NewMarket Corp (NEU) 2010 Q1 法說會逐字稿

Greetings and welcome to NewMarket Corporation's first quarter 2010 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, Melissa. Thank you for joining me to discuss our first quarter results. With me today is Teddy Gottwald, our CEO. We'll follow our normal format. I do have some expanded comments today to try to give you some better insight to the performance of the Company during the first quarter. As a reminder, some of the comments we will make today are forward-looking 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 assure -- 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. Full discussion of these factors can be found in our 10-K. We plan to file our 10-Q next week. Please review it for more details on the performance of our Company during the quarter. All of my comparisons today will be comparing the first quarter of 2010 to the first quarter of 2009 unless I state otherwise.

Net income for the quarter increased to $42 million or $2.78 a share, improvement of 47% over the net income for the first quarter of last year of $29 million or $1.88 a share. Included in this result for this quarter, is the negative impact of $1.4 million or $0.09 a share, related to recording a loss on the derivative instrument that we have. Beginning this year, we will separate our real estate development activities out in our segment reporting. Our segments will be petroleum additives, real estate development, and an all-other category, which includes the operations of the TEL business, primarily sales of TEL in North America, and certain contract manufacturing that Ethyl provides to Afton into third parties. I'll start with petroleum additives. Petroleum additives net sales of $389 million increased $54 million or 16% from $335 million for the previous first quarter period. The increase reflects higher product shipments of 21%.

Product shipments were especially weak in the first two months of 2009, as you recall, but are now at a level which we consider more in line with our business, excluding the impact of the severe recession we endured. The significant increase in product shipments was in the lubricant additives product lines. You will recall this was the area that was most significantly impacted in the lower volumes recorded last year. Petroleum additives operating profit increased $20 million when comparing a three month period. The operating profit margin was 18.1% for this quarter, and 15% for the last year's first quarter. The three-month 2010 results are significantly higher across the lubricant additive product lines. We believe this level of operating profit is representative of our business today.

That is not to say that each and every quarter will earn an 18% margin, but on whole, after removing the noise -- normal noise associated with the quarter's performance, our product offering of highly technically developed products should earn a margin in the upper teens. We are currently experiencing increases in the purchase price of raw materials -- certain raw materials. We have seen increases in base oil, and that seems to be the material that many of the people who follow our industry focus on, but we buy many, many other materials. One of the results of the severe recession we endured was the fact that many of our suppliers reduced capacity to manage their operations. Many of those facilities are either fully closed or operating at lower rates.

In addition to that, with the widespread between natural gas and crude oil, many petrochemical operations are cracking natural gas, which reduces the availability of C3s, and C4s from which many of our raw materials are derived. This causes tightness in the supply of our raw materials, which often leads to higher prices, just supply and demand. Our supply team has done their normal excellent job in ensuring an uninterrupted supply of the materials that we need to produce our products. We are confident we will be able to recover those increases and maintain our profitability, and see nothing in the macro business environment that we face that would indicate otherwise. Our market reports indicate that our customers are successfully increasing prices in their marketplace to recover their cost increases also.

Foreign currency had a minimal negative impact of $1 million this quarter in comparing the two quarters. Our selling, general, administrative, and R&D expenses were up $6.6 million in the quarterly comparison. S&A increased about $4.3 million and was mainly due to higher personnel costs and professional fees, while R&D was up $2.3 million. Within this total increase of $6.6 million, was a $2 million unfavorable foreign currency impact. We continue to invest in S&A and R&D to support our customer's programs and to development the technology required to remain a leader in this industry.

We consider quarterly comparisons of S&A and R&D to be of minimal value in understanding our business. The comparisons are often clouded by the timing of spend associated with efforts in R&D, currency movement, and the timing of professional fees and changing in staff levels. We manage these spends on annual basis, not a quarterly one. We expect that S&A and R&D will continue to increase on a year-over-year basis in order for us to be successful in implementing our sales, marketing, and technical plans. We are very pleased that we have completed the acquisition of Polartech. A global company specializing in the supply of metal working additives. With this acquisition, we will strengthen our industrial product portfolio with Polartechs premier metal working fluid additive technology.

This acquisition represents a significant step for Afton in achieving our strategy to expand our technology and expertise in the industrial area. As a result of the acquisition, we also now have a greater presence in targeted international markets, including India and China, where we see opportunities for growth. There are about 130 full-time employees in this business. Polartech has utilized expert application knowledge and differentiated additive technology to create value for their customers. That business model will be an excellent fit with the rest of our petroleum additives business. The acquisition was completed in early March. We paid about $44 million for this business.

