NewMarket Corp (NEU) 2009 Q4 法說會逐字稿

Greetings and welcome to the NewMarket Corporation's fourth-quarter 2009 and year-end 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.

Thank you. Thank you for joining me to discuss our fourth quarter and total year performance. With me today is Teddy Gottwald, our CEO. As usual, I have a few planned comments, after which we will open the lines for any questions.

As a reminder, some of our 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 most recently filed 10-K and 10-Qs.

We plan to file our 2009 10-K toward the end of February. Please read it for a more detailed explanation of the Company's performance.

As you know, we released earnings yesterday. The fourth quarter was another very good quarter for our business. The income for the quarter was $46.3 million or $3.03 a share compared to $19.4 million or $1.27 a share last year's fourth quarter.

This quarter included a benefit to net income of $2.8 million or $0.18 a share as the amount of the unrealized loss on the interest rate swap related to Foundry Park was smaller than the September 30 valuation. Excluding this item, earnings for the quarter were $43.5 million or $2.85 a share.

Petroleum additives results were up significantly for the quarter, posting an operating profit of $65.8 million compared to $32.5 million for last year's fourth quarter. Volumes shipped for the fourth quarter of this year improved 17% over the same period last year, reflecting the return in demand from the significant drop in shipments that we experienced in the last two months of 2008 related to the economic slowdown.

Shipments, as measured by volume, were down about 5.5% on a sequential basis comparing the fourth quarter to the third quarter. This is not an unusual variation for our business.

The change in profits between the two fourth-quarter periods was dominated by the improvement in volumes and higher margins, offset by higher spending in GS&A. Our profits for the fourth quarter were below that of the third quarter. The meaningful adverse impacts were lower volumes, lower margins due to higher raw material costs, and planned higher spending in GS&A.

Margins for the fourth quarter were 16.4%.

Net income for the year was $162 million or $10.65 a share compared to $73 million or $4.75 a share for 2008. The net income included an unrealized loss of $7 million or $0.46 a share from recording an interest rate swap agreement related to financing on Foundry Park at fair value. Excluding this, earnings for the year were $169 million or $11.11 a share.

These items are reflected separately for clarification in the summary of earnings schedule that is at the end of yesterday's press release.

As we all know, petroleum additives operation had a very strong performance in 2009, with operating profit improving to $280 million. The improvements were broadly based across regions and product lines.

Shipments for the year were lower 9% due to lower shipments in the first half of this year, reflecting the market slowdown that occurred in late 2008 and continued through the first half of 2009. I recently saw an industry report that stated that worldwide demand for lubricants was down about 12% on an annual comparison.

Shipments in the second half of 2009 were up 6% over shipments in the second half of last year. We believe product shipments are now near more normal levels that were typical before the worldwide economic slowdown.

During the year, we continued to invest in R&D and S&A in support of our customers' programs. Total R&D for petroleum additives was $86 million in 2009 compared to $82 million for 2008. This change included about a $3 million favorable currency impact; so the actual spending increase was larger than the dollar equivalents show. The increase in R&D was across all product lines. We expect to increase our spending in R&D as our business expands in support of our customers' programs.

Our project to construct the multistory corporate headquarters for MeadWestvaco was completed on time and under budget near the end of December. The receipt of rental income payments has begun in January. This business will be reported as a separate segment in our financials going forward. We finished the year with $99 million drawn on the construction loan, and we had capital expenditures of $52 million for the year.

As you may have seen this morning, yesterday we filed an 8-K which detailed the highlights of more permanent financing that we have secured. The full details of the loan will be in a filing that we will make in the next few days.

The key characteristics of the loan are that it is five years in term with two 13-month extensions available; LIBOR plus 400 pricing with a 200 floor in LIBOR; and a 15-year amortization of the loan. The loan was made by Foundry Park LLC, which is a subsidiary of NewMarket Development Corporation, and is fully guaranteed by NewMarket Corporation.

