NewMarket Corp (NEU) 2010 Q4 法說會逐字稿

Greetings and welcome to the fourth-quarter 2010 and yea-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 Florenza, Vice President of NewMarket Corporation. Thank you, sir. You may begin.

Thank you. Thanks to everyone for joining us to discuss the quarter and year. With me today is our CEO, Teddy Gottwald, and we will open the lines for some questions after some comments that I have.

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 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.

We plan to file our 10-K toward the end of February. It will contain many disclosures that we will not cover today. I encourage you to read it for more details on the performance of our company.

Net income for the fourth quarter was $49.4 million or $3.47 a share. This is an improvement of 7% over last year's fourth quarter. The percentage increase in earnings per share was 14%, reflecting the additional benefit of our stock repurchase activity.

Net income for this period included a gain on an interest rate swap agreement related to financing on Foundry Park, which is reflected separately for each period in the summary of earnings schedule at the end of the press release we issued yesterday. For the quarter, the net income from this swap added $4.4 million or $0.31 per share. In the comparative period of last year the impact was $2.8 million of income.

Comparing the performance of the Company in both periods without the swap had us earning $3.16 in this fourth quarter compared to $2.85 in last year's fourth quarter. On an annual basis without the swap we had earnings per share of $12.52 in 2010 and $11.11 in 2009, which is an increase of 13%.

Our consolidated revenue for the quarter was $461 million, which is a 14% increase from the 2009 fourth quarter. For the year, consolidated revenue increased a little over 17% to $1.8 billion.

Taking a look at the petroleum additives, the petroleum additives net sales for the quarter was $455 million, which is an increase of $54 million or 13% over last year's fourth quarter. The increase in sales reflects higher product shipments of about 3.5%. Selling prices were also favorable when comparing the two fourth-quarter periods. Partially offsetting these favorable impacts during the fourth quarter was a small unfavorable foreign exchange impact.

For the year, petroleum additives net sales were $1.77 billion which was 17% higher than last year. The increase between the two periods reflects about a 12.5% increase in product shipments. During the first half of 2009 product shipments were lower than we would have expected for this business, which we believe was caused by the worldwide economic slowdown. We have seen a steady improvement in demand from those levels and believe the overall demand for petroleum additives products has recovered from recessionary effects and are now at levels more consistent with normal market demands.

Petroleum additives operating profit was $72 million for the quarter, which is a 9% improvement over last year's fourth quarter. We are very pleased with the 9% improvement in profits. The operating profit margin for the quarter was 15.8% compared to 16.4% in the 2009 fourth quarter.

The fourth quarter tends to be somewhat lower in profit margins due to a variety of reasons and this quarter was no exception. Our margins for the quarter remained strong. During the corner we begin to see increases in raw material costs which will show up in our first-quarter results. We are in the marketplace with pricing actions to recover those increases.

For the year, petroleum additives profit of $299 million exceeded the 2009 results by 7%. Our business performed very well across the board during the year. Our supply team managed a difficult environment with excellent production and security of supply for our customers. Our plants are running at high operating rates and demand is healthy.

The operating margin for the year 2010 was 16.9%, which is directly in line with what we have been indicating this business is capable of repeatedly producing.

There have been no significant changes to the industry conditions. Supply and demand remain healthy and balanced, raw materials are tight but sufficient, and the demands for the goods and services we offer has returned to more normal levels after the negative impacts of the worldwide recession.

The revenue for the real estate development segment was $2.7 million for the quarter and $11.3 million for the year. [The building was begun] in 2009 and that is why there are no comparative numbers. The operating profit of the real estate segment for the year was $7 million, which we expect will be representative of the segment performance going forward.

The increase in interest and financing expenses between the fourth-quarter and yearly comparisons was primarily related to the mortgage loan on the Foundry Park I office building. Prior to obtaining the mortgage loan in 2010, the interest in financing expenses for the construction phase were being capitalized. The other item -- other income net for the quarter that you see on an annual basis was a loss of $10 million for 2010 compared to $11.2 million for 2009, and this is the interest rate swap we have been discussing.