We did not include any of the sales or profits for this business in this earnings release due to the late date of the acquisition within the quarter and our ability to get information on a partial month. We have included its summary impact on the balance sheet in the asset section. This business will fold into the rest of petroleum additives and we will not be reporting separately on it in our discussions in filing going forward. We expect that the margins associated with this business will be in line with similar businesses in our portfolio. This business will be accretive to earnings, and provides ample opportunity for growth. We believe our patient approach to acquisitions have paid off with this purchase.

Turning to the real estate development segment. The revenue of $2.9 million for the real estate development segment represents the rentals for the office building which was constructed by Foundry Park One. As you recall, the building was completed in late '09 and rental revenues started in January. The operating profit for the real estate development was $1.8 million for three months. During 2009, the office building was under construction, resulting in no revenue and limited non-capital expenses. The way you should think of this business, or view this business on a go-forward basis is as follows. The performance will be essentially the same each quarter. The quarterly economic view of the business would show the revenues as we did this quarter of $2.9 million, depreciation and amortization of about $1.1 million, and interest associated with the permanent loan we have on the facility.

The interest will decline as the debt is paid, but the first 12 months of interest expense will be about $4.5 million. Now that the project is completed, we have moved from the construction phase to the landlord phase of the business. We are pleased to have MeadWestvaco as excellent tenant, and are happy to welcome them as a valued member of the Richmond business community. Interest and financing expenses were $3.9 million for the quarter, compared to $2.9 million for last year's first quarter. The increase is related to the mortgage on Foundry Park that I just discussed. Other expenses for the quarter were $2.3 million and that was the $1.4 million after taxes I discussed at the beginning associated with the -- recording the loss on the -- on the swap that we have. Income tax for the quarter had an effective tax rate of 32.6%, compared to 33.3% last year's first quarter.

As in other items of our results, quarterly comparisons are not particularly insightful or meaningful. But we believe that our effective tax rate for this year will be about 33%. Cash was $88 million at the end of the quarter, which was a decrease of $64 million since year end. We had very good cash generation from our business this quarter. Working capital used about $11 million of the cash, in support of the business, as we increased inventories to respond to demand for our products. There were several other items affect working capital and these will be outlined in our 10-Q. We completed the acquisition of Polartech, paid for it with it with cash on hand, invested $6.7 million in capital expenditures, and we estimate our capital expenditures for this year to be about $40 million. Cash used in financing activities during the quarter amounted to $52 million. That included repaying the $99 million construction loan on Foundry Park, and borrowing $68.4 million that we discussed a minute ago. In addition to the use of cash, we funded dividends of $5.6 million, and repurchased $14.3 million of stock.

During the quarter, we did open-market purchases of 168,549 shares, at an average price of $84.70 a share. We have approximately $65.7 million remaining on our stock repurchase authorization. From time to time, we repurchase stock when we view that it is undervalued, weighing the benefit of other potential uses of cash, like acquisitions. We had long-term debt of $219 million at the end of the quarter, which is a decrease of $31 million since the end of the year, and that was all associated with reducing the debt on Foundry Park. We had no borrowings under the revolving credit facility at then of the quarter. We did have $13 million of letters of credit against that facility, resulting in an unused portion of the revolver of $137 million. Our debt at the end of March results in a debt to EBITDA ratio of 0.7 times, a very low leverage ratio. As you probably have seen, each of Moody's and S&P upgraded our debt during the quarter. We were also moved into the S&P mid-cap 400. It's also reinforcing to get external recognition in such a concrete fashion of the performance of our business and our Company.

Turning to the outlook, needless to say, we're very pleased with the performance of our business during the first quarter. We have begun the quarter with good solid results built upon a diverse product offering, customer base, and geographical presence. Our margins are good. We have demonstrated our ability, multiple times over the last several years, to adjust our prices to compensate for increases in raw material and other costs. We believe the overall demand for petroleum additives is rebounding as the world wide economic turmoil appears to be abating. Our technology is strong, and we're well positioned to help our customers transition to the new passenger car motor oil specification being introduced in North America later this year.

Our project to expand our supply chain capabilities in the Far East is on schedule, and we should begin shipping from that location later this quarter. We see no reason we will not continue to perform well in subsequent quarters. Subject to the normal ups and downs associated with this business. While we will be busy integrating Polartech into our business this year, we continue to have acquisitions as the highest priority for the use of our cash and borrowing capacity. Our primary focus for acquisitions remains in the petroleum additive space, as we believe this will have the highest probability for success. Within petroleum additives, industrial lubricant additives, and fuel additives are our main focus. Thank you for your attention. I'd like to open the lines now for any questions. Melissa?