The initial principal amount of the loan is $68.4 million. We used cash on hand to fund the difference between the construction loan and the amount of the new loan. We are also investigating fixing LIBOR over the five-year period via a swap. Current rates would bring the fix in the 2.7, 2.8 range, which would make it 6.7, 6.8 all-in if we were successful.

The excellent performance of our business this year also translated into significant improvements in our liquidity position, with cash increasing to $152 million compared to $22 million at the end of last year. The cash generated by operations allowed us to repay all of the drawn debt we had on our revolver at the end of last year, which was $41.9 million. Other major uses of cash were providing for $39 million of capital expenditures; making $24 million of contributions to our pension plans; and funding $16 million in dividends.

During 2009, we increased the size of our revolving facility by $45 million through increased commitments of the original parties to the loan and by the addition of other lenders. We are quite pleased with this development, as it was accomplished in the most difficult lending environment that we have seen in a long time. At the end of the year, the facilities limit was $150 million, with only $4 million of letter of credits written against this commitment.

Our net debt decreased from $215 million at the end of the 08 to $98 million at the end of '09, despite the debt associated with Foundry Park increasing by $56 million. We expect the capital expenditures will be in the $40 million range for 2010.

Obviously, we're quite pleased with our results for 2009. We're entering 2010 cautiously optimistic that our business has returned to more historical levels of demand.

In the near term, we don't expect any macroeconomic changes in our industry dynamics that would cause margins to change significantly either up or down. We expect to begin manufacturing and blending in the Singapore facility this year, which will greatly improve our service levels to that very important part of the world.

Our plants are running full. We continue to spend heavily in R&D and expect another successful year for our petroleum additives business. We have a solid business base, a good technical offering, and an excellent team which is dedicated to our customers and our business.

Thank you for your attention. I'd now like to open the lines for any questions.

(Operator Instructions) Ian Zaffino, Oppenheimer & Co.

Great. Thank you very much. David, I know in the comments you had alluded to higher raw materials in the fourth quarter. Is that base oil you are specifically talking about? Because I didn't think it went up that much in the fourth quarter.

We've seen some increases in base oil and we've seen some increases in some of our other raw materials.

So would you say it's the other raw materials that really drove this, or was it the base oil that drove it?

No, I would probably say it's about equal.

Okay. As far as I guess there have been some -- we talked about this. There's been some price increases. I know in the past you've talked about your ability to pass that through and the timing of that passthrough was becoming shorter and shorter, so you were able to pass it through to the market faster and faster.

Is that still the dynamics you are seeing out there? If so, what is the lag now versus let's just say a year ago and three years ago?

This is Teddy. We've taken a number of steps to try to tighten that lag over the last year, and that has been successful in a lot places. So it's shorter than it's been.

It was a good full quarter and it's less than that now. I can't really say how much less it is, but it's tighter than it's been.

Okay. The last question would be, as you I guess poll your customers or speak to your sales force, what is the appetite out there to potentially absorb another price increase on your behalf? So as you look to pass your base oil, what is the reception?

Obviously it's not going to be good, but is it pretty much the same as it was before? Or is there greater resistance?

Well, let me answer that in a little bit of a broader way. I think that David mentioned that volumes are returning to more of a normal level, kind of pre-economic crisis level. I would put that in a mid-single-digit kind of volume increase for the market this year versus last year.

Along with that normalcy, we're seeing a return to raw materials and prices I think moving in a tighter bandwidth. We're seeing less of the big swings in cost. And you'd expect that, with crude moving in a tighter band.

So I think as we go into a tighter bandwidth, we're really talking about normal business operations. So I think you have to take that into account when you consider the market's appetite for prices moving in any direction. I think we're in a more normal period now; and so I expect normal conversations between us and our suppliers, and us and our customers.

Okay, super. Thank you very much.

Ivan Marcuse, KeyBanc Capital Markets.

Hey, guys. How are you doing? One, on the price question, so there was a price increases that are implemented in the third, fourth quarter. Did you see any benefit of that in the fourth quarter? Or when do you expect to see that benefit? Would that be more in the first quarter?