The effective tax rate was somewhat lower this quarter at 28.9%. The major change from previous periods is the action that Congress took late in 2010 to reinstate the R&D tax credit. This benefited our business about $2 million and had about a 3 percentage point reduction on the effective tax rate had it not been present.

The overall tax rate for the year was 31.9% compared to 32.2% last year. 2011 tax rate should be in this range with adjustments upward as the states increase their need for tax revenue.

Cash at the end of 2010 was $50 million, which was virtually unchanged from the third-quarter number of $50 million. For the entire year, our business generated significant cash flows which we have used to support the ongoing needs of our business, fund our acquisition early in the year, and to repurchase our stock. [I am] mainly going to discuss the cash flows for the quarter with reference to the year to date when appropriate.

Our operating activities generated $49 million of cash during the quarter. Unlike previous quarters in the year, working capital was essentially neutral for the quarter but this was likely just a timing issue as our growing business must be supported by increasing levels of working capital.

For the year, the demand on cash for working capital was about a $60 million use. For the quarter, the $49 million generated was used to fund dividends of $6 million and capital investments of $11 million and to repurchase $35.8 million of stock. We also received the net $9 million associated with the swap and paid revolver debt down by $16 million.

Our year-end drawings on the revolver were $4 million. For the year, our capital expenditures were $36 million. We expect capital expenditures for 2011 to be in the $45 million to $50 million range.

In July, our Board authorized a stock repurchase program of up to $200 million. This authorization is valid until December 2012. During the fourth quarter we repurchased approximately 288,000 shares of stock at an average price of $124.64. Approximately $154 million remains under the Board authorization. For the whole year 2010 we repurchased 1.2 million shares for $125 million at an average price of $102.92.

Our total debt at the end of the quarter was $220 million, which was composed of $150 million of bonds, $66 million on Foundry Park, and $4 million drawn on our revolving line of credit. Our EBITDA for the year was about $316 million, giving us a debt to EBITDA ratio of 0.7 times. We continue to operate with very low leverage.

The unused portion of our $300 million revolver stood at $291 million at the end of the year. We had the $4 million drawn that I just mentioned and $5 million of letters of credit issued against this facility.

Looking out, we begin 2011 with a high confidence in our business as 2010 proved to be a record-setting year. The fundamentals of how we run our business -- a safety first culture, customer-focused solutions, technology-driven product offerings, world-class supply chain capability, and a regional organizational structure to better understand our customers' needs -- will continue to pay dividend to all our stakeholders.

We expect 2011 to be more profitable than 2010 as we project an increase in volume, revenue, and net income. Over the past several years we have made significant investments to expand our capabilities around the globe. These investments have been in people, research centers, and production capacity. We intend to use these new capabilities to improve our ability to deliver the goods and services that our customers value and to expand our business and profits.

In summary, we expect the business practices that have produced the outstanding results of the last two years to continue next year. We expect that the macro business environment in which we operate will improve as the world economies continue to strengthen.

Our business continues to generate significant amounts of cash beyond what is necessary for the expansion and growth of our current business lines. We regularly review the many internal opportunities which we have to utilize this cash, both from a geographical and product line point of view.

We have increased our efforts in investigating potential acquisitions as both a use for this cash and a reward for our shareholders. Our primary focus in the acquisition area remains on the petroleum additives industry. It is our view that this industry will provide the greatest opportunity for a good return on our investment while minimizing risk.

We remain focused on this strategy and will evaluate any future opportunities. Nonetheless, we are patient in this pursuit and intend to make the right acquisition when the opportunity arises. Until an acquisition materializes, we will build cash on our balance sheet and we will continue to evaluate all alternative uses for that cash to enhance shareholder value, including stock repurchases and dividends.

That is the end of my prepared comments. Dan, can we open the lines for questions, please?

(Operator Instructions) Mike Sison, KeyBanc.

Good morning, guys. Happy New Year to you. Can you talk a little bit about the growth that you are looking to see in 2011, maybe to some degree how strong, and then what are the key drivers that will get you there?

Sure, good morning. It's Teddy. The industry growth we still see in the 1% to 2% type of range. We are working hard to beat that and we believe we will in 2011.