Thank you. We will now be conducting a question-and-answer session. (Operator instructions). Our first question is from Mike Sison with KeyBanc Capital Markets. Please proceed with your question.

Hi, guys. Nice start to the year.

Thank you.

Thank you.

In terms of volume, the recovery you had has had a nice improve there. How much of was that restocking or core growth? I'm trying to get a feel for what the run rate of growth for the industry is right now.

This is Teddy. I guess the best way to look at it is that we think that our volumes are -- and the industry volumes are returning to the levels -- excuse me -- that we saw in the middle of 2008. I would put it in the mid-single digits in terms of increase versus 2009. So if you take last year's volumes, we expect them to be up in the mid-single-digit range this year.

Okay. Great. And it's tough to see, but were volumes up sequentially versus the fourth quarter? On a run rate trend?

No, volumes were down a couple percentage points in the first quarter from the fourth quarter, and it was almost exclusively in the fuel additive's section of our business.

Got it and then you commented a little bit on raw materials and some shortages. Did that impact volume at all? Your inability to get raw materials?

No, it did not.

Okay. And where are we on -- in terms of raw materials and pricing? It sounds to me that pricing initiatives seem pretty good here. Are you ahead of raw materials now? Will you be ahead in the second quarter? Were you a little bit behind this quarter?

It's really hard to say at any one point in time. We really don't look at it in three-month increments, and, the best way to look at it is that over the last 18 to 24 months, through some pretty dramatic changes in -- in pricing, and economic conditions, we have been able to recover cost increases with regularity in the market, and we don't see anything that's -- that's changed that today.

Great. And final question, any view on base oil? Do you think it continues to go up? Stabilize? Any thoughts that you could share?

It's -- it's a crystal ball that's only as good as anyone else's. Base oil has gone up. We think that it's probably going to stabilize for a while and then go up again later on in the year, but that's only as good as what you just paid for it.

You got it. Well, thank you very much.

You're welcome.

Thank you. Our next question is from Todd Vencil with Davenport & Company. Please proceed with your question.

Hey, good afternoon. Hi, guys.

Hello, Todd.

Follow up on that question about the volumes being down sequentially in the fuel additives. Is that -- I mean, what is the normal seasonal trend if there one in that that you expected to see in did what happened fit with that?

I don't read anything into that. That's well within the norm of what happens in that business section. We would like to think that every business goes up every quarter. It just doesn't work that way. So that was no alert to us.

Got it. What about pricing sequentially? I recall you were putting some in last quarter. Did pricing offset some of that volume this quarter?

Not much, no.

Okay. Okay. And then David on the corporate unallocated side, that kind of bounces around -- I mean, as you think about, -- think through the year there, is a good run rate to sort of look at what has happened over the last couple of years and be something like that?

Yes that one will behave, annually, inflation plus a little bit. Because mainly cost there is salaries.

Right.

And benefit.

Okay. I got it. That's all I had. Thanks a lot. And your expanded comments, Dave, knocked out a lot of the questions I had. So thanks for that.

Thank you.

Thank you. Our next question is with Dmitry Silversteyn with Longbow Research. Please proceed with your question.

Good afternoon, gentlemen. And let me add my congratulations to getting the year off to a good start.

Thank you.

You mentioned your primary goal is acquisitions and particularly in the petroleum additive segment Can you give us an idea of what is your sweet spot in terms of the size of the deals that you are looking for, as well as if there are any particular geography or product lines or capabilities that you are looking to bring?

Sure. It's a small universe. There aren't a lot of opportunities out there, but we continue to look for them. We have made two in the last couple of years. Both of them pretty small. One in the fuel additives area, and one in the industrial area, and going forward, I would think that fuels and industrial continue to be the -- the areas with the most opportunity.

As far as our sweet spot goes, we -- we would love to find something in the 100 to $200 million range. There just aren't many companies in our markets in that size. Most of them tend to be smaller than that.

Okay. So it's -- I -- I guess that the germ of my question is, if the opportunities are somewhat limited both by the size of the businesses and the number of the businesses out there, cash deployment, obviously you still have an authorization out there, and you are going to be buying back stock opportunistically. Are there any other near-term thoughts on using the cash to shareholders benefit?

Well, you have got your finger on the main ones. Acquisitions are the top priority. Stock buyback when the opportunities present themselves. We'll continue to look at our dividend policy, reinvesting in the business. We hope that we can find some more acquisitions to use our -- our cash for.