It will be more in the first quarter.

Okay. Then from a seasonality, NewMarket specific, is the first quarter -- tend to be a little bit stronger than the fourth quarter historically? Or are they about equal?

It tended to be somewhat stronger, one over four.

Okay. So then with the raw materials where they are at now, do you think the price increase that is -- that will be -- that you will see the benefits in the first quarter, do you think that will be sufficient to offset the increase in raw material cost that you have seen recently? Or do you think that down the road there is likely to be another price increase?

I really think that the best way to answer that is by saying we're in the normal cycle now. At any point in time we may either be behind or ahead, but I think we're in a pretty tight range today, between raw material movements and our price movement.

Okay. Then in the fourth quarter, was there any sort of FX translation of receivables from a subsidiary due to the dollar strengthening? And how did that impact the fourth quarter? Where does that flow through, if there was that effect?

FX flows through cost of goods sold. Fourth quarter to third quarter it was probably $5 million ballpark adverse. Fourth quarter to third quarter.

Okay. Then, David, what did working capital end up being for the year?

We will look it up and answer you in two seconds. Do you have another question?

All right. Well that also -- the cash flow of operations, looking for that one also.

Then when you're looking at 2010, what kind of dollar amount -- assuming the dollar -- taking out the FX impact, how much more spending in R&D and SG&A do you see in 2010 over 2009?

Excluding FX, we would expect more than inflationary increase in R&D.

Okay.

And S&A, inflation plus REACH, because we believe there may be some fair amount of spending in 2010 on the REACH program in Europe; and that will flow its way to S&A.

So what would REACH be, $5 million?

In that ballpark.

Okay.

It looked like working capital ended around 406 for the year.

Okay, then what was the cash flow of operations?

I think it was 20 or so.

Around there? Where would, for 2010, last question -- working capital, do you think it will be -- which --? I know there is a lot of different factors that go on. But what kind of -- do you think it's going to be a use or source in 2010 and what would your anticipation be?

I mean the best thing I can tell you is what we use, and we use a zero because we know we don't know.

Okay. Fair enough. Thanks a lot for taking my questions.

Absolutely.

Dmitry Silversteyn, Longbow Research.

Good morning, guys. This is [Egian Tad]; I'm sitting in for Dmitry. Most of my questions have been answered. I just have a question on, I guess in Singapore facility, what is the timing of the startup this year? Is it going to be second half, first half?

First half.

Second-quarter?

That's a good assumption, yes.

Okay. Could you provide a little bit more color, I guess, just follow-up questions on prices. What was the price quarter over quarter? Was it up, was it down, was it flat compared fourth versus third quarter?

It was up, but not as much as raw materials went up. That's a function of actions we took during the quarter. And as we answered previously, the main benefit of that will be seen in the first quarter.

Okay, great. Thank you. And just the last question on what are your tax rate expectations for next year?

32%, 33%, 34%. 32% if Congress passes the R&D tax credits which they have to pay us every year. Closer to 34% if they don't.

Okay. Actually I'm sorry, one more question on the rental income. What are your expectations for that for the new segment?

Yes, we will publish that in the first quarter. It's going to have a minor impact on EPS for the new segment.

Penny or two?

Yes.

Okay, great. Thank you.

Todd Vencil, Davenport & Company.

Thanks, good morning, guys. David, you threw out three factors on the margin decline from 3Q to 4Q -- higher raws, lower volumes, and higher R&D. Can you rank those, and even if you want to estimate a dollar impact, that would be great?

I can't estimate a dollar impact, but volume would have been the biggest; margin would have been the second; and then GS&A would have been the third.

Okay. You guys both -- I guess this is probably a Teddy question since I think you've talked this about before. But you've talked about long-run margins or margins through the cycle. David, I guess you may have sort of pre-answered this by your comment about no macro factors (technical difficulty) your margins.

But at this point, Teddy, last quarter I think you said through the cycle you're looking for maybe a midteens kind of a margin in petroleum additives. How does that feel to you right now?