It's nothing revolutionary for us. It's continued effort to expand geographically and increase our presence where we have traditionally had lower share, as well as continued efforts to expand our product line. So that is the story.

Okay. And then in terms of profitability, if you grow to your plan, will margins in total for the year expand versus 2010?

I think that we expect our margins to continue to be solid and in line with the last couple of years.

Okay. And then one question on the fourth quarter. It looks to me that R&D and testing expense sort of had a step-up relative to your prior couple quarters. Is that the new sustainable level or is that just sort of just a little bit of higher testing in one quarter, and maybe go back to the low 20s type of thing?

Mike, the way we look at R&D is more an annual basis than a quarter basis, and annually I think R&D has stepped up about 6%. The fourth quarter just shook out to be a higher quarter than the previous by $3 million. We had some extra outside testing.

We tend to think that R&D is going to go up every annual clip at inflation plus, and that is what I would expect going forward.

Okay, great. Thank you.

You are welcome.

Saul Ludwig, Northcoast Research.

Good morning, guys. Teddy, you just mentioned that part of your game plan is to expand your product line. Could you talk a little bit about what new products or new applications that you are going to be targeting that you haven't had in the past that would be representative of some of the product line expansion that you refer to?

I really don't want to tip our hand to much there. It's in the traditional petroleum additives area. We look at engine oil, the drive line areas, industrial where we have made good progress with the addition of Polartech.

When we peel it back and look at our market shares in the different segments, we are stronger in some areas than others. We are constantly working to shore up our market position and our product offerings in the areas where we might not be as strong as our competition, and then some areas that are within those broad categories. And I shouldn't leave fuels out either.

But it's not really exploring broad new ground. It's technology and it's technology that is well within our grasp. It just takes investment and oftentimes extended field trials to get the approvals necessary to offer those products.

The big increase in your cap spending, is that going to add capacity? In other words, if you now have capacity to make 100 units of things will that capital expenditure be -- add a 1%, 2%, 3% to your capacity or is it more process improvement-related expending?

It's some of each, Saul. We will add a little bit of capacity but it's nominal. We have some infrastructure improvements targeted for some time in 2011, so it's a little bit of everything.

Okay. And then finally for David, of the $80 million increase in your inventories or 41% increase, how much of that do you think was more units that you now have in the bin versus the effect of higher raw material costs?

I think -- you should think most of it's probably units. We use LIFO in the United States where we have most of our inventory. We use more of an average type around the world, but I haven't really peeled that back yet. But I would think a lot of these units, Saul.

You mean that you would have 40% more volume in your --?

No, that is (multiple speakers). It's component parts. But I can look at that if it's important to you and give you some feedback on that.

Great. Thank you very much, guys.

Dmitry Silversteyn, Longbow Research.

Good morning and congratulations on finishing the year on a strong note. A quick question for you.

You talked about the surge in raw materials that you experienced in the fourth quarter that will begin impacting the profitability, or at least flow through the P&L, in the first quarter and you talked about responding with pricing. Can you talk about kind of the dynamics and the timing of the price increase versus the raw material increase you are seeing, and how we should look at the progression of profit recapture, if you will, as we go through the year?

Yes, Dmitry, it's David. I typically believe there is about a two-month difference in those two events. So if raw materials instantly went up on January 1, I am making that up, that it might be March 1 before we would see any impact from price action. So you might expect a couple of months a pinch.

And then to follow-up on that, if you kind of look at the status quo before the price increase and then the raw material surge in the fourth quarter and your own price increases going up in the first quarter or something like that, is the pricing that is going up or is the price increase that you are trying to put into the market is that going to offset the raw material increases that you have -- increases that you have seen to date or will you still be lagging when that price increase goes fully through? In terms of recapturing your profit.

Yes, I understand your question. If the raws were to freeze, which they won't, then we would recapture them is our plan.

Okay, so basically your expectation is for the raws to probably continue to inflate slightly for the year, but you think your pricing mechanism will be sufficient to offset those pressures?

The ones that are on the table right now, yes.

Okay. All right. Then quick question, just a bookkeeping question. What was your depreciation and amortization in the quarter?

$9 million.