Okay. You had a very strong volume growth in additives, particularly lube additives, year-over-year in the first quarter. Are you -- did you have much exposure to the automotive OEM market as far as original fluids being put into engines and cars as they are being built. And was that behind the very strong quarter that you have put forth here?

That particular market is important us to, and -- and we -- we're a substantial player in that segment. You can't use the decline in auto production really in any way to -- to compare this year's first quarter with last year's first quarter -- excuse me. The decline in auto production really predated the first quarter of last year. It's something that we have seen for a while. It's an important part of our business, but in terms of percent of revenue, it's not a very large percent.

Okay. I understand. And then final question on pricing, you have addressed it a couple of times. I'm just kind of interested in more of a your impression of getting pricing going forward. Is it -- it is becoming more difficult to get pricing as base oil moves up, and, since you haven't lowered pricing very much, when the base oil price declined, or are customers still amenable to accepting price increases, just a question of the pace of increase to allow them to pass through, their cost to their customers?

I really don't see anything in the -- the business environment today to say it's -- it's any different; that the conditions are really changing. As costs move, we have been able to -- to adjust accordingly, and I think we'll continue to be able to do so.

Okay. All right. Thank you very much. That's all I have. Sure.

Thank you. Our next question is from Bob Goldberg, with (inaudible) Asset Management. Please proceed with your question.

Good afternoon, guys. Couple of questions. One on Polartech. I was wondering if you could give us some sense of the size of the business in terms of the revenue.

Yes, Bob, when we announced the acquisition, we stated that they have $45 million -- about $45 million of revenue in 2008.

2008? Okay. Okay. And we assume it's in that range today or -- it probably was down in '09 --

Yes, it went down and it's going up, so that's why we haven't really talked about it. But it moved like the rest of the industrial market moved.

And how does the profitability compare with your business?

As I said earlier in my comments, it will be roughly in line with parts of our portfolio.

Okay. Okay. And what does it do to your depreciation and amortization for the year, does it increase it very much?

We don't know the answer to that just yet, because we haven't done the allocation of purchase price. I'll let you know when I know.

Okay. On the base business, I was wondering about seasonality and volume. Normally my impression has been that 2Q and 3Q would be your highest volume quarters of the year. Is that still the case or how would you think about volumes as we look into the June quarter and the September quarters?

I think Q2 and Q3 are our best quarters, and I don't see any signs that that is going to be different this year.

And that would be historically -- I know history has been somewhat impacted the last couple of years by the financial distress, but would we be looking at maybe a 5% improvement as we go into the stronger quarters or what kind of magnitude of volume improvement would you expect? And is there any catchup in the fuel side of the business, where you had a little bit weaker first quarter?

I don't think there's much catchup in fuels to answer that question. A long time ago, I used to say, round numbers we did 23% of our business in the first quarter, 26, 27 in the middle two, and then another 23, but like you pointed out, I'm not sure any patterns matter right now. But a couple percentage points difference, if you look at it that way.

I guess another way to look at it, was March -- if you look at the progression during the first quarter, was March particularly strong relative to January and February --

Yes.

March was much stronger?

It was stronger, relative to the other two, yes.

And April -- I assume April would continue that trend then.

That would be our expectation.

And just one last question. I also assume pricing would be a positive influence in the June quarter versus the March quarter?

Like we said, we think the margins we have now are ones that we can keep. I can't slice that it thin.

All right. I'm just drawing that conclusion because we know raw materials are going higher.

Right.

I assume it would be logical to conclude that you would have to have higher pricing. If you are going to maintain margin with higher raw materials.

That's a fact.

All right. Thank you.

You're welcome.

Thank you (Operator instructions). Our next question is from Saul Ludwig with North Coast Research, please proceed with your question.

Good morning, David, and -- You are getting very good at this.

Well, you said good morning, so I don't know where you are in.

Good afternoon to you and Teddy there. I am here with Ivan. A couple of things. In the first quarter your volume was up 21%, and the revenues were up 16. What was the components of the negative 5?

Price. Customer mix. Remember, we're comparing quarters that are like ages apart nowadays in what we have gone through in our business. But it's price. Customer mix and price.

And how much did FX impact our revenues, negatively?

Actually, FX was positive $5 million.

Was plus $5 million. So price mix was down a good amount?

$25 million or so.

Okay. Down $25 million. Okay. Is that a surprise? I mean, you think that -- you actually cut prices that much? Or was it mostly due to mix.

No, remember, we're comparing 1Q '09 to 1Q '10.

I'm with you.