I'm really, Todd, I am going to go back to what David said. We really don't see anything significant on the horizon that's going to move our margins considerably from where they have been, let's say over the last year.

I can't be more specific than that because if you look at the last year, our margins in any quarter ranged from I think a low of around 15% to a high of about 23%. And there are a lot of dynamics moving the needle back and forth between those levels. Volume, mix, foreign exchange, raw material costs, and where we were on pricing, timing of some spending. Lots of factors.

But it netted out to a good number over the course of the year. And I don't see anything to indicate margin pressure or margin expansion from kind of the longer-term -- well, 12-month average, certainly. And I would be kind of disappointed if they didn't hold up where they have been.

All right. Appreciate that. The price increases you guys have put in, have you talked about the magnitude of those increases?

No, we have not.

Would you?

No.

Fair enough. Do you have a thought you want to share for what you are thinking about raw material costs in 2010 relative to '09, and how much higher or different they might be?

I can tell you that we are seeing costs going up right now, and that's as far ahead as I can look with any accuracy in this market. I really don't know, Todd.

Okay.

But there is some increase going on right now.

All right. Final question. Your big publicly traded competitor reinitiated their capital plan for the next decade or whatever it is and have talked about a new plant that they are going to break ground on later in the year. What is your -- obviously that's not going to be coming around for a while. But do you have any thoughts on the impact that thing might have down the road?

Yes, I read a little bit in the industry trade about that. I think that that plan is very consistent with the one that they talked about a couple years back.

This industry will return to, let's say, a 1% to 2% kind of growth. And we've all done a lot of debottlenecking over the last handful of years. We've seen the need to add a modest amount of new capacity, and we're doing that currently and have plans over time to do it more, in a modest way.

Their 10-year plan, I think I can't comment really on whether it makes sense for them. But it doesn't appear to be out of line with a combination of their prior spending and the market growth.

And when we look at our view on capital spending over the next 10 years, our plan is very consistent with theirs when you consider the scale differences between the two companies.

Got it. Okay. Hey, thanks a lot.

Saul Ludwig, KeyBanc Capital Markets.

Good morning, guys. Teddy, you mentioned that the relationship between price and raw material cost should be sort of at a normal level, but at times you are slightly behind that curve, and other times you are slightly ahead of that curve.

Would you characterize the fourth quarter as a period where you may have been slightly behind that curve?

Yes.

Did you think that with the price increases that you put in place for the first quarter, with what is your guess -- no one knows for sure about raw materials, but you have a guess at it. Would you think that the first-quarter price increases would move that needle more toward a normal relationship between price and cost, in contrast to the fourth quarter where pricing may have lagged raw material cost relative to this normal number?

Well, Saul, I'll answer your question; but I'll just say when you ask me about last quarter it's easy for me to respond. When you start talking about the future, it gets cloudy.

No one has the perfect crystal ball, Teddy, and whatever you say is a guess and it may or may not come to pass. We are just looking -- what is your best shot as you see it today. We're not going to shoot you if it doesn't turn out that way.

Thanks a lot for that.

Appreciate that, yes. We think that going into the quarter we were in good shape in terms of the increases. But as I mentioned, we've seen a number of announcements on some costs increases in the last couple of weeks. And I don't know when those will occur. So going into the quarter, I can say we were comfortable.

David, could you explain that comment that you made earlier about the FX? Back in the third quarter, you had those dollar receivables that turned out to be a big gain. I think you made $0.75 a share in the third quarter because of just accounting on that dollar receivable in the UK.

Then you made some comment earlier about $5 million impact in the fourth quarter. It was a plus in a third quarter. What did you mean by that impact in the fourth quarter?

I thought I was answering the question of what is the differential between the third quarter and the fourth quarter on that one element. And I answered that was about a $5 million adverse in 4Q versus 3Q.

Did you? Now in the 3Q, the gain was versus 3Q a year ago. What was the impact of any receivable issues that were not of an operating nature, but more of an accounting nature, the fourth quarter versus fourth quarter?

