarter, and you noticed that raw revs sit down a fair amount in second quarter just based on year-over-year comparison. As you think about the third and the fourth quarter, I mean, how should that trend do you think, given what the costs are going to look like both on, I guess what your prices are and where the raws are, I mean how do you see that sort of price cost relationship trending?

I can't do it on my head, because I don't recall what the third quarter of last year looks like. I think we are seeing a little bit of a more, I do want to use the word, stability, where pricing and raw materials are now more closely matched than they had been in a while. So it maybe a little bit of stability in the third quarter, but the gap so to speak we've got.

So, and you guys have talked about a long term through the cycle margin of say 10% in this business, I mean, first of all is that still a good number?

Hey Todd, this is Teddy.

Hi Teddy.

I think we are looking at better margins than that. We are seeing some stability, although, as we mentioned, we are seeing some raw materials ticking upwards. We are also looking at higher GS&A spend in the second half, but the industry fundamentals are very sound today, and we don't see anything on the horizon to cause a significant shift. So we are looking at better margins, although we don't expect them to stay at the second quarter levels.

So, I'm thinking sort of through the cycle Teddy, I mean how much of an order of magnitude do you think it may be -- getting into the low teens or is it again sort of if you look over a multiyear period on average?

Yeah, I think so, but that's about it, as far as we are willing to go on that.

All right, fair enough. Question about the business I mean, it seems like a lot of the volume declines were in the lubricant additives business that you talked about in the second quarter, I mean, what's driving that as opposed to the fuel additives being weaker year-over-year?

Well, remember we discussed before this, the two different dynamics and the fact that fuel additives, fuels aren't stockpiled. Remember we discussed maybe a seven day supply of fuels, and so there is not that ability to yo-yo if you want to use that phrase, I use that phrase the inventory whereas lubricant additives can be. What we are seeing is more of an underlying steady demand in fuels, and then more of the destocking effect can happen in the lubricant side.

I appreciate that, and you gave, I guess the 5% to 8% you know X de-stocking volume down. Do you have feel for what the volumes were if you sort of carve out that de-stocking in the first half?

Do you mean what device would have been if the de-stocking hadn't happened?

Well I am just trying to think, year-over-year I mean, if you are looking whereas the de-stocking didn't happen you are saying volumes this year down 5% to 8%.

Right.

So if de-stocking hadn't happened what were volumes down in the first half?

I don't have an answer to that. In total I am expecting volumes might be down around 10%.

Okay. That helps, yes absolutely. Final question from me I guess, going to back around to the cash and the balance sheet, didn't do any repurchases in the quarter, any plans for repurchases or other uses of that cash other than the CapEx and other things you talked about?

We did have an $80 million authorization but, we don't obviously comment on any action were taken on the stock ever. And we will be using some of that cash for the capital programs we've got in front of us. And we still have acquisitions as our top priority, we are looking all of the time.

See anything interesting on there, any movement either way in availability of stock?

You'll know when we know.

Fair enough, thanks a lot.

All right.

(Operator Instructions). Our next question is coming from Ian Zaffino with Oppenheimer. Please state your question.

Great thank you. This is just following up on the last question about M&A, would this be more from a strategic standpoint, more of a technology gain, what would be the motivation again in the type of acquisition you are looking to do?

I would say mostly technology, technology is what drives our industry, and we are always looking for opportunities to expand our technical base in the petroleum additives field. That's the primary driver. It depends somewhat on the business. Gaining expanded sales channels is also something that we are interested in particularly on the fuel additive side, but technology is the primary driver.

Okay. As far as the capacity, your operating utilization rates. What are they, I guess if you could do it may be overall or region wide and kind of, what you have seen from the industry as well?

We are running, what I call the high rates, which is 80% to 90% high rates. I don't know where the industry is running. We suspect that they may all be running at that rate. And from a regional, we had more of a global supply chain. So region is not meaningful to us on how hard one region is running versus another.

Okay, all right, thank you very much.

You are welcome.

Our next question is coming from Robert Felice with Jay Goldman & Company. Please state your question.

Okay, guys. Most of my questions have been answered. Just have one or two more. I guess, if I look back historically, your second and third quarter profitability levels have usually come pretty close to each other and mirrored each other pretty similarly.

You've had an interesting, number of interesting dynamics here in the third quarter versus the second quarter. I guess, on the headwind side, you will have higher raw material costs, higher SG&A and higher R&D as you mentioned, but from a tailwind perspective you have higher volumes and better fixed cost absorption. So how do we balance those dynamics, and how should we think about the absolute level of profitability in the third quarter versus the second quarter?

Well, you got all the ingredients for the cake right? This is just a question of how it's going to rise.

Yes, that's why I asked you that.

Yes and we don't give earnings guidance. We are just trying to tell you, the business is operating well, and as Teddy said we don't see anything in our line of sight that says, the dynamics of the industry is going to change.

So fair to say broadly speaking, profitability levels in the third quarter should be fairly similar at least, hopefully within the range of the second quarter.

You can say that, if that's what you want to say, that will be a good quarter.

All right, David, and then just lastly, I guess, in terms of absolute levels of profitability as we look out to 2010, do you think current levels of profitability are sustainable. I understand that the second quarter of this year perhaps is somewhat of maybe an anomaly given price cost dynamics, but as we look forward, how do you think this could shake out?

We really aren't in a position to give you guidance on that, mainly because we just need to get more time under our belt to see how the volumes are playing out. I think that's going to be the key as we go forward. We are looking at what we believe is strong fundamental volume in our industry today and if that holds, then we expect 2010 to be a good year.

Okay, great. That's helpful. Thanks for taking my questions.

You are welcome.

For the moment we appear to have no further questions at this time. I will now turn the call back over to management for any closing comments.

Thanks everyone for joining and we will see you next time. Bye-bye.

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