And remember in '08, we were raising prices, raising prizes, and then the world changed. And the bottom dropped out of everything. Raw materials dropped, and we told you all back last year, '09, we were out in the marketplace, adjusting prices downward to manage that situation, and so now we compare '10 to '09, and the first quarter of '09, we hadn't dropped them much. We dropped them later is the way the arithmetic worked out. But no, it did not surprise me to answer your question.

Okay. Okay. You mentioned -- I'm thinking about R&D and SG&A for the full year. You were up -- last year, S&A was $115 million, and R&D was $86 million, so you had about $201 million for the both of them.

What type of increase do you think we should be thinking about for the full year? Because as has happened often in the past, there is skewing in the quarter, which has either the apparency of good news or bad news and it does affect people's thinking about your earnings, and how should we think about S&A and R&D for the full year, versus the full year in '09?

Yes, I always tell folks that you should think that those two buckets together are going to move up every year, and they are going to move up, whatever our salary and benefit, administration bucket is plus some. 5, 6% a year.

In total, if it's up even 6%, that would be $12 million, and you already have $6.5 million of it in the first quarter.

$2 million of which was FX, and you have got to throw that away.

Okay. Okay. You said on the call that the FX cost you $1 million, and then in the next breath, you said in the S&A and R&D it was $2 million. Were they separate numbers? Or somewhat inclusive? I didn't understand why one was $1 million. And one was $2 million.

I wasn't clear, I'm sorry. The bottom line impact of exchange rates around the world to our profit in comparing those two periods was $1 million.

In total profits?

That's correct.

But in the S&A and R&D category, it was $2 million negative?

That's correct.

Is that really just the effect of tax affecting the two million to get to the one million so to speak?

No, remember we had positive revenues. I told you that a minute ago. $5 million due to currency. I have got to have some negative costs somewhere to get down to $1 million. So that's how it works. I can discuss that with you offline if you want to discuss it further.

Okay. And I think -- I think -- let's see one other item here. Nope. I think we're all set. Thank you very much.

Okay.

Thank you. Our next question is from Scott Blumenthal with Emerald Advisers.

Thank you for taking my call.

Certainly.

I might have missed this on Mike's question. I'm not sure if you answered this. But do you sense that with improving prices, I'm sure you are in contact with your non-base oil suppliers on a regular basis, and you did mention that they had shuttered capacity during the downturn, now with prices improving on their side, do you sense that they are bringing on capacity, or do you expect that to increase at all?

If conditions continue in the trend that they are, yes, I think we'll see more chemical capacity coming back up, but it seems to go down faster than it goes -- comes back on. So there are spots of tightness, and it's making our folks work really hard to deal with it, but we're getting through it okay. Hopefully, there will be fewer of them as the year progresses.

When spreads move to the point where they have been between crude and nap gas, and your chemical suppliers switch to cracking that gas, can you give us some idea as to how that changes the price dynamic and availability for NewMarket?

I was trying to get to that point a little bit earlier. Let me see if I can do a better job. When they use natural gas, they have fewer of the products that a lot of our products are derived from, and so that increases the price of those raw materials to us, and this has nothing to do with base oil, and a lot of times, folks have focused on base oil, and it used to be, a long time ago, that was sufficient. Well, it's not sufficient anymore. So that's why we're seeing increases in other areas that we're having to manage our way through.

Okay. David, so when there's a switch to nat gas, the prices -- I guess when nat gas is cheaper, prices for non-base oil products that you consume tend to increase because your supplier's ability to create them at the same rate is impeded by the process?

That's correct.

Okay. All right. Just trying to understand. I think that's about it. Thank you.

You're welcome.

Thank you. (Operator instructions). Our next question is a follow-up question from Todd Vencil with Davenport & Company. Please proceed with your question.

Thanks, I just thought of a couple of things for you David. Was there any income from the real estate segment that you just broke out in the back half of last year? Or is that kind of $800,000 to $1 million operating profit number in the other segment for the third quarter and fourth quarter, and then into the first quarter? Is that kind of a good range?

Yes, Todd, last year we might have had $250,000 of expense each quarter for Foundry Park.

Okay.

But the other is not driven by that in previous periods, no.

Got it. And then is there any way I can get you to preview the Q and break out as you usually do in that document the components in the change of sales -- where you talk about the dollar (inaudible) on the one hand shipment and product mix and on the other price (inaudible)

Yes. Let me go through that. That's what Saul was getting at.

Okay.

So we had $5 million favorable FX, $76 million favorable volume shipment mix, and $27 million unfavorable pricing mix.

Got it. Thanks.

You're welcome.

Thank you. Mr. Fiorenza, there are no more questions in queue. I would like to turn the call over to you for closing comments.

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

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.