Probably from what I am looking at -- fourth quarter to fourth quarter, right?

That was the question.

About $3 million adverse.

$3 million adverse. So that had nothing to do with prices and raw material costs. That was just a hit to cost of goods because of what? Certain receivables that you had in dollars that became worth less?

That's correct.

Okay. With regard to this issue of nature of receivables in different countries, it is this something that's going to appear every quarter either plus or minus, depending on these dollar versus euro exchange rates?

Yes. It has every quarter since the beginning. Over big periods of time, they always tended to push out, wash out. You win; some you lose some.

Okay. I think you've answered that. Then just finally you mentioned, Teddy, at the start of the year -- at the start of this call, you had a 9% volume decline '09 versus '08. Would you expect your volume in '10 -- again, this is one of those guesses that no one knows for sure. But would you expect your volume could recover that 9% and be up 9% and basically be back to '08 levels in '10?

No, I think that's probably high, Saul.

A little high?

Yes.

Okay, appreciate that. Thank you very much, guys.

(Operator Instructions) Robert Felice, J. Goldman & Co.

Hey, guys. Most of my questions have been answered. Just one or two more. What was the absolute dollar increase in raw materials on a sequential basis from 3Q to 4Q?

You mean total that hit cost of goods sold?

Yes.

I don't have that number with me.

I mean just ballparking, would you say it's kind of in that $7 million to $10 million kind of range?

I haven't broken it apart, Robert. I am not evading your question; I just haven't done that arithmetic. I mean, I can do it, but --

Okay, I mean I am just trying to, in my mind, build a bridge between fourth-quarter operating profit and third-quarter operating profit. You mentioned the $5 million hit from FX on a sequential basis. You've got SG&A and R&D that's higher by roughly $7 million. Your volume is off by 5.5%.

So my rough guess is that is probably a $10 million to $12 million hit. Is it fair then to say the differential is all raw material costs?

Yes. Yes.

Okay. Was there any change in price sequentially either up or down from 3Q to 4Q?

Yes, there was a small -- yes, there was an increase; it wasn't as much as the raws went up.

Okay. Then I guess, Teddy, just broadly speaking, we've talked about the opportunity to recover at least part of that 9% decline in volume from '08 to '09 and '10. You have talked about stability of margins going forward, that the industry should at least be able to put through price that is sufficient to offset raw material costs.

Granted that at some points you will be behind that curve, as Saul mentioned; some points you'll be ahead of that curve. So as we add up all of these pieces, should we expect that additive profit could be up in '10 versus '09?

That's a big question mark, and I don't have an answer for you. I'm sorry.

Maybe you can characterize the dynamics that would make you feel confident that it could be up, or vice versa that make you hesitant that you would be able to maintain it.

Yes, I do think we'll see higher volumes this year, modestly higher volumes. And I don't expect our margins to be considerably different in 2010 versus last year.

But I'm cautious on that. I mean, that's my hope, that's my expectation. But I just think there is still -- we are not so far away from some pretty wild volatility in this market that I am willing to bet that it's all behind us.

Nor am I confident enough in those volume numbers to see that as a sure thing. So I think we're a going to have a good year. Last year was certainly a good year. And it's my expectation that we won't see any wild swings in either direction from last year's results. But who is to say?

Okay. It sounds like the bulk of your hesitation is really on the volatility in the raws and any temporary price cost differentials that could result, given that volatility?

Yes, that is a safe assumption.

Okay. Great. Thanks for taking my questions.

Sure.

Ivan Marcuse, KeyBanc Capital Markets.

Hey, David, real quick question. Of the $36 million bridge from petroleum additives from fourth-quarter '08 to fourth-quarter '09, just to make sure I'm on the same page, what is the FX price and volume breakout?

The revenue -- the component of revenue?

Yes.

I don't have that with me, but I will be happy to get it for you.

All right. I will give you a call later then.

All right.

Thank you, gentlemen. We have no further questions at this time. I would like to turn the floor back to management.

Thank everyone for joining, and we will talk to you next quarter. Bye-bye.

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