Okay. And looking at kind of the annual run rates on inventory turns and working capital as a percentage of sales that seemed to have taken a step up in 2010 versus 2009. How much of that is just raw material inflation rather than volume growth?

And assuming that prices stay where they are and volumes continue to grow 1% to 2%, is this the new level of inventories and working capital that we are looking at?

Yes, I do believe it's likely the new level of inventories. We probably have an average of 50 days of revenue for receivables, so as the top line grows the receivables will go accordingly. Receivables dropped in the fourth quarter just because revenues dropped relative to the third quarter, and they will bounce back up in the first quarter.

Right, right. Actually, DSOs, they crept up by about a day, which I guess is a normal as you ramp-up sales.

Okay. And then just a quick outlook for 2011. You talked about margin sustainability in your businesses. When you look at the corporate expense, how should we think about that as far as any deltas in pension funding or environmental or whatever else may be jerking around the corporate and other line?

No, I think you should think the corporate line will just move with the inflationary pressures of salaries and benefits, and not terribly much more than that.

So about 3% to 5% a year or so?

Yes.

Thank you very much. That is all I have.

Welcome.

Todd Vencil, Davenport & Company.

Morning, Teddy. Morning, David. A lot of mine have been knocked out, but I do have a couple left.

Teddy, on the concept of acquisitions, you both said you are going to continue to focus on the petroleum additives industry and that makes sense. Is there any thought in your mind of moving to a multiplatform stance over time, or of maybe doing some kind of adjacency that is not exactly in your wheelhouse now but would be closely related to what you do?

We don't rule that out, but most of our acquisition efforts and analysis and research is focused on petroleum additives. At some point down the road would we venture beyond our core petroleum additives? Yes, but I honestly don't see that happening anytime in the near future.

Does that answer the question?

No, that does. That is great. And then I guess the only thing I have, David, just since this is usually in the Q and it's going to be a little while before the K comes out, can you tell me what the numbers would be as you usually report them for the impact on fourth-quarter sales from shipments and product mix, and then selling prices, customer mix, and FX?

Yes, I can. For the quarter we went up 13% quarter to quarter; 3.5% to 4% of that was shipments, 11% or so was selling prices, and negative 1% on currency.

Great, thanks a lot.

You are welcome.

[Andre Golobeteur], [MAT Capital].

Gentlemen, good morning. Congratulations again on a solid quarter. A couple of questions; I guess, Teddy, for your comment you made about the profitability.

When you said you think it's sustainable over the levels that you have seen over the last couple of years, can you just kind of clarify that? Because obviously two years ago your margins were at 8% and a year ago they were at 18%, and the trailing is 17%. So when you were saying that in 2011 you feel that you will be able to sustain it at an average level over the last few years. What is kind of the range that we are talking about?

I think you can expect it to be in the high teens, where it has been for the last two years.

So no change we are looking at? Call it, 17% to 18% level, is that right?

We are not going to be that specific but, yes, consistent with, let's say, the last six quarters or so.

Understood. And then just one more. In terms of the general dynamic, historically you guys have said that I think in the industry the second half of the year, right, seasonally is a weaker part of the year. So if I think for you and your competitors kind of the third and fourth quarter typically volume-wise are weaker quarters.

So in terms of the recapture of margin and in terms of modeling, how would that work? I guess you will recapture some of the price come second or third or fourth quarter, but then there will be a volume issue. So in your fourth quarter your operating margin is at, call it, 16%, which was your lowest in this given year. And then you are saying in the first quarter you will still lag.

So just kind of help me think through how you are going to get back to that 17%/18% given that you will have volume issues in the third and fourth quarter. Does that make sense?

Typically, the weaker quarters are the first and fourth. The second and third quarters are usually strong, stronger. We are not talking about a huge difference, maybe 5% or so lighter in the first and fourth quarters than the middle of the year, but we expect volumes for the year to be up versus last year.

And you said that number is, call it -- you are targeting 1% to 2%, correct, and just something higher than that hopefully?

We think we will do better than that.

Okay. That is all I have, thank you.

Gentlemen, there are no further questions at this time. Do you have any closing comments?

No, just thanks everyone for participating and we will talk with you next time. Have a good day.